Australia | Aug 30 2010
By Chris Shaw
Full year earnings for uranium producer Paladin ((PDN)) fell short of expectations, the company delivering a loss of around US$53 million against market expectations of a loss of closer to US$21 million.
One positive was the result reflected higher corporate and marketing costs and an adjustment to tax charges rather than any operational issues. This means the result was not of any great concern in the view of BA Merrill Lynch.
As well, while the Kayelekera mine continues to ramp-up at a slower pace than had been expected, Macquarie notes this is now well understood by the market and so has been factored into broker models.
Management at Paladin will hold a conference call later this week to discuss the result in more detail, but on the back of the numbers announced last week some brokers have trimmed their earnings estimates.
As an example, Macquarie has cut its forecasts for FY11 by around 12% and in FY12 by around 3%, the changes largely reflecting increased depreciation charges. Goldman Sachs has also lowered its estimates for both FY11 and FY12 by around 1%, while others such as BA-ML intend to wait until after the investor briefing.
According to Goldman Sachs, the key for the company is not that adjustments to estimates have been made but that both Langer Heinrich and Kayelekera now appear to be operating at stronger levels. This means a lower risk outlook going forward as immediate expansion opportunities for Paladin are of the brownfield rather than greenfield variety.
An improving production outlook means the major risk for Paladin in the short to medium-term is the uranium price, with RBS Australia painting a somewhat negative view of this given its suggestion the global uranium market appears well supplied near-term.
RBS Australia notes this view is shared by uranium market participants, with Energy Resources of Australia ((ERA)) indicating spot prices could remain around current levels for the rest of this year and into 2011.
Macquarie agrees the next year is not likely to offer the company any free kicks with respect to uranium prices, though on a medium-term perspective the broker suggests ex Kazakhstan uranium supply growth is likely to be slower than many expect and the contract market appears to be gradually tightening.
As well, Macquarie notes there have been some new off-take agreements signed by Paladin for 2011-15, with pricing based on a blend of spot and term market prices. Elsewhere in the industry, Cameco has also announced a new off-take agreement out to 2020. This is a positive for contract prices in Macquarie's view.
With China to lead the way in terms of global nuclear demand growth through the next decade, Macquarie sees enough potential good news to remain positive on Paladin from a longer-term perspective. This means no change to its Outperform rating.
Citi offers a similar argument, the broker retaining its Buy rating on Paladin post the profit result as the company remains its preferred uranium exposure, even though upside appears to be capped until the uranium price improves.
What also attracts BA-ML is Paladin has an open register and a growing exposure to the term market in uranium. As production grows, the benefits of this exposure should become more apparent, which the broker expects will mean an increasingly attractive investment case for the stock.
Others take a different view, both Goldman Sachs and RBS Australia maintaining their Sell ratings on Paladin on valuation grounds as the stock is currently trading at a premium to estimates of net present value.
Deutsche Bank agrees the stock is a Sell, remaining negative given Paladin's inability to deliver projects on time and on budget. This is pushing up cash costs for the company and reinforces the broker's view value is limited at present given the stock is trading on a stretched forward earnings multiple.
Overall the FNArena database shows Paladin is rated as Buy three times, Hold twice and Sell three times, with an average price target of $3.87. This is unchanged post the profit result.
Shares in Paladin today are higher and as at 11.30am the stock was up 7c at $3.78. This compares to a range over the past year of $3.37 to $5.18 and implies upside of around 4% to the current consensus price target on the FNArena database.