Tag Archives: water-utilities

Rio Tinto Is Stabbing Energy Resources Of Australia In The Back

Summary Energy Resources of Australia lost almost US$500M in market capitalization after deciding not to go ahead with the Rangers 3 Deeps zone. The company is currently processing low-grade stockpile which should keep the lights on. The company is now an excellent call option on the uranium price as it has existing infrastructure and is trading at less than $2 per pound in the ground. Introduction I’m a believer in uranium and whilst I don’t think we’ll see substantially higher prices this year or even next year, I’d still like to be positioned to benefit from an expected uptick in the sexiness of uranium-related investments. I can be patient and have been keeping an eye on several uranium companies. Energy Resources of Australia (OTCPK: EGRAF ) is one of them, and the share price has tumbled after major shareholder Rio Tinto (NYSE: RIO ) decided not to get ahead with providing financial support for the development of the Ranger 3 Deeps zone. That’s a pity, but maybe there’s an opportunity here for people who are patient. Energy Resources of Australia is a – surprise, surprise- Australian company and I’d strongly recommend you to trade in the company’s shares through the facilities of the Australian Stock Exchange where it’s listed with ERA as its ticker symbol . The average daily volume is 2.2 million shares. The company is still processing stockpiles but won’t develop the underground mine In the second quarter of this year, Energy Resources produced 390 tonnes of uranium (861,000 pounds) which would generate almost $40M in revenue based on today’s spot price. That’s still pretty decent but not a lot and that’s due to the fact ERA is basically just processing its (low-grade) stockpiles. The average grade of the processed ore in the second quarter was just 0.09% (10% lower compared to the previous quarter) whilst the total amount of ore it milled also decreased due to a planned mill shutdown. Source: annual report This is part of the plan to wind down operations at the Ranger mines and connected to the rehabilitation plan for the area. As part of its original agreement with the governments, ERA was operating the mine under the ‘Ranger Authority’ agreement which is expiring in 2021. Unfortunately this is one of the stumble blocks for the company to even consider developing the Ranger 3 Deep zone. Earlier this year, ERA has halted all development activities at the underground uranium resource as the uranium price was too low to justify spending any more cash on that part of the project. On top of that, partner Rio Tinto also pulled out, stating the project no longer meets its investment criteria. (click to enlarge) Source: annual report A real double-whammy for Energy Resources of Australia, and as you can imagine its market capitalization fell off a cliff and whereas the company was worth A$800M just three months ago, it lost 75% of that value since then! And that’s a pity, as there’s a lot of uranium down there It’s understandable nobody wants to throw tens and hundreds of millions of dollars at an underground uranium mine at a moment the uranium price is so low even the open pit mines are struggling to stay afloat. So, yes, I do understand the reasoning behind the decision to not advance the Ranger 3 Deeps zone as the result of the previously published pre-feasibility study was disappointing. The pre-feasibility study was based on an updated resource estimate using a cutoff grade of 0.11% uranium compared to a previously used cut-off grade of 0.15% U3O8. Yes, the lower cut-off grade has indeed increased the total resource base of the project which now contains 96.5 million pounds of uranium, but unfortunately this also caused a sharp 20% reduction in the average grade which dropped to 0.224%. Source: annual report This was quite disappointing as everybody knows in this investment climate it’s all about generating returns on investments and keeping the payback period short. In the past it used to be a game of ‘my resource estimate is bigger than yours’, but that era is over and investors are focusing on decent internal rate of returns. The Rangers 3 Deeps zone might not be mined in the near future, but fortunately the uranium resources aren’t running away. According to its most recent financial statements, ERA had a working capital position of A$350M (more than its current market capitalization) and this should keep the company afloat for a little bit longer. The average rock value per tonne of ore is $175/t based on the spot price and almost $250/t based on the long-term uranium price. That’s the equivalent of almost 7 g/t gold so I do believe there is value down there (literally). Investment thesis Buying shares of Energy Resources of Australia is buying a call option on the uranium price as the Rangers 3 Deeps project definitely won’t be developed at the current uranium price. It doesn’t mean the project is worthless and ERA might just ‘sit’ on it until the outlook for uranium improves again. ERA is now valued at US$1.75 per pound of uranium in the ground and that’s not expensive, considering the resource is located in a safe region. I might initiate a very small position in the next few days or weeks as a speculative bet on the uranium price. Keep in mind this company has a higher than average risk profile and even though I do think this mine will eventually be developed, there’s no way I can guarantee it will indeed happen. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EGRAF over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Dividend Growth Stock Overview: SJW Corporation

About SJW Corporation SJW Corporation (NYSE: SJW ) provides water services to customers in the San Jose, CA metropolitan area and to customers in the region between San Antonio and Austin, TX. The company was incorporated in California in February 1985, and is headquartered in San Jose. SJW has 395 full-time employees. The company is organized into four subsidiaries: (1) the San Jose Water Company; (2) SJWTX, Inc.; (3) SJW Land Company; and (4) the Texas Water Alliance. SJW Corporation does not report financial information for each of the subsidiaries separately. Originally incorporated in 1866, San Jose Water Company is the predecessor organization to SJW Corporation. In the 1985 reorganization, San Jose Water Company became a wholly-owned subsidiary of SJW Corporation. San Jose Water is a public utility that provides water service to over 1 million people in the metropolitan San Jose area. The company’s supply comes from a variety of sources, including groundwater, surface water, reclaimed water and imported water. Roughly 40-50% of its annual water production is purchased. SJWTX was incorporated in Texas in 1985, and does business as Canyon Lake Water Service Company. This subsidiary provides water service to roughly 36,000 people located in the region between San Antonio and Austin, TX. SJW Land Company owns undeveloped land in California and Tennessee, owns and operates commercial buildings in California, Arizona and Tennessee, and has a 70% interest in a real estate limited partnership. Finally, the Texas Water Alliance subsidiary is developing a water supply project in Texas to ensure future water supplies for the Canyon Lake Water Service Company. As a regulated utility, local and state authorities dictate SJW’s revenues and income. In 2014, the company had operating revenue of $320 million, which was up 15.5% from 2013. Net income more than doubled from 2013 to $51.8 million. Earnings per share did the same, coming in at $2.54, which gives the company a payout ratio of about 31% using the current annualized dividend of 78 cents per share. The revenue and income increase was due to approved rate changes, slightly offset by a reduction in customer water usage. The revenue increase continued in the 1st quarter of the year, with a 13.7% increase in revenue and a more than quadrupling of net income for the quarter year-over-year. In addition to the rate increases, the significant increase in net income was also due to a reduction of groundwater extraction costs. As a company that predominantly operates public utilities, SJW has had, and expects to have, large capital improvement expenditures. The company spent nearly $92 million on capital expenditures in 2014. In 2015, it plans to spend over $133 million as part of more than $660 million in capital improvements from 2015 to 2019. The company is a member of the Russell 2000 index and trades under the ticker symbol SJW. As of mid-July, the stock yielded 2.5%. SJW Corporation’s Dividend and Stock Split History (click to enlarge) SJW has grown dividends at less than 4% a year since 1995. SJW Corporation and its predecessor companies have paid dividends since 1944, and increased them since 1968. It announces annual dividend increases at the end of January, with the stock going ex-dividend in the first half of February. In January 2015, SJW announced a 4% dividend increase to an annualized rate of 78 cents per share. The company should announce its 49th consecutive annual dividend increase in January 2016. SJW Corp. historically increases its dividend in the low- to mid-single digit percentages, and the dividend growth rates reflect this. The company’s 5-year compounded annual dividend growth rate (CADGR) is 2.78%. Longer term, the CADGRs are slightly higher: the 10-year CADGR is 3.81%, the 20-year CADGR is 3.94% and the 25-year CADGR is 3.76%. SJW has split its stock twice. The splits occurred in close succession, with the company splitting the stock 3-for-1 in March 2004 and then 2-for-1 in March 2006. A single share purchased prior to March 2004 would have split into 6 shares. Over the 5 years ending December 31, 2014, SJW Corporation stock appreciated at an annualized rate of 10.40%, from a split-adjusted $19.35 to $31.73. This underperformed the 13.0% compounded return of the S&P 500 index and the 14.0% compounded return of the Russell 2000 Small Cap index over the same period. SJW Corporation’s Direct Purchase and Dividend Reinvestment Plans SJW does not have a direct purchase or dividend reinvestment plan. (The company initiated one for investors in 2011, but terminated it in 2014.) In order to invest in the stock, you’ll need to purchase it through a broker; most will allow you to reinvest dividends without any fee. Ask your broker for more information on how to set this up, if you are interested. Helpful Links SJW Corporation’s Investor Relations Website Current quote and financial summary for SJW Corporation (finviz.com) Disclosure: I do not currently have, nor do I plan to take positions in SJW.

Tough Times Ahead For REC Silicon ASA

REC Silicon posted yet another abysmal quarter with no respite in sight. As predicted, the company’s inventory build plan backfired, and the company raised capital through debt and equity offerings in the last 24 hours. We believe the management is too optimistic, and as such do not see much joy for shareholders for quite some time to come. REC Silicon ( OTCPK:RNWEF ), as we forecasted , reported horrendous second quarter results on Tuesday. While revenues of $93M is an improvement over $74.4M from Q1, they come at a steep cost to the company in terms of plummeting ASPs. As a result of the plummeting ASPs, EBITDA declined again from $24.8M in Q1 to $5.8 million in Q2. The process-in-trade loophole, through which the company has been shipping polysilicon to China in the recent past is no longer available to the company, and effectively a big part of the company’s customers disappeared overnight. Against this backdrop, the company built another 1248 MT of inventory as it was unable to sell its poly production in the market. This inventory build in a downward pricing environment sapped the company’s cash flow, and the company has now come to the realization that its current business vector is not sustainable. However, as we wrote earlier, this handwriting was on the wall when the company decided to build inventories instead of selling product due to low ASPs in Q1. In the face of further declining prices and balance sheet stress, the company opted to sell product at distressed prices. While the FBR poly produced by REC Silicon has typically commanded lower ASPs than Siemens poly that most of the industry produces, the gap between the prices has increased dramatically in the recent quarters. This gap opened up further at the end of Q2 (see chart below). We believe there are two reasons for this widening gap. The first is that instead of withholding selling at the low prices as the company did in Q1, the company sold product at artificially low price to raise some much-needed cash. Secondly, customers sensing the upcoming changes to Process-in-Trade, and the company’s financial position, appear to have negotiated hard and gotten steeper discounts than usual. While the company sold a significant amount of polysilicon at low prices in the quarter, the production continued to be ahead of sales. The resulting 1248 MT inventory build in the quarter has now increased the company’s inventory to approximately 6000 MT – approximately 4 months of sales. Finally, the company decided that it cannot keep building inventory and has decided to cut its production at its Moses Lake facility. This reduced the company’s manufacturing capacity by about 2000 MT. The company also decided to put on hold its expansion plans. REC Silicon had previously planned 3000 MT of new capacity using its updated FBR-B process. This new process could have helped the company further improve cost structure but is now being halted with an eye towards a future restart. The company is conducting an orderly shutdown process and expects to be able to bring the facility to production within a year once it decides to restart the work. With these production moves, the company is dramatically reducing its capacity and expects that it will deplete its current inventory by 1500 MT in Q3. This would help generate some much needed cash flow for the company. The company also made an equity offering last night and sold about 10% of the company shares. REC Silicon allocated 230,000,000 new ordinary shares at a price of NOK 1.55 per share in the Private Placement to existing shareholders and new investors, with gross proceeds of NOK 356.5 million (approx. $43M). The company also announced Thursday morning that it also has sold or agreed to sell a nominal value of NOK 155,000,000 (approx. $19M) of bonds held in treasury to investors to raise additional money. These moves dramatically strengthen the company’s balance sheet and reduce the fears of possible default of debt payments coming up in 2016. In the earnings call this morning , management commented that the adversity is temporary and caused by the tariff war between US and China, and that the company expected the trade situation to be resolved by early 2016. Over the short term, the company sees Korean manufacturers supplying 60% of China import needs, German manufacturers supplying 30% of the needs, and the US poly manufacturers essentially shut out of the market. With the tariffs, the company expects that Korea production will mostly go to China leaving the US producers to chase Malaysia, Taiwan and other countries. REC management contends that the current low polysilicon prices are due to tariffs and Chinese government subsidies will not prevail in the long term. The company’s worst case plan involves shipping product to countries outside of China and continuing with interim measures such as tolling until the Company’s Yulin JV enters production, at which time, the company expects to be able to serve the China market. REC sees polysilicon becoming the choke point in PV production and expects poly prices to recover. The company, with over a billion dollars in assets, is not taking any impairment charges in spite of these developments because it expects the trade situation to be resolved by the beginning of 2016. We see the management’s view, even the most pessimistic version, as likely too optimistic. We do not see any indication that the tariffs are likely to go away quickly and we do not see an end to production from China’s SOEs and other heavily subsidized Chinese manufacturers. We also do not buy the commentary that a long-term shortage of poly will develop and that the poly prices will move up meaningfully. Even a more moderate set of assumptions would suggest that the company’s thesis that the current market economics will not work and the prices will go up over time is highly speculative. Unfortunately for the company, the reduction of production means the fixed cost absorption will be a problem and the company will have an inferior cost structure going forward. The company’s manufacturing roadmap, which relied on the lower cost FBR-B production, is now problematic. Because of these factors, we believe it is highly likely that the company’s assets are severely impaired. The company’s silicon gas sales, which do not depend on the polysilicon business, provide a respite to the company. However, this product line offers no significant long-term growth benefit to the company’s story. While the management presents itself as planning for worst case, we believe the company is far too optimistic. Given the tariff uncertainty, likely low polysilicon prices, impending new capacity, and commodity nature of the industry, investors in the company may not have much to celebrate for a long time to come. Our view on RNWEF: Avoid. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.