##{"id":59964,"date":"2012-05-18T10:59:04","date_gmt":"2012-05-18T00:59:04","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/05\/18\/paladin-turning-the-corner\/"},"modified":"2012-05-18T10:59:04","modified_gmt":"2012-05-18T00:59:04","slug":"paladin-turning-the-corner","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/05\/18\/paladin-turning-the-corner\/","title":{"rendered":"Paladin Turning The Corner"},"content":{"rendered":"

\n\t – Paladin's share price weak in recent months
\n\t – Concerns over key financial measures are contributing factor
\n\t – Some signs of improvement in financials emerging
\n\t – Value on offer if cash flows and uranium market sentiment improve<\/strong>
\n\t <\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tBalance sheet and cash flow concerns have contributed to uranium play Paladin Energy's ((PDN<\/span>)) share price falling by more than 30% in recent months, but there are signs the company is starting to generate some improvement in these key financials.<\/p>\n

\n\tIn JP Morgan's view, while cash flow were again negative for Paladin in the March quarter there were some positive signs with respect to the ability to generate positive cash flow in coming periods. These include cost reductions at both the Kayelekera<\/span> project and in administration, an upcoming moderation in capex<\/span> and the fact cash commitments for finished goods have all but stopped.<\/p>\n

\n\tThe improvement in cash flows won't be immediate, as JP Morgan continues to forecast negative cash flow in the June quarter given higher receivables, but by the September quarter Paladin should be back into the black from a cash flow perspective in the broker's view. BA Merrill Lynch is a little more conservative with its timing, suggesting it may be the fourth quarter of 2012 when cash flows turn positive.<\/p>\n

\n\tThis is important as it suggests to JP Morgan that Paladin won't need to raise equity over the next 12 months. On the broker's numbers, Paladin currently has around US$171 million in cash available and over the next 12 months a balance of a minimum of US$100 million should be maintained. There could also be some asset sales during the period, which would further strengthen Paladin's balance sheet.<\/p>\n

\n\tUBS agrees with JP Morgan's assessment, estimating at the current run rate Paladin will maintain a cash position good enough to just cover its upcoming refinancing commitments. <\/p>\n

\n\tThe quarterly update from Paladin indicated cash costs are trending higher, causing the likes of UBS to cut earnings estimates for the company. but BA-ML expects this will be temporary as costs should tick back down in coming periods as cost optimisation<\/span> processes are executed.<\/p>\n

\n\tJP Morgan similarly trimmed its earnings estimates, in part to account for the one-year delay to the start-up of the stage four expansion at Langer<\/span> Heinrich. First production from the expansion is now expected in the September quarter of 2014.<\/p>\n

\n\tLooking forward, UBS suggests it will be cash flows and Paladin's balance sheet and not earnings that will drive share price performance over the coming year. This largely reflects the fact investors have been nervous with respect to Paladin's ability to meet refinancing commitments, especially given a history of disappointing with respect to the meeting of production targets.<\/p>\n

\n\tAs well, JP Morgan suggests part of the decline in the Paladin share price of late can be attributed to general negative sentiment towards uranium. This sentiment is somewhat misplaced in the broker's view, as the outlook for uranium appears stronger than is being priced in at present.<\/p>\n

\n\tIn support of this argument, JP Morgan notes incentive prices for new production in uranium is around 60% above the current spot price and cost curve support at US$50 per pound limits downside price risk. As well, the market's deficit is growing as Russian secondary sources of material are coming off the market.<\/p>\n

\n\tGiven this more positive view on the outlook for uranium, and to reflect Paladin's strong leverage to spot uranium prices, JP Morgan retains a n Overweight rating on the stock. BA-ML shares a positive view, suggesting Paladin's outlook now is far brighter than was the case 12 months ago given the expectation of improving costs and cash flows and price support from a tight supply environment.<\/p>\n

\n\tThe more cautious argument from UBS and others is cash flows for Paladin, while likely to improve, continue to look tight for the next 12-15 months. Non-core asset sales could alleviate this to some extent and if debt was reduced UBS sees scope for the stock to re-rate closer to valuation. UBS has a valuation on Paladin of $2.43 on a discounted cash flow basis. <\/p>\n

\n\tOverall, the FNArena<\/span> database shows Paladin is rated as Buy three times and Hold four times, with a consensus price target of $1.96. Targets range from UBS at $1.25 to JP Morgan at $2.75.<\/p>\n

\n\tShares in Paladin today are weaker in a down market and as at 10.40am the stock was 7c<\/span> lower at $1.205. This compares to a trading range over the past year of $1.11 to $3.33, the current share price implying upside of more than 50% relative to the consensus price target in the database.<\/p>\n

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