ERA and Rio face a difficult conversation over the value of a deposit you can’t mine

The Ranger uranium mine in Kakadu National Park.

If you can’t mine a deposit, does it still have value? Or is it just dirt? This is the thorny issue Grant Thornton was asked to struggle with when handed the job of putting a value on ERA shares.

On the face of it, Grant Thornton’s independent expert report – released to the market by ERA on Monday – has simply put a price on the minority shareholding in ERA, suggesting Rio Tinto would need to pay up to $122.6m to mop up the 13.7 per cent of the company it does not already own.

But, with Rio already having committed to fund the clean-up of ERA’s historic Ranger uranium mine – which sits inside the World Heritage-listed Kakadu National Park – the Grant Thornton figure is likely to face some significant push-back from the mining major, given Rio is already on the hook for a clean-up that could cost more than $1bn more than ERA has available.

ERA is facing a substantial shortfall in the cash needed to clean up the site of the long-running uranium mine, with the Grant Thorton report suggesting that – on current estimates – $1.19bn-$1.79bn is still needed to fund the remaining work.

ERA was holding $669m at the end of June, including $537m held by the federal government in a rehabilitation trust account.

It commissioned Grant Thornton to put a valuation on its shares in July, after Rio said it wouldn’t participate in a proposed $300m rights offering at a proposed 10-15 per cent discount to ERA’s trading price – hovering at around 20c at the time, saying the trading price did not represent “fair value” for ERA’s assets.

The independent expert was engaged to value those assets, and effectively set a price for the raising.

The Grant Thornton report puts a valuation of 15.9c-24.3c on ERA shares – implying the minority shareholdings are worth $80.2m-$122.6m.

But that’s where the problem starts, because ERA has no intention of mining any of the deposits on which Grant Thornton’s valuation is based – and probably wouldn’t be allowed to even if it wanted to.

Grant Thornton’s report puts a raw $982m-$1.28bn valuation of the uranium still sitting under ERA’s control, the bulk of which comes from the undeveloped Jabiluka deposit.

The problem is – as noted by the accounting firm – that ERA’s agreement with the region’s Mirarr traditional owners says the deposit won’t be developed without their permission.

Which they will not give.

Curiously enough, the Grant Thornton report also puts a $600,000-$16.7m valuation on the Ranger 3 Deeps deposit – where mining is about to be banned under legislation before federal parliament, required to extend the time ERA has to rehabilitate the site.

To be fair to Grant Thornton, it came into the job wedged between a rock and a hard place.

On the current plans of ERA and Rio, the company has no value and is merely the holder of a substantial rehabilitation liability. But it’s also worth remembering that uranium does not belong to either company. In this case – because Ranger was discovered in 1969, before the Northern Territory became self-governing – it belongs to the Crown, through the federal government.

It’s clear that the current Labor government, and any Senate in which the Greens hold the balance of power, is not going to allow an extension of mining at Ranger or Jabiluka.

But times and governments change and, as Grant Thornton notes, the energy crisis in Europe has made uranium sexy again.

It is theoretically possible that the traditional owners could have a change of view, and that a future government could again allow mining.

The market thinks ERA is worth $830m, and no doubt minority shareholders want to be paid for their shares, even if they bought ERA stock knowing the company planned to close its only real asset. But Rio will resist the idea it should be forced to pay $80m-$122m for the privilege of paying another $1bn in rehabilitation costs.