Commodities | Nov 10 2006
By Greg Peel
There has been some concern to date in the world of metallurgy and uranium production over the process adopted at Paladin Resources’ (PDN) much heralded Langer Heinrich mine in Namibia. In order to dispel those concerns, Paladin organised a tele-conference presentation by Langer MD Garnett Halliday and group metallurgist Dave Marsh.
The concern lies in the alkaline leach circuit extraction process being ramped up at Langer. Uranium is more often extracted through an acid leach process. Will the process work? A lot hangs in the balance.
The uranium at Langer is only of a low grade. Much lower, for example, than that at Canada’s massive Cigar Lake project. But there is a lot of it. Paladin believes at least 40Mt. The good news is that while Cigar Lake requires underground excavation, Langer Heinrich is an open-pit operation. Hence the cost of extraction is much lower.
Cigar Lake is now underwater, and it may take a year before the mine is back on track to provide the 10% plus of world uranium demand it was hoped. As a result, the uranium price has shot up again recently, to a “spot” price of US$60.25/lb.
While Langer Heinrich does not come close to the reserve estimates of Cigar Lake, Olympic Dam or Ranger, it is still a globally significant reserve. Of further significance is that current uranium producers are selling their product for as little as US$16.50/lb, and may have to do so for some time yet. This is due to the previously established practice of selling uranium on a long term contract basis.
Paladin does not have that restriction. The timing of the Langer Heinrich commencement, due at the beginning of 2007, is as good as winning the lottery. Paladin will be in a position to sell its uranium at today’s prices, and could already be talking forward sales. It is unclear when, for example, Energy Resources Australia (ERA) will be free of its existing contracts. It’s not telling.
UBS analysts believe Paladin could achieve uranium forward sales at as much as US$10/lb over the current spot. That’s US$70.25 – a long way from US$16.50/lb. That’s why Paladin has caused so much excitement on bourses around the world.
But back to alkaline leaching. Dave Marsh has explained that the reason why acid leaching was dismissed at Langer is because the ore contains high quantities of carbonate which would require the use of 5-6 times more acid than in traditional processes.
The company from whom Paladin bought Langer Heinrich – Gencor – had started developing the alkaline leach process way back in 1975. Paladin has since improved that process. You would probably need to hold a degree in metallurgy to understand how, but suffice to say the presentation was enough for the UBS analysts to become a lot more confident in the Langer project. All is on track for ramp-up completion by next month, as forecast.
UBS is assuming that Langer will begin producing uranium next month, and will reach full production potential in the third quarter of next year. By the analysts’ calculation, a share price of $6.37 implies a discounted long term uranium price of US$68.50/lb. UBS is projecting a 2007 price for uranium of US$71/lb in 2007 and US$75/lb in 2008.
Nevertheless, UBS retains a Neutral rating on Paladin with a target price of $6.00 – 13% below yesterday’s close. Only three brokers in the FNArena database cover Paladin, and both ABN Amro and Deutsche Bank rate the stock a Buy. The average target is $6.18, with ABN the high-marker at $6.47. That is still below today’s (lunchtime) price of $6.64.
Both Paladin and ERA have seen stellar stock price runs of late. These are the only pure-play uranium stocks on the Australian market which can actually produce uranium. It now remains to be seen whether the other two brokers will downgrade on the basis of the share price rally or rethink uranium price forecasts. It also remains to be seen whether other brokers will initiate coverage of a resource stock that is dominating the headlines.