Be cautious about hitting the buy button on ERA

Rio Tinto (ASX: RIO) uranium subsidiary Energy Resources Australia (ASX: ERA) yesterday announced the completion of its brine concentrator at its Ranger mine.

Ranger is one of the most productive uranium mines in the world and is located 260 km east of Darwin, surrounded by the heritage-listed Kakadu National Park. Uranium was originally discovered at Ranger in 1969, but the mine didn’t begin operations until 1980 as a result of substantial reviews into the effects and consequences of mining projects in the area.

After exhausting original ore bodies, in 2009 another body was discovered (Ranger 3 Deeps) and is expected to contain 34,000 tonnes of uranium oxide. In its 2012 annual report, Rio said “Construction of a A$100 million exploration started in May 2012 with exploration drilling expected to commence in Q2 2013”.

ERA’s new $220 million brine concentrator will enable the facility to treat large quantities (around 1.8 billion litres) of water each year. According to The Australian “the concentrator uses internationally-proven technology to treat industrial process waters to extremely high standards through a process of heating and evaporative cooling.”

ERA’s outgoing CEO, Rob Atkinson, said “the brine concentrator is a critical component of ERA’s future as the successful treatment of process water is key to rehabilitating the site and ensuring our water balances are in full control”.

In 2011, ERA raised around $500 million for part of the concentrator’s funding. In addition, much of capital has been used to prove the economic viability of its Ranger 3 Deeps decline to expand the underground mine.

Australian Conservation Foundation campaigner Dave Sweeney believes ERA should be focusing on being more environmentally friendly rather than expanding on an existing mine. “The company should halt the Ranger 3 Deeps project – as it did with its earlier flawed acid heap leaching proposal – and concentrate its brine and its brain on the challenges it raised in responsibly ending operations, rehabilitating Ranger and assisting the transition to a post-mining future for this world heritage listed region,” Mr Sweeny said.

Foolish takeaway

Source: Google Finance

Investors have watched as ERA’s shares and those of its 68% owner Rio Tinto have fallen from grace thanks to a number of commodities severely dropping in price. ERA expects the price of uranium to remain at US$35 a pound until Japan and China can lead a recovery. However Japan’s continued resistance to atomic power after the Fukushima disaster and yesterday’s 5.3 magnitude quake make a return to nuclear energy increasingly unlikely.

Investors will be wise to exercise patience before buying shares in either company. If (and it’s a highly likely if) the price of iron ore drops substantially as a result of a supply glut, Rio could end up looking just like ERA – trying to sell a product for a ridiculously low price, amassing debt (or diluting shareholder ownership through capital raisings) and dropping in market capitalisation and stock price.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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