A Close Look At Paladin's Uranium Assets

I used Thursday's dip to establish a position in Paladin Resources (PALAF.PK). Paladin has been in the news quite a bit recently, because of its approval to begin a second mine in Malawi, as well as its takeover bid for Australian-based Summit Resources. However, because this is the first time I’ve looked at Paladin in quite a while, I think it is useful to start by detailing Paladin’s uranium assets.

Paladin’s uranium assets: Paladin has interests in 4 large uranium projects around the world. In December, Paladin announced that it had commissioned its Langer Heinrich mine in Namibia. This is the first major uranium mining project to opened anywhere in the world in the last 20 years, and it is 100% owned by Paladin Resources. Inferred resources of uranium at this mine are about 55 million pounds, giving the mine a valuation of over $4.6 billion at current spot uranium prices.

Just a week ago, Paladin announced formal approval of its Kayelekeera uranium mine in Malawi. Paladin has an 85% stake in this project, with the Republic of Malawi owning the other 15 percent. Inferred reserves at this mine are 34.5 million tons, giving it a value of about $3 billion at current spot prices. Paladin’s stake is worth about $2.55 billion. In addition, Paladin believes that further exploration around the mine will reveal significant satellite deposits of uranium, which could allow the mine’s life to be extended significantly.

Paladin also has two joint ventures in Australia. The first, the Isa Uranium Joint Venture, gives Paladin a 50 percent stake in the Valhalla and Skal uranium projects in North Queensland. Summit Resources is the other company involved in this joint venture with a 50 percent stake, and Paladin has just launched a hostile takeover for Summit Resources in order to gain a 100 percent stake in these deposits. Summit also has interests in several other projects around Australia. The Valhalla deposit is estimated to contain about 57 million pounds of uranium, while the Skal deposit is estimated to contain 11 million pounds. This gives the entire project a value of about $5.7 billion, and makes Paladin’s 50 percent stake worth $2.8 billion at the current spot uranium price. However, getting this uranium out of the ground will require the regional government to change current policy with regard to uranium mining, so this project is likely to be held up by bureacratic red tape for some time. Still, considering Summit resources other assets, Paladin appears to be getting a good deal if they purchase Summit for anything less than $1 billion (the current bid is about $900 million).

Finally, Paladin owns a 41.7% interest in the Bigrlyi Uranium Joint Venture, with Energy Metals owning the other 59% of the venture. The reserve estimate for Bigrlyi was updated today, with an increase to 14.3 million pounds of uranium (a 26 percent increase over previous estimates). Therefore, the total value of the deposit at current spot prices is $1.2 billion, with Paladin’s stake amounting to about $500 million.

Overall, Paladin therefore has a uranium asset base that is valued at approximately $10.5 billion. The acquisition of Summit resources, if it succeeds, would bring this valuation up to over $13 billion. Given that Paladin has about 501 million shares outstanding at present, Paladin has a current market capitalization of about $3.5 billion, representing a significant discount to Paladin’s asset base even when taking into account the risk-free interest rate. Moreover, the value of Paladin’s asset base will continue to rise with the spot price, which has been projected by many industry analysts to surpass $100/lb this year. Because Paladin has not sold forward most of its production, the company has a much higher degree of leverage with regard to the spot uranium price than most producers, and I believe this will be a positive factor for the share price going forward.

Finally, because of Paladin’s strong future cash flows, the company has significant room for growth via mergers and acquisitions as well as through further exploration. Relative to its asset base, Paladin appears to be trading at a significant discount, even when taking into account present value calculations by using the risk free interest rate. The recent dip in the company’s stock price appears to have created an opportunity here, and that is why I decided to establish my position on this pullback.

Tomorrow I will be detailing Paladin’s expected production schedule, so be sure to check back for more as we discuss Paladin’s expected cash flows.

Full disclosure: The author is long PALAF.PK