Clock - Uranium Supply Crunch and Critical ... - Andrew Johns

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Canada Research | Page 46 of 87UraniumExhibit 60: Quarterly Production and Costs at Kayelekera and LangerProduction (lbs U3O8)2,250,0002,000,0001,750,0001,500,0001,250,0001,000,000750,000500,000250,0000706050403020100Cost of Sales (US$/lb)Kayelekera Langer Heinrich Implied Cost of Sales (US$/lb)Source: Raymond James Ltd., Paladin Energy; Note: F4Q12 costs are RJL EstimatedCosts Remain High. With nameplate production levels nearly reached, focus hasswitched to reducing costs at the mines and on a corporate level. At Kayelekera, cashcosts were US$47/lb in F3Q12A; Paladin aimed to reduce this level to the ‘low-US$40s’by mid-2012 (i.e., F4Q12E) and optimize below US$40/lb with further throughputincreases, a recently restructured mining contract, and installation of a steam turbine byyear-end 2013E. The May 2012 decision by Malawi’s government to devalue the kwacha33% and un-peg it from the US dollar should also put downward pressure on locallydenominatedcosts at Kayelekera, particularly if the currency continues to drop relativeto USD (Paladin expects a US$5 mln/year benefit). At Langer, cash costs were US$30/lbin F3Q12A and, with fixed costs representing approximately half of total costs, thecompany expects a return to the mid-US$20s (i.e., Stage II rates; FY2010A costs wereUS$26/lb) as throughputs pick-up.We tend to be conservative on the speed with which Paladin will be able to lower cashcosts; we model US$37/lb cash costs at Kayelekera in FY2013E, dropping to US$32/lb inthe long-term, while at Langer, we see US$28/lb in FY2013E and reaching US$24/lb inFY2015E.On the corporate level, amongst other cuts, Paladin lowered its global exploration budgetby US$5 mln to US$16 mln for FY2012E and plans to maintain that level for FY2013E.Debt-Laden Balance Sheet. Following a US$274 mln bond issue, we estimate Paladinhas ~US$190 mln in working capital (~US$175 mln in cash). At March 30, 2012, totalinventories were valued at US$313.8 mln. We estimate the company currently hasUS$936 mln in outstanding debt, including:• US$300 mln in November 2010 3.6% convertible bonds (CBs), maturing November2015 (convertible at US$5.61/share);• ~US$134 mln remaining in March 2008 5.0% CBs, maturing March 2013 (convertibleat US$6.52/share);• US$274 mln in May 2012 6.0% CBs, maturing April 2017 (convertible atUS$2.19/share);• US$129.7 mln drawn under the Langer Stage III project facility expiring June 2017;• US$98 mln under the Kayelekera credit facility, expiring March 2015.Our annual interest burden for the next three financial years is ~US$40 mln. Wetreat all these facilities as ‘debt’ in our model, save for the May 2012 bonds(given a reasonable conversion price).Debt Outlook. Paladin plans to settle March 2008 bonds (due March 2013) using theexisting balance sheet and internal cash flow, with the difference made up by divestingcertain non-core assets as outlined below. We believe the recent US$274 mln bond saleprovides sufficient cash to avoid a fire sale before March 2013. Our concern centers on aRaymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Uranium Canada Research | Page 47 of 87total of US$398 mln in debt maturing CY2015E and capital required for Michelin. Basedon our current estimates of future cash flows, we believe the company will issueadditional bonds, as outlined in the table below (we do not include these notional bondsor their interest payments in our NAV).Exhibit 61: RJL Debt Assumptions for PaladinLong-term Debt Instrument Currently Currently Assumed Estimated Treatment inUS$ mln Available Outstanding Interest Maturity RJL NAV EstimateConvertible Bonds (issued Mar-'08; 'current' per maturity) 325 134 5.0% Mar-13 (FY) DebtConvertible Bonds (issued Nov-'10) 300 300 3.6% Nov-15 (FY) DebtConvertible Bonds (issued May-'12) 274 274 6.0% Apr-17 (FY) EquityKayalekera Credit Facility 167 98 5.0% Jun-15 (FY) DebtLanger Stage III Credit Facility 141 130 4.1% Jun-17 (FY) DebtNotional (to settle Nov-'10 bonds; issued C3Q15E) 150 0 6.0% Aug-20 (FY) ExcludedNotional (Michelin funding; issued FY'18E) 350 0 6.0% Dec-22 (FY) ExcludedCurrent LT Debt 1,207 936Total Debt (incl. RJL notional) 1,707 936Source: Raymond James Ltd., Paladin EnergyAsset Sale(s) Looming. With its F4Q11 results, Paladin announced it was looking atselling partial stakes in some non-producing projects to boost liquidity. We havesubsequently learned that as many as three deals are expected within the next “three orfour months” (Bloomberg, June 22, 2012) and that at least some Australian assets are inplay, while Aurora is unlikely to be monetized in the near-term. Australia comprises 24%of the project portion of our NAV (vs. Namibia at 48%, Malawi at 18%, and Canada at8%). While we are cautious on the amount of cash that Paladin may be able toimmediately realize (with current spot prices and market sentiment), we believe theaddition of new strategic partners could accelerate the timeline to their development.Potential CatalystsPotential milestones for the company this calendar year include:• Start-up of in-fill and extension drilling at Aurora, Canada in 3Q12;• F4Q12 financial results at the end of August 2012 – we will be looking for improvedcash costs at Langer and Kayelekera;• Update on minority interest farm-outs of select non-producing assets (likelyAustralia) in 4Q12;• Results from Stage IV feasibility by year-end (or early 2013).The Quarter AheadPaladin released operational results for F4Q12E on July 13, 2012. Total production was2.05 Mlbs on the quarter (a record) and 6.89 Mlbs on the year, slightly missing guidanceof 6.96 Mlbs. Langer bounced back from some earlier Stage III commissioning issues,while Kayelekera rebounded from a seven-day strike in May to reach nameplate levelsin June (266 klbs). Quarterly sales were reported in-line with post-F3Q12 guidance at2.24 Mlbs at US$56/lb for revenues of US$125.5 mln – also a record for the company.We expect these strong sales, along with Paladin’s on-going cost optimization program,to underpin a further improvement in costs, particularly at Langer, where a return tosub-US$30/lb cash costs is likely. On the quarter, we project net earnings of -US$6.0 mlnor -US$0.01/share. We expect financial results to be released by the end of August2012.Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
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