Valuation The Issue For Paladin

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

By Chris Shaw

In the past couple of months the share price of emerging uranium producer Paladin Energy ((PDN)) has risen by around 70%, in part driven by a slowly improving uranium price on world markets. According to Macquarie this is not enough to justify the share price gains however, especially since results in the March quarter were broadly as the broker had expected.

To reflect this, the broker has downgraded its rating on the stock to Neutral from Outperform, while at the same time it has lifted its price target to $4.50 from $3.30. The move to downgrade its rating matches those of RBS Australia and Deutsche Bank from late last month, both of which were also driven by valuation issues on the back of the gains in the company’s share price.

For the March quarter the company reported an operating profit of US$10.7 million and an underlying net loss after tax of US$6.8 million, results that also matched the forecasts of Citi. The results were achieved on production of 685,000 pounds of uranium in the period, while sales totalled 453,000 pounds.

One encouraging development over the period was the trend in operating costs as Macquarie estimates costs for the period came in at US$27.30 per pound, a result it suggests could have been even better had it not been for appreciation of the rand against the US dollar.

Costs could yet come down further, Citi noting the Stage 2 ramp-up at Langer Heinrich will be completed in the June quarter and as throughput increases this should see costs come down to around US$26 per pound in the second half of this year.

As well, the company’s Kayelekera project should commence production over the next few months and this will see output increase, GSJB Were actually lifting its earnings estimates for FY09 slightly post the quarterly report to reflect the higher sales it now expects.

Another positive for the company, in Macquarie’s view, is the strength of its balance sheet, as there is currently around US$149 million in cash on hand while capital commitments over the next 12 months are expected to only be around US$25 million exluding any expenditure on the Phase 3 extention at Langer Heinrich.

Like Macquarie, Citi sees some valuation issues surrounding the stock and retains its Sell rating post the quarterly update. UBS in contrast rates the stock as a Hold, pointing out in the past couple of months the market’s valuation of undeveloped resources across the sector has increased and this has driven some of the share price gains.

On its numbers, UBS suggests such resources are now being valued at around US$8 per pound, up from US$6 previously, which in net present value terms for the stock is equal to a 15% increase to $4.71, so to reflect this the broker’s price target has increased to $5.00 from $4.15.

While the stock is regarded fully priced at current levels, a strengthening uranium price and the potential of the company as a corporate target from any industry consolidation means the price should find some support even at these elevated levels, suggests UBS.

Post the quarterly production report, the FNArena database shows the company is rated as Neutral six times and Sell twice, with an average price target of $4.10, up from $3.82 prior to the update. GSJB Were is the other broker with a Sell recommendation, the broker arguing at current levels the market is pricing in a shortage of the fuel when the reality is it is not all that scarce at present.

Shares in Paladin today are slightly weaker in line with the broader market and as at 10.55am the stock was down 6c at $4.67, which compares to a trading range over the past year of $1.63 to $6.72.

Click to view our Glossary of Financial Terms