The case for Uranium is simple, yet convoluted. In today’s environment, almost no-one is making money producing Uranium. A lot of mines are on Care & Maintenance (C&M) and old mines are depleting. But for those who understand the underlying Uranium Supply / Demand case, and accept higher-than-today Uranium prices thesis, we now need to start identifying the winners and the losers.
PALADIN ENERGY LTD
- ASX: PDN
- Shares Outstanding: 2.03B
- Share price: AU$0.09 (15.01.2020)
- Market Cap: AU$: 180.482M
Paladin Energy – An Overview
Paladin Energy, for those familiar with the recent history of Uranium equities markets, brings to mind meteoric gains. Paladin stock went from a low of A$0.01 in 2003 to A$10.80 on 2007 (1). Paladin wasn’t the only Uranium company with huge gains during the last Uranium bull market, but it led the way and was the poster boy for how do things right.
Paladin Energy … brings to mind meteoric gains …But the house of cards fell as quickly as it rose
But the house of cards fell as quickly as it rose. There were multiple reasons that lead to the fall of Paladin, but the huge debt load Paladin was the main culprit. In 2017 Paladin entered administration, or in layman’s terms, Paladin went bust, leaving behind many upset shareholders. But what it did allow them to do was to start anew with a much clearer balance sheet.
Paladin Energy’s flagship asset is a 75% stake of Langer-Heinrich Uranium Mine (LHM) in Namibia. In 2018, LHM was put in Care & Maintenance (C&M) and is currently undergoing a PFS2 which, “ is expected to be completed by March 2020 and involves a more detailed study, including process optimisation aimed at lowering costs, recovering Vanadium and potentially increasing production in the later stages of the mine life.”
Also, a Maiden Vanadium Mineral Resource of 38.8Mlb V2O5 has been declared.
Paladin also owns an 85% share of Kayelekera Uranium Mine in Malawi. Kayelekera, like LHM, is in C&M. On 24 June 2019, Paladin entered into agreement to sell Kayelekera to Hylea Metals. This sale is subject to approval from Malawian Government (3). But for simplicity let’s assume the sale will go through.
Finally, Paladin also owns a few exploration projects in Canada and Australia. The combined Resources of these assets are 320Mlbs (4). Paladin carries USD$132M in debt and has a cash balance of c. US$41M (4).
Langer-Heinrich Mine PFS1
Pre-Feasibility Study (PFS1) which focused on a rapid, low-capital and low-risk restart was published on 14 October 2019. It lays out two rapid restart plans.
- 5.2Mlbs pa production for the first 8 years with Life of Mine (LOM) AISC of $33/lbs and CAPEX of $80M. From years 8-20 LHM would produce 2.7Mlbs pa.
- 6.5Mlbs production for the first 6 years with LOM AISC of $29/lbs and CAPEX of $110M. From years 7-16 LHM would produce 3.4Mlbs pa. (5)
Neither of these plans takes into account the potential to recover Vanadium, but we could assume that with a modest CAPEX a Vanadium circuit could be added and they could produce Vanadium as a by-product. Scott Sullivan, CEO of Paladin, stated that, “we are hoping to produce it at a few dollars (?) per pound or less” in his SmithWeekly Research interview (6).
There is a one noteworthy asterisk in these assumptions: “PFS1 has delivered a further optimised plan for the restart with a level of accuracy of +25%/-15%.”.(5) So let’s call these numbers the best case scenario.
From the production, approximately 30% will be sold to CNNC at spot-price. Sullivan also stated that they want to be more conservative than the last management and sell 50% of the production with mid-term or off-take agreements. So that’s another 20% they may sell into spot-market (6).
What I gather from Sullivan’s interviews is the need to see Uranium prices in the range of $45-55/lbs before they would get in to production. He also states that they would be happy with $50-60/lbs Uranium prices. This means that it is reasonable to expect them to start locking in some of their production before $50/lbs and that 50% of their production is sold before Uranium goes to $60/lbs. So it would be realistic to assume that the average price for their long-term contracts would be in the $50-55/lbs area. The preferred plan is the first plan with 5.2Mlbs, although it would be interesting to know what CNNC thinks.
After laying down a few base assumptions, let’s study these plans with ‘what-if scenarios’, in the simplest terms:
|First 8 Years||Years 8-20|
|Paladin’s share of EBITDA||$61.43||$80.93||$100.43||$31.89||$42.04||$52.14|
|Plan 1||First 8 Years||Years 8-20|
|Paladin’s share of EBITDA||$96.28||$120.66||$145.03||$50.36||$63.11||$75.86|
Compared to Paladin Energy’s $117M market cap, LHM can generate a lot of EBITDA. A good start
But Let’s Be Realistic
Mine level profitability does not equate to company level profitability. In my humble opinion, it makes sense to look at Uranium companies with an assumption that we still have to wait another 3-5 years before we will see materially higher Uranium prices. If this assumption proves to be overly conservative, we make more money, if it proves to be realistic, we avoid misallocation of assets.
At a corporate level, if Paladin can burn less cash per annum than it’s currently burning, this might be realistic:
|USD:AUD : 1.46||2019Q4||2020||2021||2022||2023|
|Sale of Kavelekera||$0.1||$1.2||$2.1|
|Cash at the end of the period ($41)||$40||$27||$19||$14||$4|
The debt has maturity of January 2023, and the interest is deferred. If they restart LHM for example in 2022, they would have $14-$19M in-hand. They would need to refinance the debt, finance 75% of the $80M CAPEX (=$60M) and would need minimum of $20M in working capital.
In total that would mean they would need to finance $220-240M. In the “best case” this could be done with debt, but more likely a combination of debt and equity. Then an entity like CNNC may come in and finance the whole CAPEX in exchange of a low-cost, long-term contract. Again, for the sake of simplicity, we assume that the whole thing is financed by debt with 8% interest rate.
|Restart in 2022|
|Production starts in 2023|
|Ave. price per lbs sold||$51.25||$56.25||$61.25||$66.25|
|Paladin’s share of EBITDA ($M)||$71.2||$90.7||$110.2||$129.7|
|Net income ($M)||$14.9||$28.6||$42.4||$55.9|
|Shares (M) 2020|
There are a few things that could change this calculus.
- Vanadium production. With $20M CAPEX, production of 1.5Mlbs, AISC of $2/lbs and Vanadium price of $12/lbs Paladin would earn extra AUD$0.005 per share. With production of 2Mlbs pa, AISC of $1/lbs and Vanadium price of $15/lbs, we get an extra AUD$0.01 per share.
- Using internal debts of LHM to Paladin and accrued losses from previous years, Paladin might not need to pay any taxes for quite some time.
Combining 1 & 2, Paladin’s earnings could look more like this for the first few years:
|Net Income (AUD)||$45.7||$74.2||$102.6||$131.1|
This is the maximum EPS Paladin “could” be making if all the circumstances play out perfectly, but this wouldn’t last for long.
I have run multiple DCF models, but in reality there are so many variables that they do not add a lot of value. The interesting thing is to try to understand how much OCF Paladin could make over the 20-year LOM of LHM. $600-$900M range could be reasonable. Out of this Paladin needs to pay down its $250M debt, mine closures, etc.
If this is the true value proposition of Paladin Energy, I’m not impressed.
Management & Ownership
John Hodder, a non-Executive Director “as a co-founding principal of Tembo Capital Management Ltd controls 223,589,744 shares through its holding in Paladin under the entity Ndovu Capital XII BV.” (2).
Beside John Hodder, management doesn’t own a lot.
In Australia, there is no register of interests, so you have to search press releases as every Director buy & sell is reported in 3Y declarations. From what I can find, in total, excluding John Hodder, management own 320,000 shares. On 23rd October 2019 Paladin’s share price was AUD$0.085. So the total value of these shares is AUD$27,200 (i.e. $18,600).
I usually focus mainly on the CEO and the Chairman of the Board. But in Paladin’s case Rick Crabb, the Non-Executive Chairman has resigned and will be replaced by someone on 31st December 2019 (7).
So let’s focus on the CEO.
Sullivan served as the Managing Director for Minbos Resources from 2nd November 2012 to 21st February 2014. He also served as interim Executive Chairman from 6th August 2013 until he resigned from both of these positions on 21st February 2014. During this time the company didn’t have a CEO and the duties of CEO were performed by the Managing Director, Scott Sullivan.
Minbos had two phosphate projects, one in DRC and one in Angola. Both had scoping studies and good economics. Like so many junior mining companies, Minbos was not making any cash flows from its operations and needed to raise finance from time to time.
Just a few weeks before Sullivan resigned, Minbos failed to raise capital (10). Was this the reason for his resignation? When he started in Minbos the share was trading at A$0.20 (8). When he resigned the stock was trading at A$0.006 (9). That is a whopping 97% decline in 1 year and 6 months. Based on annual reports 2013 and 2014, Sullivan didn’t purchase any shares of the company.
His salary in Minbos was $300,000 pa. So he was paid c.$450,000 during his short tenure:
Plus, he was also incentivised with options:
Due to the fact that his tenure started at November 2012 and ended in February 2014, he didn’t work any full fiscal year. For fiscal year 2013 he worked 8 months and his compensation package looked like this:
In April 2014, after leaving Minbos, Sullivan joined Attila Resources (now New Century Resources, a zinc tailings play in Australia) as CEO. During that time Attila’s flagship was their 70% interest in the Kodiak Coke Coal project. According to their PFS the project, with $140/t coal, had an NVP of USD$166M and IRR of 48%.
In 2014 the company was in the midst of a DFS when they received an offer “to purchase Attila’s 70% interest in the Kodiak Project” from Magni Resources. This was a cash offer of A$68m. At this time Attila had a market cap of A$22.6m (11). They suspended work on the DFS and waited (12). But the deal fell apart due to Magni’s inability to finance the deal (13). Soon after Sullivan resigned.
At the start of his tenure Attila had a market cap of A$28.8M and a share price of A$0.40 (14). They also had a cash balance of A$5.9M. At the end of his tenure, September 2015, the company had a market cap of AUS$14M and a share price of A$0.16 (I don’t have the exact share price for September 2015. Share was trading at 0.16 on 30th of October (15) and 0.16 at 30th of July 2015 (16). These are the dates of the closest Quarterly Activity Reports). The company had a cash balance of A$1.2M on 30th July 2015 (16) and A$0.678M on 30th October 2015 (15).
The company was running out of money and had failed to seal the deal. According to Attila’s Annual Report 2015 Sullivan didn’t own any shares of Attila Resources during his tenure.
S. Sullivan’s salary was:
He was also vested 1,000,000 options in 2014 and 500,000 in 2015 with “Value of options at grant date of AUD$177,000” (13).
Last sample of Sullivan’s career is his tenure as the General Manager of Newcrest’s Telfer Mine. He worked as the GM from November 2015 to October 2017. We can’t comment his performance in Telfer. Based on Newcrest’s Annual Reports 2015-2018, Telfer’s track record looks like this:
|Gold head grade||0.71||0.7||0.8||0.88|
|Gold production (koz)||425.5||386.2||462.5||5203|
During Sullivan’s time the AISC went up and production dropped. After his tenure ended, tonnage and gold production went up. But it would be hard to say if this was due to Sullivan performance. We don’t know why his work in Newcrest ended.
Sullivan has also been a Managing Director in a consulting company Impact Strategies from 2012 to today.
In Paladin Energy Sullivan’s earnings are as follows (2):
Why was a performance bonus was paid, let alone one of this size, given Paladin Energy’s share price has dropped nearly 30% during fiscal year 2019. It would be hard for Directors to claim to be aligned with shareholder interests.
It also worth noting the lack of insider ownership at Paladin. Do they know something shareholders don’t? Is the scale of Directors compensation appropriate given that LHM is in C&M, it is loss-making and the is no share price appreciation? Like previous companies headed by Sullivan, it is clear is that shareholders are starting to question his effectiveness and ability to lead.
The Short and Ugly
Paladin can be profitable in a reasonable $50/lbs spot price environment, as can many other Uranium players. I also think that LHM is a good asset. With Vanadium production, it reasonable to expect an EPS of A$0.01-A$0.02.
Valuing the exploration assets would be anyone’s guess. There may well be value in them as you can buy companies like Vimy, Bannerman, Forsys, etc. with permits and technical studies done with extremely low valuations. Uranium bulls may point to the last cycle and value the exploration assets at Lbs/EV value of $3-5/lbs. This would give the exploration targets a value of $1B. It’s hard to credibly argue that ‘pound in the ground’ valuation makes sense. Yet Sullivan often says in his interviews that based on the EV/lbs ratio, Paladin Energy is cheap (3 & 6). This cheap promotional rhetoric.
With $80/lbs Uranium price and fully unhedged strategy, Paladin could be making a cool A$150M in net profits, slap a P/E of 15 (although the production will drop drastically in the year 8) to that and you end up with a value of A$2.25Bn for LHM and A$1.5Bn for the exploration assets. This would equate to A$1.70 share price.
(6) comment section
For some, even this value, is on the low side.
Comparably, Paladin doesn’t offer a great value proposition. There are better deals on offer for investors. And when combined with a management’s track record, especially the CEO, this is not an investment story that makes me feel comfortable.
- https://www.wiseinternational.org/nuclear-monitor/847/paladin-energy-goes-bust, Paladin Energy goes bust
- Paladin Energy, Annual Report 2019
- https://www.youtube.com/watch?v=IFHo8eblsA4, Scott Sullivan’s Proactive interview 27 September 2019
- Paladin Energy, New York 1-2-1 presentation, 17 October 2019
- https://www.paladinenergy.com.au/announcements/deliver/2053, PFS1
- https://www.youtube.com/watch?v=tJoz8xkp5TY, Scott Sullivan’s SmithWeekly interview 27 august 2019
- https://hotcopper.com.au/threads/ann-minbos-board-changes.2193085/, Minbos board changes
- https://hotcopper.com.au/threads/ann-rights-issue-close-subscriptions.2179697/, Rights Issue Close & Subscriptions 12/2/2014
- https://wcsecure.weblink.com.au/pdf/AYA/01595284.pdf, Attila Resources, Quarterly Activities Report December 2014
- ttps://wcsecure.weblink.com.au/pdf/AYA/01608070.pdf, Attila Resources Interim report 2014
- https://wcsecure.weblink.com.au/pdf/AYA/01681040.pdf, Attila Resources, ANNUAL REPORT 2015
- https://www.asx.com.au/asxpdf/20140430/pdf/42p9qblsmtnjpl.pdf, Attila Resources Quarterly activity report March 2014
- https://www.asx.com.au/asxpdf/20151030/pdf/432mrfxz04tlmc.pdf, Attila Resources Quarterly activity report September 2015.
- ttps://www.asx.com.au/asxpdf/20150730/pdf/4304stv37fhhqh.pdf, Attila Resources Quarterly activity report June 2015.