Much of the news headlines related to nuclear energy are concerned with either Iran or North Korea, and how these two countries are playing dirty games with the rest of the world in order to achieve their ulterior, and predictably evil, motives. That should not divert our attention from the fact that nuclear energy is clean, green and cheap when compared with conventional sources of energy. Countries like Japan, India, Norway and even the U.S. depend on nuclear energy sourced from enriched uranium for generating power and also for medicinal purposes.
With that in mind, it is important to understand that uranium is extremely important in an era when oil and gas prices are skyrocketing and Middle Eastern tensions continue. Rio Tinto (RIO) is one of the largest producers of uranium, and its facility in Namibia has been doing well for the last few years. However, Rio reported that its uranium output declined by almost 41% to 2,148 metric tons. It not only missed the target, but also sent shock waves through the stock market.
The Rossing mine has quite a lot of uranium left, but it may see a gradual decrease in the amount of uranium that will be unearthed in the future. Rio Tinto also mentioned that excessive rainfall, low grade uranium, maintenance shutdowns, and industrial strikes wreaked havoc on its uranium industry in Namibia. In fact, Rio Tinto revealed that the Rossing mine faced a loss of $57 million but was confident that it would make a profit in 2014. It may sound too optimistic in a world that is accustomed to pessimistic headlines and skepticism among analysts.
However, there are many positive factors helping Rio. First, it has a very successful uranium industry elsewhere in the world as well. Rio does not just mine for uranium in Namibia, but also in Australia, where it runs a successful mine at Energy Resources of Australia. The mine is located 250 kilometers east of Darwin in Australia's Northern Territory. The Rossing mine may have seen bad days, but it still continues to be one of the largest uranium mines in the world and will continue to provide nuclear energy to several nations around the world.
The Rossing mine produces 7.55% of the world's uranium requirements. If you are still not convinced about Rio Tinto's successful uranium business, there is better news. It is planning to acquire mining rights of Toro Energy in Namibia. Toro Energy controls 25% of Nova Energy, which produces uranium. If Rio Tinto grabs this deal, it would be able to secure mining rights for not only uranium, but also base and rare metals. This announcement shows that Rio is planning way ahead of its current status and is in great shape when it comes to securing prospective projects for the future. If Rio acquires Toro, it would become very easy for it to maintain its uranium production at optimum levels. The only hitch probably will be to develop the infrastructure in the same manner as it has developed the facilities at the Rossing mine. It needs to be seen how and when Rio Tinto will acquire Toro but when it does, its stock will surely become more valuable than it is at the moment.
By acquiring Toro, Rio will be able to deal with its competitors who are doing rather well too. It would be able to sell its uranium to countries like Japan, India and certain European countries, which heavily depend upon nuclear energy for fuel purposes. Though it may seem like Rio is concentrating on uranium, it is not stopping at just that. It has gone ahead and sought complete control over Richards Bay Mining Holdings and Richards Bay Titanium Holdings. Should Rio win the case, it would stand to gain a lot of mining opportunities that are related to other metals like titanium.
Meanwhile, competitors like Cameco are doing pretty well too. Cameco is planning to spend $8 billion in Saskatchewan in order to mine uranium. It would be really good if Rio manages to get hold of one of these mines in Canada, as that would help it to diversify its uranium business out of Namibia and Australia. Cameco (CCJ) seems confident that in spite of Fukushima disaster, the nuclear industry is kicking back again, and nuclear stock will likely become more attractive. With that in mind, Rio must make sure that it grabs every uranium opportunity that comes its way.
BHP Billiton (BHP), on the other hand, is under pressure from Western Australian state officials to sell its underdeveloped uranium project. The government's argument is that if BHP does not intend to develop the mine, it should sell it to a company that can develop it efficiently. The first company that comes to my mind is of course, Rio Tinto. Rio may express interest in the coming weeks, if it chooses to acquire more uranium mines. Rio Tinto's other competitors, like Freeport-McMoRan (FCX) and Vale (VALE), do not really deal with uranium, leaving the road clear for Rio.
Thus, Rio should concentrate on its attempts to secure newer uranium mines, engage in exploration activities and also work toward acquiring mines that are rich in metals. This would bolster the already strong stock that Rio boasts of. In fact, being the 3rd-largest mining company in the world, there is no doubt that it would continue to attract investors from all around the world. Even when it announces minor setbacks, like the Rossing mine's uranium production in 2011, we should take it in stride and understand that Rio is busy getting its business back, while media tries to sensationalize trivial issues that are common in mines.
I believe Rio Tinto is the perfect mining stock to invest in at the moment. Excluding goodwill, it has revealed a return on invested capital averaging around 24% in the last 3 years. Companies that generate a cash flow margin of more than 5% are perceived to be great companies to invest in. With a free cash flow margin of 19.6% in the last 3 years, Rio Tinto's cash flow generation is very strong. It is also expected that the company's free cash flow margin is going to be around 22.1% in the coming years. By purchasing Toro, Rio Tinto has effectively proven to investors that its plans and schemes are going to be stable, bullish and ambitious.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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