4Q09 Production Report
Paladin's production for the quarter was a record 987,310lb of U3O8. Output should have been higher, but Kayelekera has been slower to ramp-up than the company planned. Inventory was reduced with sales of 1.1Mlb at an average price of US$56.54/lb which was above the prevailing spot price. The company entered into a new long term contract for delivery of 4Mlb starting in 2012.
The company’s strategy selling under long-term contracts is working well. The average price received was significantly higher than the average spot price of US$45.44/lb.
The company did not release a 4Q09 financial update as it did for 3Q09. The last time that we reviewed the company was in FAT-MIN-192 where we discussed the outlook for uranium and noted that 3Q09 continued a history of net losses after tax. We also stated our concern for the high earnings multiples that the stock was trading on but the market seems to have justified this on the grounds that a price hike in uranium was just around the corner.
We also looked at why Paladin might bid for Deep Yellow, using the cash raised from a placement of 93.45M shares. Deep Yellow has also fallen out of favour with the market and is getting cheaper by the day.
The bubble for the uranium sector has temporarily burst and it could last a couple of years. The problem for the uranium industry as a whole is that it seems that the sector is now in oversupply and this is weighing on the price of U3O8.
Paladin will not report a net profit after tax at the current price of uranium which is US$42.50/lb. The spot price of U3O8 has been sliding since June 2007 when it reached US$137.30. Needless to say, high prices in 2007 triggered a huge increase in exploration budgets to find uranium and there were many successes.
On the supply side, production from Kazakhstan has increased and the US is still a net seller from stockpiles. Another round of de-commissioning nuclear war heads would push the price revival even further out.
Kazakhstan is quickly becoming a leading producer of uranium. Within a year or two the country’s production is expected to overtake Australia and Canada. Political risk is high, but Kazakhstan is rich in uranium. Uranium will play an important role in developing the country and foreign explorers are rushing in to stake their claims.
What looked promising not long ago now looks ill, at least for the next 12-24 months. The uranium market looks like it will be in oversupply this year, with a surplus building for perhaps the year after. In the case of uranium the good times seem to always be just around the corner.
The thesis that the market has been operating on is that in addition to building new reactors there would be an impact on supply when Russia's "megatons for megawatts" program came to an end. This program converted nuclear warheads into reactor fuel.
By 2015 the secondary material from Russian and US uranium stocks which currently supplies 40% of the market might fall to as low of 5%. Demand for mined uranium would soar. The trouble is, depending on price, there is no shortage of uranium and there are lots of new mines on the drawing boards.
Australian uranium producer ERA has predicted a challenging year for 2010 and so it will also be for Paladin. Paladin’s MD Mr John Borshoff believes that the long term price needs to be US$75 to US$85 per pound to sustain the industry. Needless to say, the industry is a far cry from being profitable at the current price.
Uranium is a highly specialised industry. Given its benign outlook for the next 12-24 months, it is time to switch into a company better placed to take immediate advantage of the global economic recovery, like BHP Billiton.
SHARE PRICE CHARTS AND COMMENTS:
Fat Prophets initially gained exposure to Paladin through a position in Valhalla Resources. Our effective entry price was $1.53. Our last review of this stock was in September (Fat Mining 192).
From a charting perspective, Paladin Energy looks increasingly bearish. Since breaking to the downside of a descending triangle in mid January there has been an accelerated move lower. Paladin touched a recent low of $3.46 late January representing a fall of $2.06 or 37.32% since early June 2009.
The downtrend in place suggests further downside risks ahead, along with the bearish momentum cross of the short term moving average (green line) below the long term moving average (red line) dictating the likely future direction.
STATE OF PLAY
Paladin's new long term contract was with a major Asian utility and covers the delivery of 44Mlb commencing in 2012. The company has not named the customer but there are twenty nuclear power plants under construction in China, six under construction in South Korea, and five under construction in India.
Paladin has reported that work is well advanced to send a trial shipment of uranium directly to China. This will test the logistics of shipping from Africa to Chinese conversion facilities.
Uranium miners are intently focussed on India and China because this is where the biggest growth in future demand will come from. In addition to reactors that are under construction, there are another 37 planned for China, 23 for India, 13 for Japan and 8 for Russia. Looking even further ahead to 2030, there are 120 proposed for China, 37 for Russia and 15 for India.
At Langer Heinrich Stage 2 has ramped-up with all circuits operating at design capacity. Output from Langer Heinrich was 841,995lb of U3O8 for the quarter. Tonnes of ore crushed have risen during ramp-up to a record 177,427t in December. Paladin is confident that Stage 2 design output of 3.7Mlb per annum is being achieved.
Stage 3 expansion to 5.2Mlb per annum is forging ahead. Site earthworks have started but there has been an increase in the capital cost from US$71M to US$99.5M. The cost is higher because the scope of the project was revised to lower operating costs and/or improve recoveries.
The Board has signed off on the Stage 4 expansion to 10Mlb per annum. An internal study has indicated an internal rate of return of 25% which is quiet reasonable. A 36,000m drilling program will be completed by mid-2010 which will convert inferred resources into indicated status for the Stage 4 feasibility study.
Kayelekera facility is having issues with wash screen that has not achieved target throughput. The problem will be fixed with the installation of a secondary wash screening facility in 2Q10. Otherwise most areas of the plant are exceeding design capacity. Kayelekera produced 145,315lb for the quarter.
The long term outlook for the demand for uranium has not changed. Over the next twenty years global demand is expected to at least double, and in theory the price should stage a strong rebound. However, at the time being there is no shortage of supply.
The strength of future uranium demand is uncertain. There has been a trend in some countries like Switzerland, Spain, Finland and Sweden to expand production from existing reactors. If we look at the best estimate for installed capacity, the World Nuclear Association is forecasting global nuclear capacity to rise from 372,693MWe in 2010 to 872,115MWe in 2030, assuming that all the planned and proposed reactors are built.
What is not known is how many of the current 436 operable reactors will be decommissioned by 2030. Most of the older reactors were built with operating lives of 25-40 years. However, in recent times engineering assessments are increasing the operating lives of some reactors. For instance in the USA, 60 reactors have had their lives increased from 40 to 60 years. The life of one reactor in Japan has been increased to 70 years.
The IAEA provides data on the age distribution of operable reactors. There are 134 reactors over 30 years old. Sixty four reactors are over 35 years old and 9 reactors are over 40 years old. We would think that by 2030, most of the reactors more than 30 years old will have been permanently shutdown, although there can be no guarantee of this.
All that we can confidently say is that net demand will rise over coming decades but the rate of increase is hard to predict. The outlook for supply will depend on price. It might take up to 2 years to bring the market back in to balance and perhaps the price will move back above US$65/lb.
A problem with such a big increase in the number of nuclear power generators is safe disposal of nuclear waste. This is both a challenge and a huge cost, not to mention the high cost of large nuclear reactors. The world has lots of gas and is finding a lot more of it, particularly in the US.
Gas is clean energy, environmentally friendly and very attractive. Appealing as nuclear energy is, gas fired power stations are more appealing all round. Gas will more than likely make inroads and many of the planned nuclear reactors might end up with gas turbines on the drawing board.
At this point in time, we no longer see a compelling reason to own Paladin. The stock is extraordinarily expensive trading on a 2010 PER of around 65X and a CFR of 20X. On a PER basis this is over 3 times more expensive than BHP Billiton.
Accordingly we are changing our recommendation from BUY to SELL for all Members.
Members might like to consider a SWITCH into BHP Billiton.
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