Uranium Week: Paladin Capitulates

This story features PALADIN ENERGY LIMITED. For more info SHARE ANALYSIS: PDN

In order to avoid further cash burn ahead of a debt repayment obligation, Paladin Energy has suspended production at its flagship mine.

By Greg Peel

Activity in the spot uranium market picked up slightly last week after a quiet prior week. Transactions totalled 600,000lbs but there is little sign of commitment on either the buy or sell side at present, industry consultant TradeTech reports.

TradeTech’s weekly spot price indicator remains unchanged at US$25.75/lb. There were no transactions reported in term markets. The consultant’s term price indicators remain unchanged at US$27.40/lb (mid) and US$38.00/lb (long).

One step forward and two steps back. Two weeks ago Shikoku Electric’s Ikata unit 3 became the third Japanese reactor to restart operation, five years after the Fukushima disaster. Last week the newly elected governor of the Kagoshima prefecture requested the temporary shutdown of Kyushu Electric’s Sendai units 1 and 2 – the first two reactors to have been restarted.

It was good news for leading Australian uranium producer Paladin Energy ((PDN)) when the company declared an FY16 underlying profit of US$25m last week, compared with a loss of US$21m the year before. But with the spot uranium price continuing to wallow and debt issues still lingering for Paladin, the company has now taken drastic steps.

Mining at Paladin’s flagship Langer Heinrich mine in Namibia is to be suspended, pending uranium price improvement. The company will process low grade ore stockpiles in the interim. While this decision results in a drop in production, importantly it results in a sharp drop in operating costs and hence cash burn.

If Langer Heinrich had continued in a sub-US$30 uranium price world Paladin would have likely fallen short of its US$212m convertible bond payment obligation due in April. The cost reduction and proceeds from asset sales means Paladin should just get over the line, albeit the US$175m expected from the sale of a 24% stake in Langer Heinrich to China’s CNNC is subject to a non-binding arrangement, UBS points out.

UBS suggests the uranium industry cannot sustain operations at spot prices below US$30/lb for more than a year. On that basis the broker expects further production suspensions and closures and therefore a higher price going forward. Morgan Stanley has just lowered its medium term spot price forecast by 27% to US$31/lb, noting this is still some 24% above current spot.

Morgan Stanley expects Langer Heinrich to remain suspended for two years, by which time the broker expects a spot price of US$40/lb. This suggests Paladin is doing the right thing and will likely make good on its 2017 payment ahead of its next payment obligation in 2020.
 

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