Company Profile
Paladin Energy is an Australian-domiciled company focused on uranium production, development and exploration with projects in Namibia, Malawi and Australia. Its flagship Langer Heinrich mine is expected to produce 2.6 million pounds U3O8 in 2008. Kayelekera construction is scheduled for completion at the end of this year.
Event
In a note entitled “Providing Paladin's New Energy” Talbot explains the reasons behind his Buy rating and C$7.75 target.
Takeaways From The Event
Talbot introduces Paladin by writing “Paladin is the ideal uranium investment. It is a pure play producer that boasts world class deposits and a large resource base. It operates in friendly jurisdictions and remains largely un-hedged. Paladin has all the hallmarks of a solid uranium developer and producer. Yet it appears as if the face of this company may change dramatically going forward.
Enter "Paladin Nuclear" as it takes over the sales and marketing, M&A and perhaps exploration functions. PDN is convinced that we should expect fundamental changes in the way nuclear fuel is transacted. It proposes to facilitate uranium trading as an alternative to the current spot and term markets. Traditional commodity marketing groups have demonstrated that as deal volume increases, improved contract optimization is recognized. PDN seeks to take advantage of this. Meanwhile, we speculate that this venture will likely require an initial supply base for its traders…we anticipate M&A activity.”
“While Paladin Energy with Managing Director John Borshoff will continue to operate the executive, production and mine development sides of the business, Paladin Nuclear is expected to take over the uranium sales and marketing, mergers and acquisitions, and perhaps to some extent, exploration.
Paladin Nuclear is to be based in Denver, Colorado with Dustin Garrow as Managing Director. To get closer to its customers, offices are scheduled to be opened in Europe mid-2008 and in Asia in 2009. Paladin plans to target customers who seek flexible and variable contractual and sales proposals that extend beyond the traditional term contracts and spot sales transactions. In essence, Paladin proposes to facilitate trading of uranium as an alternative to the current spot and term markets. Paladin Nuclear is being designed to manage Paladin’s uranium inventory (and revenue) though traditional commodity trading groups – it would be free to buy, sell, lend and borrow the commodity. Paladin Nuclear should function differently than the existing “physical uranium supply warehouses”, namely Uranium Participation Corporation (U-T:C$11.88) and Nufcor Uranium Limited (NU-L: £2.90). While management indicates that it is not interested in stockpiling uranium, the marketing arm will likely require an initial supply base for its traders. We remind investors that Paladin has not committed the majority of its future production. As its mines approach ~7 million pounds U3O8 annually in the next 12 months, its remaining contracts only amount to about one year of future production."
The company also has one of the fastest growing production profiles in the Uranium sector. Talbot elaborates this point by saying “Langer Heinrich achieved design capacity last December, and we look towards initial Kayelekera production and Langer Heinrich expansion to provide the 7 million pounds U3O8 forecast for 2009. Meanwhile, the prospects for further resource expansion at both operations are considerable, and potentially may support further production expansions.”
“Paladin’s 100%-owned Langer Heinrich uranium mine is located in Namibia, Southern Africa. Uranium is hosted within a series of at least seven calcrete-type deposits along a 15km palaeo-channel system. Resources total 105.6 million pounds U3O8 comprised of 37.1 million tonnes grading 0.06% U3O8 for 49.7 million pounds Measured and Indicated, and 43.0 million tonnes grading 0.06% for 55.9 million pounds Inferred. Inclusive of the M&I resources are reserves totalling 25.4 million tonnes grading 0.07% for 37.6 million pounds. All mineralization is located within 50m of surface.
Feasibility contemplated a 1.5 Mtpa operation with 11 years of mining and 15 years of processing life. Head feed grades were estimated at 0.0875% U3O8 over the first 11 years, followed by another four years processing from a low grade stockpile grading 0.032% U3O8. Operating costs for the reserves we expected to average $14.18/lb U3O8 life of mine, including $12.20/lb in the first six years. Projected capital costs were $92MM. Langer Heinrich currently sells production into three contracts that were arranged in conjunction with early project financing. These contracts total only ~7 million pounds representing a small fraction of the current 106 million pound resource. The three contracts all consist of floor prices with escalation clauses for both floors and ceilings. Two of the contracts have +50% upside riders attached and this is calculated using a formula based on a combination of both spot and term prices. Paladin holds this information tightly.”
“The 85%-owned Kayelekera uranium deposit is located in Malawi, Eastern Africa. Uranium is hosted within a series of arkose and mudstone units (Figure 3). Resources total 34.5 million pounds U3O8 on a 100% basis, comprised of 15.3 million tonnes grading 0.09% U3O8 for 30.0 million pounds Measured and Indicated, and 3.4 million tonnes grading 0.06% for 4.5 million pounds Inferred. Inclusive of the M&I resources are reserves totalling 10.5 million tonnes grading 0.11% for 25.1 million pounds.
A Bankable Feasibility Study and Malawi Development Agreement were both approved in 2007. The Development Agreement provides a 10 year stability regime. A 15% free carried equity was transferred to Malawi in exchange for a lower corporate tax rate (to 27.5% from 30.0%), lower resource rent tax (nil from 10%), and lower NSR (1.5% for years one to three and 3% thereafter, down from 5%). There is also no import VAT or duty during the stability period, 100% capital write-off for tax purposes and requirements to provide social infrastructure.
Feasibility contemplates an 11 year mine life with 3.3 million pounds of production expected annually in years one through seven, and 1.17 million pounds annually thereafter. Throughput design is a conventional 1.5 Mtpa acid leach plant with head feed grade of 0.11% U3O8 and 90% recovery. Capex was estimated at $185 million with most of this to be spent during F2008/F2009. Operating costs are anticipated at $19 per pound in years one through seven and $23 per pound LOM. Paladin believes there is excellent potential to extend mine life. Meanwhile, definition drilling continues to define the limits of the deposit and to upgrade inferred resources. An updated resource and reserve estimation is scheduled for March 2008.
“The Mt. Isa JV is a 50:50 Joint Venture between Mt. Isa Uranium and Summit Resources. PDN’s 90.9% interest is a result of a combination of its 100% ownership of Mt. Isa Uranium and its ~81.9% ownership of Summit Resources. The JV comprises of eight uranium (+ vanadium) deposits and a minimum of 15 target areas. Dundee visited the Mt. Isa JV Valhalla and Skal uranium-vanadium deposits on November 12, 2007. Summit Resources has an interest in other deposits including Andersons and Watta, in which Paladin would have an effective 81.9% interest.
Intensive resource and expansion drilling at Valhalla and Skal continues as part of an A$8MM program. Metallurgical and environmental baseline studies are underway as part of a pre-feasibility study anticipated by year end 2008. It is likely Paladin would consider in the order of 4 to 5 million pounds U3O8 annual production from this operation. A Feasibility Study will likely be completed prior to a Queensland mining ban resolution.
Valhalla is hosted within sheared volcanic rocks. The main zone strikes for 800m and extends to 660m at depth where it remains open down plunge. The deposit appears to hold together quite well down to 400m where it still measures over 100m in true thickness. A previous Indicated and Inferred resource estimated ~57 million lbs U3O8 (100% basis) and graded 0.08%. A systematic 50,000m RC and diamond drill program continues.
An initial Skal resource is expected within Q1/CY08. Mapping and drilling support a new re-interpretation that suggests the presence of several en echelon plunging shoots. An historic resource totals ~11 MM lbs U3O8 (100% basis) at grades of 0.10% to 0.13%.
Skal and Valhalla appear to be part of Paladin‘s long term plan – projects that would not only extend its production profile forward, but also give Paladin production outside of Africa. While uranium mining continues to be banned in Queensland, we believe it is likely just a matter of time before this policy is rescinded at the state level as it has been at the Commonwealth level.”
Paladin recently purchased the Angela deposit which is slated for production by 2012, which as Talbot says should lessen “any potential impact of any delay at Mt. Isa as a result of the Queensland uranium mining ban. A rumoured desire to purchase an existing mine, perhaps in North America or Asia, could also provide an additional and immediate bump in production.”
“Paladin recently announced that it and Cameco were selected from a group of 37 applicants to develop the Angela and Pamela deposits in Northern Territory, Australia. The purchase price was zero. The two companies will form a 50:50 joint venture that is committed to spend A$5 million on initial exploration and another A$5 to $10 million through a bankable feasibility and environmental impact assessment. Past work at Angela and Pamela by Uranerz suggests historical resources of between 26.5 million and 28.7 million lbs U3O8 and grades around 0.10% to 0.13% U3O8. Uranium has been identified regionally where the redox boundary moves locally to lower or higher stratigraphic levels, analogous to sandstone-type deposits in the western United States. These steps have been known to be remarkably consistent down plunge. The Angela deposit remains open at depth and Paladin is confident that it can grow its size. Paladin’s alkaline leach experience. Northern Territory does not prohibit uranium mining as does Queensland. This is particularly important given the timeline uncertainty attached to Paladin’s Mt. Isa JV’s Valhalla and Skal projects. Paladin’s production goal for Angela-Pamela is before 2012, with Skal and Valhalla slated to enter production thereafter.”
Talbot ends by saying “We believe Paladin Energy Ltd. to be one of the most exciting and innovative companies in the uranium industry. We anticipate Paladin’s presence on the uranium scene to grow significantly through a blend of organic growth, project development, and M&A activity. We expect its generative group to find new opportunities using its proprietary database. This provides Paladin an advantage to target prospects that may not be widely familiar.
Paladin is likely to become a focus for investors looking for steady cash flow and strong growth prospects as the remaining uranium producers seem to take turns in the penalty box in a sector that is somewhat devoid of blue chip stocks. The ideal just got better.”
Valuation and Price Target
Talbot bases his 12-month share price target of C$7.75 on a 10% DCF valuation, while adding per share value for additional resources, equity investments and year-end cash to derive its NAV per share. Talbot also mentions that Paladin’s NAV is equal to its target price since he does not use NAV or DCF multiples in his Paladin valuation.
Investment Risks
Without limitations, some of the risks include reserves and resource risk, development risks, permitting risks, off-take agreements, commodity price risks, geo-political risks, exchange rates, weather related impacts etc.
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