Australia | Apr 17 2012
– Paladin's March quarter production disappoints (yet again)
– Sales solid, expected to be stronger in June quarter
– Minor changes to broker models post the report
– Brokers remain split on outlook for Paladin
By Chris Shaw
The three months to the end of March proved to be yet another disappointing production period for Paladin ((PDN)), with both the Langer Heinrich and Kayelekera mines operating below market expectations for the quarter.
Total uranium production in the quarter was 1.77 million pounds, JP Morgan noting this fell 3% short of the December quarter and was lower than the broker's forecast of 1.98 million pounds. Langer Heinrich fell short due to commissioning bottlenecks and lower grade feed, while unsuccessful testing of a new reagent impacted on performance at Kayelekera.
The production result meant guidance for the full year has been trimmed, management now forecasting full year output of 6.95 million pounds. Brokers have adjusted to this by trimming expectations, Citi cutting its production forecast for FY12 to 6.9 million pounds from 7.0 million pounds previously.
On the plus side, Citi notes sales for Paladin during the period were achieved at a slightly higher price than expected, the average realised sales price of US$59.17 per pound coming in above the broker's US$57.70 forecast.
Inventory levels also increased during the March quarter, something Citi expects will result in higher sales in the June quarter. BA Merrill Lynch agrees, pointing out Paladin's sales volumes tend to be unevenly distributed throughout the year. This means a significantly higher sales figure for the June quarter should come as no great surprise.
The other changes to models are longer-dated, an example being UBS's expectations for Langer Heinrich Stage 4. The broker now sees first production from this stage being delayed by nine months relative to previous estimates, to the first half of 2015. This has a minor impact on both earnings in coming years and valuation for Paladin, UBS trimming its valuation by 1% to $2.60.
While there have been minor changes to models across the market, price targets and ratings have not been adjusted. The FNArena database shows Paladin is rated as Buy three times, Hold three times and Sell once. The consensus price target is $2.18, with targets ranging from Macquarie at $1.50 to JP Morgan at $3.35.
With respect to the Buy argument for Paladin, JP Morgan continues to be attracted to the group's leverage to spot uranium prices. As the broker notes, the average estimated incentive price for new uranium production is around US$80 per pound. Given this is above current spot prices there is potential for projects to be delayed or cancelled, potentially leading to a tightening market and higher prices in JP Morgan's view.
Another positive noted by Citi is the potential for Paladin to create value by selling some assets. At present Paladin is in discussion with potential joint venture partners with respect to undeveloped assets, but Citi suggests this is unlikely to raise enough funds to meet some debt repayments due next year.
This leads Citi to suggest selling a joint venture stake in an undeveloped asset would both reduce development risk and generate a value for something the market currently ascribes little value to. This offers some upside potential in the broker's view.
In contrast, Deutsche continues to rate Paladin as a Hold, reflecting both the expectation of further minor delays to production as expansions are bedded down and with upcoming capex and refinancing requirements continuing to pressure the group's balance sheet. UBS sides with Deutsche in that funding and cash flow remain concerns, though the broker suggests these could be removed if asset sales result from Paladin's strategic review process.
In a relatively flat market shares in Paladin are weaker today and as at 12.40pm the stock was down 8.5c at $1.69. This compares to a range over the past year of $1.11 to $3.80 and implies upside of just under 30% relative to the consensus price target in the FNArena database.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
