Limbering up, ready to join the game
Paladin Energy (ASX:PDN) shares have pulled back from recent highs, but both the macro and company-specific drivers remain favourable, with the scope for Paladin shares to trade a leg higher. The Langer Heinrich Mine reopening, slated for the first quarter of 2024, is a key milestone looming, and our medium-term outlook for uranium continues to be bullish, with this a key swing factor for Paladin.
Since our initiation on Paladin in mid-August, uranium prices have continued to trend upwards materially, hitting a fresh 12-year high of $73 a pound in October. This has helped lift Paladin. Although we anticipate the ups and downs typical of any commodity, we believe that supportive structural factors can push prices higher again over the next couple of years.
Increasing demand and constrained supply create this favourable environment for prices. To recap the macro view briefly, there is growing demand and contract volumes (the latter are a key factor in the slightly quirky uranium market) as an energy-hungry world seeks carbonless, reliable base electricity capacity. Nuclear is a potential key to meeting what the world is seeking, and interest has been reinvigorated. There is a big surge in new reactors set to come online in the coming years. Small “modular” reactors could accelerate demand growth over the next decade.
Meanwhile, supply has been constrained. Several mines around the world have either been closed, or production reduced due to economic and environmental factors. Many of the world’s major uranium mines were first developed long ago and face challenging production profiles. Sanctions on Russia rocked the market; then there was the coup in Niger and output challenges at Cameco and Kazatomprom. While secondary supply earlier easily met reduced demand, that supply is dwindling.
Meanwhile, we believe Paladin’s refurbishment of the Langer Heinrich mine has the potential to add significant value for shareholders, given the direction for uranium prices. The relatively low capital cost for refurbishment versus a greenfield site gives Paladin an edge.
We retain a speculative buy rating on Paladin Energy.
The technical picture is favourable. Since breaking out above historic resistance within a decade-long range back in 2021, Paladin consolidated until upside momentum was reasserted this year. The bullish breakout above near-term resistance at 80 and 90 cents several months ago effectively brought the ranging consolidation of the past few years to an end.
With Paladin moving higher into a new trading range, support is heavily delineated at the 85/90c level as the recommissioning of the Langer mine in Namibia draws closer. Rising uranium prices have also been a support. An advance above this month’s high at $1.10 would mark a resumption of upward momentum, with the next major historical resistance level at $1.50.
Langer Heinrich will soon be on the pitch
Paladin’s September quarterly activities report noted the Langer Heinrich Mine in Namibia is about 80% complete, with commissioning at the project underway. The project is on schedule to achieve first production by the first quarter of calendar 2024 within its US$118 million budget. The mine, in which Paladin owns a 75% interest, was placed in care and maintenance in 2018 due to low uranium prices. The refurbishment is fully funded, and the costs are much lower than a greenfield project, providing Paladin with a handy head start on many other uranium companies to capitalise on the recovery in prices. The company has appointed mining contractor Trollope Mining Namibia for the stockpile reclaim phase.
Meanwhile, Paladin’s expansion of its ownership into the Michelin Project in Labrador, Canada, by acquiring a 100% interest and securing mineral licenses for new ground adjoining the project, positions the company for future growth and diversification.
Paladin’s financial health remains robust, with unrestricted cash of US$99.8 million as of 30 September 2023, after net cash expenditure of US$28.3 million over the quarter. The company has appointed African financial services provider Nedbank Limited for a proposed syndicated debt facility, providing capital flexibility as operations at the Langer Heinrich Mine recommence.
Meanwhile, Paladin is engaging with industry counterparties on uranium sales to bolster the existing orderbook. Initial C1 cash costs at Langer Heinrich are estimated at US$27.40 per pound (2021 estimate). We expect to see a pickup in this number due to general inflationary pressures across the broader mining sector, but an updated estimate has not been released. However, even with a material increase, the higher prevailing uranium prices should deliver satisfactory operating margins.
In summary, the investment case for Paladin is underpinned by a favourable outlook for uranium, with Paladin about to come back on the pitch as a player in the production game. Our bullish view on uranium is predicated on increasing demand due to a global shift towards clean energy and energy security, supply constraints, technological advancements, and growing investor interest.
We retain a speculative buy rating on Paladin Energy (ASX:PDN).
Disclosure: Interest associated with Fat Prophets holds shares in Paladin Energy (ASX:PDN).
