Electricity remains the most important reason why uranium is mined and will continue to be the most important reason for the sustenance of uranium companies. With this in mind, I was surprised to learn that BHP Billiton Limited (BHP) was selling its wholly-owned Yeelirrie uranium deposit in Western Australia to Cameco Corporation (CCJ) for $430 million. Sources at BHP have revealed that it would be better off without the undeveloped mine and it would be better for the company to concentrate on larger and more profitable mines than Yeelirrie, which just continues to exist in Western Australia in a state of dormancy. BHP Billiton 'hoped' that Cameco woul be able to develop the mine as it is too small a mine to fit into its portfolio.
I would have liked BHP Billiton to operate the mine, develop it and rake in the profits by selling uranium to either Russia or China. If BHP Billiton had not sold the mine to Cameco, it would also have developed a positive image in the eyes of Australian authorities who have always complained and grumbled that BHP Billiton leaves mines undeveloped and unattended. As I mentioned earlier, most developing countries are in dire need of electricity and uranium seems to be one of the very few solutions around. If BHP Billiton had capitalized on this need in the international market, its overall valuation would have increased at least a little.
Analyst David Sadowski spoke to The Energy Report and shared his views on the uranium industry. He mentioned that the uranium business is bullish on the whole, and he continued to add that BHP Billiton is one of the few companies that can manage to sell uranium at a low price because it has a significant gold and copper output as well. Reading that analysis, it is very confusing to learn that BHP went ahead and sold what could be a profitable mine, to Cameco.
BHP's earnings before interest, taxes, depreciation and amortization declined by 9% to $33.7 billion. The company's earnings before interest and taxes declined to $27.2 billion, by 15%. Attributable profit, according to the company's transcript, was $15.4 billion. This means BHP Billiton experienced a decline of 35%. However, the company's cash flow is very strong at $24.4 billion. With a final dividend of 57 cents per share and a low cost, high margin growth, BHP Billiton continues to be a valuable company to invest in.
It sure would have been great to just keep the mine without selling it to Cameco. As discussed earlier, I do believe that uranium mines are very valuable even if the significance on overall valuation is minimal. However, even after selling the uranium mine to Cameco, BHP Billiton remains in a very strong position. The sale was partly to consolidate its mines in Australia and elsewhere, where business is really good, according to BHP Billiton.
If we take a look at BHP Billiton's competitors, the first company that comes to mind is Rio Tinto (RIO). Rio has been successfully managing and operating its uranium mines at Energy Resources of Australia Ltd in Australia and Rössing in Namibia. In fact, Energy Resources of Australia is the world's third largest uranium producer. Rio Tinto continues to sell its products to developing countries around the world, where uranium is used to generate electricity. Other competitors of BHP include Chevron Corporation (CVX) and Vale S.A. (VALE), which have at different points in time expressed their interest in uranium exploration and mining. Chevron had toyed with the idea of uranium exploration in Kazakhstan. Nothing concrete came out of that idea and it had only undertaken uranium exploration projects in McDermitt Caldera in the U.S.
On the other hand, Chevron continues to have a very successful oil and gas business. VALE had expressed its interest in uranium exploration in Australia in 2009. That did not set off the way it should have either. VALE is currently operating the world's largest iron ore mine and is likely to make a lot of profit from its other mines. Cameco on the other hand has a very successful uranium exploration project in Kazakhstan. Kazakhstan's dictator Nursultan Nazarbayev has been particularly supportive to Cameco and its expansion plans in the country.
With these factors in mind, BHP Billiton could certainly have decided to keep its own uranium mine and operated it at a later stage. At the same time, considering its decline in earnings, it was a wise decision to sell an inactive mine, so that BHP Billiton can concentrate on its strengths more than its weaknesses. As for investors, they can rely on BHP Billiton's conservative calculations and measured responses to market demands. Selling the risky Yeelirrie uranium deposit in Western Australia is the best example possible for BHP Billiton's reliable and conservative stance, which will appeal to investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.