Friday, April 29, 2011

Hot Rocks Down Under

Uranium mining sector valuations are in a severe contraction following the crisis at JapanFukushima nuclear reactor, making it timely to consider uranium stocks for growth portfolios.  I believe the first place to look for uranium is “down under” in Australia. 

Australia might seem like an odd choice for a stake in uranium mining.  Despite Australia’s rich resource, the country comes in a distant third to Kazakhstan and Canada in terms of actual production.  Accordingly to the World Nuclear Association, together the three produced about 60% of actual supply, which topped 53,000 metric tons in 2010, but Australia’s share is just 11%.  Take a second look!  Australia boasts nearly a quarter of the world’s uranium reserves and its mining industry is in a strong financial position.  In my view that positions it’s mining operations for a lasting growth period.

Australia’s leading uranium producer is BHP Billiton Pty. (A:  ASK; BHP:  NYSE ADR) with $62.4 billion in revenue in the last twelve months on which it earned $17.1 billion in net income.  That is a 28.0% net profit margin.  It is no small-cap, but it offers investors diversification across multiple mineral markets, including aluminum, iron ore, and manganese.   The company also has interest in mined carbon from diamonds to metallurgical coal and energy coal to petroleum.  The dividend adds a 2.1% dividend yield a forward price earnings multiple near 14.0 projected earnings.

Next on our list is the real powerhouse behind Australia’s uranium mining sector  -  Rio Tinto (RIO:  NYSE ADR; RIO:  AXS; RIO:  LXS).  Rio Tinto reported $56.6 billion in total sales in the most recently reported twelve months, providing $14.4 billion in net income.  Like BHP Billiton, it is a widely diversified global operation, with production in aluminum, copper, diamonds, coal, iron ore, uranium, gold and industrial minerals.  Although most of its production is from Australia and North America, the Company operates in more than 50 countries.  Rio Tinto's uranium interests are located at two mines: the Ranger Uranium Mine in Australia and the Rössing Uranium Mine in Namibia.  Through these two assets the company is the third-largest producer of uranium in the world.

For investors who want a more direct ownership in uranium mining, Rio Tinto’s partner in Australia, Energy Resources of Australia Ltd. (EGRAF:  OTC/BB; ERA:  ASX), is a true small-cap vehicle.  Energy Resources reported a profit of $51.0 million on $636.3 million in sales in the most recently reported twelve months.  China is a major customer.

Rio Tinto owns two-thirds of Energy Resources shares but there is room for others to play.  The company’s ADR in the U.S. is currently trading near 52-week lows and offers a yield of 1.6% at the current share price.  A beta near 1.00 is also appealing.  Unfortunately, the shares quoted in the U.S. trade by appointment, making it necessary to trade on the Australian exchange to command a position of size.  Analysts are expected a small profit in the year 2011, but have forecast a rebound in earnings next year.  On a forward basis the stock is trading at 7.0 times 2012 estimates, suggesting that investors with an extended investment horizon and some patience could fare well in ERA/AU despite the added expense of investing in the Aussie dollar and exchange.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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