Australia | Nov 14 2012
– Depressed uranium price weighing
– Paladin still worth holding
– Targeting cost reduction
By Eva Brocklehurst
Uranium producer Paladin Energy ((PDN)) is battling a soggy uranium price. Having announced a headline loss of US$45.9 million in the September quarter the company's profitability has been thwarted with the uranium price averaging around US$49/lb over the quarter. BA-Merrill Lynch estimates the company was only breaking even in terms of cash flow during the quarter and, with the spot price moving closer to US$40/lb recently, it is likely to be cash flow negative now.
Paladin has projects located in Africa, Canada and Australia. However, its two producing mines, and the focus of most broker attention, are Langer-Heinrich in Namibia and Kayelekera in Malawi. UBS also finds the near-term cash flow potential dubious. Although cash costs declined in the quarter, down 1.3% at Langer-Heinrich to US$31.8/lb and down 6% at Kalyelekera to US$49/lb, the mines were still barely profitable. While the company is seriously targeting cost reductions in 2013 to 2015 UBS fears the uranium price will continue to trend lower and the company's cost targeting will only go so far to restoring profitability. UBS retains a Hold rating and its price target of $1.50 is at the lower end of the FNArena database range. UBS assumes no value for undeveloped resources.
Macquarie was searching for positives after another write-down at Kayelekera – around US$41 million this time on the basis of a reduction in the spot price. This comes a year after an impairment of US$180m was booked in the wake of the Japanese earthquake and the Fukushima reactor meltdown. The positives, Macquarie noted, include an increase in sales guidance for the December quarter. This was raised to 2.7mlbs (from over 2mlbs previously), helped by new mid-term sales contracts to be delivered on from late 2012 to 2015. Additionally, Langer Heinrich produced around 487,000lbs in October, or in excess of 12% of nameplate, whilst Kayelekera operated at around 95% nameplate capacity in the month.
JP Morgan found the quarterly results were quite weak as it had envisaged a positive cash flow, given US$52m in sales was carried over from the June quarter. While positive on the sector over the long-term, the broker does not believe prices for uranium will go anywhere for the next 12 months. Even so, JP Morgan sticks with its Hold rating, finding Paladin offers significant leverage to uranium spot prices. Deutsche is in the same boat, retaining a Hold rating due to uranium pricing, operational and cash flow risks. This broker is assuming US$5m per annum of cost savings at both Kalyelekera and Langer-Heinrich as revised mining plans are targeting lower strip regions. This will push out costs to FY15.
BA-Merrill Lynch has a price objective of $2.30, at the top of the FNArena database range, and expects Paladin to trade at a premium to its peers. BA-ML uses a 11.3% discount rate plus exploration value for several undeveloped assets to arrive at its price objective and retains a Buy rating. The justification for this is the company's low-risk and brownfield production growth. Nevertheless, the broker notes there are still some items to be sorted out regarding these projects, such as securing adequate water and power for the Langer-Heinrich expansion and commissioning risks at Kayelekera.
On the FNArena database Paladin scores four Holds and two Buys. The consensus target price is $1.74 within a range of $1.32 to $2.30.
See also Paladin On The Mend September 20 2012.
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