Commissioning Risks Keep Brokers Neutral On Paladin

This story features PALADIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: PDN

By Chris Shaw

In terms of bottom-line earnings emerging uranium producer Paladin ((PDN)) reported a loss of more than US$475 million but equity brokers are not particularly perturbed as they point out the headline number included significant asset impairment charges. On an underlying earnings basis the loss was more in the order of US$25 million for the first half of FY09.

Of more importance, according to ABN Amro, is the fact the group’s growth projects are continuing to progress well, with Langer Heinrich Stage 2 set for a ramp-up in March and with design capacity seen as consistently achievable in coming months. As well the Kayelekera mine should deliver a productoin ramp-up schedule in March after commissioning last month, the project now being 90% complete.

It is this de-risking of projects that is cause for optimism in the broker’s view, especially given what it sees as a favourable outlook for the uranium sector generally thanks to lagging supply and a growing demand outlook. Deutsche Bank agrees the outlook for the company is good given not only growing output but also the progress being achieved in terms of cost reductions at the group’s projects.

JP Morgan also rates the stock as an Outperform, though its positive view is largely a longer-term one as the stockbroker suggests in the current economic environment the market is unlikely to apply full value to the group’s projects and its portfolio of exploration assets.

Taking a more cautious view is Bank of America-Merrill Lynch as the broker suggests there is still a fair amount of commissioning risk associated with the company’s new projects over the next few months. To reflect this the broker retains a preference for Energy Resources of Australia ((ERA)) as it has more established operations and is well placed to benefit from what should be stronger uranium prices in the longer-term given the upcoming expiration of a number of ERA’s legacy contracts.

According to Macquarie it will be something of a stretch for Paladin to achieve its full year production guidance and for this reason the broker rates the stock as a Hold, a rating matched by UBS given it shares the commissioning concerns of Bank of America-Merrill Lynch.

Overall the FNArena database shows a total of three Buys and five Neutral ratings with an average price target of $3.06, up from $3.02 prior to the interim result. The target incorporates expectations of solid medium-term earnings growth, as ABN Amro is forecasting earnings per share (the company reports in US dollar terms) to improve from a loss of US6c in 2008 to a loss of US2c this year and a profit of US20c per share in 2010 and US13c in 2011.

JP Morgan believes EPS this year can be positive and is forecasting US3.2c in normalised terms, increasing to US13.2c in 2010 and  US17.6c in 2011, while UBS is forecasting an EPS loss of US6c this year before earnings turn positive to the tune of US3c in 2010 and US16c in 2011.

Shares in Paladin today are higher post the profit result and as at 11.55am the stock was up 17c or 5.6% at $3.19. This compares to a range over the past 12 months of $1.63 to $6.72.

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