Monday, July 21, 2008

Yellow cake production fall hits ERA

WHAT THE BROKERS SAY: Sarah-Jane Tasker and Robin Bromby | July 21, 2008

Energy Resources of Australia (ERA), JBWere, Hold recommendation, 12-month share price target of $23.52, Last traded at $23.15

ENERGY Resources of Australia announced last week it had seen a 31 per cent drop in uranium output for the quarter, after restricted access to the open pit.
ERA, the producer of a 10th of the world's uranium, mined 1030 tonnes of uranium oxide in the second quarter of calendar 2008, compared with 1490 tonnes in the previous corresponding quarter.
The uranium miner said the drop in output was due to restricted access to the higher grade ore in the bottom of the pit at the Ranger mine in the Northern Territory, following heavy rainfall in the region.
Market analysts JBWere said ERA's second-quarter 2008 production report was slightly weaker than expected, mainly due to lower head grade of 0.26 per cent for the first half of the year.
But the results did not alter its thoughts on the miner, with a hold recommendation maintained.
``ERA is our preferred uranium sector play with potential to upgrade its resource and production. Long-term contracts have been a significant drag on the stock but in our view are less of an issue going forward with weaker price forecasts,'' JBWere said in a note to clients.

Western Plains Resources (WPG), Veritas Securities, Buy recommendation, Price target $2.48, Last traded at $1

VERITAS analyst Piers Reynolds notes that WPG's Buzzard iron ore project in South Australia's Gawler Craton has an attractive ratio of 65 per cent lump to 35 per cent fines.
The company is also part of a consortium that is looking at building a 20 million tonne a year loading facility at Port Bonython, 35km northwest of Whyalla.
Veritas believes the selection of a preferred tenderer for the Port Bonython project will take longer than previously expected and the wharf is now likely to be completed in late 2010. The analyst is assuming that, from mid-2009, iron ore exports will move through Darwin for a period of 18 months at the rate of 1 million tonnes a year.
``The recent near-doubling of the iron ore prices increases the attractiveness for early export through Darwin,'' the report says.
Cash costs will be $90 a tonne against the current ore price of $115/tonne, a cash margin of $25/tonne.
Veritas expects WPG to outperform over the next six to 12 months.

Alumina (AWC), Merrill Lynch, Underperform recommendation, Price objective of $5.68, Last traded at $4.53

SHARES in Alumina recently jumped after aluminium prices rocketed to a record high as top producer China cut output, lowering global supply. But that wasn't enough to change Merrill's recommendation on the miner.
``Despite a rally in the aluminium price following reports that China's top-20 ally producers `intend' to cut output by 5-10 per cent, we maintain our underperform on AWC,'' Merrill analysts wrote in a report.
``While we admit the stock is beginning to look attractive on a value basis, given the likelihood further costs increases will be announced at the half-year result on July 31 _ we will wait till then before revisiting our recommendation.''
The bauxite miner also recently disclosed that the fallout from the shutdown of its Varanus Island gas supplies in Western Australia would not be as bad as initially expected.
Alumina said the effect of the Varanus gas supply disruption on underlying earnings for June was a net $7 million. It had previously expected a net impact of between $12 million and $17 million.
The impact for the third quarter was now expected to be a net $31 million.

Newcrest Mining (NCM), UBSBuy recommendation, 12-month price target of $34, Last traded at $32.21

NEWCREST'S recent London presentation flagged some large resource and reserve upgrades across the asset base. Resources appear to be heading to 150 million ounces of gold equivalent and reserves to 69 million ounces equivalent.
``We estimate that on a gold-only basis the reserves would increase from 33.2 million ounces to 43 million ounces,'' UBS said in its analyst note to clients.
UBS's interpretation of the slides suggests that the key difference is a potential 8 million ounce upgrade at Cadia Valley from reserves of 16 million ounces to 24 million ounces.
A significant portion of the pending upgrades appears to be coming from deposits with an elevated copper component. With the development of the Cadia East deposits and the Ridgeway Deeps project, the Cadia Valley assets are heading towards gold-copper. Following the presentation, UBS maintained its buy recommendation for the gold giant.
``While most investors are comfortable paying a healthy premium for gold assets, there is little need to be paying a large premium for copper production when global copper producers are trading at significant discounts to gold stocks,'' UBS said.

Woodside Petroleum (WPL), JPMorgan, Neutral recommendation, Price target of $69.30, Last traded at $55.50

WOODSIDE competitor Chevron recently announced a significant extension of its Iago gas field adjacent to its Wheatstone discovery.
US energy giant Chevron also reportedly has a vision for a new LNG facility on the Pilbara coast in Western Australia.
JPMorgan believes that while another strong LNG project is a negative for all aspiring Australian LNG developers, the Wheatstone/Iago expansion is more a direct competitor for Woodside in respect of competition for resources and WA state department approvals.
``The gas discovered at Wheatstone/Iago would be sufficient, in our view, to feed a single LNG train. In this respect, Chevron's plans regarding Wheatstone closely resemble Woodside's strategy regarding the Pluto development,'' JPMorgan said in a note to clients.
The success at Iago, which is in the Carnarvon Basin, comes amid speculation Chevron is still considering linking its Wheatstone field with Woodside's nearby Pluto-2 LNG project, for which Woodside is trying to source gas, rather than go through with a new plant.
While Chevron has previously refused to give an indication of how much Wheatstone will cost, Woodside's similar-sized Browse is seen by analysts as costing about $US20 billion.

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