ERA is to raise $500m via a renounceable entitlement offer. In our last report we highlighted this as a key risk. "[ERA] has also flagged intentions to advance a longer term funding plan to which 68.7% shareholder Rio Tinto is committed. Is this reassuring or will it see RIO mopping up the minorities for a song? No question it’s a key risk - hence our High price risk rating!" In many respects this is not the worst possible outcome. The offer is fair in the sense of being both pro-rata and renounceable. At least minority shareholders who won't or can't participate will likely be afforded some recompense. There will be a book-build of any retail shortfall and any premium received distributed to non-participating shareholders - RIO seen to be acting as a good corporate citizen!
This is fine if you honestly think ERA is worth only $2 in the long term, not though if like us you believe it is worth far more. If you fall within the latter camp, the only way to avoid a rip-off is to participate in the raising. But then of course you still run the risk of being treated like a second-class citizen down the track - as minority shareholders so often are - between a rock and a hard place as it were!
The offer is 12-for-7 at $1.53, a 29.8% discount to the theoretical ex-rights price, but a whopping 95% discount to the $28 highs of mid 2009. The shares went ex-entitlements from the October 12 announcement and remain in trading halt until October 17. The retail entitlement offer closes on November 9, new shares to trade from November 21. The cynic in us marvels at the spate of negative ERA announcements in the lead-up. Apparently just about everything that could go wrong has. Not of course the Ranger Deeps exploration decline and mine studies which ERA is more than happy to spend $175m on, while RIO graciously underwrites the entitlement offer. At least a near-term floor to the share price retreat is likely in store if nothing else.
We retain our Buy recommendation. Our valuation, adjusted for the bonus element of the entitlement issue, is unchanged at $6.90. Of course $6.90ps is only as good as our prior $15.55ps valuation if you participate in the entitlement issue. No surprises, we recommend participating in the issue! For those who don't participate, our valuation is effectively more than halved. Our Participate recommendation comes with the same caveat as for the underlying Buy recommendation - ERA is a high risk stock, made more so in the case of the minority retail shareholders. That said, we can't help but remain upbeat about the underlying business. It may require patience, with some lean cash flow years as treatment of low grade stocks increasingly comes to the fore. But with potential for mining of Ranger 3 Deeps mineralisation, exploration success elsewhere and not forgetting that the warehoused Jabiluka gem hasn't gone away, our interest is keen.
Proceeds from the entitlement offer go to:- Funds for ($m) Brine concentrator 220 Water management 52 Ranger Deeps decline 120 Ranger Deeps evaluation 55 Expanded exploration 40 Issue costs/other 13 TOTAL 500
Third quarter uranium production easily improved on the wipe-out that was 2Q11 and was even 11% higher than 3Q10. The highest throughput that we can remember, up 17% on 3Q10 to 680kt, reflects mill improvements made while operations were suspended in 2Q11. Favourably the water that caused that suspension is on schedule to be completely removed from the pit before the onset of 2011/12 wet season thanks to enhanced water treatment facilities. Fourth quarter uranium output is forecast to be similar to 3Q11's 2.23Mlb, only marginally below more normal levels.
ERA spent $3m on exploration including diamond drilling at the Georgetown target east of Ranger 3 Deeps. No results were released. In September preparations began for diamond drilling at Ranger 18 East, 2km north of current Ranger operations. Meaningful exploration on ground as prospective as ERA's East Alligator River licenses has the potential to turn the market's existing dejection on its head. ERA will spend $40m across the wider Ranger project area from 2012 to 2014.
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