PALAF - Paladin Energy: Near-Term Uranium Production At Langer Heinrich

2023-12-15 11:10:00 ET

Summary

• Paladin Energy is reopening the Langer Heinrich uranium mine in Namibia, benefiting from the current high uranium prices.
• The project remains on track and on budget for completion in Q1 2024, with minimal risk of execution and cost overruns.
• Paladin Energy has secured offtake agreements for a significant portion of its anticipated uranium production, providing stability and potential for pricing upside.

Introduction

Paladin Energy ( PALAF ) couldn’t have timed the reopening of its large uranium mine in Namibia any better. The uranium price is doing exceptionally well on the spot market, and that’s the perfect environment for a new producer to sell its production into.

As there is a decent volume on the US exchange (with an average daily turnover of approximately 400,000 shares), I will keep all data and amounts in USD. Investors with access to Australian markets could consider the ASX-listing of Paladin where it is trading with PDN as ticker symbol . The average daily volume in Australia is close to 23 million shares.

The Langer Heinrich mine will reopen in Q1 2024

There’s really only one thing that matters for Paladin Energy, and that is the on-budget completion of the 75% owned Langer Heinrich uranium mine in Namibia. In 2022, the company decided to reopen the mine after a period of care and maintenance due to the low uranium prices. In hindsight, the decision to reopen the mine couldn’t have come at a better time as the timing will likely work out even better than anyone anticipated. While you can’t predict the uranium price when you place the orders for long-lead items, Paladin is lucking out.

The project remains on track to be completed in Q1 2024, and more importantly, the project level completion has now reached a factor of in excess of 85% which means there is minimal risk on further execution and cost overruns. Indeed, the company has confirmed Langer Heinrich remains on budget.

With close to US$100M in cash on the balance sheet (excluding restricted cash) as of the end of September, Paladin is more than fully funded to completion. And thanks to the strong uranium market, the appetite for bank financing is back and the company has appointed Nedbank as a lead arranger to work on a syndicated debt facility.

As a reminder, Langer Heinrich is anticipated to produce an average of 6 million pounds of uranium per year in years 2-9 of the mining operation where after the stockpile phase (Y10-17) will produce an additional 3.3 million pounds per year. The total anticipated production over the life of mine (2024-2042) is anticipated to be 72 million pounds of uranium at an anticipated C1 production cost of US$27.4/pound. The total production cost including sustaining capex and transportation costs will add $4.2 per pound resulting in a production cost of $31.6/pound. Those are estimates from 2022 so even if we would apply a 10% cost escalation, the total production cost should remain contained to $35/pound.

This means that at an average uranium price of, say, $75 per pound, Langer Heinrich will generate a net margin of approximately $37/pound (after also taking the royalties and export levy into consideration). Applying that to the anticipated production rate of 4.5 million pounds (75% of the 6M pound per year operation) would result in an annual cash flow of just over US$165M. The balance sheet of Paladin contains almost $2.2B in accumulated losses and this should provide a strong tax shield so I don’t anticipate a high tax bill. This should result in a free cash flow of just over US$0.05 per share and this will allow Paladin to build a war chest.

Just to be clear: I used an average realized uranium price of $75 but this doesn’t mean Paladin Energy will be able to sell its uranium at the current spot price. It has offtake agreements in place for 2024 and those contracts have a pricing mechanism that contains exposure to fixed price as well as market related price mechanisms. About 25% of the mine life will be sold to China-based CNNC while a ‘leading US utility’ will purchase approximately 5% of the anticipated output until 2030. Subsequent to signing these cornerstone offtake agreements, Paladin Energy has further expanded its offtake portfolio and the current offtake book covers just under 50% of the anticipated uranium production between 2024 and 2030. Interestingly, only 19% of the volumes have contracts in place based on base-escalated price mechanisms.

This does mean there should be plenty of uranium available to sell on the spot market or to sell as part of long-term contracts with a stronger pricing mechanism as the uranium market is now tilting in favor of the producers. Paladin Energy confirms it will continue to ‘layer its contract book’ to ensure the right balance between risk protection and pricing upside.

Paladin secured full ownership of the Michelin project again

Even at the current spot price, I expect the NPV8% of Langer Heinrich to be lower than Paladin’s current market capitalization as the market is clearly fully rewarding the company for restarting the mine.

But that doesn’t mean Paladin Energy can be ignored. Not only is a near-term producer a good vehicle to gain exposure to the uranium price if you are a uranium bull and expect even higher prices to materialize in the near future. Secondly, as Paladin has a diversified asset base, one could consider the production and cash flow from Langer Heinrich to be the starting point to trying to rebuild a prime uranium producer.

As you can see below, Paladin Energy has plenty of assets elsewhere and its Australian portfolio contains almost 190 million pounds of uranium.

Additionally, the Canadian portfolio contains the Michelin project where Paladin recently increased its ownership from 75% to 100% . That project was hit by a moratorium on uranium mining about a decade ago and the lifting of the moratorium coincided with the Fukushima-disaster but as the sentiment around uranium and nuclear energy is shifting, the 92 million pound uranium project could once again be potential source of supply down the road.

Investment thesis

If you would look at Paladin Energy and only focus on the near-term production Langer Heinrich mine in Namibia, it looks like Paladin is close to fully valued. However, the company is much more than just Langer Heinrich and as the sentiment towards nuclear power is changing and as the world will need more uranium mines simply to meet the current demand, Paladin Energy could be seen as a call option on the uranium sector as a whole, underpinned by near-term cash flow.

For further details see: