Paladin Energy
Australia/Metals & Mining
Paladin Energy Desk Note
Opportunities in Uranium
09/05/11 12/05/11
BUY March 2013 5% convertible bonds (ISNXS0349087451) - The bonds are currently trading at 99.5-100 referencing USD 3.675. At this price they yield 5.14% which is a z spread of 439 bps. - Using a credit spread of 500 bps, volatility assumption of 40% and stock borrow of 100 bps the bonds are worth 101.73. - The implied credit spread is 628 bps and the implied volatility is 29.25%. Parity is 55.73 and the delta 22%. Realised volatility in USD is just north of 50% for 300 days. - Langer Heinrich stage 4 capex could begin in early/mid 2013 and could total up to USD400m, with the majority incurred over a two year period starting in late 2013. Bearing this in mind and the necessary refinancing required for the 2013 bond itself we prefer the 2013 bonds over 2015 bonds. - We believe on fundamentals both the credit and the equity are attractive in the case of the 2013 bonds. Uranium prices are supported by strong medium term demand/supply dynamics and are likely to edge back up as Governments clarify their nuclear energy policies, we believe - The World Nuclear Association forecasts that world nuclear energy capacity will increase by 63% by 2030. We expect only a small downward revision to this forecast following the recent accident in Japan. - Mines currently account for 78% of world uranium demand, with the balance made up from secondary sources which are being depleted. - Uranium spot prices have fallen from USD68 immediately prior to the recent disaster in Japan to a USD56 currently. We expect prices to remain at around these levels whilst Governments clarify their nuclear energy policies. - China’s nuclear power policy is key to uranium prices. China accounts for 37% of new planned capacity (2010-2030). It has suspended the approval process for new reactors whilst safety standards are reassessed. Medium term nuclear energy targets remain intact. - Paladin’s contracts are shorter-term than the industry average and it has greater sensitivity to uranium spot prices. - We forecast a total debt/EBITDA ratio of 3.8x in FY2012 and 2.0x in FY2013, as the current expansion phases complete and these mines reach nameplate production. The company has adequate liquidity in FY2011 and FY2012. Year to June, USD Revenues EBITDA EBIT Interest paid Profit/loss before tax Net cash flow from operating activities Net cash flow from investing activities Net cash flow from financing activities Cash and cash equivalents Non-current financial liabilities, interest bearing Current financial liabilities interest bearing Total debt Net debt Total assets Total shareholders' equity Equity Ratio Total debt / EBITDA Net debt / EBITDA EBITDA / Interest Expense EBIT / Interest Expense Capex / Sales
12/05/2011
2008 101.9 -4.3 -13.3 -18.4 -44.2 -18.4 -150.9 324.1 337.6 571.5 11.0 582.5 244.9 2,563.1 1,429.3 0.6 na na na na 1.0
2009 114.8 -773.2 -782.0 -13.6 -813.4 -213.2 -245.6 -6.7 66.2 572.0 14.2 586.2 520.0 1,463.5 631.2 0.4 na na na na 2.1
2010 204.3 10.3 -4.0 -4.0 -24.9 -41.9 -172.2 495.3 348.8 682.2 47.9 730.1 381.3 1,957.6 956.4 0.5 70.8 37.0 2.6 na 0.8
Bond Price History 115 110 105 100 95 90 85 80 12/10/09 31/12/09 21/3/10
9/6/10
28/8/10 16/11/10
4/2/11
25/4/11
XS0349087451 Corp
Equity Price History 6 6 5 5 4 4 3 3 2 12/10/09 31/12/09 21/3/10
9/6/10
28/8/10 16/11/10 4/2/11
25/4/11
PDN AU Equity
Research ISM Capital LLP Melanie Thornton, CFA Andreas Hajialexandrou Michael Coakley Nicolas Lokiec Paul Makepeace Company Information Ticker/RIC/Reuters RIC/Reuters Country Exchange/List No. outstanding shares Free float (%) Inst. stake of float (%) Market capitalisation (bn) Enterprise value Net debt
+44 (0)20 7938 8980
PDN AU Equity XS0349087451 AUSTRALIA ASE 778 82 32 2,652 4,221 14,048
Equity Valuation Ratios (Bloomberg) FY11 P/E Estimate EV/EBITDA adjusted (x) P/BV (x) Dividend yield (%)
2011(F) 315.6 55.5 17.5 -32.0 -44.2 -41.0 -113.7 -265.2 188.4 679.4 45.0 724.4 536.0 2,030.1 1,012.7 0.5 13.1 9.7 1.7 0.5 0.3
2012(F) 465.1 181.0 140.0 -36.0 90.6 54.8 -40.0 -356.4 162.8 323.0 361.0 684.0 521.2 2,280.4 1,295.0 0.6 3.8 2.9 5.0 3.9 0.1
70.6 2.6 0.0
2013(F) 552.1 237.6 192.6 -34.0 145.2 97.5 -60.0 -22.0 0.0 301.0 40.0 483.7 483.7 1,999.1 1,347.4 0.7 2.0 2.0 7.0 5.7 0.1
Australia/Metals & Mining
Paladin Energy Debt and Liquidity We expect the company to become free cash flow positive (after capex) in FY2012 as the recent expansion of Langer Heinrich Stage 3 and Kayelekera completes and these mines reach nameplate output. We forecast that total debt/ebitda will fall to 3.8x in FY2012 Stage 3 expansion at Langer Heinrich is 93% complete and around 98% of the required capex has been spent. Kayeleka is mostly completed. Capex in FY2012 and FY2013 will be mainly maintenance capex plus a possible USD10m further expansion at Kaylekera. A feasibility study regarding further expansion at Langer Heinrich (stage 4) is underway and is expected to be completed by the end of calendar year 2011, with a decision made in Mid-2012. If the project goes ahead, this will likely begin in the first half of calendar 2013, with the bulk of capex incurred over a two year period starting in the second half of calendar 2013. This could cost of to USD400m, depending on the outcome of the feasibility study. A LHM stage 4 expansion would likely be funded by a secured bank facility. The company has said it may also consider issuing another convertible or it could issue equity. The development of Aurora will cost USD500m-USD1bn. A moratorium with the Aboriginal people is expected to end soon. A decision has not yet been made when the development will begin but the company has indicated that development will likely begin once LHM stage 4 nears completion. Both Langer Heinrich and Kayelekera are expected to reach nameplate output in FY2012. The company has adequate liquidity in FY2011 and FY2012 whilst volumes at LHM and Kayelekera step-up Sources of liquidity Total cash at start of year Operating cash flow Bank line availability at start of year Total funds available
FY2011
FY2012
FY2013
348.8 -41.0 12.0 319.8
188.4 54.8 0.0 243.2
162.8 97.5 0.0 260.3
Uses of liquidity Capex Other Bank debt maturities Convertibles maturities Tota uses
FY2011
FY2012
FY2013
-109.5 -4.2 -55.2 0.0 -168.9
-40.0 0 -55.2 0.0 -95.2
-60.0 0 -31.4 -325.0 -416.4
150.9
148.1
-156.1
Total liquidity Source: ISM
The company has sufficient cash to finance its current activities until March 2013 when the USD325m convertible redeems. In October 2010, Paladin made a tender offer to repurchase USD250m of December 2010 4.5% bonds, funding this with a new issue of November 2015 3.25% bonds. We expect the company to seek to roll-over the 2013 bonds ahead of redemption.
12/05/2011
Australia/Metals & Mining
Paladin Energy The company will continue to look for acquisitions In July 2010, the company made a share offer for the remaining 77% of NGM it did not already own, valuing the company at AD27m. In December 2010 it purchased Aurora Uranium assets from Frontier Gold for CD261m (USD277m), paid for by the issue of 52m shares to Frontier Gold (since acquired by Newmont Mining). The company will continue to look at acquisition opportunities. It typically looks to buy assets at a low price/lb (Aurora was acquired for USD1.9/lb) with a long lifespan that offers geographical diversity to the group in the context of a favourable regulatory environment and acceptable political risk. It prefers to finance its M&A activity with equity issue, but will also consider a combination of debt and equity and or an equity contribution by a customer. If Paladin is itself acquired, a ratchet reduces the conversion price of the March 2013 bonds or they can be put at par. If a change of control occurred today, the conversion price would be reduced by 8% Paladin could itself be attractive to a larger group. It is a non-aligned, pure play uranium miner and its share price has fallen by 28% since the Fukushima accident. Its largest shareholder is Newmont Mining with 6.7% who acquired this stake as part of its acquisition of Frontier Gold and it is thought not be to a long term shareholder. If a change of control occurs, then for 30 calendar days after the Change of Control Notice is issued, the conversion price would be: Change of Control Conversion Price = Original Conversion Price*/(1 + (25 x c/t) *Conversion if no change of control. c= number of days from change of control to maturity. t = number of days from issue date to maturity Assets of both LHM and Kayelekera mines are pledged as security against project development loans. Assets Pledged as security Current Cash & cash equivalents Trade & other receivables Inventories Total current assets pledged as security
FY09
FY10
19.6 24.1 52.6 96.3
47.3 41.5 102.5 191.3
Non-current Inventories PPE Mine development Deferred tax asset Intangible assets Total non-current assets pledged as security
24.9 153 14.6 3.9 15.6 212.0
40.8 533.2 119.2 0 24.6 717.8
Total assets pledged as security
308.3
909.1
Source: ISM, Paladin
12/05/2011
Australia/Metals & Mining
Paladin Energy Paladin’s contract structure Paladin’s output is sold both via multi-year contracts and on the spot market. It currently has an above average exposure to the spot-market due to management’s favourable view of uranium prices Paladin does not publish a detailed break-down of its contract structure. We estimate that at present, multiyear contracts cover around 70-75% of its output with the balance sold on the spot market. Multi-year contracts are priced using a combination of spot and term prices. For instance, this may include a simple average of the two or it may include price escalation clauses. The company’s favourable view of uranium prices has led it to structure a greater share of price upside into its contracts. Most contracts are short term compared with its some of its peers; no current contract extends beyond 2015. It has so far resisted pressure from some of its clients (in the US and China) for very long term and large size contracts. The WNA believes that spot prices amount to around 20% of uranium supply with the balance traded via contracts of 3-15 years in length. Most of its clients are in the US and Asia.
Uranium prices Uranium prices are likely to continue to be held back whilst Governments perform safety checks on existing reactors and confirm their nuclear energy policies Recent events in Japan have caused some important users of nuclear energy to review their energy policies. The concern is that plans to expand nuclear power will be scaled-back as they were in the wake of past nuclear accidents. Governments are keen to check safety standard at existing plants – many reactors are more than 20 years old - before moving ahead with expansion plans. Uranium prices are likely to continue to trade on news flow whilst nuclear energy policies are clarified. The world’s nuclear energy capacity is set to rise by 63% from current levels by 2030, according to the World Nuclear Association. China, India and Russia together account for more than half of this, and any change in policy by these Governments could have a major influence on uranium demand. China has committed to building 77 nuclear reactors by 2030 which amounts to 37% of all new capacity planned or under construction. An estimated 34 of these reactors have already been approved by the Central Government of which 26 are being built. On March 16th 2011 the Chinese Government’s State Council announced that it had suspended the approval process for all new nuclear plants whilst safety standards are reassessed. Safety checks are to be conducted at all existing plants and management controls tightened. The drafting of a new Atomic Energy Law is set to be completed by October 2011 and new nuclear safety regulations are expected by the end of the year. This is likely to slow China’s nuclear development for the next 2-3 years, but importantly, it maintains its commitment to 40GW of nuclear power by 2015. The Russian Government has said that it will not make any changes to its plans. India will introduce legislation to create an independent nuclear power regulator. However, it has also confirmed that it will go ahead with plans for two new pressurised water reactors on India’s West Coast, signalling its continued commitment to nuclear power. Prior to the Fukushima accident, Japan was planning to expand its capacity by a total of 14 reactors (or 19.2GW) by 2030.
12/05/2011
Australia/Metals & Mining
Paladin Energy Table 1: Current and planned nuclear reactors and capacity Current no. of reactors
Under construction
Planned by 2030
Current % nuclear
50 (57.8GWe) 14 (16GWe) 18 (15.7Gwe) 6 (8.4GWe) 12 (16.5GWe) 9 (11.6GWe)
2% 18% 2% 35% 29% 20%
China Russia India South Korea Japan United States
13 (10.2GWe) 27 (29.7GWe) 32 (23GWe) 10 (8.9GWe) 20 (4.1GWe) 5 (4.1GWe) 21 (17.6GWe) 5 (5.8GWe) 55 (47.3GWe) 2 (2.7GWe) 104 (101.1GWe) 1 (1.2GWe)
Total
443 (377.2GWe) 62 (64.6GWe) 156 (174.7GWe)
Policy in 2011
Target 5% nuclear by 2020 Target 70-80% by 2100 Target 25% by 2050 National strategic priority Target 40% by 2017 Favourable to Nuclear.
Source: WNA
The US is the largest current user of nuclear energy with 27% of the world’s nuclear power capacity. It has said it remains committed to nuclear energy, but will look at the situation in Japan to help ensure that nuclear energy is produced safely. France, with 13% of the world’s reactors is assessing its plans, and has not yet announced any changes. Swiss (1%) and German (4%) Governments have taken the most cautious stance. Germany is already committed to the phasing out of nuclear power. In 2010, its Government announced plans to extend the life of plants for an additional 12 years beyond the previously agreed phase out dates. In March 2011, Angela Merkel announced that this decision would be revisited in a 3 month moratorium whilst safety standards are re-checked. Switzerland has suspended the approvals process for 3 new nuclear plants so safety standards can be reassessed. Medium term demand/supply dynamics remain supportive for Uranium miners The current (2009 data) 435 reactors require 77,000 tonnes of Uranium Oxide concentrate containing 65,000 tonnes of Uranium, according to the WNA. It forecasts a 33% increase in world uranium demand between 2010 and 2020 and a further 16% increase in demand between 2020 and 2030. Mines yielded 60,000 tonnes of uranium oxide concentrate, containing 50,722 tonnes of uranium which accounted for 78% of world uranium demand. The balance was made up from secondary sources (commercial stockpiles, nuclear weapons, recycled plutonium and uranium from reprocessing used fuel and from some reenrichment of depleted uranium tails). Since 2000, the dilution of military high-enriched uranium has been supplying the equivalent of 10,600 tonnes of uranium oxide. Other secondary sources of uranium include government stockpiles and re-enrichment of depleted uranium. The following graph shows the WNA’s projections of various sources of supply until 2030, and its expectation of demand.
Source: WNA
12/05/2011
Australia/Metals & Mining
Paladin Energy The WNA’s production cost curve shows that prices rise sharply once output from mines exceeds 70,000 tonnes of uranium.
Source: WNA
Key risk factors Paladin management is actively seeking acquisition opportunities. Management says these will likely be funded either by further equity or debt issue. Management thinks the political risk to its assets in Malawi and Namibia is acceptable. Malawi is a multi-party democracy. It currently has good diplomatic relations with many Western countries and has policies to attract foreign direct investment. The judiciary is strong, but parliament has the power to make laws without consultation. Namibia is a stable multi-party democracy, having gained full independence from South Africa in 1990. In 2010 it established a state-owned mining company, Epangelo. In April 2011, Isak Katali, Minister of Mines and Energy, in a speech in Parliament raised fears of nationalisation of the country’s mines. He later clarified these comments, saying that State ownership would apply only to new discoveries, and not to existing investments. Epangelo is underfunded and will likely require partners for future mineral development. In 2010, mining accounted for 15% of Namibia’s GDP and half of its export revenue. In January 2011, Paladin downgraded uranium production guidance to 6.0-6.3lbm from 7.0lbm due to a slower than expected ramp-up at Kayelekera. In April it again downgraded production guidance to 6.0lbm due to high rainfall and diesel shortage at Kayelekera.
12/05/2011
Australia/Metals & Mining
Paladin Energy FY10
FY11
FY12
FY13
Business Description
Paladin is currently the 9th largest uranium producer (Source: WNA). It has two active mines, Langer Heinrich in Namibia and Kayelekera in Malawi, as well as a portfolio of properties in Australia, Africa and Canada at various stages of development .
Segmental sales (lb,m) Lange Heinrich, Namibia Kaylekera, Malawi
2.73 1.00
3.60 2.00
4.25 3.20
5.20 3.30
Liquidity FY11 Total Debt FY10 Cash Est. Net debt
SGD SGD
FY11 Operating cashflow Est commited capex FY11 Commited bank availability Q310 FY10 Liquidity Est. Equity Valuation Ratios (Bloomberg) FY11 P/E Estimate P/BV (x)
SGD SGD SGD SGD
724 188 536 -
41 110 7 157 114.2 2.6
Peers P/B
Paladin Energy Ltd Extract Resources Ltd Uranium One Inc Cameco Corp
P/E
2.6 15.8 1.9 2.3
EV/FY11 EBITDA60D Vol
15.6 8.4 10.7
24.5
Sales by Segment
Revenues by Segment 600
500 400 300
200 100 0
FY2009
FY2010
FY2011
FY2012
FY2013
Uranium
Source: ISM
Output volume by mine in lb (m) 10 8 6 4 2 0 FY2009 Source: ISM
FY2010
FY2011
Langer Heinrich
FY2012
74.8 100.7 95.3 47.9
Assets + Cash & Near Cash Items + Short-Term Investments + Accounts & Notes Receivable + Inventories + Other Current Assets Total Current Assets
FY 2007 183 0 3 38 9 233
FY 2008 338 0 29 69 13 448
FY 2009 66 0 13 86 17 182
FY 2010 349 0 14 109 44 516
FY 2011 188 0 40 168 20 416
FY 2012 163 0 42 165 28 398
FY 2013 -143 0 44 155 32 88
60 135 1,630 1,825 2,058
0 242 1,874 2,115 2,563
69 512 700 1,282 1,464
36 660 746 1,442 1,958
88 705 820 1,614 2,030
88 780 1,014 1,883 2,280
88 920 902 1,911 1,999
Liabilities & Shareholders' Equity + Accounts Payable + Short-Term Borrowings + Other Short-Term Liabilities Total Current Liabilities
14 6 11 30
41 11 2 54
67 14 10 91
63 48 10 121
85 45 10 140
94 361 10 465
103 40 10 153
+ Long-Term Borrowings + Other Long-Term Liabilities Total Long-Term Liabilities
268 452 720
572 508 1,080
572 169 741
682 198 880
679 198 877
323 198 521
301 198 499
Total Liabilities
750
1,134
832
1,001
1,017
985
652
+ Minority Interest 185 + Share Capital & APIC 1,075 + Retained Earnings & Other Equity 48 Total Shareholders' Equity 1,308 Total Liabilities & Equity 2,058 Income Statement FY 2007 Revenue 11.2 Cost of revenue -12.0 Operating Expenses -36.0 Other Revenues 0.0 EBITDA -35.2 EBIT -36.8 Interest expense -7.7 Other finance costs -5.3 Pretax Income -49.8 Income Tax Expense 11.7 Income Before XO Itemsand minorities -38.1 Extraordinary Loss Net of Tax 0.0 Minority Interests -0.4 Net attributable income -37.7 Average Number of Shares 511.2 Stated earnings per share ($ cts) -7.4 P/E na
208 1,089 133 1,429 2,563 FY 2008 101.9 -66.4 -48.8 0.0 -4.3 -13.3 -18.4 -12.5 -44.2 7.0 -37.2 0.0 -1.2 -36.0 608.3 -5.9 na
69 1,112 -549 631 1,463 FY 2009 114.8 -66.4 -831.5 1.1 -773.2 -782.0 -13.6 -16.9 -813.4 237.0 -576.4 0.0 96.2 -672.6 618.0 -77.7 na
73 1,475 -592 956 1,958 FY 2010 204.3 -153.0 -64.8 9.5 10.3 -4.0 -4.0 -16.9 -24.9 -28.1 -53.0 0.0 -0.9 -52.1 697.0 -7.5 na
83 1,509 -580 1,013 2,030 FY 2011 315.6 -213.1 -85.0 0.0 55.5 17.5 -32.0 -29.7 -44.2 18.2 -26.0 0.0 -5.0 -21.0 797.0 -2.6 0.0
83 1,509 -297 1,295 2,280 FY 2012 465.1 -257.5 -67.6 0.0 181.0 140.0 -36.0 -13.4 90.6 -27.2 63.4 0.0 3.0 60.4 797.0 7.6 0.0
83 1,509 -245 1,347 1,999 FY 2013 552.1 -289.9 -69.6 0.0 237.6 192.6 -34.0 -13.4 145.2 -43.6 101.6 0.0 2.5 99.1 797.0 12.4 0.0
Cashflow Statement Cash From Operating Activities + Net Income + Depreciation & Amortization + Other Non-Cash Adjustments Cash From Operations
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
-37.6 2.1 -3.0 -38.6
-36.0 10.9 7.0 -18.4
-672.6 8.8 450.6 -213.2
-52.1 14.3 -3.3 -41.9
-21.0 38.0 -58.0 -41.0
60.4 41.0 -46.6 54.8
99.1 45.0 -46.6 97.5
Cash From Investing Activities + Disposal of Fixed Assets + Capital Expenditures + Other Investing Activities Cash From Investing Activities
0.2 -88.9 -33.1 -122.0
1.9 -99.6 -51.3 -150.9
0.2 -237.0 -8.8 -245.6
0.0 -170.4 -1.8 -172.2
0.0 -109.5 -4.2 -113.7
0.0 -40.0 0.0 -40.0
0.0 -60.0 0.0 -60.0
Cash from Financing Activities + Dividends Paid Net change in borrowing + Change in Short-Term Borrowings + Increase in Long-Term Borrowings + Decrease in Long-term Borrowings + Increase in share capital - Decrease in share capital + Other Cash from Financing Activities
0.0 299.6 0.0 299.6 0.0 7.1 0.0 -6.9 299.8
0.0 324.7 0.0 329.3 -4.6 10.5 0.0 -11.1 324.1
0.0 -12.2 0.0 0.0 -12.2 6.2 0.0 -0.7 -6.7
0.0 138.4 0.0 145.0 -6.6 364.1 0.0 -7.2 495.3
0.0 -259.9 -2.9 -2.8 -257.1 1.3 0.0 -5.9 -265.2
0.0 -356.4 318.1 -356.4 0.0 0.0 0.0 0.0 -356.4
0.0 -22.0 -5.0 -22.0 0.0 0.0 0.0 0.0 -22.0
Net Changes in Cash
139.2
154.8
-465.5
281.2
-419.9
-341.6
15.5
+ LT Investments & LT Receivables + PPE & mine development + Other Long-Term Assets Total Long-Term Assets Total Assets
FY2013
Kaylekera
SGD at 31/12/2010 Curr. USD
Convertible bonds Convertible bonds Total Unsecured Debt Secured bank loans Secured bank loans Secured bank loans Total Secured Debt Source: ISM
12/05/2011
312.9 254.8 567.7 42.9 16.7 102.6 162.2
Maturity
2013 2015
Paladin Energy Desk Note
Opportunities in Uranium
09/05/11 12/05/11
BUY March 2013 5% convertible bonds (ISNXS0349087451) - The bonds are currently trading at 99.5-100 referencing USD 3.675. At this price they yield 5.14% which is a z spread of 439 bps. - Using a credit spread of 500 bps, volatility assumption of 40% and stock borrow of 100 bps the bonds are worth 101.73. - The implied credit spread is 628 bps and the implied volatility is 29.25%. Parity is 55.73 and the delta 22%. Realised volatility in USD is just north of 50% for 300 days. - Langer Heinrich stage 4 capex could begin in early/mid 2013 and could total up to USD400m, with the majority incurred over a two year period starting in late 2013. Bearing this in mind and the necessary refinancing required for the 2013 bond itself we prefer the 2013 bonds over 2015 bonds. - We believe on fundamentals both the credit and the equity are attractive in the case of the 2013 bonds. Uranium prices are supported by strong medium term demand/supply dynamics and are likely to edge back up as Governments clarify their nuclear energy policies, we believe - The World Nuclear Association forecasts that world nuclear energy capacity will increase by 63% by 2030. We expect only a small downward revision to this forecast following the recent accident in Japan. - Mines currently account for 78% of world uranium demand, with the balance made up from secondary sources which are being depleted. - Uranium spot prices have fallen from USD68 immediately prior to the recent disaster in Japan to a USD56 currently. We expect prices to remain at around these levels whilst Governments clarify their nuclear energy policies. - China’s nuclear power policy is key to uranium prices. China accounts for 37% of new planned capacity (2010-2030). It has suspended the approval process for new reactors whilst safety standards are reassessed. Medium term nuclear energy targets remain intact. - Paladin’s contracts are shorter-term than the industry average and it has greater sensitivity to uranium spot prices. - We forecast a total debt/EBITDA ratio of 3.8x in FY2012 and 2.0x in FY2013, as the current expansion phases complete and these mines reach nameplate production. The company has adequate liquidity in FY2011 and FY2012. Year to June, USD Revenues EBITDA EBIT Interest paid Profit/loss before tax Net cash flow from operating activities Net cash flow from investing activities Net cash flow from financing activities Cash and cash equivalents Non-current financial liabilities, interest bearing Current financial liabilities interest bearing Total debt Net debt Total assets Total shareholders' equity Equity Ratio Total debt / EBITDA Net debt / EBITDA EBITDA / Interest Expense EBIT / Interest Expense Capex / Sales
12/05/2011
2008 101.9 -4.3 -13.3 -18.4 -44.2 -18.4 -150.9 324.1 337.6 571.5 11.0 582.5 244.9 2,563.1 1,429.3 0.6 na na na na 1.0
2009 114.8 -773.2 -782.0 -13.6 -813.4 -213.2 -245.6 -6.7 66.2 572.0 14.2 586.2 520.0 1,463.5 631.2 0.4 na na na na 2.1
2010 204.3 10.3 -4.0 -4.0 -24.9 -41.9 -172.2 495.3 348.8 682.2 47.9 730.1 381.3 1,957.6 956.4 0.5 70.8 37.0 2.6 na 0.8
Bond Price History 115 110 105 100 95 90 85 80 12/10/09 31/12/09 21/3/10
9/6/10
28/8/10 16/11/10
4/2/11
25/4/11
XS0349087451 Corp
Equity Price History 6 6 5 5 4 4 3 3 2 12/10/09 31/12/09 21/3/10
9/6/10
28/8/10 16/11/10 4/2/11
25/4/11
PDN AU Equity
Research ISM Capital LLP Melanie Thornton, CFA Andreas Hajialexandrou Michael Coakley Nicolas Lokiec Paul Makepeace Company Information Ticker/RIC/Reuters RIC/Reuters Country Exchange/List No. outstanding shares Free float (%) Inst. stake of float (%) Market capitalisation (bn) Enterprise value Net debt
+44 (0)20 7938 8980
PDN AU Equity XS0349087451 AUSTRALIA ASE 778 82 32 2,652 4,221 14,048
Equity Valuation Ratios (Bloomberg) FY11 P/E Estimate EV/EBITDA adjusted (x) P/BV (x) Dividend yield (%)
2011(F) 315.6 55.5 17.5 -32.0 -44.2 -41.0 -113.7 -265.2 188.4 679.4 45.0 724.4 536.0 2,030.1 1,012.7 0.5 13.1 9.7 1.7 0.5 0.3
2012(F) 465.1 181.0 140.0 -36.0 90.6 54.8 -40.0 -356.4 162.8 323.0 361.0 684.0 521.2 2,280.4 1,295.0 0.6 3.8 2.9 5.0 3.9 0.1
70.6 2.6 0.0
2013(F) 552.1 237.6 192.6 -34.0 145.2 97.5 -60.0 -22.0 0.0 301.0 40.0 483.7 483.7 1,999.1 1,347.4 0.7 2.0 2.0 7.0 5.7 0.1
Australia/Metals & Mining
Paladin Energy Debt and Liquidity We expect the company to become free cash flow positive (after capex) in FY2012 as the recent expansion of Langer Heinrich Stage 3 and Kayelekera completes and these mines reach nameplate output. We forecast that total debt/ebitda will fall to 3.8x in FY2012 Stage 3 expansion at Langer Heinrich is 93% complete and around 98% of the required capex has been spent. Kayeleka is mostly completed. Capex in FY2012 and FY2013 will be mainly maintenance capex plus a possible USD10m further expansion at Kaylekera. A feasibility study regarding further expansion at Langer Heinrich (stage 4) is underway and is expected to be completed by the end of calendar year 2011, with a decision made in Mid-2012. If the project goes ahead, this will likely begin in the first half of calendar 2013, with the bulk of capex incurred over a two year period starting in the second half of calendar 2013. This could cost of to USD400m, depending on the outcome of the feasibility study. A LHM stage 4 expansion would likely be funded by a secured bank facility. The company has said it may also consider issuing another convertible or it could issue equity. The development of Aurora will cost USD500m-USD1bn. A moratorium with the Aboriginal people is expected to end soon. A decision has not yet been made when the development will begin but the company has indicated that development will likely begin once LHM stage 4 nears completion. Both Langer Heinrich and Kayelekera are expected to reach nameplate output in FY2012. The company has adequate liquidity in FY2011 and FY2012 whilst volumes at LHM and Kayelekera step-up Sources of liquidity Total cash at start of year Operating cash flow Bank line availability at start of year Total funds available
FY2011
FY2012
FY2013
348.8 -41.0 12.0 319.8
188.4 54.8 0.0 243.2
162.8 97.5 0.0 260.3
Uses of liquidity Capex Other Bank debt maturities Convertibles maturities Tota uses
FY2011
FY2012
FY2013
-109.5 -4.2 -55.2 0.0 -168.9
-40.0 0 -55.2 0.0 -95.2
-60.0 0 -31.4 -325.0 -416.4
150.9
148.1
-156.1
Total liquidity Source: ISM
The company has sufficient cash to finance its current activities until March 2013 when the USD325m convertible redeems. In October 2010, Paladin made a tender offer to repurchase USD250m of December 2010 4.5% bonds, funding this with a new issue of November 2015 3.25% bonds. We expect the company to seek to roll-over the 2013 bonds ahead of redemption.
12/05/2011
Australia/Metals & Mining
Paladin Energy The company will continue to look for acquisitions In July 2010, the company made a share offer for the remaining 77% of NGM it did not already own, valuing the company at AD27m. In December 2010 it purchased Aurora Uranium assets from Frontier Gold for CD261m (USD277m), paid for by the issue of 52m shares to Frontier Gold (since acquired by Newmont Mining). The company will continue to look at acquisition opportunities. It typically looks to buy assets at a low price/lb (Aurora was acquired for USD1.9/lb) with a long lifespan that offers geographical diversity to the group in the context of a favourable regulatory environment and acceptable political risk. It prefers to finance its M&A activity with equity issue, but will also consider a combination of debt and equity and or an equity contribution by a customer. If Paladin is itself acquired, a ratchet reduces the conversion price of the March 2013 bonds or they can be put at par. If a change of control occurred today, the conversion price would be reduced by 8% Paladin could itself be attractive to a larger group. It is a non-aligned, pure play uranium miner and its share price has fallen by 28% since the Fukushima accident. Its largest shareholder is Newmont Mining with 6.7% who acquired this stake as part of its acquisition of Frontier Gold and it is thought not be to a long term shareholder. If a change of control occurs, then for 30 calendar days after the Change of Control Notice is issued, the conversion price would be: Change of Control Conversion Price = Original Conversion Price*/(1 + (25 x c/t) *Conversion if no change of control. c= number of days from change of control to maturity. t = number of days from issue date to maturity Assets of both LHM and Kayelekera mines are pledged as security against project development loans. Assets Pledged as security Current Cash & cash equivalents Trade & other receivables Inventories Total current assets pledged as security
FY09
FY10
19.6 24.1 52.6 96.3
47.3 41.5 102.5 191.3
Non-current Inventories PPE Mine development Deferred tax asset Intangible assets Total non-current assets pledged as security
24.9 153 14.6 3.9 15.6 212.0
40.8 533.2 119.2 0 24.6 717.8
Total assets pledged as security
308.3
909.1
Source: ISM, Paladin
12/05/2011
Australia/Metals & Mining
Paladin Energy Paladin’s contract structure Paladin’s output is sold both via multi-year contracts and on the spot market. It currently has an above average exposure to the spot-market due to management’s favourable view of uranium prices Paladin does not publish a detailed break-down of its contract structure. We estimate that at present, multiyear contracts cover around 70-75% of its output with the balance sold on the spot market. Multi-year contracts are priced using a combination of spot and term prices. For instance, this may include a simple average of the two or it may include price escalation clauses. The company’s favourable view of uranium prices has led it to structure a greater share of price upside into its contracts. Most contracts are short term compared with its some of its peers; no current contract extends beyond 2015. It has so far resisted pressure from some of its clients (in the US and China) for very long term and large size contracts. The WNA believes that spot prices amount to around 20% of uranium supply with the balance traded via contracts of 3-15 years in length. Most of its clients are in the US and Asia.
Uranium prices Uranium prices are likely to continue to be held back whilst Governments perform safety checks on existing reactors and confirm their nuclear energy policies Recent events in Japan have caused some important users of nuclear energy to review their energy policies. The concern is that plans to expand nuclear power will be scaled-back as they were in the wake of past nuclear accidents. Governments are keen to check safety standard at existing plants – many reactors are more than 20 years old - before moving ahead with expansion plans. Uranium prices are likely to continue to trade on news flow whilst nuclear energy policies are clarified. The world’s nuclear energy capacity is set to rise by 63% from current levels by 2030, according to the World Nuclear Association. China, India and Russia together account for more than half of this, and any change in policy by these Governments could have a major influence on uranium demand. China has committed to building 77 nuclear reactors by 2030 which amounts to 37% of all new capacity planned or under construction. An estimated 34 of these reactors have already been approved by the Central Government of which 26 are being built. On March 16th 2011 the Chinese Government’s State Council announced that it had suspended the approval process for all new nuclear plants whilst safety standards are reassessed. Safety checks are to be conducted at all existing plants and management controls tightened. The drafting of a new Atomic Energy Law is set to be completed by October 2011 and new nuclear safety regulations are expected by the end of the year. This is likely to slow China’s nuclear development for the next 2-3 years, but importantly, it maintains its commitment to 40GW of nuclear power by 2015. The Russian Government has said that it will not make any changes to its plans. India will introduce legislation to create an independent nuclear power regulator. However, it has also confirmed that it will go ahead with plans for two new pressurised water reactors on India’s West Coast, signalling its continued commitment to nuclear power. Prior to the Fukushima accident, Japan was planning to expand its capacity by a total of 14 reactors (or 19.2GW) by 2030.
12/05/2011
Australia/Metals & Mining
Paladin Energy Table 1: Current and planned nuclear reactors and capacity Current no. of reactors
Under construction
Planned by 2030
Current % nuclear
50 (57.8GWe) 14 (16GWe) 18 (15.7Gwe) 6 (8.4GWe) 12 (16.5GWe) 9 (11.6GWe)
2% 18% 2% 35% 29% 20%
China Russia India South Korea Japan United States
13 (10.2GWe) 27 (29.7GWe) 32 (23GWe) 10 (8.9GWe) 20 (4.1GWe) 5 (4.1GWe) 21 (17.6GWe) 5 (5.8GWe) 55 (47.3GWe) 2 (2.7GWe) 104 (101.1GWe) 1 (1.2GWe)
Total
443 (377.2GWe) 62 (64.6GWe) 156 (174.7GWe)
Policy in 2011
Target 5% nuclear by 2020 Target 70-80% by 2100 Target 25% by 2050 National strategic priority Target 40% by 2017 Favourable to Nuclear.
Source: WNA
The US is the largest current user of nuclear energy with 27% of the world’s nuclear power capacity. It has said it remains committed to nuclear energy, but will look at the situation in Japan to help ensure that nuclear energy is produced safely. France, with 13% of the world’s reactors is assessing its plans, and has not yet announced any changes. Swiss (1%) and German (4%) Governments have taken the most cautious stance. Germany is already committed to the phasing out of nuclear power. In 2010, its Government announced plans to extend the life of plants for an additional 12 years beyond the previously agreed phase out dates. In March 2011, Angela Merkel announced that this decision would be revisited in a 3 month moratorium whilst safety standards are re-checked. Switzerland has suspended the approvals process for 3 new nuclear plants so safety standards can be reassessed. Medium term demand/supply dynamics remain supportive for Uranium miners The current (2009 data) 435 reactors require 77,000 tonnes of Uranium Oxide concentrate containing 65,000 tonnes of Uranium, according to the WNA. It forecasts a 33% increase in world uranium demand between 2010 and 2020 and a further 16% increase in demand between 2020 and 2030. Mines yielded 60,000 tonnes of uranium oxide concentrate, containing 50,722 tonnes of uranium which accounted for 78% of world uranium demand. The balance was made up from secondary sources (commercial stockpiles, nuclear weapons, recycled plutonium and uranium from reprocessing used fuel and from some reenrichment of depleted uranium tails). Since 2000, the dilution of military high-enriched uranium has been supplying the equivalent of 10,600 tonnes of uranium oxide. Other secondary sources of uranium include government stockpiles and re-enrichment of depleted uranium. The following graph shows the WNA’s projections of various sources of supply until 2030, and its expectation of demand.
Source: WNA
12/05/2011
Australia/Metals & Mining
Paladin Energy The WNA’s production cost curve shows that prices rise sharply once output from mines exceeds 70,000 tonnes of uranium.
Source: WNA
Key risk factors Paladin management is actively seeking acquisition opportunities. Management says these will likely be funded either by further equity or debt issue. Management thinks the political risk to its assets in Malawi and Namibia is acceptable. Malawi is a multi-party democracy. It currently has good diplomatic relations with many Western countries and has policies to attract foreign direct investment. The judiciary is strong, but parliament has the power to make laws without consultation. Namibia is a stable multi-party democracy, having gained full independence from South Africa in 1990. In 2010 it established a state-owned mining company, Epangelo. In April 2011, Isak Katali, Minister of Mines and Energy, in a speech in Parliament raised fears of nationalisation of the country’s mines. He later clarified these comments, saying that State ownership would apply only to new discoveries, and not to existing investments. Epangelo is underfunded and will likely require partners for future mineral development. In 2010, mining accounted for 15% of Namibia’s GDP and half of its export revenue. In January 2011, Paladin downgraded uranium production guidance to 6.0-6.3lbm from 7.0lbm due to a slower than expected ramp-up at Kayelekera. In April it again downgraded production guidance to 6.0lbm due to high rainfall and diesel shortage at Kayelekera.
12/05/2011
Australia/Metals & Mining
Paladin Energy FY10
FY11
FY12
FY13
Business Description
Paladin is currently the 9th largest uranium producer (Source: WNA). It has two active mines, Langer Heinrich in Namibia and Kayelekera in Malawi, as well as a portfolio of properties in Australia, Africa and Canada at various stages of development .
Segmental sales (lb,m) Lange Heinrich, Namibia Kaylekera, Malawi
2.73 1.00
3.60 2.00
4.25 3.20
5.20 3.30
Liquidity FY11 Total Debt FY10 Cash Est. Net debt
SGD SGD
FY11 Operating cashflow Est commited capex FY11 Commited bank availability Q310 FY10 Liquidity Est. Equity Valuation Ratios (Bloomberg) FY11 P/E Estimate P/BV (x)
SGD SGD SGD SGD
724 188 536 -
41 110 7 157 114.2 2.6
Peers P/B
Paladin Energy Ltd Extract Resources Ltd Uranium One Inc Cameco Corp
P/E
2.6 15.8 1.9 2.3
EV/FY11 EBITDA60D Vol
15.6 8.4 10.7
24.5
Sales by Segment
Revenues by Segment 600
500 400 300
200 100 0
FY2009
FY2010
FY2011
FY2012
FY2013
Uranium
Source: ISM
Output volume by mine in lb (m) 10 8 6 4 2 0 FY2009 Source: ISM
FY2010
FY2011
Langer Heinrich
FY2012
74.8 100.7 95.3 47.9
Assets + Cash & Near Cash Items + Short-Term Investments + Accounts & Notes Receivable + Inventories + Other Current Assets Total Current Assets
FY 2007 183 0 3 38 9 233
FY 2008 338 0 29 69 13 448
FY 2009 66 0 13 86 17 182
FY 2010 349 0 14 109 44 516
FY 2011 188 0 40 168 20 416
FY 2012 163 0 42 165 28 398
FY 2013 -143 0 44 155 32 88
60 135 1,630 1,825 2,058
0 242 1,874 2,115 2,563
69 512 700 1,282 1,464
36 660 746 1,442 1,958
88 705 820 1,614 2,030
88 780 1,014 1,883 2,280
88 920 902 1,911 1,999
Liabilities & Shareholders' Equity + Accounts Payable + Short-Term Borrowings + Other Short-Term Liabilities Total Current Liabilities
14 6 11 30
41 11 2 54
67 14 10 91
63 48 10 121
85 45 10 140
94 361 10 465
103 40 10 153
+ Long-Term Borrowings + Other Long-Term Liabilities Total Long-Term Liabilities
268 452 720
572 508 1,080
572 169 741
682 198 880
679 198 877
323 198 521
301 198 499
Total Liabilities
750
1,134
832
1,001
1,017
985
652
+ Minority Interest 185 + Share Capital & APIC 1,075 + Retained Earnings & Other Equity 48 Total Shareholders' Equity 1,308 Total Liabilities & Equity 2,058 Income Statement FY 2007 Revenue 11.2 Cost of revenue -12.0 Operating Expenses -36.0 Other Revenues 0.0 EBITDA -35.2 EBIT -36.8 Interest expense -7.7 Other finance costs -5.3 Pretax Income -49.8 Income Tax Expense 11.7 Income Before XO Itemsand minorities -38.1 Extraordinary Loss Net of Tax 0.0 Minority Interests -0.4 Net attributable income -37.7 Average Number of Shares 511.2 Stated earnings per share ($ cts) -7.4 P/E na
208 1,089 133 1,429 2,563 FY 2008 101.9 -66.4 -48.8 0.0 -4.3 -13.3 -18.4 -12.5 -44.2 7.0 -37.2 0.0 -1.2 -36.0 608.3 -5.9 na
69 1,112 -549 631 1,463 FY 2009 114.8 -66.4 -831.5 1.1 -773.2 -782.0 -13.6 -16.9 -813.4 237.0 -576.4 0.0 96.2 -672.6 618.0 -77.7 na
73 1,475 -592 956 1,958 FY 2010 204.3 -153.0 -64.8 9.5 10.3 -4.0 -4.0 -16.9 -24.9 -28.1 -53.0 0.0 -0.9 -52.1 697.0 -7.5 na
83 1,509 -580 1,013 2,030 FY 2011 315.6 -213.1 -85.0 0.0 55.5 17.5 -32.0 -29.7 -44.2 18.2 -26.0 0.0 -5.0 -21.0 797.0 -2.6 0.0
83 1,509 -297 1,295 2,280 FY 2012 465.1 -257.5 -67.6 0.0 181.0 140.0 -36.0 -13.4 90.6 -27.2 63.4 0.0 3.0 60.4 797.0 7.6 0.0
83 1,509 -245 1,347 1,999 FY 2013 552.1 -289.9 -69.6 0.0 237.6 192.6 -34.0 -13.4 145.2 -43.6 101.6 0.0 2.5 99.1 797.0 12.4 0.0
Cashflow Statement Cash From Operating Activities + Net Income + Depreciation & Amortization + Other Non-Cash Adjustments Cash From Operations
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
-37.6 2.1 -3.0 -38.6
-36.0 10.9 7.0 -18.4
-672.6 8.8 450.6 -213.2
-52.1 14.3 -3.3 -41.9
-21.0 38.0 -58.0 -41.0
60.4 41.0 -46.6 54.8
99.1 45.0 -46.6 97.5
Cash From Investing Activities + Disposal of Fixed Assets + Capital Expenditures + Other Investing Activities Cash From Investing Activities
0.2 -88.9 -33.1 -122.0
1.9 -99.6 -51.3 -150.9
0.2 -237.0 -8.8 -245.6
0.0 -170.4 -1.8 -172.2
0.0 -109.5 -4.2 -113.7
0.0 -40.0 0.0 -40.0
0.0 -60.0 0.0 -60.0
Cash from Financing Activities + Dividends Paid Net change in borrowing + Change in Short-Term Borrowings + Increase in Long-Term Borrowings + Decrease in Long-term Borrowings + Increase in share capital - Decrease in share capital + Other Cash from Financing Activities
0.0 299.6 0.0 299.6 0.0 7.1 0.0 -6.9 299.8
0.0 324.7 0.0 329.3 -4.6 10.5 0.0 -11.1 324.1
0.0 -12.2 0.0 0.0 -12.2 6.2 0.0 -0.7 -6.7
0.0 138.4 0.0 145.0 -6.6 364.1 0.0 -7.2 495.3
0.0 -259.9 -2.9 -2.8 -257.1 1.3 0.0 -5.9 -265.2
0.0 -356.4 318.1 -356.4 0.0 0.0 0.0 0.0 -356.4
0.0 -22.0 -5.0 -22.0 0.0 0.0 0.0 0.0 -22.0
Net Changes in Cash
139.2
154.8
-465.5
281.2
-419.9
-341.6
15.5
+ LT Investments & LT Receivables + PPE & mine development + Other Long-Term Assets Total Long-Term Assets Total Assets
FY2013
Kaylekera
SGD at 31/12/2010 Curr. USD
Convertible bonds Convertible bonds Total Unsecured Debt Secured bank loans Secured bank loans Secured bank loans Total Secured Debt Source: ISM
12/05/2011
312.9 254.8 567.7 42.9 16.7 102.6 162.2
Maturity
2013 2015
