Paladin gets PE from Asia

Like most uranium companies last year, Paladin Energy (TSX: PDN; ASX: PDN) struggled with tough markets and low commodity prices.

The company suspended production at its Kayelekera mine in Malawi in February 2014 due to low uranium prices and unprofitability, stating that it won’t restart the operation until uranium prices improve, and in the last three months of the year, trimmed its 2015 production guidance from 5.4 million to 5.8 million lb. uranium oxide to 5.2 million to 5.4 million lb. uranium oxide.

But there was some good news, too. In the final two months of 2014, Paladin raised A$205 million (US$163 million) — of which US$76 million came from HOPU Clean Energy (Singapore) Pte. Ltd. The capital will be used to strengthen Paladin’s balance sheet and help repay a US$300-million convertible bond due in November 2015.

HOPU — part of a private equity firm with offices in Beijing, Hong Kong and Singapore, and focused on China-related investment opportunities — is now a cornerstone strategic investor with a 15% stake in the company. The HOPU team has expertise in investment, financing and capital markets, as well as diverse experience working with state-owned Chinese enterprises and private entrepreneurs. Its investment focus is to pursue investment opportunities driven by China’s economic reforms and developments, particularly in energy, mining, agriculture and financial services.

As part of the terms of its strategic investment, HOPU negotiated a seat on Paladin’s board. Wendong Zhang, the private equity firm’s senior managing director, joined Paladin’s board on Nov. 25.

Describing Zhang as a “very, very able and capable person” who is both U.S.-trained and educated, Paladin founder and CEO John Borshoff said the HOPU investment has two advantages: “It strengthens our board appropriately, and via the considerable footprint it has in China, it will make other opportunities available to us.”

The strategic investment from the Asia-based private equity firm follows Paladin’s sale in July 2014 of a 25% stake in its open-pit Langer Heinrich uranium mine in Namibia to a subsidiary of China National Nuclear Corp. (Langer Heinrich is in the Namib Desert, 80 km east of the seaport of Walvis Bay and 40 km southeast of the Rossing uranium mine operated by Rio Tinto [NYSE: RIO; LSE: RIO].)

The sale to China National Nuclear Corp. (CNNC) was the largest Chinese resource deal made in 2014, Borshoff says in a telephone interview from his office in Australia. “Chinese interest in uranium is significant and they are looking for companies with good management that can turn vision into reality, and that’s why they did the deal with us.”

Borshoff notes that the CNNC deal and the HOPU investment show that Paladin has “built a real mechanism to advantage opportunities out of China.” He adds that the company offers investors “an established producer that is at the beginning of its growth profile” in an industry where “all the other established producers are mature.”

The geologist notes that he created Paladin just over a decade ago and the company has grown from zero production in 2004 to having two mines in Africa and a portfolio of development projects in Australia.

“We started as a hopeful in 2003 and we had a vision that was to establish two operating mines, which we have accomplished in Africa,” he continues. “How many other uranium companies do you know of that have been able to build two greenfield projects in Africa — outside of the country of its headquarters — and with a project pipeline for future development. There have been none. That’s why HOPU was interested in Paladin.”

In the three months ended Dec. 31, 2014, production at Paladin’s Langer Heinrich mine totalled 1.3 million lb. uranium oxide (U3O8), up 27% from the 1.03 million lb. it produced in the third quarter. Sales revenue in the quarter rose 79% from the previous quarter to US$69.9 million.

The company sold 1.9 million lb. U3O8 in the quarter at an average selling price of US$36.58 per lb. — below the TradeTech weekly spot price average for the period of US$37.66 per lb.

This year Paladin is targeting production at budgeted rates and focusing on reducing operating costs and improving process efficiencies. The company has also started work on a feasibility study to develop a detailed plan for restarting Kayelekera when uranium prices and market conditions are more favourable. In addition to looking at cost-optimizing factors such as commercial power, the feasibility study will examine manpower rationalization and other related improvements. 

Malawi has designated linking Paladin’s mine to the national power grid as a “top priority” for ESCOM, the country’s power utility. Kayelekera is the country’s largest mine and when in production between 2009 and 2014, made up 10% of its gross domestic product. Paladin owns an 85% stake in the large open-pit resin-in-pulp operation in northern Malawi and the government owns the remainder.

For Paladin, connecting Kayelekera to the national power grid is essential because it will have a significant impact on operating costs, trimming them by an estimated US$3 to US$4 per lb.

“The rebuild of the regional power lines is being carried out through a fund supported by the U.S.,” Borshoff says. “And it does appear that with the new government in Malawi, they’re going to make it a priority to electrify the north. With that being done, we think we may be able to get power to the site even during our care and maintenance stage towards the end of next year.”

Borshoff says Kayelekera has immense strategic value for the company and that the US$12-million care and maintenance program is a legitimate one “so that it is at a ready-to-start stage” when prices improve.

Meanwhile at Langer Heinrich, Paladin is waiting for better markets and prices before starting the fourth stage of expansion, which would take production from 5.5 million to 7.5 million lb. uranium oxide.

“We’re not expanding any more until there is a substantial increase in the uranium price,” Borshoff says. “We’re not going to waste any more resources than we have to and we’ll hold off. I think that’s the general tenor in the supply industry. You need price incentives to initiate projects.”

“Fukushima has put a rocket into the supply side,” he adds. “If it hadn’t been for Fukushima, we would have embarked by now on our second stage of growth on the back of having established a brand for Paladin.”

Borshoff says he sees a turnaround in the uranium sector earlier than some people do, with a supply side shortage gap emerging from 2016, and emphasizes that the coming shortfall can only be met by current price incentives.

“This is an industry with tired capacity that has been around for 50 years, and has not been replenished,” he says. “A lot of the projects are getting old, they need replacing … and the newer projects will have shorter mine lives and not as good grade … it’s the reality of mining.”

David Sadowski — a mining analyst at Raymond James in Vancouver who has covered the uranium sector for years — says he expects “greater positivity in 2015 as several industry tailwinds are likely to emerge.” These include the restart of Japan’s Sendai 1&2 reactors in the first half of the year, he argues in a recent research report, along with
“a wave of global nuclear utilities returning to long-term contracting activities, surging reactor start-ups in Asia and ramping M&A activity in the uranium space.”

Colin Healey of Haywood Securities likes Paladin because he argues the company “offers a production expansion profile unrivalled outside of the existing producers, with the potential to add more than 5.3 million lb. U3O8 to nameplate annual production capacity, over the next three to four years, at lower risk than certain other potential sources of new uranium production, such as unpermitted developers.”

Healey models Kayelekera “restarting and approaching nameplate capacity of 3.3 million lb. U3O8 in 2017,” and says growth from Langer Heinrich meanwhile will be delivered in a staged approach. The next stage is the stage-four expansion, he adds, “which could [not modelled] add 4.8 million lb. U3O8 capacity by 2017, if uranium prices justify such an expansion.”

Over the last year Paladin shares have traded from 26.5¢ to 61¢, and at press time traded at 32.5¢.