Monday, June 04, 2007

Paladin Resources Ltd - A Near Term Uranium Producer

On my post on Cameco, which has little ability to take advantage of uranium spot prices because of long term hedge contracts, I was asked about uranium producers able to take advantage of the current spot prices like near term/new uranium producer Paladin.

Fully diluted Paladin Resources Ltd has 600,989,245 shares (May 14, 2007). Today it closed at $8.12 giving it a fully diluted market cap of $4.9 billion, or almost 1/4 of that of Cameco. For a near term or new producer investors have given Paladin a lot of valuation. Paladin Resources has a market cap about 17 times bigger than Roca, which is a near term molybdenum producer, and about 26 times bigger than Blue Note, which is a near term zinc producer. For a new producer Paladin has a very substantial market cap already.

Paladin new mines are Langer Heinrich, and Kayelekera. Kayelerkera is projected to reach full production of 3.3 million pounds in 2009 and Langer Heinrich 3.7 million in later 2008, for a total of 7 million pounds per year for 2010. 7.5 million pounds is committed to contracts from 2007 to 2012. Cumulative production to the end of 2012 is projected to be 31 million pounds and their reports all use a "conservative" price of $90/lb for Uranium to give $2.8 billion in revenues from now until the end of 2012, or 57% of the market cap. Keep in mind the "conservative" $90/lb is about 10 times the 2001 price of uranium and they do not reach their full production until 2010.

Langer Heinrich was officially opened March 15, 2007, and is currently operating at 70% of its "design capacity." It was projected to mine 2.6 million pounds for 2007, but is now expecting to be between 400,000 and 600,000 lbs by June 30th, and reaching that rate after June 30th, so about 1.8 million pounds for 2007.

Paladin does not give clear guidance as to how they get their 31 million pound production figure. My estimates are:

  • 2007 - 1.8 million pounds (Langer)
  • 2008 - 3.1 million pounds (Langer)
  • 2009 - 5.2 million pounds (3.7 Langer, 1.5 Kayelekera)
  • 2010 - 7 million pounds
  • 2011 - 7 million pounds
  • 2012 - 7 million pounds
This year's production at best will give 2007 gross revenue of $125*1.8 = $225 million, or about 4.5% of the market cap before any expenses. Paladin does have some hedge, the 7.5 million pounds over 5 years the banks required, but the price of the hedge is well hidden, so $225 million is mostly likely an over estimate of gross revenue.

For 2008 at $125/lb would be $388 million, and at $90/lb would be $279 million, 7.9% and 5.7% of market cap respectively.

For 2009 at $125/lb would be $650 million, and at $90/lb would be $468 million, 13.2% and 9.6% of market cap respectively.

For 2010 and beyond at $125/lb would be $875 million and at $90/lb would be $630 million, 17.9% and 12.9% of market cap respectively.

Out of that comes production costs, administrative costs, royalties, exploration, technical reports, stock based compensation, capital costs, maintenance, taxes and so on all have to be paid.

They have other projects they can develop, but they have to change some policy and laws to get approval.

On long term price, the further out you go, the more likely the prediction will be wrong and the bigger the gamble, either for upside or downside. What I found when searching long term predictions:

The same is true of Raymond James analyst Bart Jaworksi, whose latest estimates show an average uranium price of $90/pound for 2007 and an average of $100/pound for 2008 and 2009. But, Jaworski did not budge from his price forecast of an average uranium price of $60/pound for 2010.

Prices may average $100 a pound in 2007 before easing to $85 in 2008 and $75 in 2009, Toronto-based RBC Dominion Securities Inc. said Nov. 17.

The team at GSJBW seems to acknowledge all these risks. The broker has a long term price forecast of US$45/lb but the figure doesn't figure anywhere in the outlook for the next few years. Average U3O8 spot price forecast for calendar 2007 is US$90/lb, for next year it is US$95/lb, after which a gradual decline is assumed to US$80/lb. (2011 sees a rise to US$85/lb, however).
Paladin's "conservative" $90 average price is not conservative relative to analyst predictions. Using Jaworski's forecasts the average price assuming the $60 remains constant would be $74.44/lb. Using $125/lb for 2007 the RBC averages to $78.89. The third one averages to $85.23. $90/lb is not a conservative price, but a strong price. Use that $60/lb for 7 million pounds and gross revenue is a mere 8.6% of market cap.

Paladin currently has a very small production profile able to cash in on the current strong uranium prices.

Strong prices are simply vulnerable to downward price corrects and as prices become stronger valuation models need to become more conservative to take that into consideration. Paladin currently has a seriously inadequate production profile relative to market cap and even when their production growth plans are meet for 2010 the production profile is still highly marginal compared to their current market cap and is utterly crippled should prices decline.

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