Paladin Still Burning Cash

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

-Cost cutting to continue
-Cash flow trend still negative

By Eva Brocklehurst

Uranium miner Paladin Energy ((PDN))  has been diligent in cutting costs but unable to keep up with the falling price of the yellow stuff. Rapid falls in the uranium price this year have had a negative impact on the company's cash flow and it doesn't look like getting better any time soon.

Of the five brokers currently covering the stock on the FNArena database, two have updated commentary after the September quarter report – JP Morgan and UBS. Both brokers retain Neutral ratings on the stock, having both downgraded in August after the announcement of an US$88m capital raising. JP Morgan believes the stock is trading well below unrisked valuation. The broker's 50c price target of  reflects a 25% discount to valuation, relating to concerns over the cash flow trend. Paladin has three Hold ratings and two Sell on the database. The price targets range from 40c to 72c. The consensus price target of 57c suggests 38.5% upside to the last share price.

The company generated positive operating cash flow for the quarter of $3.4 million, but this was boosted by a $30m unwinding of working capital and low interest payments. Cash flow is still a big concern because, with uranium prices around US$35.75/lb and Paladin burning US$85m per annum in pre-debt repayments, cash is not hanging around. The cash balance at the end of the quarter was US$125m but UBS estimates, at the end of FY14, it will be reduced to US$32m at current spot prices.

Profitability was hampered by impairments in the quarter, even though revenue increased 13% from higher sales volumes. The company is committed to lowering costs further at both operations and head office. At Langer Heinrich the target is for unit costs to be lowered another 15% over FY14 and FY15. It's pushing up hill. Both Citi (Sell) and BA-Merrill Lynch (Underperform) have noted in the past that cost reductions are OK but have little impact in a realm of falling prices. Moreover, Paladin, according to Merrills, suffers from higher costs and gearing than its peers.

JP Morgan observed the improvement in operations and that costs continue to come down. Production is close to, or exceeding, nameplate. The problem is the speed at which prices are falling has been greater than the cost saving that were achieved. JP Morgan estimates the cash balance could reach US$35-45m by the end of FY14 at current trends and this makes a part sale of Langer Heinrich even more important. The company had terminated sale discussions with interested parties earlier in the year, unable to agree on an acceptable price, and instead undertook the placement to bolster the balance sheet. Paladin has indicated it would provide an update on the sale process by the end of this month.

Paladin has two producing mines, Langer Heinrich in Namibia and Kayelekera in Malawi. The company has projects in Queensland but current policy prohibits uranium mining.

FNArena noted last month there was little reason for Paladin to feel confident. The international uranium market is currently in balance on a demand/supply basis and the continually delayed re-start of Japanese reactors is the most important catalyst. Even when this happens there's not likely to be a significant rebound in prices because improvement is likely to be met with increased prices.
 

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