Australia | Sep 07 2007
By Greg Peel
After playing the role of the big bad predator over the last twelve months, Paladin Resources (PDN) could now become prey, at least according to CEO and founder John Borshoff. Talking it up?
There is no doubt Paladin has been a big disapointment of late – not just for the Johnny-come-latelies into the uranium space (which includes just about every major brokerage in town) but also for the longer term holders of the stock. Among Paladin’s problems have been its $1.2 billion dilutive spending spree on Valhalla (VUL) and Summit (SMM), ramp-up problems in Namibia and a falling uranium spot price. (See “Paladin Stung By Production Shortfall”; Australia; 05/09/07)
Paladin’s share price has now fallen below $6, having scaled the dizzy heights above $10 when the world thought the uranium price was going to US$200/lb. It is now US$85/lb. The Australian reports Borshoff has suggested that ongoing rationalisation of the uranium market could make Paladin a takeover target if the share price keeps slipping as it has.
So what’s the problem John?
Perhaps from a shareholder’s point of view it would be a waste for Paladin to be swallowed up into some mega-diversified just as Namibia is coming on, Malawi’s in the wings and Queensland simply awaits the go ahead. ABN Amro calculates the current Paladin share price is only implying about a US$60/lb price for uranium, while spot is at US$85/lb, long term views are bullish, and consolidation in the uranium space earlier in the year suggested much higher valuations.
The turn around in the market’s perception of Paladin is a combination of the sudden realisation US$138/lb was getting ambitious, and the fact that Langer Heinrich has been slow to ramp up. ABN believes the project is only now where it was supposed to be at the start of the year. Modifications are underway, however, and while noting additional capex has been in the order of US$8m Paladin should be able to reach its target of 2.2Mlbs in FY08.
On the basis of production problems ABN has lowered its valuation for the stock from $6.92 to $6.59, but the analysts’ 12-month target falls from $12.10 to $8.94. ABN has been a slow mover among the target adjusters, with the average now sitting at $8.00 on a $6.40 (Macquarie) to $10.40 (UBS) spread. ABN retains Buy, so the B/H/S ratio sits at 3/1/1, with GSJB Were the stick in the mud.
In the meantime, Merrill Lynch has raised its FY09 uranium price forecast by 17% to US$70/lb, leaving its FY07 average at US$105/lb and FY08 at US$80/lb. This adjustment comes as part of a major Merrills overhaul of commodity price forecasts – something analysts like to do every now and again.
The only loser of the bunch was zinc, with a 3% reduction in FY07, but the analysts raised the FY09 price by 25%. Otherwise, zero to substantially positive price upgrades have been made to forecasts for copper, aluminium, nickel, lead, gold, the coal spectrum, and iron ore (from previous forecasts).
FY07 highlights include 8% for copper, 29% for lead (everyone’s been way behind the curve on that one), and 24% for LV-PCI coal. FY08 highlights include 25% for copper, 38% for lead and 20% for iron ore (implying 30% above FY07).
As is always the case, commodity forecast upgrades, particularly longer dated ones, result in substantial earnings forecast increases for resources stocks. Among the big winners are BHP Billiton (BHP), Rio Tinto (RIO), Alumina (AWC), Zinifex (ZFX), Murchison Metals (MMX), and Oxiana (OXR).
