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ERA’s cost-cutting continues while uranium prices flounder

In a market update presentation, Energy Resources of Australia (ASX: ERA) announced that its uranium production projections for 2013 will be 2,800-3,200 tonnes. It also updated its progress in realising $150 million in cost savings by the end of 2014.

The production forecast was 2,700-3,300 tonnes in its April update, so the 2013 range is narrowing down, however it will be less than the 3,710 tonnes that were produced in 2012. The company, which is 68% owned by Rio Tinto (ASX: RIO), just recently reported a $53.55 million loss for its half-year result, with its expenses approximately the same as its $144.3 million revenue. A larger than average $129 million depreciation charge added to the net loss, its third in three years since 2010.

Its Ranger 3 Deeps mine project was discussed, and the company said that the pre-feasibility study was on schedule and on budget. Assuming all necessary approvals are granted, the commencement of production should take place in late 2015. This underground project is adjacent to its open pit mine site, located in the Kakadu National Park. The open pit mine is nearing its end, and so are mining approvals for it, so the underground project is of great importance to continue the company’s activities in this area.

This month the newly installed Brine Concentrator began operation to clean up water used in production. It will be able to process up to 1.8 billion litres per year, rehabilitating the site’s water to be safe near the heritage-listed national park. The water facilities cost $20 million annually to operate.

A total cumulative $102 million out of $150 million in projected savings has been achieved since 2011. However, will this lead to a profit in the near-term if the company in the end is producing less than before, and uranium prices are still around $30-$40/lb?

The overseas uranium market still has not recovered since the Japanese nuclear disaster in Fukushima, and downward price pressure is coming from the development of cheap natural gas within the US, seen as an alternative power generation fuel with less pollutants than coal, and no need for specialised containment and storage that nuclear energy requires.

Longer-term, the company saw some rays of hope from the fact that China has around 30 nuclear plants under construction. As we reported, China will triple its nuclear generated energy capacity in the mid-term. Other countries like Korea, UAE and India are also increasing nuclear power usage, so the potential increased demand may drive commodity prices back up to more profitable levels.

Foolish takeaway

Up until 2011, the company was turning a profit, but after the Fukushima disaster, countries are reassessing their use of nuclear power, and operational costs have swelled also. Being a “single play” business, with basically only one product to sell, causes roller coaster price and profit movements, with no way to diversify and smooth out market extremes. Investors shouldn’t shun this industry because of radiation fears or ideology, but they should only approach it once world demand is up.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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