Energy Resources of Australia Ltd. (ERA.AU) said Friday that its first
half profit plunged 82% after the Rio Tinto Ltd. (RIO.AU) subsidiary,
and one of the world's biggest uranium producers, encountered poor ore
grades at the resumption of dry season mining in Australia's Northern
Territory.
A big fall in profits was largely expected by the market after
ERA on July 13 adjusted for the lower grades by sharply downgrading its
2010 full year production guidance by 18% to 4,300-4,700 metric tons of
uranium ore. It reiterated that guidance Friday.
But the owner of the world's second biggest uranium mine by
output, Ranger, on Friday also said that it's getting less money for its
uranium oxide as high global stockpiles and lower demand caused by a
global economic slowdown keep prices subdued. A stronger Australian
dollar also wiped about A$50 million off the group's top line.
Net profit for the six months to June 30 fell to A$22.7
million, from A$127.6 million in the previous corresponding period,
missing UBS and Credit Suisse forecasts of A$28 million and A$39.6
million, respectively.
Revenue slid 37% to A$217.7 million from A$347.0 million.
"It's definitely a year of two halves," Chief Executive Rob
Atkinson told Dow Jones Newswires. "It was a challenging first half, but
we appear to be well set up for the second half and I'm certainly
looking forward to a stronger performance," he said.
ERA, 68%-owned by Rio Tinto, negotiates prices in long-term
sales contracts, although some contracts can be partially influenced by
movements in the spot price.
Higher uranium stockpiles, particularly in
Kazakhstan
,
and delays in the construction of some nuclear reactors in China are
expected to keep uranium oxide, or yellow cake, prices suppressed in the
short term, ERA said.
"My sense is it's going to remain reasonably flat for the next
year or so," Atkinson said when asked when the world's yellow cake
supply and demand balance might swing in ERA's favour.
The Darwin-based company stuck to its forecast of achieving an
average realized uranium oxide price in 2010 broadly similar to the
US$50.84 it got in 2009. In the 2010 first half, it realized a price of
US$44.79 per pound, down from US$48.02 in the 2009 first half.
Credit Suisse analyst Matthew Hope noted that by sticking to
its full year guidance, ERA must be expecting better second half prices.
Hope said that management in an analysts' call Friday said
lower-cost contracts negotiated some time ago ended in the first half.
"I expect they'll get US$54-US$55 per pound in the second half," Hope
said.
ERA downgraded its output guidance on July 13 after it gained
access to the main ore body at Ranger when seasonal rains dried up and
it overcame stability problems with the south wall of the pit.
The ore it encountered, however, was of a much lower grade
than it expected. "We see good grades in front of us now and we're
hoping to exploit that," Atkinson said July 13.
Ranger produced 9% of the world's uranium in 2009, according
to the World Nuclear Association.
ERA has extended the life of the mine to at least 2012, after
which it plans to sell stockpiled ore until 2020.
The company is considering an expansion of the mine in which
it would plunder an untapped 30,000-40,000 metric ton resource in the
Ranger 3 Deeps mineral deposit. It is currently finalizing studies on
whether to build a 'decline'--a tunnel bored through the resource to
facilitate closely spaced drilling and a geotechnical assessment--and
expects to make a final decision on the decline by Sept. 30.
ERA also said Friday it expects to submit a draft
environmental impact statement for its proposed heap leach facility in
the second half of 2010 following a "minor delay". Heap leaching uses
acid filtration to extract minerals from poor quality ore.
The company warned in February that work on the growth
projects will combine with maintenance costs to push up its expenses in
2010, without providing specific numbers. Atkinson said he expects costs
in 2010 may be "slightly weighted" to the second half.
ERA declared an eight cents a share interim dividend, above
UBS' seven cents forecast but well below a 19 cents tip by Credit
Suisse, which was hoping ERA would tap its large cash position to fatten
the payout.