Last month, Rio Tinto said that it is not interested to continue with the final feasibility study of the Energy Resources of Australia Limited (ASX: ERA) Ranger 3 Deeps project in the present operating environment, with regards to the economic challenges faced by the project. Rio Tinto was earlier involved with Energy Resources on a conditional credit facility to support the company fund its ongoing rehabilitation work at the Ranger mine site. Moreover, Rio Tinto would fund Energy resources if the Ranger project needed extra funds beyond the firm’s cash reserves and future earnings from processing ore stockpiles.
Operating Performance
Energy resources have invested over $378 million in rehabilitation and water management projects from 2012, with $220 million used for the construction and commissioning of the brine concentrator and $57 million used for rehabilitation activities last year. Energy resource forecasted an investment of over $31milllion for this year. With regards to the Ranger processing plant performance, Energy resources estimates a production guidance of 2015 of 1,600 tonnes to 2,200 tonnes.
Rehabilitation Milestones (Source: Company Reports)
As per the March quarter highlights, Energy resources uranium oxide production reduced 18% to 489 tonnes, as compared to 599 tonnes in December 2014. Meanwhile, the total evaluation expenditure was decreased to $4 million during the quarter and was spent for Ranger 3 Deeps underground mine prefeasibility study, against $16 million in the previous quarter and $6 million of total evaluation expenditure during March 2014. The Ranger3 Deeps underground mine’s supplementary environmental impact statement is under development, and the submission is expected during the second quarter of 2015. With regards to the rehabilitation activities on the Ranger project area, infrastructure to enable Pit 3 is expected to get tailings from the mill for final deposition was commissioned.
Energy resources have not been performing well from quite some time. The firmeven posted a 61% decline in production during 2014 to 1,165 tonnes of uranium oxide, as compared to 2013. The Uranium oxide production was impacted severely due to the Leach Tank 1 failure during the end of 2013. The inventory levels declined on the back of sale of drummed uranium oxide holdings due to plant suspension. Depreciation also decreased impacted by the lower production and decrease asset cost base.
Earnings Variance (Source: Company Reports)
Even the cash position as of December 31
st, 2014 decreased to $293 million from $357 million as of January 2014, as $83 million was incurred for evaluation and exploration expenditure and $57 million for rehabilitation expenditure. Meanwhile, the firm generated a positive cash flow of $85 million in 2014. On the other hand the company was successful to surpass its $150 million target of cumulative cash cost reductions and achieved cost savings of more than $23 million. Also the firm has no debt by the end of the year.
Cash generation (Source: Company Reports)
Conclusion
Rio Tinto has a major share (around 68%) in Energy Resources of Australia Limited (ASX: ERA), but have been undergoing continuous losses over the past few years. Rio Tinto’s recent move of withdrawing of funding the final feasibility study of the Energy Resources Ranger 3 Deeps project, suggest that it is no longer interested in the project. Moreover, management also admits that the uranium market has not been improving as expected further movement if uranium prices remain skeptical. Probably, Rio Tinto do not want to bear the risk anymore with the Ranger mine lease expiring by 2021 and an uncertainty of the uranium market in the short term. Moreover the project has also been facing opposition from the traditional owners for uranium mining in Kakadu National part. Energy resources will continue to process the stockpiled ore till 2021 and then rehabilitate the site for over five years. Rio Tinto is committed to support this process in the future.
As a result of Rio Tinto’s announcement on the Energy Resources Ranger 3 Deeps project, the shares of ERA has crashed over 47% on June 12
th itself, and have been declining since than as the uranium market remains skeptical. Moreover, Rio Tinto is estimating a future non-cash impairment charge of over $300 million (post tax) with regards to the firm’s shareholding in Energy Resources, adding more pressure to ERA. The stock’s price has been wiped out by over 72% over the last four weeks only. Despite such huge crash in the shares of Energy resources, we believe the Stock is still expensive, given the hazy future of Energy Resources.
ERA Daily Chart (source - Thomson Reuters)
Based on the foregoing, we give an “EXPENSIVE” recommendation to the stock at the current price of $0.39.
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