Paladin Better Positioned For Uranium Upswing

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

-Improved fiscal position, plant
-Lower prices may be about timing
-Japanese re-starts a catalyst
 

By Eva Brocklehurst

Paladin Energy ((PDN)) disappointed brokers with the uranium price it realised in the December quarter but it delivered a positive, if measured, outlook commentary. The company has trimmed FY15 production guidance to what brokers believe is a more realistic 5.2-5.5m pounds but Paladin is nonetheless considered to be in a better position now to benefit from a more sustained recovery in the uranium market.

Paladin indicated that prices were affected by weaker demand and a number of suppliers reduced offer prices to complete end-of-year sales. December quarter production fell short of Morgan Stanley's expectations although sales rose as expected. The broker does not expect the sales lift will continue and looks for sales to broadly match production over the course of FY15. Morgan Stanley was disappointed there was no premium in the price achieved, having hoped to find a rising premium as sales volumes under contract increased, but this was not evident.

On another more sustainable note, JP Morgan observes volumes in the term market continue to grow and prices continue to improve, reaching US$50/lb at the end of 2014 and driven predominately by US utilities purchasing for delivery in 2015-18. Langer Heinrich production was up 27% on the prior quarter but 11% below JP Morgan's forecasts. Plant throughput has returned to acceptable levels although the recovery is slower than anticipated. Revenue of US$70m was 3.0% below JP Morgan's estimates. Realised prices of US$36.58/lb were within 3.0% of JP Morgan's forecasts and, similar to the September quarter, were closer to spot than term prices.

One reason for the lower realised price could be the timing of sales and the large moves in spot prices over the quarter. Morgan Stanley expects more clarity on this aspect in the financial statements next month. Re-starting of Japanese reactors in the March quarter may also lift sector sentiment. Morgan Stanley expects, following approvals for the Sendai 1 & 2 reactors, that re-starts will occur this quarter. Paladin also noted two more Japanese reactors, Takahama 3 & 4, have met new safety requirements. Morgan Stanley retains an Overweight rating based on the improved fiscal position of the company and the forecast strengthening of uranium prices through growing demand.

Production was lower than what Morgans expected and, while the downgrade to FY15 guidance was disappointing, the broker believes it is far more realistic. Morgans also suspects the lower-than-spot average realised price in the quarter was because of the timing of sales and the volatility in the spot price. The broker still finds significant value in the stock at the current share price. With a revitalised balance the company is in a better position to benefit from a more sustained recovery in uranium and Morgans maintains an Add rating. In contrast, Deutsche Bank echoes the disappointment but believes the stock is fairly valued, with a recovery already modelled into the valuation for the company. Hence, a Hold rating is preferred.

The lack of a premium in the realised price was disappointing for UBS as well. The broker notes the company has focused on de-leveraging, having been recapitalised by the introduction of a strategic investor and an entitlement offer. The company is understood to be evaluating further initiatives to strengthen the balance sheet, targeting cost reductions through the bi-carbonate recovery project. UBS does not expect the Kayelekera mine will re-start until uranium approaches a price of US$75/lb. UBS highlights the fact its valuation carries around 60c for undeveloped resources, which the market appears to be unprepared to pay for in the current uranium price environment. Furthermore, the cash burn is expected to weigh on the stock until the uranium price moves through US$40/lb.

Paladin Energy has a mixed bag of recommendations on the FNArena database with two Buy, two Hold and one Sell. The consensus target is 44c, suggesting 29.4% upside to the last share price. Targets range from 33c (Deutsche Bank) to 54c (Morgans).

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