Nuclear Resurgence Seen Luring Paladin Bids: Commodities

By James Paton on July 18, 2012

Australian uranium producer Paladin Energy Ltd. (PDN) is tempting acquirers from Canada to China with a stock price that’s less than the value of its net assets as Japan restarts idled nuclear reactors.

Paladin, which lost almost 80 percent of its value after Japan suffered the worst atomic crisis in a quarter century, is now trading at a 22 percent discount to book value, according to data compiled by Bloomberg. While uranium prices have tumbled 26 percent since the meltdowns at the Fukushima Dai-Ichi plant in March 2011, the Perth-based company is projected this fiscal year to post its first profit since beginning production of the nuclear fuel, analysts’ estimates compiled by Bloomberg show.

With Japan’s decision to turn two reactors back on this month signaling a possible bottom for uranium prices, Paladin, which operates mines in Africa and explores for the fuel in Australia and Canada, may attract interest from Saskatoon, Saskatchewan-based Cameco Corp. (CCO), Resource Capital Research said. Chinese companies seeking uranium as the country builds 26 new reactors are also potential bidders for the $917 million company, according to Octa Phillip Securities Ltd.

“Paladin is a target,” Andrew Shearer, a Melbourne-based analyst for Octa Phillip, said in a telephone interview. “It could be an opportunistic purchase at a time when the uranium market is potentially at its bottom.”

Strategic Options

Paladin Chief Executive Officer John Borshoff didn’t return two messages seeking comment. Borshoff owns about 22 million shares, or 2.6 percent of Paladin, according to data compiled by Bloomberg.

The company, which told investors last year it may sell stakes in some of its exploration projects, reiterated last week it is considering “joint venture and strategic options offered by participants in the nuclear industry.”

“The high level of interest from these parties has confirmed both the global demand for high-quality uranium assets and the desire to partner with Paladin,” according to a July 13 stock exchange filing. Paladin said in the statement it is evaluating three potential deals and plans to announce the results of the discussions between August and October.

Founded in 1993, Paladin began acquiring uranium assets five years later during a downturn in the uranium market, its website shows. The company’s Langer Heinrich mine in Namibia was officially opened in 2007, while the Kayelekera project in Malawi began production in 2009. Paladin plans to boost output to 8 million to 8.5 million pounds of uranium in the year ending in June 2013, from 6.9 million pounds the previous year.

‘There’s Light’

“Now they are actually delivering in terms of production,” Troy Irvin, a Perth-based analyst at Argonaut Securities Pty Ltd., said in a telephone interview. “Paladin’s long journey highlights how difficult it is to get mines up and running, how difficult it is to get new supply. They’ve done that, and it appears there’s light at the end of the tunnel.”

With production rising, Paladin’s revenue is expected to reach $488 million in the year that ends June 2013, more than double what was reported in 2010, according to data compiled by Bloomberg. Analysts project the company will report net income of $34 million this year, the first profit since Paladin started producing uranium at the Langer Heinrich mine at the end of 2006, the data show.

Fukushima Disaster

The nuclear fuel traded at $67.50 a pound before the earthquake and tsunami that struck Japan crippled Tokyo Electric Power Co. (9501)’s Fukushima nuclear power plant and triggered the worst atomic disaster since Chernobyl in 1986. The accident spurred countries such as Germany and Taiwan to announce their withdrawals from nuclear power, while China put new plant approvals on hold because of safety concerns.

After falling to a post-Fukushima low of $49 last August, uranium traded at $50.15 on July 16, according to data compiled by Bloomberg. Uranium, which peaked at $136 in 2007, declined in 2008 and 2009 before surging 40 percent in 2010.

Japan’s decision to restart two nuclear power plants, ending a two-month period when all the country’s 50 reactors were offline for safety checks, may help improve the outlook for uranium. A Kansai Electric Power Co. (9503) reactor at the Ohi plant started generating electricity earlier this month, and a second Ohi reactor is also set to resume.

“Sentiment has improved,” Haris Khaliqi, a Sydney-based analyst at Foster Stockbroking Pty, said by phone. “With Japan taking the first steps to restart their fleet of reactors, that’s a positive step and should provide some support for the uranium price. It highlights that uranium will be an integral part of Japan’s power mix going forward.”

‘More Uranium’

A rise in Chinese imports will also help spur a rebound in prices beginning this year, JPMorgan Chase & Co. analysts project. Spot uranium prices may rise from $55 later this year to $85 in 2014, they wrote in a July 10 report.

“China will likely continue to import more uranium than its existing reactors require with the expectation of a significant roll-out of capacity,” Mark Busuttil, a Sydney- based analyst at the New York-based bank, wrote.

Still, negative sentiment toward uranium, along with nuclear safety concerns after the crisis in Japan, has weighed on Paladin’s shares, JPMorgan said in the report.

A 78 percent drop since Japan’s earthquake and tsunami has pushed the shares to a seven-year low of A$1.065 as of yesterday’s close. At that level, Paladin is trading at 0.78 times the value of its net assets and 43 percent below the A$1.88 price target of 17 analysts compiled by Bloomberg. That compares with an average premium to book value of 31 percent for the 26 members of the ISE-CCM Global Uranium (YC) index.

‘Stable Floor’

The valuations are helping make Paladin a target for companies betting on an eventual recovery in the uranium market, according to John Wilson, Sydney-based managing director at Resource Capital.

“The uranium price does seem to have found a fairly stable floor above $50 a pound,” he said. “They’ve got an attractive growth profile and exploration pipeline.”

Paladin may fetch more than A$1.5 billion ($1.6 billion), a 69 percent premium to yesterday’s value, if a buyer offered the same price per pound of uranium paid in takeovers of Hathor Exploration Ltd., Extract Resources Ltd. and Mantra Resources Ltd., Octa Phillip’s Shearer said. London-based Rio Tinto Group bought Hathor last year for C$654 million ($646 million).

“We’ve seen that the prices paid by strategic investors for long-term uranium supply are certainly a lot more than equity market values for uranium stocks,” Shearer said.

China Demand

China has 14 reactors operating and 26 under construction, accounting for more than 40 percent of the plants being built globally, according to the World Nuclear Association. China, the world’s biggest energy user, approved a five-year nuclear safety plan at the end of May that may lead the nation to end a temporary halt on new plant approvals. China hasn’t said when it will start approving more reactors.

“The country has to rely on nuclear power to replace some fossil fuels in the next 20 to 30 years,” said Patrick Dai, an analyst at Macquarie Group Ltd. in Hong Kong. “It’s not a question about whether China will restart nuclear programs. It is a question of how quickly China will resume the expansion.”

Two of the three state backed companies charged with building China’s nuclear power plants -- China National Nuclear Corp., and China Guangdong Nuclear Power Group Co. -- have already begun to acquire overseas suppliers of uranium.

Cameco

China National Nuclear, which said in March that it was in talks with France’s Areva SA (AREVA) to buy a stake in uranium mines, is the parent of Hong Kong-listed CNNC International Ltd. (2302), which owns a mine in Niger and bought Canada’s Western Prospector Group Ltd., which explores for uranium in Mongolia, in 2009.

“Chinese nuclear power players will definitely be interested in Paladin, especially while the asset remains cheap, as they need to stock up uranium for long-term capacity expansions,” Dai said. “China’s current uranium reserves may only be enough for 10 to 15 years consumption, so they would rather acquire uranium assets now rather than later.”

Spokesmen for CNNC in Beijing and China Guangdong in Shenzhen could not be reached to comment.

Cameco, the world’s largest uranium producer, may also have an interest in Paladin, especially its Michelin project in eastern Canada, Resource Capital’s Wilson said. Paladin added Michelin when it completed the purchase of uranium assets from Fronteer Gold Inc. for C$260.9 million in early 2011.

‘Acquisition Path’

Cameco agreed in May to buy trader Nukem Energy GmbH for 105 million euros ($129 million) after acquiring Areva’s 30 percent stake in a uranium project in Saskatchewan for C$150 million. Cameco terminated an offer to buy Hathor after being outbid by Rio.

A Cameco filing in May to raise as much as C$1 billion by selling stock, bonds or other securities, stoked speculation it is considering further acquisitions, according to Foster Stockbroking’s Khaliqi. Cameco said in the filing that it has no immediate plans to raise the funds.

“Cameco has made it clear they’re on an acquisition path,” Khaliqi said. “Paladin would give them scale and quite a diverse exploration portfolio.”

“As one of the world’s leading uranium producers, we are often associated with speculation about various business deals,” Rob Gereghty, a spokesman for Cameco, said in an e- mailed statement in response to being asked whether the company is considering a takeover of Paladin. “Any material agreement we complete would be broadly communicated to investors and other stakeholders by a news release.”

Bond Repayment

Paladin, trading at the lowest level since 2005, and facing the repayment of $134 million in convertible bonds next March, may be vulnerable to a takeover, said Edward Sterck, an analyst at BMO Capital Markets in London. Sterck expects uranium prices to rise as much as 30 percent to $65 next year.

“Until relatively recently I never really considered Paladin to be much of a takeover candidate,” he said in a telephone interview. “Potentially now does represent a good time to look at acquisitions, especially given shares generally are a fair amount lower than they have been in the past.”

To contact the reporter on this story: James Paton in Sydney at [email protected]

To contact the editors responsible for this story: Sarah Rabil at [email protected]; Andrew Hobbs at [email protected]