Paladin As A Uranium Price Barometer

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By Andrew Nelson

Last week Paladin ((PDN)) reported its quarterly results and while they were broadly well received, with production and sales levels strong, brokers remain universally concerned about the direction of the underlying uranium price, which has become the main driver to which broker recommendations are now pinned.

Examples: JP Morgan is at Hold and believes uranium prices will remain depressed over 2013. Says the broker “we do not believe Paladin can make positive cash flow at current spot uranium prices, and given the balance sheet leverage we do not expect the stock to re-rate unless uranium prices move higher.”

Deutsche Bank also believes Paladin’s growth profile remains one of the most attractive in the uranium industry and its long-term expectation for uranium beyond 2015 is positive given increasing Chinese demand and the re-start of Japanese reactors. However, the broker sits at Hold now because of short-medium term uranium spot price weakness.

UBS sits at Buy and guess what; the broker sees things moving in uranium’s favour during 2013. The broker’s hit list of good news includes the hope the newly elected Japanese government will get to work restarting those 48 idled reactors, the fact that there are 29 nuclear plants currently under construction in China, dwindling supply and stock levels given the lack of production incentive offered by current prices and increasing M&A activity in the sector.

Conversely, BA-Merrill Lynch sits at Sell and it is unsurprisingly not constructive on uranium prices at the moment. The broker has doubts about reactor restarts in Japan, saying “the fate of nuclear power in Japan’s energy future remains highly uncertain.” The broker reasons that even though the pro-nuclear Liberal Democratic Party will work to get nuclear energy built back up, a conclusion on all nuclear reactors will take up to three years, with restarts subject to local approval and public opinion which are expected to remain a major obstacle.

Today’s guest analysts from Raymond James maintain a Buy call on Paladin and are unsurprisingly positive on the outlook for uranium prices. The broker notes operational performance continues to improve, which not only increases the fundamental value of the stock, but also makes it increasingly attractive as a takeout target. As such, the broker remains bullish on the shares over the next 6-12 months.

To underscore the increasing focus of M&A activity in the space, Raymond James notes that last week’s takeout of Canada’s Fission Energy by Dennison Mines in an all-share deal worth roughly C$72m will do a good job in drawing the interest of majors such as Rio Tinto ((RIO)), Cameco, and maybe the Chinese. It’s important to keep in mind that of the nuclear capacity expected to come online over the next 20 years, the bulk of it will come from China.

That brings us, in a big circle, to the spot uranium market and what happened in it last week. Industry consultant TradeTech reports some very light activity, with just 400,000 pounds of U308 changing hands on four deals. Traders and intermediaries were both the buyers and sellers for the most part and price remained the main driver.

In fact, as prices rose last week, the gap between willing buyers and willing sellers widened, with TradeTech reporting that neither seemed all that willing to budge on price to get deals done. Hence, the light market activity. Still, the net result was a slight positive for sellers, with TradeTech’s WeeklyU308 Spot Price Indicator ending the week at US$42.50 per pound, up US$0.50 from the prior week’s value.

Meanwhile, the term market was devoid of any signs of life, with no new transactions or demand reported. TradeTech’s Mid-Term U308 Price Indicator remains fixed at US$48.00 per pound and the Long-Term Price Indicator stayed put at US$57.00.
 

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