We have looked at the Paladin Energy (ASX:PDN) chart on a few occasions in the past year and identified PDN as an opportunity along the way. We also highlighted in our 2024 Outlook why we thought the uranium sector was one to invest in. Recently, we researched the Company in The Dynamic Investor. This followed the Company’s announcement that it achieved first commercial production at its flagship uranium project.
Since our most recent report only two weeks ago, the shares are already up by a further 12%. In this note, we outline the key reasons for PDN’s outperformance. Is there further upside, or is it time for a breather?
About Paladin Energy
Paladin Energy is a globally significant uranium developer and exploration company with a 75% stake in the Langer Heinrich (‘LH’) project in central western Namibia. The remaining 25% interest is held by CNNC Overseas Uranium Holding (CNNC), one of China’s largest nuclear operators.
LH has already produced over 43 million pounds (Mlb) of U3O8 (uranium ore concentrate) over 10 years. The project was placed into care and maintenance in 2018 due to sustained low uranium prices. In February 2019, the Company commenced a Pre-feasibility study to further refine and verify restart plan for LH. PDN later completed a restart plan for LH, which highlighted a US$81m cost to restart. The study outlined a 17-year life of mine, with an aim to produce 77Mlb of U3O8 .
The LH project is significant in the context of global production, estimated to account for ~3% of global production in calendar year 2025. Namibia is considered a strong uranium jurisdiction, having produced uranium since 1976 under a stable mining and uranium regulation regime. Modern infrastructure provides access from the mine site to the port at Walvis Bay.
Beyond Langer Heinrich, PDN also owns a large global portfolio of uranium exploration and development assets located in Canada and Australia which show strong uranium potential.
Key Fundamental Drivers
Supportive Industry Fundamentals
The key supply-side factors supporting uranium producers are the Russia/Ukraine geopolitical tensions and supportive government policy from the US, China and India. Uranium is increasingly being seen as an important (and reliable) energy source to meet the world’s decarbonisation targets.
More recently, uranium prices have been trending back up. Market undersupply was exacerbated in 2021 following investment funds and junior miners entering the market and purchasing excess inventory. In the last year, higher prices have been driven by supply chain risk for uranium as a result of the Russia/Ukraine conflict, and production cuts from Kazatomprom*. In February 2024, Kazatomprom cut production guidance for calendar year 2024 by 13% as a result of tight sulphuric acid supply and construction delays. It also highlighted potential for downside risks to production for calendar year 2025.
The uranium price is likely to continue moving higher with US and European utilities not covered for the fuel requirements from 2026-2028 and limited new supply in that timeframe.
* Kazatomprom is the national operator of the Republic of Kazakhstan for the import/export of uranium, and the world’s largest producer of uranium (estimated to account for ~1/3rd of mined uranium supply in 2024).
Favourable Pricing & Commercial Arrangements
First commercial production at LH was achieved on schedule on 30 March 2024. The Company’s principle focus now shifts to sustainably ramping up production and building finished product inventory.
PDN do not intend to sell any uranium pounds into the spot market; only into offtake contracts. PDN currently has ~80% uncapped upside exposure to the uranium spot price through to the end of calendar year 2030. The offtake book is geographically diverse, with seven offtake agreements executed with top-tier counterparties in the US, Europe and China. These contracts range in type and duration and provide base-escalated, fixed-price and market-related pricing mechanisms.
However, it is worth noting that counter-party risk is elevated given that PDN’s 25% JV partner CNNC underpins 29% of its total sales, or ~60% of is contracted sales. Having said that, the contract with CNNC distinctively has a price floor but no price ceiling. This allows pricing to move upwards with the spot price. There is also flexibility on contract volumes depending on LH’s production ramp-up.
Attractive Pipeline of Growth Projects
Beyond the restart of Langer Heinrich, Paladin has growth options at Langer Heinrich and at the Michelin Uranium Project in Labrador, Canada (PDN has a 100% interest). The Company is looking at a number of potential growth options at the LH mine. These include orebody extension and mine plan optimisation, new technologies (i.e., ore sorting, heap leach), and processing plant optimisation and potential expansion.
The Michelin project is located in Labrador Canada, and consists of six deposits with total 127.7Mlb of Mineral Resources. The Michelin project is a potential 6Mlb project in Canada. PDN’s interest in the project rose to 100% in 2023. At a 6Mlb project, the project is the same size as the LH project. As such, development of the Michelin project could bring scale to PDN in comparison to other global producers. Having said that, producers such as Kazatomprom and Cameco are expanding production currently.
Net Cash & Debt Facility Available to Progress Project
The Company entered into a US$150m syndicated debt facility in January 2024. This facility is a flexible funding source designed to complete the commissioning of the LH project. Coupled with a net cash position of US$25m, there is sufficient working capital to: i) Manage the relatively lumpy nature of its revenue stream and ii) Potentially fund its other growth projects.
Fundamental View
We expect investor interest in the shares to continue growing. The LH project offers a meaningful exposure to the upside in the uranium price in terms of both size and commercial arrangements.
A key upcoming catalyst for the shares is a Company update due in July. This update is expected to provide maiden guidance for the LH project for FY25 operational parameters. In turn, this is expected provide further clarity on the expected ramp-up in both cashflow and EBITDA from FY25 onwards.
Charting View
Looking at the monthly chart, this upside break from a very long base (circled), is only the start of the move so there is still the possibility of significant upside during the year. Any dips remain a buying opportunity.
Michael Gable is managing director of Fairmont Equities.
Current share prices available here.
You can learn more about technical analysis in this article.
An 8-week FREE TRIAL to The Dynamic Investor can be found HERE.
Would you like us to call you when we have a great idea? Check out our services.
Disclaimer: The information in this article is general advice only. Read our full disclaimer HERE.
Like this article? Share it now on Facebook and Twitter!