Energy Resources of Australia Limited (ASX: ERA) and Paladin Energy Limited (ASX: PDN) are two of Australia's largest independent uranium producers, but have they lived out their useful half-lives?
Some might suggest yes, following the recent news stories surrounding ERA, which is majority owned (68%) by Rio Tinto Limited (ASX: RIO).
You may have already seen some of the news surrounding one of Australia's largest uranium miners, ERA, when its shares plunged 47% in early trading two weeks ago. That reaction was due to the company's decision to cancel its Ranger 3 Deeps project thanks to continued low uranium prices, and ongoing uncertainty over the uranium market's direction in the immediate future.
ERA owned and operated the Ranger mine, which is surrounded by the Kakadu National Park in Australia's Northern Territory. But the decision to not proceed with the Ranger 3 Deeps project means the mine holds very little value for ERA, Rio or anyone else wanting to mine uranium. Without Ranger 3 Deeps, ERA is processing stockpiled ore. What the company will do when that runs out is anybody's guess.
Then yesterday, 3 directors, half of ERA's board and including its chairman quit over the differing views on the Ranger 3 Deeps project. Majority shareholder Rio has announced that it doesn't support any further study or future development of Ranger 3 Deeps and appears ready and willing to see mining operations at Ranger cease in the near future. Rio says it expects to take a non-cash impairment of around US$300 million on its shareholding in ERA.
ERA's shares are currently trading at 37.5 cents, giving the company a market cap of $176 million. That appears optimistic for a company that is facing huge writedowns on the value of its assets, one barely operational uranium mine, huge rehabilitation expenses and a lease that expires in 2021. Traditional owners have previously indicated they would not consider an extension, which would leave ERA and Ranger up the creek.
The odds of posting a profit this financial year appear slim at best. ERA posted a second consecutive loss last financial year of $188 million to go with its loss of $135 million in 2013.
Last year, ERA was also forced to purchase 843 tonnes of uranium at a cost of $67 million to meet its contractual commitments. This financial year, ERA expects to produce and sell between 1,600 and 2,200 tonnes of uranium oxide, but it seems it's only a matter of time before ERA is no longer on the ASX.
As for Paladin Energy, it is trying to get its Canadian uranium mine at the Michelin project up and running. That's to supplement a recent purchase of the Carley Bore uranium project for $15.8 million and its operating Langer Heinrich mine in Namibia, Africa.
Paladin was forced to place its Kayelekera mine in Malawi on care & maintenance in February 2014 due to low uranium prices and very high production costs. Not that Langer Heinrich is a profitable mine either – hence the reason Paladin has been forced to revisit the debt markets again and has a whopping US$731 million in debt on its books against cash of US$470 million.
In the last nine months to March 2015, Paladin revealed a US$81 million loss, with Langer Heinrich operations contributing a US$24 million loss, thanks to C1 production costs of US$29.40/lb. If you add in other necessary sustaining production expenses, C1 cash costs can double or more.
The company appears hopeful of a recovery in the uranium price, although prices are still around US$36.50/lb, the same as at the start of this year, having recovered from below US$30/lb in mid-2014.
Australia's Bureau of Resource and Energy Economics (BREE) forecasts that uranium prices could rise to US$62/lb over the next few years, thanks to increasing demand, but that might not be enough to see Paladin produce a profit.
After 10 years of no profit, and millions in shareholder value destroyed, very few have profited from Paladin's ongoing existence. ERA, on the other hand, was profitable up until 2010, but has gone backwards since. Neither trend is unlikely to change in the future.
Foolish takeaway
It remains to be seen whether ERA and Paladin can survive if uranium prices continue to remain in the doldrums. But survival and generating shareholder returns should not be confused with each other. Neither company is likely to beat the market over any decent time horizon. As such, Foolish investors might want to give both companies a wide berth.
