PDN got smacked based on the perceived poor results for the sept quarter. Here is my take on the results
Preface: The price of U is at artificially low levels, making the job of mining it, marginal for most producers. Virtually every analyst has recognised that we are somewhere near the bottom of the price cycle. Lower than this will have a detrimental long term effect on exploration and possible mine closures.
Sales: Miners dig up their production and either sell it or keep it. Uranium sales are "lumpy" due to contractual norms within the industry. PDN sold only 63.4%(1.224m) of their production in the sept quarter. PDN anticipate that the unsold production(.705m) will be sold in the December quarter. They think this figure will be 2.7m This is a 220% increase on the September quarter. If we break this down ...... 1. September production 1.929m 2. delayed sales (from inventory) 0.705m subtotal 2.634m The 2.7m figure given by management reflects these sales out of inventory, plus a little more , to reflect a non repetition of the disruptions at Kayelekera .
Some of the rationale for the delay in sales may very well be managements belief that the price of U must recover from here. In other words they are demonstrating that they really believe that the price of U will recover fairly shortly.
Production:
Kayelekera Mine: Suffered from an unscheduled shutdown in August resulting in an 18% fall in available processing time by 18%. You would expect that the C1 costs would therefore blow out for this mine. In fact however it fell compared to 2011, from 52.8/lb to 49/lb. After the disruption the costs fell further to 45/lb. Accounting for the August disruption, the production levels were 94-95% of nameplate. Overall a good result (95% of nameplate with an 8/lb fall in C1)
Langer Heinrich: Operating at 99.2% nameplate for the quarter on lower than designed feed concentration. October was well above nameplate.
Costs: KM has reduced C1 by 15% to 45/lb. This is too high in todays pricing environment. But how long will these prices last? LHM C1 costs fell 7% to 31.8/lb
Cost reduction is now a key focus for management, and they are succeeding. There is no reason to doubt that the forecast extra reductions in 2013 and 2014 are possible as they have executed already quite well. According to forecast KM's C1 will be 35.6/lb in 2014 and LHM will be 27.5/lb
Other costs: As flagged in the release of 7/11 exploration, corporate and inventory should see savings of 22m per annum.
Why I topped up today. Like all I am bleeding from the recent falls. But the way to make money from these situations is to buy when its falling. I am looking forward to the Dec quarter report. I am expecting, that production has further improved as well as C1 costs. that C1 costs continue to fall that revenue doubles due to delay in sales from this quarter that the price of U is heading back towards 50 dollars
Debt Convertible bond issues:(total outstanding 708m) There are 3 issues only one of which is due for repayment in 2013(march) The other 2 are due in 2016/17 In march there will be an obligation to payout investors 134m, discharging the 325m convertible bond issuance of mar 2008. This leaves 574m maturing in 2016/17
Project finance: KM 88m outstanding from a 167m facility. LHM 118.5m from a 141m facility
repayments: 134m march 2013. 53.1m principal reduction on project finance. A total of 187.1m This is a hefty commitment for the company in the current U price environment. However there will be a payment from EDF of 150m in jan 2013. Leaving a balance of 37.1m to be drawn from the cash balance of 144m. Leaving a "balance" of 106m
interest of 40.2m will need to be paid over the next 12 months.
Cash flow There are 2 events to consider. The 150m from EDF The surge in receipts from the delayed sales of the sept qu. The anticipated sales volume of 2.7m lb represents an extra 75m over the sept quarter based on $50/lb
Flow on effects A reduction in debt of 187.1m saving 12.5m in interest going forward. Cost savings in C1 and other expenses
Without a substantial increase in U price there will be little incentive to either increase exploration spend or develop further mines. Thus the costs for PDN in the immediate future should mainly be the costs already outlined. All of which are falling and forecast to fall significantly further.
Whilst it is tough going for PDN, I believe that they have turned a corner, and should benefit from a re rating once the price of U starts moving in the right direction.
PDN Price at posting:
96.0¢ Sentiment: LT Buy Disclosure: Held
(20min delay)