morning report paladin energy ltd -trading buy, page-2

PDN recently announced the sale of a 25% stake in the Langer Heinrich (‘LH’) to China Uranium Corporation Ltd (a wholly owned subsidiary of China National Nuclear Corporation, CNNC) for a total consideration of US$190m. The transaction implies 100% of LH is valued at US$760m.
We view the transaction as a big positive for PDN as it provides a much needed cash injection, increases the company’s liquidity position and importantly eliminates the risk of a capital raising. The proceeds will be used primarily for debt reduction with net debt reducing to ~US$550m.
PDN also recently also announced a debt refinancing package for the Langer Heinrich and Kayalekera project facilities, which effectively reduces the payment schedule by US$59m over the next 18 months. The combination of the Langer Heinrich sell and the recently announced debt restructuring should provide PDN with sufficient liquidity which should see the company through to the long awaited increase in uranium prices that the market has been waiting for.
Operationally PDN has made marked progress with the recent quarterly highlighting record combined production for Langer Heinrich and Kayelekera mines in December quarter,
demonstrating stable operation near or above budget production and below budget unit cost. Broker estimates indicates that all in costs (inclusive of interest, sustaining capex and exploration) for PDN are US$47/lb. So the company will need the stubborn uranium price, which is lingering around the $35/lb mark, to rise for the operations to be profitable.
An increase in the uranium prices has widely been touted to occur in CY14 supported by the following macro themes.

- Japanese Prime Minister Shinzo Abe’s openly preference for reinstating nuclear power to recommence in order to cut the nation’s reliance on more expensive foreign energy sources. We understand Japanese authorities are currently evaluating applications to restart up to 12 reactors at six nuclear facilities with the approval to be provided by the safety commission and local governments based on upgraded safety measures;

­- Only 2 out of 50 reactors remain connected to the grid, with the restart of reactors to take up to 12mths. Any sign of Japanese approvals for restarts together with utilities accepting consignments of uranium under long-term contract after previous deferrals could be the circuit breaker to ignite a positive move in the spot uranium price. Japan previously accounted for ~20 million pounds of uranium annually prior to Fukushima vs total global demand of 177 million pounds;

­- Analyst forecast the spot price quickly returning to $70-80/lb in 2014 and let’s not get into the long-term supply shortage expected by 2017/18 – driven by 30 plants under construction in China to be operational between now and 2016 and

- The US-Russian HEU agreement is set to conclude by 2014, which could result in ~16% of current supply coming off the market.