08/09/2014 - 13:57

Energy glut costs Paladin $1bn

08/09/2014 - 13:57

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Uranium mining is a challenging business at the best of times, but the current abundance of oil and gas is making life even harder for companies such as Paladin Energy.

Energy glut costs Paladin $1bn
BANG FOR BUCK: Coal-fired power stations are the most cost-effective electricity solution in developing nations. Photo: iStockphoto

Survival stories are normally told about explorers in remote parts of the world, not about mining companies such as Paladin Energy, which last week reported another hefty loss to take its three-year total past the $1 billion mark.

If that amount of money had been lost in a single year it would have made national headlines, whereas Paladin’s latest $US389.6 million after-tax loss ($A418 million) was largely overlooked.

But when the $US474 million lost in 2013, and the $US200.8 million lost in 2012 are added to the latest number, a picture emerges of a company that is struggling to survive, let alone profit, in a world oversupplied with energy.

It wasn’t supposed to be this way, as advocates of ‘peak oil’ theory are reluctantly being forced to acknowledge.

According to the theory of peak oil, which says the world will soon run out of liquid fossil fuels such as oil and gas, it will be necessary to find alternative energy sources, including nuclear power, and renewables such as wind and solar.

However, rather than a period of shortage the reverse has occurred, with an abundance of most forms of energy, including coal and oil. This glut is holding down prices and limiting profits to all but the lowest-cost producers.

Paladin’s woes, which can be seen in 10 consecutive years of trading losses and asset-value write-downs totalling more than $US1.8 billion, are a comment on the challenge of uranium mining and the high level of competition from alternative fuels.

The losses are also a warning for investors who imagine that other companies will be able to easily and profitably enter the uranium mining business, and why talk of developing uranium mines in Western Australia any time soon is fanciful.

A recent rise in the short-term price of uranium to around $US31 a pound (the long-term sales price is higher but generally kept private) has encouraged a flicker of interest in uranium, as have plans to build more nuclear reactors in a number of countries.

But what most proposed new mines need is a price above $US60/lb, and perhaps much higher depending on the project’s location and degree of mining and transport difficulty.

Recent trends in the world energy sector indicate it is highly unlikely the uranium price will double this decade due to a range of factors.

• Lower prices for thermal (electricity-producing) coal encouraging its greater use in power stations that might have environmental problems but which are easier and cheaper to build than nuclear power stations (and very much in favour in the developing world where electricity demand is soaring).

• Rising production of oil and gas, particularly in the US, where new techniques are unlocking reservoirs of fuel in shale and other types of rock once regarded as impervious and uneconomic.

  • • The export around the world of US technology to extract shale oil, effectively ensuring a much longer life for the oil and gas industry than that predicted by peak oil theory.
  • • The increasing popularity for renewable energy sources such as wind and solar, which currently rely on government subsidies but will become cheaper as volumes grow.

Predicting the future direction of energy prices is never easy, and generally wrong, which is why speculation about the US oil price plunging to as low as $US50 a barrel from its current $US96/bbl will probably prove to be excessively pessimistic.

However forecasts such as that point to the trend price in energy, which is down, not up as had been expected at a time when peak oil theory was popular.

Adjusting to such a fundamental economic change implied by falling energy prices is more than a challenge for investors – it’s a nightmare for management in companies that have built their entire business case on rising energy prices.

Paladin is one of those companies caught by the remarkable downward trend in energy prices, and by its own optimistic forecasts of strong demand and rising prices for uranium, which have not occurred and look unlikely to occur in the foreseeable future.

Coal bounce

COAL, like uranium, has been a target of persistent environmental protest, so it will be an annoyance to the environmental lobby that coal is making a comeback thanks to that most basic of reasons – it’s cheap.

No-one is tipping a coal boom, but there is evidence emerging that coal has reached a turning point that should lead to prices creeping higher.

The cause of coal’s plunge over the past two years was not what environmentalists like to claim – a public rejection of the fuel as the world’s worst source of pollution.

The price fall was simply a function of excess production flowing from a surge of mine developments during the height of the resources boom.

Today, the reverse is happening, with an estimated 47 coalmines around the world closed during the past two years thanks to the effect of lower prices.

Removing high-cost coal from the system does not mean demand for coal is falling, in fact it continues to rise because it has become the cheap ‘go to’ fuel in most countries.

Overall, coal retains a 40 per cent share of the global energy market; and because it is so cheap, after two years of price decline it has made it even tougher for rival fuel sources to expand, and that includes uranium and renewables.

Ethical choices

FINDING ways to get rich is only half the job of an investment banker. Avoiding ways of losing money is the second half, which could be a reason for an interesting piece of recent research from Citigroup.

Coming in at 152 pages, a reported titled ‘Modern Slavery & Child Labour’ could have been co-authored by the local champion on both topics, the iron ore billionaire Andrew Forrest.

It wasn’t. The work seems to be entirely the product of the Sydney office of Citigroup; and while it raised the disturbing question of modern slavery it did not go as far as to name companies that might be exposed to a future charge of benefiting from slavery.

Perhaps in the next round of what seems to be an emerging campaign there will be a name and shame element, which could hit the share prices of some ASX-listed companies.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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