Paladin Clears The Way For Uranium Upside

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

– Placement/rights issue resolves debt problem
– Uranium prices moving up
– Morgan Stanley upgrades rating

By Greg Peel

It’s been a tough year for uranium producer Paladin Energy ((PDN)) as the spot uranium price has plummeted, reversing the upside advantage the company enjoyed pre-Fukushima when it could sell uranium at healthy spot prices while longer established peers were still stuck with longer dated contract pricing commitments. As the uranium price fell and cash began to burn, Paladin’s debt position weighed heavily.

The company has responded in several ways over past months, including restructuring its debt, selling off a partial stake in its flagship Langer Heinrich operation in Namibia and placing its Kayekeleera mine in Malawi under care & maintenance. Yet still the maturity deadline for the company’s $300m convertible note issue loomed, negating any improvement to sentiment as the spot uranium price bounced sharply from its lows.

Paladin has now announced the placement of US$52m of stock to Chinese private equity firm HOPU and an underwritten two for one entitlement offer which together will raise US$177m and solve the company’s liquidity issue. The next major debt maturity is not until 2017 so Paladin now has some breathing space to consider a number of options, which at this stage includes assessment of a Kayekeleera restart.

Restart is the magic word in the uranium market at present, given the long-awaited announcement of the pending restart of two Japanese reactors has been a driving force behind the recovery in the spot uranium price from a low of near US$28/lb to US$38/lb currently, notwithstanding a brief visit to US$44/lb. The temporary shutdown of Kaya exemplified the global supply-side response to falling prices, in which projects were put on hold or cancelled. Fresh demand is now meeting reduced supply.

Adding a strengthening outlook for uranium prices to the easing of Paladin’s near term balance sheet issues is a positive for brokers. Morgan Stanley has now upgraded the stock to Overweight from Equal-weight to join Morgans (Add) on a Buy-equivalent rating. Three other FNArena database brokers retain Hold-equivalent ratings but while Citi acknowledges the positive development of the HOPU sale, the broker can see few other positive catalysts and rather considers Paladin simply an option on a volatile uranium price, thus retaining Sell.

Macquarie has gone quiet on Paladin and has not reported on the stock since January, but the broker’s commodity analysts are sceptical about the sudden upswing in the uranium price, suggesting there may be a bit too much speculative exuberance and not enough fundamental substance to price gains at this point.

Those FNArena brokers still covering the stock have nonetheless set a share price target of 45c which suggests 23% upside from the current trading price.

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