Australia | Sep 03 2012
– Paladin result impacted by impairments, costs and uranium price
– Debt expected to fall, balance sheet pressures have eased
– Production outlook improving, some positives for uranium prices
By Chris Shaw
For the full year to June 30 uranium producer Paladin Energy ((PDN)) reported a worse than expected headline loss of US$173 million, the result being impacted by a number of impairments relating to inventories and the Kayelekera project. Underlying earnings were also impacted by higher costs and weak uranium prices during the period.
As well, JP Morgan notes Paladin's breakeven cash flow result for the year was due in part to the timing of one shipment falling into FY13. Adjusting for the shipment leaves JP Morgan expecting a return to positive cash flows in the September quarter.
The result was accompanied by production guidance for FY13 of 8.0-8.5 million pounds, with costs at Langer Heinrich expected to be less than US$30 per pound and in the low US$40's per pound at Kayelekera.
Citi notes a proposed stage 4 expansion at Langer Heinrich remains on hold given high a capex requirement of more than US$400 million. A 3.5 stage expansion generating around 75% of proposed capacity but at significantly lower capex could work in Citi's view, though further expansions remain dependent on improved uranium prices over a sustained period.
One positive to come out of the result for BA Merrill Lynch is a likely fall in Paladin's debt levels, as management is targeting a gearing ratio of less than 30% in coming years from 42% now. BA-ML estimates this would see debt fall from US$925 million now to around US$738 million in FY13.
Costs are also expected to improve and as part of a program to optimise costs Paladin is considering replacing high cost diesel fuel with electricity. BA-ML suggests this could reduce power costs by as much as 70% and could be rolled out over the next 18 months.
On the negative side, UBS sees cash balances at Paladin as coming under pressure in the coming year. Estimates of payments to suppliers suggests a minimum required uranium price of US$50 per pound, based on sales of eight million pounds for the year. UBS notes year to date uranium prices have averaged US$51.09 per pound but are currently below the US$50 per pound level.
Balance sheet pressures have been eased by the company recently agreeing to a long-term offtake agreement that included a US$200 million pre-payment. UBS notes the funds will allow Paladin to repay some convertible bonds due in March of 2013.
With balance sheet issues now put to rest, Deutsche Bank suggests the market will focus on production at Paladin's operations and the outlook for uranium prices. There are already signs of improvement with respect to production, while BA-ML sees some positives for uranium prices as well.
Management at Paladin has indicated uranium supply is coming under pressure given a number of project cuts and delays. In BA-ML's view this has potential to create something of a supply iceberg, so pushing the market into a significant deficit.
JP Morgan also expects uranium prices to improve going forward, which underpins the broker's positive view on Paladin. While trimming its price target to $2.40 from $2.55, JP Morgan continues to rate Paladin as Overweight.
The rest of the market is split on the outlook for Paladin, the FNArena database showing three Buy recommendations and four Hold ratings. The Buys are courtesy of Citi, BA-ML and JP Morgan and all factor in the full year result, while not all FNArena database brokers have updated as yet. The consensus price target for Paladin now stands at $1.88, down slightly from $1.91 prior to the result. Targets range from Macquarie at $1.30 to BA-ML at $2.70, this spread being partly explained by different assumptions with respect to the uranium price outlook.
Shares in Paladin today are down slightly in a weaker overall market and as at 11.10am the stock was 4c lower at $1.275. The current share price implies upside of better than 40% relative to the consensus price target in the FNArena database and compares to a range over the past year of $1.05 to $2.01.
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