Clock - Uranium Supply Crunch and Critical ... - Andrew Johns

13.07.2015 Views
Canada Research | Page 42 of 87UraniumPaladin Energy July 26, 2012PDN-TSX | PDN-ASXDavid Sadowski | 604.659.8255 | david.sadowski@raymondjames.caMining | UraniumShow-Me Story Starting to ShowEventWe are resuming research coverage of Paladin Energy with a $1.80 target andan Outperform rating.RecommendationWe recommend investors buy Paladin on ramping production and improvingconsistency at Langer Heinrich, Namibia and Kayelekera, Malawi.Analysis‘Show Me’ Story Starting to Show. Inconsistent execution since mid-2010 has ledto some investor fatigue and lower multiples, but recent success suggestsoperations are starting to turn around. On July 13, Paladin announced recordquarterly output of 2.0 Mlbs in F4Q12A (June 30, 2012), including 99.6% combinednameplate production rates in May and June. Sales were a record 2.24 Mlbs,which should support an improvement in high costs; we see US$34/lb, -6% q/q.Growth and Optimization. Paladin guided for FY2013 guidance of 8.0 Mlbs –8.5 Mlbs (+16% – 23% y/y). We model 8.1 Mlbs, growing to 8.6 Mlbs inFY2014E. We see cash costs dropping to US$32/lb in 2013E and US$30/lb in2014E on process optimization and corporate cost-cutting.Partnerships Positive. Paladin is negotiating with several parties to formpartnerships at some of the company’s non-producing Australian assets. Ifvaluation is reasonable, we view prospective farm-outs as positive, given theopportunity for a cash infusion into Paladin and greater likelihood ofdevelopment with a potentially energetic, well-funded partner. We ascribeUS$239 mln at Mt. Isa, US$192 mln at Manyingee, and US$37 mln at Bigrlyi.Takeout Potential. As the only major producer with no major equity controlblocks, Paladin has been viewed as one of the more likely takeout candidates inthe space. Attaining consistent performance should bolster this view further, inour view.Pile of Debt. We estimate Paladin has ~US$175 mln in cash and US$936 mln inoutstanding debt, following a US$274 mln bond issue in May 2012. Roughly US$134mln matures in March 2013, which the company should be able to meet internally.Relative Valuation. Paladin’s P/NAV of 0.63x appears attractive relative to midtierproducer peer Uranium One at 0.72x, and far below Paladin’s historical,pre-Fukushima levels of 1.31x. The company trades at an EV/lb of US$2.87 forits 543 Mlbs, a large discount to global producers at US$4.74/lb.ValuationOur target is based on a 1.0x P/NAV applied to our C$1.79 NAVPS (8%). Pleasesee our Valuation & Recommendation section for further details.EPS 1Q 2Q 3Q 4Q Full Revenue NAVPSSep Dec Mar Jun Year (mln)2011A US$(0.01) US$(0.03) US$(0.02) US$(0.02) US$(0.08) US$269Old 2012E (0.03)A 0.00A (0.02)A NA NA NA NANew 2012E (0.03)A 0.00 (0.02) (0.01) (0.06) 367 1.79Old 2013E NA NA NA NA NA NA NANew 2013E (0.01) 0.01 0.00 0.01 0.01 476 NASource: Raymond James Ltd., Thomson OneCompany ReportRating & TargetOutperform 2Target Price (6-12 mos): Old: UR New: C$1.80Current Price ( Jul-18-12 )C$1.12Total Return to Target 42%52-Week RangeC$2.85 - C$1.07Market DataMarket Capitalization (mln)C$1,061Current Net Debt (mln)US$634Enterprise Value (mln)C$1,702Shares Outstanding (mln, basic) 835.410 Day Avg Daily Volume (000s) 567Dividend/Yieldnm/nmKey Financial Metrics2011A 2012E 2013EP/ENM nm 146.6xP/NAV0.6x NACFPSOld US$(0.14) NA NANew US$(0.14) US$(0.10) US$0.07Working Capital (mln)Old US$210.5 NA NANew US$210.5 US$182.5 US$79.7Capex (mln)Old US$(129.4) NA NANew US$(129.4) US$(67.0) US$(29.5)Long Term Debt (mln)Old US$719.7 NA NANew US$719.7 US$888.6 US$754.6Production (Mlbs)Old 5.7 NA NANew 5.7 6.9 8.1Cash Costs (US$/lb)Old US$35.3 NA NANew US$35.3 US$34.7 US$31.2Total Resource (Mlbs) 543.00Shares Outstanding (mln, f.d.) 961.3Company DescriptionPaladin is a rapidly growing uranium producer withcore projects in Africa and Australia. The company'sflagship projects are Langer Heinrich in Namibia andKayelekera in Malawi.Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2

Uranium Canada Research | Page 43 of 87Investment OverviewEstablished and Growing Mines. In FY2012A (ended June 30, 2012), Paladin produced6.9 Mlbs from its two mines, Langer Heinrich (4.4 Mlbs; 100%-interest) and Kayelekera(2.5 Mlbs; 85%-interest) and sold 7.4 Mlbs. Cash costs in F3Q12A were US$36/lb (fullyearcosts are not yet reported).For FY2013, Paladin guides to production of 8.0 Mlbs – 8.5 Mlbs, a healthy 16% – 23%y/y increase. We project both mines will maintain steady nameplate capacity bycalendar year-end – Kayelekera reached nameplate production in June 2012, whileLanger should soon gain the full, optimized benefit of new heat exchangers, NIMCIXcircuit, and other components. Given results from the Stage IV feasibility study – whichenvisions 8.7 Mlbs/year conventional, plus 1.3 Mlbs/year heap leach of lower gradematerial – have been deferred to year-end (pending clarity on success of Stage III rampup),we have excluded the Stage IV expansion from our model.Exhibit 56: Production and Cash Costs Profile12Production (Mlbs)1086420F2011A F2012E F2013E F2014E F2015E F2016E F2017E F2018E F2019EAustralia Kayelekera Langer Heinrich Cash CostSource: Raymond James Ltd., Paladin Energy403020100Cash Cost ($USD/lb)Capex at Mines Substantively Complete. After spending ~US$0.75 bln on projectdevelopment, Paladin announced following F3Q12A that it had completed major capexon the current phases of Langer and Kayelekera. Working capital expenditure will alsobe reduced now that inventories are near levels required for future contracts (Paladintargets four months of inventory). As stated above, we model no further expansions,which should bolster the company’s near-term ability to service its debt (note ourmodeled payback in FY2013E, FY2015E and FY2016E in Exhibit 57; further details inPotential Concerns section).Exhibit 57: Projected Cash Flows and EOP Cash for Paladin800US$ mln (Cash Flow per Period)6004002000-200-400-6003386634811717370142 1368178308F2008AF2009AF2010AF2011AF2012EF2013EF2014EF2015EF2016EF2017EF2018ESource: Raymond James Ltd., Paladin EnergyCFF CFI CFO Cash (EOP)Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2

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