Uranium Stocks and the Dow Push the Aussie Market to a Record High

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MELBOURNE AUSTRALIA 29 DECEMBER 2006 – The All Ordinaries piled on another 0.32% to close yesterday at 5,634 after another strong night on Wall Street that saw the Dow Jones Industrial Average rise by more than 100 points on Wednesday night.  The Dow Jones closed at an all-time record of 12,510.

Justine Gallagher, head of sales trading at ABN Amro in Sydney told Bloomberg News, “The strength in resources has been fuelled by a sharp increase in US home sales, the bellweather for broader economic growth.  The market will finish the year strongly.”

While there was plenty of good news for Australian stocks with an exposure to uranium, such as BHP Billiton (ASX: BHP), ERG, and Deep Yellow (ASX: DYL).  It wasn’t quite so rosy for oil and gas producer Tap Oil (ASX: TAP).

Despite their bad news, the stock only fell by a single, solitary cent to $1.505.  The news?  Well, it surely couldn’t have been that bad if it had such a negative effect.  Perhaps, perversely, it will have a positive effect on the share price as the anticipated drop in supply of natural gas, supports or pushes up the gas price.

The news as reported by Bloomberg, was that “Apache Venture Suspends Harriet Reserves Commitment.”  Tap Oil holds a 12% interest in the Harriet joint venture with Apache (NYSE: APA).  Apache holds 69%, and the Kuwaiti Foreign Petroleum Exploration Co. holds the remaining 19% stake.

However, the circumstances of the announcement makes your correspondent wonder how company executives manage to get away with, well, some of the things they get away with.

For instance, the members of the joint venture had an agreement to show twenty years worth of reserves to their customer, Burrup Fertilisers Pty Ltd.  The deal that cemented this was only signed in December 2001.

Almost exactly five years into the arrangement and it has hit the rocks.  To such an extent that the joint venture partners have declared a ‘force majeure’ over the the project.

The ‘force majeure’ in this case is not perhaps what we would expect.  Most definitions that we have come across broadly link it with being due to an act of God, or a war, or a terrorist event, or a flood, a fire, or a riot.  In this case however, it appears that the Harriet joint venture has just not been able to find as much gas as they had promised.

Does that really count as a force majeure?  Or is it just a plain old case of over-promising and under-delivering?  Can a lack of viable discoveries really be counted this way?  We would think that would give every mining operation complete carte blanche to sign contracts left, right and centre on a promise of reserves, only to have a get-out clause if they struck dust.

Obviously, customers would soon catch onto that ruse, but it is still pretty remarkable that these three amigos look as though they are going to get away with it.

In a previous statement on the 27th October, Tap Oil told the Australian Stock Exchange that three wells it had drilled were ‘failures.’  It did however say yesterday that its drilling at the Bambra East well was “very encouraging.”

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
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