Stockbrokers See Long Term Value In Paladin
BY CHRIS SHAW - 28/01/2010
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• PDN - PALADIN ENERGY LTD
On face value the fact Paladin Energy (PDN) delivered record production and sales in the December quarter of 987,000 pounds and 1.095 million pounds respectively would seem a positive, but as Citi notes both numbers were lower than expected. Cit's own forecasts had called for 1.2 million pounds and 1.3 million pounds respectively for the quarter.
It is Citi's view that the shortfall reflected ongoing issues at Kayelekera and a slower than expected ramp-up of Langer Heinrich stage 2, though as Macquarie notes the latter did at least achieve nameplate capacity of 3.7 million pounds during the quarter. There is scope for additional upside in Macquarie's view as recoveries of 78% at present are below management's target of 85%.
The problem at Kayelekera, comments Macquarie, is that it is taking increased time to strip uranium, which is essentially a material movement issue. A second wash screening facility is to be installed in coming months and this should help, while the stockbroker notes the front end of the plant is doing the job it is supposed to do.
Factoring the result in means Paladin cannot achieve previous production guidance of between 5.6-6.1 million pounds for 2010 and to reflect this Citi has lowered its estimate to 4.4 million pounds from 5.7 million pounds previously, while RBS Australia has cut its forecast to 4.1 million ounces from 5.0 million ounces previously.
There are earnings implications from this, Macquarie cutting its earnings per share (EPS) forecast for 2010 by 50% to US2.7c, while in 2011 it expects EPS of US15.3c. RBS Australia's EPS forecasts are for a loss of US2c this year and a profit of US9c in 2011, while JP Morgan is at US7.9c and US19.3c respectively.
JP Morgan's forecasts reflect a revision in the stockbroker's production expectations for the year to 4.3 million pounds from 5.4 million pounds previously, which led to a 20.7% cut to its FY10 earnings estimate. On JPM's numbers the stock is now trading around fair value and so it retains its Neutral rating, while the FNArena database shows a range of views given Paladin is rated as Buy three times, Hold three times and Sell twice.
Citi is among those with a Buy rating on the stock as its forecasts imply a net present value of $5.40 per share, up from $4.80 previously as it has added Langer Heinrich stage 4 into its model. Given operating assets net of cash and debt are $3.70 at current levels, investors are buying the undeveloped resources and projects for free in its view. In essence, this suggests there is value for those with a longer-term investment timeframe.
Macquarie agrees, suggesting the Kayelekera issues are short-term and given the project is likely to be a 10-year operation there is little valuation impact. RBS Australia, too, agrees as while the results to date have been disappointing at the project, it seems the worst is now behind Paladin, making the recent share price sell-off a buying opportunity given the shares are about 19% below RBS's net present value estimate.
The average price target according to the FNArena database is $4.43, unchanged from prior to the quarterly production report. Shares in Paladin today are slightly higher and as at 10.50am the stock was up 4c at $3.75, which compares to a range over the past year of $2.68 to $5.52.
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