Paladin Energy’s Storm In A Teacup

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

Paladin Energy shares fell precipitously on disappointing first quarter results. Now analysts are questioning whether the sell-off was an over-reaction.

–-Paladin Energy’s production delayed not canceled
-Systemic risks or predicable hiccups?
-New contracts maintain future momentum
-Fission acquisition remains under scrutiny
-Brokers still bullish

By Danielle Ecuyer

Production down but not out

Life wasn’t meant to be easy’ or so the saying goes and recommissioning the Langer Heinrich operation is proving to be a case in point with unanimous “disappointment” from brokers following Paladin Energy’s ((PDN)) 1Q25 production miss; the result from unexpected problems.

The market certainly disliked the update sending the shares down over -15% on the day, with more selling pressure on the following day.

Consensus production estimates of 917.9klbs dwarfed the miner’s reported 640klbs quarterly update, compared to June quarter production of 520klb.

Bell Potter hits the nail on the head, when the analyst poses the questions “are these issues systemic, or can they be addressed and meet FY25 guidance?”

Therein lies the conundrum for investors.

Observing the problems, Shaw and Partners isolates the two main issues. Firstly, Paladin is using stockpiled ore with variable grades. Although the inventory was extensively surveyed, the feed grade in this quarter came up short of expectations at 422ppm versus the guided average range of 470-510ppm. 

Secondly, lower than expected tailings water exacerbated water shortages.

On balance, Shaw and Partners believes the problems amount to essentially “run-of-the-mill” commissioning issues with the water problems already addressed.

Costs rose to US$41.9/lb from Paladin’s guidance at US$31/lb resulting from the two issues, as well as lower recoveries of 69% with processed tonnage down -10% below Bell Potter’s estimates.

Macquarie points to other teething problems in the counter-current decantation circuit (a process to separate liquids from solids) of a minor nature, relating to pump and pipe sizing, as well as maintenance for screens and filters.

A two-week shutdown in November is targeted to address the problems.

Macquarie concludes Paladin would need to hit over 85% of nameplate capacity in 3Q/4Q25 to achieve the lower end of FY25 guidance. The analyst suggests while possible, the probability is low given the stockpile grade variances with plant adjustments and de-bottlenecking.

Morgan Stanley forecasts Paladin to reach nameplate capacity of 6mlb in 4Q2026. With mining expected to recommence in 2026, forecast for the September quarter, the broker believes the challenges around variable stockpiles will dissipate.

According to Shaw, the crushers are operating without problems which is emphasised as one of the biggest risks to achieving full capacity and one of the historical problems at Langer Heinrich.

A tick of approval for quality and new contracts

When it comes to ore sales of 620klbs, Paladin reported a first shipment to China National Nuclear Corporation of 319klbs and Bell Potter assumes the balance to European and North American contracts. Feedback suggests the quality was good, which Shaw highlights as another positive.

Citi points to ongoing development of Paladin’s contract commitments with three additional sale agreements this quarter and 23mlb contracted through to 2030. 

Although the company reported negative free cash flow this quarter of -US$18.6m, the situation is expected to reverse to positive cash flow in the December quarter as uranium sales proceed. At quarter end, Paladin had US$55m available in cash and US$55m in un-drawn loans.

Shaw expects the 620klbs sold in this quarter will yield revenues of US$46m in the coming quarters.

Although management has not changed FY25 guidance, most of the hit to earnings forecasts is in the current fiscal year, with across-the-board earnings downgrades from FNArena daily monitored brokers. There are less downgrades to estimates for FY26 and FY27.

Bell Potter has adopted a conservative approach with a decline of -35% to FY25 EPS estimates and -4% in FY26. Citi and Shaw are more aligned at a circa decline of -11% in EPS forecasts for FY25.

Regarding the Fission deal, Paladin is waiting for the Canadian government’s decision. Post quarter end, a notice from the Minister of Innovation, Science and Industry ordered a national security review of the proposed Fission acquisition. Both Paladin and Fission have made submissions.

Brokers positive on uranium and Paladin

FNArena’s daily monitored brokers are singing from the same song sheet when it comes to the share price fall, concluding the market’s response was an “overreaction” or “disproportionate”. Morgan Stanley states the share price fall was “outsized” and the investment case for Paladin, beyond the short term, remains intact.

While Macquarie is under research restriction, Citi, Morgan Stanley, Shaw and Partners and Bell Potter all have a Buy-equivalent ratings with an average target price of $13.62, down -52c post result.

Shaw is the most upbeat as shown by its $16 target, alongside a Buy, High risk rating. Morgan Stanley at $12.30 has the most conservative price target.

Unanimously the brokers are upbeat on the medium-to-longer term outlook for the uranium market. Shaw states “there is not enough supply to meet current demand, let alone increased demand from reactor restarts”.

Morgan Stanley believes as global uranium projects resume/restart production, “higher costs (and slower ramp ups) than prior studies have indicated” are likely and will support the cost curve.

Paladin remains the preferred exposure in the uranium sector for Shaw and Partners.

Check out our latest weekly uranium report:

https://fnarena.com/index.php/2024/10/29/uranium-week-us94lb-spot-in-reach/

The author owns Paladin shares.

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