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

Canada Research | Page 44 of 87UraniumPipeline Production. We believe that although the outlook for Paladin’s pipelineprojects is less certain, these assets – with significant resources of 327 Mlbs at 0.08% –should receive more attention with the company’s active mines nearly ramped up andpotential sales of partial stakes in non-producing assets. We model start-up of 91%-interest Mt. Isa (W. Australia) in FY2017E, contributing 2.4 Mlbs at mid-US$30s cashcosts with LOM capital costs of US$375 mln (ascribed US$236 mln, 8% NPV).At Michelin (Labrador), we project a significant open pit/underground operation startingin FY2020E and producing 6.0 Mlbs/year at sub-US$40s cash costs and capex of US$1.2bln (US$190 mln, 8% NPV); the Inuit government of Labrador lifted the three-yearuranium mining moratorium in March 2012. We model US$350 in notional debt to funddevelopment (details below).We apply a risked US$/lb to each of Paladin’s other non-core projects (collectively,US$351 mln). Within this group, we highlight the 24.0 Mlbs Manyingee ISR project(Australia), which Paladin now flags as next in line for development (initial guidance is 1Mlbs/year reached in FY2018E) and Angela/Pamela (Australia), a promising 50/50 JVwith Cameco, but which has stalled on local opposition (support was pulled inSeptember 2010). Northern Territory’s generally pro-uranium mining stance suggests tous that a license is inevitable.No Major Equity Control Blocks. Paladin remains one of the only big uranium producerswith no major equity control blocks (see Exhibit 58), unlike its peers and their strategicpartners, Uranium One (51.4% ARMZ), Energy Resources of Australia (68.4% Rio Tinto),and producer until recently, Denison Mines (15.1% Kepco). We believe this bolsterstakeout potential. One example highlighting the prevalence of this view would beBloomberg’s article titled “Nuclear Resurgence Seen Luring Paladin Offers: Real M&A”published online on July 19. The article highlights Paladin’s attractiveness for potentialM&A given its cheap valuation as well as the positive news of Japan restarting its idlednuclear reactors.Exhibit 58: Paladin Major ShareholdersSource: Raymond James Ltd., Thomson OneL1 CapitalNewmont MiningBorshoff (John)FidelityGlobal XMLCDimensionalI.G.AMPNBIMOthersShares %53,534,420 6.4%52,097,937 6.2%21,877,394 2.6%20,894,092 2.5%18,813,218 2.3%9,269,294 1.1%8,413,719 1.0%7,287,500 0.9%6,045,554 0.7%5,136,435 0.6%632,275,727 75.7%835,645,290 100.0%Good Spot Price Exposure. Paladin has consistently biased towards market-relatedpricing in its contracts, which provides good exposure for investors to movements inuranium spot and term pricing. On average, over the next few years, we estimatePaladin to be in the middle of our covered producer group on realized prices atUS$63/lb in CY2013E (vs. Cameco at US$57/lb and Uranium One at US$61/lb); US$69/lbin CY2014E (vs. US$62/lb and US$71/lb) and US$71/lb in CY2015E (vs. US$65/lb andUS$75/lb). Our NAV sensitivity is shown in Exhibit 59 below.Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2