charlie austins take

Paladin (PDN); Leveraged Uranium Play

Paladin is Australia's pure play on Uranium with a market cap of approximately A$4.2bn. The uranium market is extremely tight, there has been a swing in industry dynamic from the utilities being price makers, to price takers and the full impact of this is yet to unfold. The Uranium price is now $95/lb, it has corrected and is again trending up, with $125/lb a likely target in the near to medium term. Global utilities currently demand 183m/lb of uranium per annum, of which 15% changes hands on the spot market. This is where the Paladin story becomes compelling. Over the next 5 years PDN expect to produce 32mlb's of uranium, (from existing operations and operations under construction), of which 25mlb's is uncommitted.

The Langer Heidrich project in Namibia is now ramping up after the initial commissioning issues and is expected to be at 2.6mtpa targeted rate by the end of January 2008. It is a long life project with over 100mlbs in resources currently identified. We would expect to see a stage 2 Langer Heidrich upgrade commence almost immediately with the potential to add a further 1.1mlbs of production from the end of 2008 onwards. Given the large resource base, there is definitely the potential for a Langer Heindrich stage 3 development further into the future. Kayelekera in Malawi has all of the relevant sign-offs and construction is on schedule for a Q4 2008 start up. It is an 11 year project with the potential for 3.3m/lbs of production in the first 7 years and 1.1mlbs thereafter. Operating costs are expected to be in the order of US$20/lb. Payback is expected in the first 2 years of operation.

From 2009 onwards we see PDN producing largely unhedged uranium at a rate of 7.00mtpa with further growth options in the pipeline. Mt Isa is also progressing well and we would expect to see plenty of drilling results supporting a resource upgrade in the near term and a BFS to commence in 2009 offering further growth options.

Southern Cross estimates that PDN is trading on 11x 2010 earnings, however with such a strong outlook for the industry, this may yet prove conservative. If you want to play Uranium in Australia, in a cashflow and earnings sense that is also unhedged, then PDN is your only choice. Southern Cross currently has a $9.50ps 12mth price target representing 34% upside from the current level. We expect this to be realised as Langer Heindrich hits its straps and as Kayelekera comes into production. PDN is a clear corporate target with strong, unhedged, production growth coming on over the next few years.