The case for Uranium is simple, yet convoluted. In today’s
environment, almost no-one is making money producing Uranium. A lot of minesare 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 needto start identifying the winners and the losers.
Paladin Energy, for those familiar with the recent historyof Uranium equities markets, brings to mind meteoric gains. Paladin stock wentfrom a low of A$0.01 in 2003 to A$10.80 on 2007 (1). Paladin wasn’t the onlyUranium company with huge gains during the last Uranium bull market, but it ledthe 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. Therewere multiple reasons that lead to the fall of Paladin, but the huge debt loadPaladin was the main culprit. In 2017 Paladin entered administration, or inlayman’s terms, Paladin went bust, leaving behind many upset shareholders. Butwhat it did allow them to do was to start anew with a much clearer balancesheet.
Paladin Energy’s flagship asset is a 75% stake ofLanger-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 2020and involves a more detailed study, including process optimisation aimed atlowering costs, recovering Vanadium and potentially increasing production inthe later stages of the mine life.”
Also, a Maiden Vanadium Mineral Resource of 38.8Mlb V2O5 hasbeen declared.
Paladin also owns an 85% share of Kayelekera Uranium Mine inMalawi. Kayelekera, like LHM, is in C&M. On 24 June 2019, Paladin enteredinto agreement to sell Kayelekera to Hylea Metals. This sale is subject toapproval from Malawian Government (3). But for simplicity let’s assume the salewill go through.
Finally, Paladin also owns a few exploration projects inCanada 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).
Pre-Feasibility Study (PFS1) which focused on a rapid, low-capitaland low-risk restart was published on 14 October 2019. It lays out two rapidrestart plans.
Neither of these plans takes into account the potential torecover Vanadium, but we could assume that with a modest CAPEX a Vanadiumcircuit could be added and they could produce Vanadium as a by-product. ScottSullivan, CEO of Paladin, stated that, “weare hoping to produce it at a few dollars (?) per pound or less” in hisSmithWeekly Research interview (6).
There is a one noteworthy asterisk in these assumptions: “PFS1 has delivered a further optimised planfor the restart with a level of accuracy of +25%/-15%.”.(5) So let’s callthese numbers the best case scenario.
Fromthe production, approximately 30% will be sold to CNNC at spot-price. Sullivanalso stated that they want to be more conservative than the last management andsell 50% of the production with mid-term or off-take agreements. So that’sanother 20% they may sell into spot-market (6).
What I gather from Sullivan’s interviews is the need to seeUranium prices in the range of $45-55/lbs before they would get in toproduction. He also states that they would be happy with $50-60/lbs Uraniumprices. This means that it is reasonable to expect them to start locking in someof their production before $50/lbs and that 50% of their production is soldbefore Uranium goes to $60/lbs. So it would be realistic to assume that theaverage 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 beinteresting to know what CNNC thinks.
After laying down a few base assumptions, let’s study theseplans 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
Mine level profitability does not equate to company levelprofitability. In my humble opinion, it makes sense to look at Uraniumcompanies with an assumption that we still have to wait another 3-5 yearsbefore we will see materially higher Uranium prices. If this assumption provesto be overly conservative, we make more money, if it proves to be realistic, weavoid misallocation of assets.
At a corporate level, if Paladin can burn less cash perannum 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 isdeferred. 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 acombination of debt and equity. Then an entity like CNNC may come in andfinance 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 debtwith 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.
Combining 1 & 2, Paladin’s earnings could look more likethis 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 thecircumstances play out perfectly, but this wouldn’t last for long.
I haverun multiple DCF models, but in reality there are so many variables that theydo not add a lot of value. The interesting thing is to try to understand howmuch OCF Paladin could make over the 20-year LOM of LHM. $600-$900M range couldbe reasonable. Out of this Paladin needs to pay down its $250M debt, mineclosures, etc.
If thisis the true value proposition of Paladin Energy, I’m not impressed.
John Hodder, a non-Executive Director “as a co-founding principal of Tembo Capital Management Ltd controls223,589,744 shares through its holding in Paladin under the entity NdovuCapital XII BV.” (2).
Beside John Hodder, management doesn’t own a lot.
In Australia, there is no register of interests, so you haveto search press releases as every Director buy & sell is reported in 3Ydeclarations. From what I can find, in total, excluding John Hodder, managementown 320,000 shares. On 23rd October 2019 Paladin’s share price wasAUD$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 theBoard. But in Paladin’s case Rick Crabb, the Non-Executive Chairman hasresigned 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 MinbosResources from 2nd November 2012 to 21st February 2014. He also servedas interim Executive Chairman from 6th August 2013 until he resigned from bothof these positions on 21st February 2014. During this time thecompany didn’t have a CEO and the duties of CEO were performed by the ManagingDirector, Scott Sullivan.
Minbos had two phosphate projects, one in DRC and one inAngola. Both had scoping studies and good economics. Like so many junior miningcompanies, Minbos was not making any cash flows from its operations and neededto raise finance from time to time.
Just a few weeks before Sullivan resigned, Minbos failed toraise capital (10). Was this the reason for his resignation? When he started inMinbos the share was trading at A$0.20 (8). When he resigned the stock wastrading 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 ofthe company.
His salary in Minbos was $300,000 pa. So he was paidc.$450,000 during his short tenure:
Plus, he was also incentivised with options:
Due to the fact that his tenure started at November 2012 andended in February 2014, he didn’t work any full fiscal year. For fiscal year2013 he worked 8 months and his compensation package looked like this:
In April 2014, after leaving Minbos, Sullivan joined AttilaResources (now New Century Resources, a zinc tailings play in Australia) asCEO. During that time Attila’s flagship was their 70% interest in the KodiakCoke Coal project. According to their PFS the project, with $140/t coal, had anNVP of USD$166M and IRR of 48%.
In 2014 the company was in the midst of a DFS when theyreceived 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 amarket cap of A$22.6m (11). They suspended work on the DFS and waited (12). Butthe deal fell apart due to Magni’s inability to finance the deal (13). Soonafter Sullivan resigned.
At the start of his tenure Attila had a market cap ofA$28.8M and a share price of A$0.40 (14). They also had a cash balance ofA$5.9M. At the end of his tenure, September 2015, the company had a market capof AUS$14M and a share price of A$0.16 (Idon’t have the exact share price for September 2015. Share was trading at 0.16on 30th of October (15) and 0.16 at 30th of July 2015 (16). These are the datesof the closest Quarterly Activity Reports). The company had a cash balanceof 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 sealthe deal. According to Attila’s Annual Report 2015 Sullivan didn’t own anyshares of Attila Resources during his tenure.
S. Sullivan’s salary was:
He was also vested 1,000,000 options in 2014 and 500,000 in2015 with “Value of options at grant date of AUD$177,000” (13).
Last sample of Sullivan’s career is his tenure as theGeneral Manager of Newcrest’s Telfer Mine. He worked as the GM from November2015 to October 2017. We can’t comment his performance in Telfer. Based onNewcrest’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 productiondropped. After his tenure ended, tonnage and gold production went up. But itwould be hard to say if this was due to Sullivan performance. We don’t know whyhis work in Newcrest ended.
Sullivan has also been a Managing Director in a consultingcompany Impact Strategies from 2012 to today.
In Paladin Energy Sullivan’s earnings are as follows (2):
Why wasa performance bonus was paid, let alone one of this size, given PaladinEnergy’s share price has dropped nearly 30% during fiscal year 2019. It wouldbe hard for Directors to claim to be aligned with shareholder interests.
It alsoworth noting the lack of insider ownership at Paladin. Do they know somethingshareholders don’t? Is the scale ofDirectors compensation appropriate given that LHM is in C&M, it is loss-makingand the is no share price appreciation? Like previous companies headed by Sullivan,it is clear is that shareholders are starting to question his effectiveness andability to lead.
Paladin can be profitable in a reasonable $50/lbs spot priceenvironment, as can many other Uranium players. I also think that LHM is a goodasset. With Vanadium production, it reasonable to expect an EPS ofA$0.01-A$0.02.
Valuing the exploration assets would be anyone’s guess. Theremay well be value in them as you can buy companies like Vimy, Bannerman,Forsys, etc. with permits and technical studies done with extremely lowvaluations. Uranium bulls may point to the last cycle and value the explorationassets at Lbs/EV value of $3-5/lbs. This would give the exploration targets avalue of $1B. It’s hard to credibly argue that ‘pound in the ground’ valuationmakes sense. Yet Sullivan often says in his interviews that based on the EV/lbsratio, 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 dropdrastically in the year 8) to that and you end up with a value of A$2.25Bnfor LHM and A$1.5Bn for the exploration assets. This would equate to A$1.70share 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.
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