Australia | Oct 17 2006
By Greg Peel
It’s been a rock’n’roll ride for the fortunes of the Paladin Resources (PDN) share price this year. Uranium stocks have been hot, hot, hot, but the reality is few in Australia will actually produce uranium in the foreseeable future.
Not so Paladin. Despite having resources in Western Australia (where Premier Carpenter says no uranium mining), and being presently in a court battle to acquire Valhalla Resources (VUL) in Queensland (where Premier Beattie says no uranium mining), Paladin will produce actual uranium very shortly from its Langer Heinrich project in Namibia.
As the world has reawakened to nuclear energy the uranium price has been heading nowhere but up of late, and it again surged 6% last month to US$56/lb. This has caused investors to go diving into Paladin, only to retreat when analysts have suggested the share price is overdone. The stock hit a high in August of $5.54, before drifting away again to a trough around $4.20 when some analysts called the end of the commodities boom.
There are only three brokers in the FNA database that cover Paladin. ABN Amro has held a Buy for a while, but Deutsche Bank had previously decided the share price more than reflected the miner’s value, settling on a Hold. That changed at the beginning of this month, when Deutsche rescinded its view and upgraded its 2008 uranium price forecast to US$76/lb. The analysts upgraded to Buy and shifted their target up from $5.27 to $6.07.
Paladin has bounced off September lows to close yesterday at $5.15, representing a 22% rise in three weeks. This has proven a bit much for UBS analysts, irrespective of their positive views on the uranium price.
UBS points out that Langer Heinrich has not yet started to produce uranium, and there are always operational risks to consider. (This is a common theme among analysts who note euphoria over commodity prices often discounts the risky realities of mining operations. Merrill Lynch’s Vicki Binns has been known to bang her head against the wall at times).
UBS also notes Paladin has the opportunity to lock in 10-year uranium contracts at the current spot price but hasn’t done so yet, which could be because it hasn’t actually produced any uranium yet, or because it wants to play the market and look for higher prices still. Either way, UBS has taken the opportunity to downgrade Paladin to Neutral from Buy.
This is not a reflection on the analysts’ uranium price view. In fact they have increased their uranium price forecasts, and as a result shifted their Paladin target up from $5.00 to $5.50. It is simply a valuation consideration.
The average target in the FNA database now stands at $5.73, still 11% above yesterday’s close. The FNA database ratio sits at 2/1/0 (B/H/S).