Paladin Forced Into A Corner

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

-Balance sheet hole remains
-Very dependent on uranium price recovery
-Potential sale pushes out past 2014
 

By Eva Brocklehurst

Paladin Energy ((PDN)) has terminated the sale of a minority interest in the Langer Heinrich uranium mine, Namibia, and undertaken an $88 million placement to shore up the balance sheet. Brokers were underwhelmed by the decision but acknowledged the poor pricing environment for uranium had reduced the company's options.

Morgan Stanley expects this is a temporary measure, as without a stronger uranium price balance sheet risks remain. The company was in discussions with interested parties regarding the partial sale of Langer Heinrich but the depressed uranium market meant it was unable to achieve an acceptable price. Morgan Stanley was looking for proceeds in the order of US$200m to reduce balance sheet risk and views the placement as providing head room over FY14-15. The institutional placement of 125.6m share was made at 70c a share. The raising may provide some relief in the immediate future but the broker does not think the cash build over that period will be enough for Paladin to meet its November 2014 bond maturity commitment of US$300m. Under spot prices, the placement provides adequate funds until early FY15.

The situation has warranted a downgrade to Underperform, in Morgan Stanley's opinion. This is echoed by several other brokers. On the FNArena database JP Morgan and Citi moved to downgrade the stock, to Neutral from Overweight and Sell from Buy respectively. On the database Paladin now has just one Buy rating (UBS). There are three Hold and two Sell. The consensus target price dropped to 97c after the announcement, from $1.11 previously. It now signals 35.2% upside to the last share price. Price targets range from 67c (Citi) to $1.35 (Macquarie).

To Citi also, the equity raising will not patch the hole. Paladin was trying to sell a strategic stake in Langer Heinrich by mid 2013 and this was pushed out to mid August. Citi had valued Langer Heinrich at US$884m, so a sale of 20% could have raised US$180m or more. Paladin burnt through US$35m in cash in the June quarter and now has US$78m in cash. Total debt in the March quarter was US$744m, or US$944m including pre-payment of US$200m on the 2013 convertible note. Focus has now shifted squarely to the US$300m note due in October 2015. It all doesn't add up for Citi, whichever way it's cut. Paladin is backing a recovery in the market to be able to sell the Langer Heinrich stake at a good price in the future. Citi thinks this could happen after 2014, but it's risky.

JP Morgan called it a band-aid solution, although a part sale of Langer Heinrich was not in the broker's base case. What is of most concern is the negative cash flow stemming from depressed uranium prices, and this needs to be addressed. Paladin does provide the best leverage to uranium prices and over the longer term JP Morgan remains positive. The main reason for this is that current prices are not supportive of new supply growth. The capital raising will also allow Paladin to defer consideration of a potential divestment of equity until such time when the price more reflects the fundamental value.

These brokers also took the opportunity to ratchet down earnings estimates, based on weak spot uranium prices and the company's intention to take a further US$180m impairment for Kayelekera in Malawi, and the Niger assets.

Back at the June quarter production results, released mid July, brokers had been reasonably positive because there was a modest improvement in production guidance for FY14, which is at 8.3-8.7m pounds uranium. At the time BA-Merrill Lynch did note the re-start of Japanese nuclear power plants was taking longer than expected and that this could be a negative for uranium spot pricing. UBS, the most upbeat on the FNArena database, took note of the fact that overall revenue was in line with expectations on the back of higher-than-expected sales in the quarter. Unit costs at Langer Heinrich and Kayelekera were down 9% for FY13 and 24% year on year. Moreover, with the broker's forecasts for the rand against the US dollar lowered, the company was seen breaking even in FY14, and FY15 earnings were expected to be up 74%.

Time will tell but, at present, it's all looking somewhat pear shaped for Paladin.

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