Price Against Volume For ERA

Some issues with grades meant uranium miner Energy Resources of Australia (ERA) recorded lower than expected production in the December quarter, output of 1,140 tonnes being down 19% in quarter-on-quarter terms and 30% in year-on-year terms as well as being 16% below the forecast of UBS.

Lower head grades are expected to continue through the first half of 2010 according to UBS as the company deals with lower grades and some mine sequencing issues, though the plus side for the company is its realised price of US$50.84 per pound was better than the US$48 per pound UBS and Citi had been expecting. RBS Australia expects this trend of higher realised sale prices to continue as old legacy contracts at lower prices continue to expire.

On the back of the quarterly report, UBS has lifted its 2009 earnings forecast slightly to reflect the better realised prices and sales volumes slightly higher than it expected, but looking into 2010 the expectation production will remain lower through the first half sees it cut its numbers by 7%.

In earnings per share (EPS) terms, UBS is now forecasting 142c for 2009, 169c for 2010 and 218c for 2011, which puts it well ahead of Citi’s forecasts of 139.5c, 135.7c and 153.8c for the same years. Citi analysts focus their views on similar expectation that grades won’t show much improvement until the second half of 2010.

In the view of JP Morgan, the December production report implies stronger earnings in 2009 thanks to better pricing but weaker numbers in 2010 thanks to lower expected head grades. JPM has adjusted its estimates accordingly, its EPS numbers now standing at 142.8c in 2009, 129.3c in 2010 and 145.7c in 2011. Consensus EPS forecasts for 2009 and 2010, according to the FNArena database, stand at 133.4c and 134.3c.

Looking beyond shorter-term earnings factors, the main issue for the company is its development profile and in particular the valuation upside offered by the Ranger 3 Deeps and Jabiluka projects. According to UBS numbers, the former is worth around $5.80 per share to the company, though as JP Morgan notes the current share price implies confidence both projects successfully go ahead. JPM takes a more conservative view and ascribes a 50% probability for both projects at this time.

This means JPM’s valuation on the stock is $17.60, while its price target is $19.36. This is relatively conservative given the average price target according to the FNArena database stands at $23.28, with UBS among the highest with a target of $26.50. Recent share price weakness sees UBS upgrade to a Buy rating on the stock from Neutral previously, while the database shows a total of three Buys, two Holds and four Sell ratings.

Most of the arguments from those with Hold or Sell ratings are valuation based, as the stock is trading close to or above the price targets of four of the eight brokers offering price targets.

Shares in ERA today are higher and as at 11.00am the stock was up 63c or 2.8% at $22.90, which compares to a range over the past year of $16.75 to $28.28.

Greg Peel

About Greg Peel

Greg Peel joined Macquarie Bank in 1986 and acquired trading experience in equities, currency, fixed income and commodities derivatives, ultimately being appointed director of equity derivatives trading. He later published In With The Smart Money (a plain English guide to the mysterious world of financial markets and derivatives) and acted as a consultant to boutique investment funds. In 2004 Greg joined FNArena as a contributing writer. He is now a director and principal of the company. Greg compliments the journalistic background of the FNArena team with lengthy experience as a financial markets proprietary trader.

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