Paladin Still Buying In Uranium

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Greg Peel

The same thing has happened to BHP Billiton ((BHP)), as problems at Olympic Dam meant the company was unable to fulfil its forward contracts and was forced to buy in uranium oxide from the spot market. It has also happened to Paladin Resources ((PDN)), which admitted back in September the company was forced to buy 250klbs of oxide to satisfy its contracts.

In the case of BHP, sales contracts have been longstanding. In the case of Paladin, sales contracts would have been written within the year. This means the company failed to allow for possible ramp-up problems – the sort of problems every new venture encounters. BHP is too big a diversified miner for anyone much to notice the difference, but for little Paladin it’s sitting there glowing on the bottom line. Buy-ins cost the company US$12.2m in the September quarter.

And there is more to come. Paladin had indicated the buy-ins weren’t finished, and there would be more to come in the December quarter. ABN Amro assumes the volume required could be as much as 35-100klbs, which would cost the company between US$1.5m and US$5m. In September Paladin was buying spot uranium at US$130/lb – almost the top of the market – and selling it into contracts at US$80/lb. Thankfully the December quarter has brought a fall in the uranium price. Over the course of the quarter the spot uranium price fell as low as US$75/lb, although it has recently returned to US$93/lb.

Adding in this anticipated loss with higher depreciation rates and higher corporate charges, ABN has reduced its FY08 profit forecast for Paladin by 22% from US$25.6m to US$19.9m. Profit forecasts for FY09-10 fall 2% on the depreciation rate. The end result is only a small change in target – from $7.84 to $7.72 – which incorporates an independent long term uranium price assumption of US$85-90/lb as provided by industry consultants TradeTech and Ux Consulting. ABN maintains a Hold rating.

The risk is that further delays are experienced in Namibia, the broker says, but the upside is potential for an upgrade to reserves at either of the Namibian sites. Naturally Paladin’s share price will also be influenced by movements in the uranium price either way. The TradeTech spot price has remained at US$93/lb for the third week running, and the consultants believe earlier days of extreme volatility have now abated. Buyers and sellers are becoming more wary and stubborn.

No one’s said anything much about Queensland lately, where Paladin lays claim to the significant Valhalla and Skal reserves acquired via the takeover of Summit Resources. Last time we left that little debate, then premier Peter Beattie had been um-ing and ah-ing about whether or not he would lift the state’s uranium mining ban. Just when we thought he had, the coal unions muscled in and the decision was reversed. Beattie had indicated he would run with federal Labor policy, but opposition leader Rudd threw the decision back to the states. So as it stands there is still a ban.

However, Queensland now has a new premier (still Labor) and the federal Labor Party is looking like it will form a government next week. The impression back in April from the national Labor Party conference was that the uranium mining ban question might simply be put off to another day. The federal government has no right to force state government hands, otherwise the Coalition government would have lifted the ban across the country already. It is still unclear which way Rudd might go, and the uranium mining question has not been an election plank. Paladin also has tenements in Western Australia, but WA’s premier Alan Carpenter has always adopted an “over my dead body” approach.

Paladin’s share price has recently bounced from under $6 to over $8, only to be back at $7 again. The all time high is $10.80, at the height of uranium euphoria. The current average target price in the FNArena database is $7.83, on a spread of $6.40 (Macquarie, Neutral) to $9.05 (UBS, Buy). UBS remains the most bullish on the future uranium price.

The B/H/S ratio is 2/2/1 from the five brokers covering the stock. GSJB Were is the Sell, with a target of $7.18 as it stands presently.

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