13 January 2011
Uranium Sector Analyst Peter Chapman 612 8224 2847
Uranium continues to strengthen
Authorisation Johan Hedstrom 612 8224 2859
The rise in spot uranium prices is reflecting a tighter supply situation than is generally understood by industry forecasters. Tier 1 producers including Rio Tinto, Areva and Cameco are showing no clear evidence of getting new production into the market and fund buying is re-emerging. This has placed pressure on the spot price with the price rising from $40/lb in June to $66/lb in January. Key Buy Recommendation Current Price Price Target
PDN
$5.20
$6.00
Uranium fundamentals strengthen With tighter supply, demand side players have sprung into action, with China buying 133mlb in long term contracts. The major consuming nations including Korea, India and Japan appear yet to fully secure their positions. This recent activity, along with renewed fund buying, has assisted in moving spot prices considerably higher. Spot has the potential to go a lot higher yet, as it did in 2008 when it peaked at over US$140/lb.
Paladin the sector leader: Target upgrade to $6.00 ($5.50) PDN is very well placed to benefit from stronger uranium prices as it: continues to ramp up production; and has a large proportion of sales (c.50%) not committed under contract. We have increased the target to $6.00 ($5.50) on higher short term uranium prices and a greater NPV multiple of 1.3 (1.2) due to higher uranium resources from the Canadian acquisition. Buy. In this note we look at recent M&A transactions and ASX uranium company comparables, providing a brief synopsis (pages 8-11) on companies of most interest such as EXT, BMN, MEY, GGG, DYL and EMX. Uranium Price ($/lb) versus PDN
Uranium Sector – Share Price Changes CY2010 12
160 140
Uranium Spot ($)
10
PDN Share Price
120
8 100 80
6
60 4 40 2 20 0 04‐Jan‐05
0 04‐Jan‐06
04‐Jan‐07
04‐Jan‐08
04‐Jan‐09
04‐Jan‐10
04‐Jan‐11
SOURCE: IRESS
SOUTHERN CROSS EQUITIES LIMITED INCORPORATED ACN 071 935 441 AFSL 247027
SOURCE: IRESS
MEMBER ORGANISATION OF THE AUSTRALIAN STOCK EXCHANGE
DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 14 THAT FORM PART OF IT.
RESTRICTED DISTRIBUTION THIS RESEARCH IS DIRECTED TO PROFESSIONAL INVESTORS
Page 1
Uranium Sector
Global M&A Activity Russians, Koreans and Japanese active Following Paladin’s plans to purchase the uranium assets of Canadian company, Aurora Energy Resources Inc, and Russia’s ARMZ Uranium Holdings making an all cash offer for Mantra Resources in December, we look at recent transactions in the uranium sector and see where they fit in terms of comparative value. Post the Mantra takeover, there appears to be increasing interest by corporates in resources greater than 60mlb.
Recent deals at $2-10/lb resource
The two transactions announced in December were at different ends of the EV/lb resource curve. We note that the range of EV/Resources is between $2/lb and $10/lb for recent corporate transactions. Paladin’s acquisition of Aurora’s uranium assets was priced at approximately $2/lb. ARMZ’s acquisition of Mantra was priced at approximately $10/lb resource. We understand Paladin thinks there is further scope for increasing the resource and reserve position as Fronteer Gold (Aurora’s parent) had neither sufficient money nor strategic imperative to exploit. Given the company’s tier 1 marketing status, a boost in reserves means a substantial lift in PDN’s asset value, which is a driving force in M and A valuations in this sector. Figure 1 – Selected Uranium M&A 2009-2010 Date
Acquirer
Acquisition
Acquisition price Nationality % acquired Resources EV/lb A$m mlb $/lb
Dec‐10
Paladin
Aurora Uranium Assets 261
Australian
100
137
1.91
Dec‐10
ARMZ
Mantra Resources
1041
Russian
100
101
10.27 9.70
Dec‐10
Kalahari
Extract (placement )
61
UK
1.71
6
Jul‐10
Itochu*
Polo Resources
158
Japanese
10
34
4.68
Dec‐09
Kepco/Areva JV
Imouraneren mine JV
253
France/Korea 10
32
7.86
Sep‐09
CUDC
Energy Metals
96
Chinese
17
5.55
70
* Itochu sold its 9.2% stake in EXT to Itochu SOURCE: BLOOMBERG, COMPANY REPORTS
Other corporate transactions have also occurred, with significant ones including: •
In April 2009, Denison Mines Corp entered into a MOU with Korea Electric Power Corporation (KEPCO) for KEPCO to purchase 20% of Denison's production and acquire 58m Denison shares representing 19.9% of the post-transaction capital for CDN$75.4m.
•
In February 2009, Mega Uranium Ltd announced a deal with JAURD (the Japan Australia Uranium Resources Development Co. Ltd.) and ITOCHU Corporation (ITOCHU) as its proposed 35% joint venture partners in its Lake Maitland Project, Western Australia (Inferred Resource 23.7mlb).
•
In August 2010, Uranium One shareholders voted to sell a controlling stake in the company to Russian state-owned miner ARMZ in exchange for $610m cash, plus 50% of the Akbastau uranium mine and a 49.67% of the Zarechnoye mine. This increases ARMZs ownership in Uranium One from 23% to 51%.
Page 2
Uranium Sector
Uranium Mining in Australia State Laws affecting uranium mining in Australia Uranium reserves can be found in Western Australia, South Australia, the Northern Territory and Queensland. Australia, as the world’s largest known depository of recoverable uranium, is in a prime position to be a competitive producer and exporter of uranium.
Federal Government supportive
The current Federal government’s policy is in favour of uranium mining and the export of uranium. Federal laws are consistent with international standards – that is, laws relating to export of uranium are in accordance with the International Nuclear Non Proliferation Treaty (INNPT). In accordance with international standards, Australia has a safeguard system under the INNPT to prevent the use of Australian uranium for the development of nuclear weapons or any military programs. In Australia, a combination of state, territory and federal laws regulate the exploration, production and export of uranium. Generally, the states and territories regulate uranium exploration and production, and the Federal Government regulates export and some safety aspects of the uranium industry in compliance with Australia’s commitments under international laws applying to the nuclear industry and nuclear non-proliferation.
Mining permitted in SA, NT Mining banned in Qld, NSW, Vic but for how long? WA lifted its ban
Uranium exploration and mining is permitted in South Australia and in the Northern Territory. In November 2008, the WA government announced that it had lifted the administrative ban on uranium mining which had been in place since June 2002. The change in Western Australia’s policy means that, in terms of land area, uranium mining is now permitted on the majority of mainland Australia. Queensland, New South Wales and Victoria however maintain an administrative ban on uranium mining. There are currently only three operating uranium mines in Australia. These are located in South Australia (Olympic Dam and Beverley mines) and the Northern Territory (Ranger Mine).
Figure 2 – Australia’s Uranium Resources
SOURCE: AUSTRALIAN URANIUM ASSOCIATION
Page 3
Uranium Sector
Global Production Significant expansion in uranium supply met with demand Australia down 31% in FY10 Canada also down
Kazakhstan the world’s largest at 18kt
In 2009-2010, Australia’s uranium production declined by 31% to 7156 tonnes U3O8. This was mainly the result of an extended maintenance outage at BHP’s Olympic Dam following the failure of the main haulage shaft in October 2009. In addition production at ERA’s Ranger mine was lower in the first two quarters of 2010, a result of lower grades. Australia’s uranium production is expected to increase, underpinned by Olympic Dam’s return to higher production and the start-up of Uranium One’s South Australian Honeymoon operation in the March quarter 2011, Australia’s fourth uranium mine. In Kazakhstan, the world’s largest uranium producer, production in 2010 is estimated to have increased by 11% to 18kt, after increasing by more than 60% in 2009. This is a result of the start up of Kyzylkum Joint Venture’s Kharasan Two (17kt U3O8 annual capacity) and the ramp up of nine mines commissioned in Kazakhstan over the past two years. Over the past 18 months there has been a net expansion in global uranium supply. But it has not been as dramatic as the increase in Kazak material may suggest as there has been offsetting declines elsewhere. Looking at the longer term picture, the increase in Kazak production of 12kt since 2005 has been set against the decrease in the combined Australian and Canadian production of some 7-8kt. The increase in supply has been met with an increase in discretionary uranium purchases (purchases not intended to be used in the short term). These purchases made up around 85% of spot market in the first half of 2010, compared to 60% in the same period in 2009. Buyers on the spot market took advantage of the low prices in 2010 to build stocks or make speculative investments in uranium, and provided support for prices above US$40/lb.
Figure 3 – Production growth in the world’s top three uranium producers
SOURCE: ABARE
Page 4
Uranium Sector
Paladin Energy (PDN) -
Sector Leader - Buy
PDN production on the rise Rated production of 7.0mlbpa
Since becoming a producer in 2007, PDN has continued to expand to its current rated capacity of 7.0mlbpa. The completion of Langer Heinrich Stage 2 in 2H09 took this operation to 3.7mlbpa and Kayelekera attained its design rate of 3.3mlb in September 2010, although not on a sustainable basis. Expectations for the December quarter were for continued operating improvements and total production well in excess of the previous quarter’s 1.36mlb. Capacity will increase to 5.2mlbpa at Langer Heinrich with Stage 3, which is due for mechanical completion in the March 2011 quarter.
Figure 4 - PDN production record 1800
Total
1600
Sales kt
1400
klbs
1200 1000 800 600 400 200 Sep‐10
Dec‐10
Jun‐10
Mar‐10
Dec‐09
Jun‐09
Sep‐09
Dec‐08
Mar‐09
Sep‐08
Jun‐08
Mar‐08
Sep‐07
Dec‐07
Jun‐07
Mar‐07
0
SOURCE: COMPANY DATA
Resources boosted with Canadian acquisition Another 137mlb resource acquired; takes PDN total to 530mlb
PDN has agreed to purchase the uranium assets of Aurora Energy Resources Inc, a wholly owned subsidiary of the Canadian gold company Fronteer Gold (TSXFRG, AMEX-FRG). Not only does the acquisition give PDN substantial additional resources, totalling 137mlb, the acquisition is very well priced from PDN’s point at under US$2.00/lb of resource. Assets to be acquired are the Michelin deposit (67.12Mlb Measured and Indicated and 36.08Mlb Inferred Resources of U3O8), Jacques Lake, Rainbow, Nash, Inda and Gear deposits plus exploration ground. Consideration is C$260.87m via the issuance of 52.1m PDN shares, equivalent to US$1.90/lb of resource, with the transaction expected to be completed in February 2011, subject to government and regulatory approvals. The Preliminary Economic Assessment (PEA), of the Michelin Project, shows a financially robust open-pit and underground uranium mining operation in Labrador, Canada. It is based on a milling facility at the Michelin site capable of processing 10,000t/day, which will produce up to 7.3mlb of U3O8 pa. Direct cash costs are stated at US$28.57/lb over the 17-year mine life, NPV US$914m (at 8%pa) with a pre-tax IRR of 19.4% and a pay-back period of 4.7 years.
Page 5
Uranium Sector
Paladin Energy (PDN) Company Description Paladin Energy Ltd is a growing mid tier uranium producer, 100% focussed on uranium, with two operating mines in Africa; Langer Heinrich in Namibia and Kayelekera in Malawi and a number of advanced uranium prospects in Australia and now Canada. PDN has a strategic position in the uranium industry with a strong resource position, production growth and a solid management team.
Investment Strategy We rate PDN a Buy. The company offers high leverage to the realised uranium price and is well positioned for growth organically and via acquisitions. PDN trades on an EV/Resource of $8/lb post its acquisition of Aurora, very modest for an established, high growth producer. It is one of two only dedicated uranium producers on the ASX (along with ERA), having the largest market cap and by far the largest enterprise value. PDN has been a moderate performer over the past year, although not keeping up with some of the smaller players. However, PDN is set to outperform in the context of increasing production and uranium pricing.
Valuation SCE has raised its target price for PDN to $6.00 ($5.50) on higher short term uranium prices and a greater NPV multiple of 1.3x (1.2x) due to higher uranium resources from the Canadian acquisition. There is greater confidence that future production growth will be achieved following attainment of design levels at the end of 2010.
Shareholders GE Asset Mgt 6.18% (as announced just this week), The Capital Group 6.07%.
Board and Management John Borhsoff (Managing Director/CEO), Rick Crabb (Chairman, Non-Executive Director), Sean Llewelyn (Non-Executive Director), Don Shumka (Non-Executive Director), Peter Donkin (Non-Executive Director), Philip Baily (Non-Executive Director).
Page 6
Uranium Sector
Paladin SWOT analysis STRENGTHS Rapidly Growing. PDN has been in production for only four years and already has production capacity of 7mlbpa with expansion plans to 13mlbpa. Size of Resources. PDN has extensive resources totalling approximately 530 mlbs (including Canadian acquisition). Board. The board and management team have a strong mix of home grown Australian geology and mining knowledge, African experience and international management expertise. Diversified. With the recent acquisition of Aurora (to be completed), PDN is well diversified across numerous countries including Canada, Australia, Namibia and Malawi. Credible Supplier. Given PDN’s accession to tier 1 in uranium marketing, PDN is a credible supplier to the uranium industry. Uranium price outlook. Fundamentals convey that the recent strength in uranium pricing is a result of a tighter supply situation. WEAKNESSES Balance sheet structure. Net debt was approximately $442m as at the September quarterly. Following the $430m capital raising completed in September 2009 at $4.60 per share, PDN’s balance sheet has improved. However, its convertible bonds are unpopular with equity investors. These are: US$20.4m maturing 15 December 2011 at US$7.685 (US$230m have been repurchased), US$325M maturing 11 March 2013 at US$6.59, US$300m November 2015 at US$5.665. OPPORTUNITIES Strategic position in the industry. PDN has an open register and lays claim to substantial resources that make it highly attractive to those seeking to secure strategic holdings in uranium. Marketing contracts. With PDN having only approximately 50% of its production contracted for FY11+, PDN is able to take advantage of the potential upside in uranium pricing. THREATS Commodity price and exchange rate fluctuations. Similar to other commodity producers, PDN is subject to fluctuations in prices. Paladin’s uranium contracts comprise a range of pricing mechanisms; including some linked and dependent upon the spot uranium price. Country risk – Country risk is a factor as a result of operations in Namibia and Malawi. However, these are 2 of the more politically stable countries by African standards.
Page 7
Uranium Sector
ASX Uranium Company Comparables Highlights •
PDN (producer), the dominant company by market cap; ERA (producer) and EXT (non-producer) are the two other majors.
•
PDN has considerable borrowings but at the same time has strengthening operating cash flow that we estimate exceeds US$220m in FY13.
•
PDN’s EV/Resource rating has improved to $7.94/lb, on a large 530mlb, which enhances its appeal to investors and corporate alike.
•
EXT has large current Resources of almost 400mlb (with expansion likely) representing very good value at $5.90/lb. Its Husab deposit (aka Rossing South) is one of the most significant uranium discoveries ever made.
•
ERA has the highest level of net cash in the sector of $165m. Concern continues over its production outlook.
•
Attention is drawn to companies with sizeable Resources that are trading on low EV/Resource lbs (Figure 7), namely MEY, BMN, GGG and DYL. Concerns over BNM’s high projected costs of production may be ameliorated by the return to higher uranium prices.
•
EMX warrants close attention as the baby of the group (lowest market cap) and a low EV/Resource oz of $2.53/lb.
Figure 5 – Industry Comps – as at 11 January 2011 Stock
ASX Code
Last A$
Mkt cap A$m
Net Cash A$m
EV A$m
Resources Mlbs
EV/lb $/lb 24.68
AFRICAN ENERGY RESOURCES LIMITED
AFR
0.67
195
3
192
7.8
BANNERMAN RESOURCES LIMITED
BMN
0.66
156
17
139
170.2
0.82
DEEP YELLOW LIMITED
DYL
0.33
372
25
347
109.7
3.16
ENCOUNTER
ENR
0.86
88
10
78
10.6
7.33
ENERGIA
EMX
0.36
25
5
21
7.5
2.53
ENERGY AND MINERALS AUSTRALIA
EMA
0.22
83
5
79
59.9
1.31
ENERGY METALS
EME
0.77
118
11
107
26.1
4.11
ENERGY RESOURCES OF AUSTRALIA
ERA
11.58
2210
165
2045
396.1
5.16
EXTRACT RESOURCES LIMITED
EXT
9.07
2214
53
2161
365.7
5.91
GREENLAND MINERALS AND ENERGY
GGG
1.22
358
62
296
193.9
1.53
MANHATTAN CORPORATION
MHC
1.36
122
0
121
10.9
11.10
MANTRA RESOURCES
MRU
7.83
1044
67
977
101.4
9.64
MARENICA ENERGY
MEY
0.09
46
2
45
103.4
0.43
PALADIN ENERGY LIMITED
PDN
4.99
3826
‐381
4207
529.8
7.94
PENINSULA MINERALS LIMITED
PEN
0.09
177
4
173
25.2
6.86
SUMMIT RESOURCES LIMITED
SMM
3.70
807
5
802
75.7
10.59
THUNDELARRA EXPLORATION LIMITED
THX
0.61
93
19
74
TORO ENERGY LIMITED
TOE
0.15
145
50
95
30.5
3.10
N/A
NB: PALADIN RESOURCES INCLUDE CANADIAN ASSETS SOURCE: COMPANY AND SOUTHERN CROSS EQUITIES ESTIMATES
Page 8
Uranium Sector
Figure 6 - Market Caps ($m) 4500
PDN the dominant sector company
4000 3500
Two other majors, ERA (producing), EXT (non producer)
3000 2500 2000
EMX an attractive baby
1500 1000 500 0 PDN
EXT
ERA
MRU SMM DYL
GGG
AFR
PEN BMN
TOE MHC
EME
THX
ENR
EMA
MEY EMX
SOURCE: IRESS, COMPANY DATA
Figure 7 – EV/Resource lb and Resource Size
EXT a standout with large, low priced Resources
30
600
25
500 EV/lb ($)
PDN’s EV/Resource reduced to $8/lb with Canada Cheap, large Resources: MEY, BMN, GGG, DYL
Resources
20
400
15
300
10
200
5
100
0
0 MEY BMN EMA GGG EMX TOE
DYL
EME ERA
EXT
PEN
ENR
PDN MRU SMM MHC AFR
SOURCE: COMPANY DATA
Figure 8 – Net Cash ($m) 200
Cashed up: ERA, GGG, EXT All have net cash save PDN
100 0 ‐100 ‐200 ‐300 ‐400 ‐500 ERA
MRU
GGG
EXT
TOE
DYL
THX
BMN
EME
ENR
SMM EMA
EMX
PEN
AFR
MEY
MHC
PDN
SOURCE: COMPANY DATA
Page 9
Uranium Sector
ASX Uranium Stock Update (not rated by SCE) African Energy Resources (AFR) Last $0.67, Mkt Cap $195m, EV/lb: $24.68 Junior drilling uranium targets in Zambia and Botswana. A mining licence has been granted over the 11mlb U3O8 Chirundu JV project, Zambia (AFR 70%). AFR has the cash to fund its 2010/11 exploration program and beyond. Best performing stock in the sector in CY2010 by virtue of its Sese steam coal project in Botswana. Bannerman Resources (BMN) Last $0.66, Mkt Cap $156m, EV/lb: $0.82 Focussed on uranium projects in Africa with tenements in Namibia and Botswana. BMN’s flagship Namibian project, Etango (80%) has advanced to a DFS. The current price implies a resource value of only $0.82/lb, a low value, largely due to the low grade/high cost of the project. BMN raised $15m in December 2010 to advance its feasibility study on Etango, for regional exploration activities and for general corporate and administrative purposes. Deep Yellow (DYL) Last $0.33, Mkt Cap $372m, EV/lb: $3.16 Uranium exploration and development company currently focused on advanced resource development projects in Namibia and Queensland. Targeting to become a uranium producer in Namibia in 2013-2014. The timeline for PFS results on DYL’s Omahala project in Namibia has recently been extended to the 2nd quarter 2011 to evaluate the inclusion of material from the recently discovered Ongolo Alaskite project. PDN holds 19.3% stake in Deep Yellow. Encounter (ENR) Last $0.86, Mkt Cap $88m, EV/lb: $7.33 Diversified explorer with manganese, zinc, copper and uranium interests in Western Australia. ENR has been an outstanding performer in the market over the last twelve months a result of its Yeneena-BM1 copper discovery near Telfer in the Paterson province. Recently completed a share placement in December, raising $6m to accelerate and expand the company’s exploration programs at the Yeneena project and provide working capital. Energia (EMX) Last $0.36, Mkt Cap $23m, EV/lb: $2.53 Junior West Australian based explorer, listed as a demerging of uranium assets from Carbon Energy. The current price implies an EV/Resource lb of only $2.53. Strong uranium mineralisation has been reported in January from drilling at Carley Bore. Work has commenced on an updated exploration target and potentially an increased JORC resource for the deposit ahead of a scoping study. Have 8 granted tenements in SA and are currently identifying drilling locations there. Also hold 7 granted tenements (base metals) and 2 applications for uranium tenements in Italy. Energy and Minerals Aust (EMA) Last $0.22, Mkt Cap $83m, EV/lb: $1.31 EMA is developing the Mulga rocks project, Western Australia, targeting uranium production in 2014. Progressing towards a PFS after receiving positive scoping study results in November 2010. Recent developments include favourable metallurgical recoveries of lignite and sandstone based uranium.
Page 10
Uranium Sector Energy Metals (EME) Last $0.77, Mkt Cap $118m, EV/lb: $4.11 Energy Metals is a dedicated uranium explorer with nine projects located in the Northern Territory (NT) and Western Australia covering over 4,000 km². Most of the projects contain uranium discovered by major companies in the 1970’s, including the advanced Bigrlyi Project in the NT (EME 53.3%). Increased its Lake Mason resource in December to 3.7mlb. 60% owned by CGNP of China. Energy Resources (ERA) Last $11.58, Mkt Cap $2,210m, EV/lb: $5.16 Has mined ore at Ranger (NT) since 1981, the world’s second largest uranium mine, with production of 5.5ktpa of U3O8, equivalent to 10% of global uranium mine supply. ERA earnings guidance revised down for 2010 following lower than expected production and earnings 1H10. Extract Resources Limited (EXT) Last $9.07, Mkt Cap $2,214m, EV/lb: $5.91 EXT’s exploration for uranium in Namibia continues to exceed expectations. An August resource update confirmed Husab (aka Rossing South) as one of the most significant uranium discoveries ever made, the fifth largest uranium only deposit in the world. EXT continues towards completing its DFS, due 1Q2011. Greenland Minerals and Energy (GGG) Last $1.22, Mkt Cap $358m, EV/lb: $1.53 GGG is evaluating the Kvanefjeld multi element project in Greenland. The Greenland government amended the standard terms of exploration licenses in September 2010 to allow for the inclusion of radioactive elements as exploitable minerals for exploration and evaluation. GGG received approval in December to fully evaluate the Kvanefjeld multi element project. Manhattan Corporation (MHC) Last $1.36, Mkt Cap $122m, EV/lb: $11.10 MHC is developing and adding to its uranium resource base in the Ponton Mulga Rock uranium province of WA. The deposit already ranks as the 12th largest reported uranium resource in Australia and fourth largest in Western Australia. MHC is currently undertaking an aggressive 40,000m AC drill program to systematically test five uranium mineralised targets, to the north of the QVSNR, at Ponton in WA. Mantra (MRU) Last $7.83, Mkt Cap $1044m, EV/lb: $9.64 MRU and Russia’s ARMZ, via a Scheme, have agreed for ARMZ to acquire all of the issued share capital in MRU at $8.00 per share cash, valuing the company at $1.16bn. MRU’s main asset is the Mkuju River Project in Tanzania as well as other projects in southern Africa. This bid highlights the size, strategic nature and nearterm development potential of Mkuju River. Marenica Energy (MEY) Last $0.09, Mkt Cap $46m, EV/lb: $0.43 Scoping study recently completed on the Marenica uranium project, Namibia (MEY 75%), demonstrating positive project economics for a 20Mtpa heap leach operating forecast to produce 3.5mlbs per annum over a 13 year mine life. Average operating costs are estimated to be US$38/lb with a capital cost of US$260m. Current price implies an EV/Resource lb of only $.0.43 Peninsula Minerals (PEN) Last $0.09, Mkt Cap $177m, EV/lb: $6.86 Exploring for uranium in the US, South Africa and Australia, and gold in Fiji. A PFS in July 10 confirmed the economics of the Lance uranium project (WY, USA). BFS expected 1Q11; production potential 2012 – initial rate 1.5mlbs per annum
Page 11
Uranium Sector Summit Resources (SMM) Last $3.70, Mkt Cap $807m, EV/lb: $10.59 SMM controls 4,429km of tenements in three major project areas centred on the city of Mount Isa in northwest Queensland. The Company’s core objectives are to bring these deposits into production and to expand its uranium resources within the region. Drilling activities have been focussed on the previously identified ‘blind’ target at Odin, approximately 500m to the north of Valhalla as well as the commencement of resource definition and extension drilling at Bikini. A maiden resource at Odin was announced in December of 10.3mlb. Thundelarra Exploration (THX) Last $0.61, Mkt Cap $93m, EV/lb: $N/A Inaugural resource for the high grade Thunderball uranium deposit, NT is expected imminently. THX also hold a 40% interest in the Copernicus nickel mine, WA, with Panoramic Resources (60%). Toro Energy (TOE) Last $0.15, Mkt Cap $145m, EV/lb: $3.10 Pacesetter in advancing calcrete style uranium projects in Australia at its Wiluna project (at the BFS stage). Company is cashed up ($50m cash) and will need to look to corporate acquisitions to reach its target 220mlb resources by 2015. Toro completed a contract with MMG in December 2010 for the acquisition of Wiluna tenements, pastoral and other assets.
Page 12
Paladin (PDN)
Recommendation Price Target (12 months)
as at 13 January 2011
Uranium Sector
Buy $5.20 $6.00
Table 1 - Financial summary Paladin Resources (PDN) As at PROFIT AND LOSS (US$M) Y/e June 30 Sales revenue EBITDA Depreciation Amortisation EBIT Other income (expenses) Net Interest Expense Pre-tax profit Tax Net Profit Minorities SCEQ adj profit One-off items Reported net profit
Share price: Market Cap:
12-Jan-11
2009a 112 9 -9 0 1 0 -31 -30 0 -30 0 -30 -450 -480
2010a 204 14 -14 0 -1 0 -21 -22 -28 -50 -1 -51 -2 -53
2011f 352 142 -38 0 104 0 -28 76 -23 53 -1 52 0 52
2012f 532 292 -46 0 246 0 -19 227 -77 150 -1 149 0 149
2013f 612 346 -50 0 296 0 -8 288 -99 189 -1 188 0 188
VALUATION DATA (US$M) Y/e June 30 Net profit adj ($m) EPS (c)
EPS growth (%) P/E ratio (x) CFPS (c) Price/CF (x) DPS (c)
Yield (%) Franking (%) EV/EBITDA
EBITDA margin (%)
2009a -30 -79.7 1234 -6 -1 -345 0 0 0 453 8
AUD $ AUD $
2010a -51 -7.4 -91 -61 -6 -78 0 0 0 301 7
2011f 52 7.1 -197 63 12 37 0 0 0 29 40
2012f 149 20.6 188 22 21 22 0 0 0 14 55
Valuation per share (A$): A$ Target price (12 mth):
2009a 8 1 -33 -76 -42 0 0
2010a 7 0 -3 -6 -4 0 -128
2011f 40 30 3 5 4 0 31
2012f 55 46 7 13 10 0 34
2013f 56 48 9 13 13 0 34
LIQUIDITY AND LEVERAGE Y/e June 30 Net debt/(cash) ($m) Net debt/equity (%) Net interest cover (x) Current ratio (x) Inventory turnover Inventory/sales Free Cash Flow Yield (%)
2009a 520 82 0 2 0 71 -7
2010a 381 40 0 4 1 55 -6
2011f 401 40 4 9 1 43 -1
2012f 281 24 13 10 1 21 3
2013f 82 6 35 8 1 21 5
INTERIMS (US$M) Y/e June 30 ($m) Sales revenue EBITDA SCEQ adj profit Reported net profit
2009a 67 16 -9 -476
2010a 101 14 -20 -20
2011f 149 42 8 8
2012f 246 131 64 64
2013f 304 171 91 91
US$M 1053 519 786 -100 761 61 -27 -412 2642
Current UScps 1.47 0.72 1.09 -0.14 1.06 0.09 -0.04 -0.57 3.68 4.23
12 mth UScps 1.60 0.78 1.09 -0.14 1.19 0.09 -0.03 -0.56 4.02 4.62
24 mth UScps 1.53 0.73 1.09 -0.13 1.34 0.09 -0.02 -0.39 4.23 4.86
2010a
2011f
2012f
2013f
1,550 436 1,986 4.38 1,717 3.78
1,697 1,257 2,954 6.51 2,765 6.10
2,091 1,505 3,596 7.93 3,369 7.43
2,479 1,505 3,983 8.78 3,757 8.28
2010a 201 -219 -31 0 8 -42
2011f 354 -216 -28 -23 3 89
2012f 520 -222 -19 -77 -50 152
2013f 609 -255 -8 -99 -27 220
-237 0 0 -21 -258
-170 0 0 -2 -172
-93 0 0 -16 -109
-34 0 0 -16 -50
-35 0 0 -16 -51
-12 1 0 4 -7
131 364 0 0 496
41 0 0 0 41
0 19 0 0 19
-325 30 0 0 -295
-273
282
21
120
-126
66
349
370
490
364
2009a 66 29 86 0 1 182
2010a 349 32 109 0 26 516
2011f 370 30 106 0 37 544
2012f 490 43 156 0 44 733
2013f 364 46 183 0 36 629
512 0 661 81 1282 1464
660 0 705 36 1442 1958
716 0 721 21 1498 2042
704 0 737 6 1488 2221
689 0 753 6 1489 2118
Payables Debt Provisions Other Total liabilities
67 586 42 137 832
63 730 44 164 1001
50 771 44 164 1029
61 771 44 164 1040
65 446 44 164 719
Shareholders’ equity Minorities Total shareholders funds
473 158 631
798 158 956
855 158 1013
1020 161 1181
1235 164 1399
Total funds employed
1151
1338
1414
1462
1481
Spot U3O8 Price (US$/lb) Received U3O8 Price (US$/lb)
W/A diluted shares on issue
602
718
725
725
775
A$
Change in borrowings Equity raised Dividends paid Other Financing cashflow Net change in cash Cash at end of period
BALANCE SHEET (US$M) Y/e June 30 Cash Receivables Inventories Investments Other Current assets
4.23 6.00 15% Buy
Recommendation: PROFITABILITY RATIOS Y/e June 30 EBITDA/sales (%) EBIT/sales (%) Return on assets (%) Return on equity (%) Return on funds empl’d (%) Dividend cover (x) Effective tax rate (%)
2009a 127 -106 -30 0 0 -8
Capex Investments Asset sales Exploration & Other Investing cashflow
2013f 188 24.3 18 19 28 16 0 0 0 11 56 $ $
Total Return (including yield) CASHFLOW (US$M) Y/e June 30 Receipts from customers Payments to suppliers Net interest Tax paid Other Operating cashflow
5.20 3,736
VALUATION
PPE Investments Intangibles Other Non-current assets Total assets
Langer Heinrich Kayelekera Summit Assets Corporate Exploration/projects Deep Yellow Hedging Cash Total Tota/ Acps SEGMENTALS Y/e June 30 2009a U 3 O8 Production (t) 100% of projects Langer Heinrich 1,226 Kayelekera (PDN 85%) 16 Total (t) 1,242 Total Production (mlb) 2.74 Total Sales (t) 918 Total Sales (Mlb) 2.02 Cash Cost (US$/lb) ASSUMPTIONS Y/e June 30
32
29
32
30
30
2009a
2010a
2011f
2012f
2013f
51 55
44 54
58 58
73 72
75 74
0.748
0.883
0.970
0.958
0.912
SOURCE: SOUTHERN CROSS EQUITIES ESTIMATES
Page 13
Uranium Sector
Recommendation structure Spec Buy: Expect >30% total return on a 12 month view but carries significantly higher risk than its sector Buy: Expect >15% total return on a 12 month view Accumulate: Expect total return between 0% and +15% on a 12 month view Reduce: Expect -15% and 0% total return on a 12 month view Sell: Expect
