Paladin Energy Ltd (ASX:PDN) is a uranium producer with assets in Namibia, Malawi, Australia and Canada.
Perth-broker Hartleys has assigned a Speculative Buy rating to the stock, with a A$0.35 12-month price target.
Paladin shares last traded at A$0.17, providing significant potential upside.
The following is an extract from the report.
Still the best way to play uranium
The market remains sceptical that Paladin Energy Limited (PDN) will be able to consummate the announced sale of a further 24% interest in the Langer Heinrich uranium mine (LHM).
Given the buyer is the same Chinese counterparty that purchased a 25% interest in LHM in 2014, it would be reasonable to assume a shorter due diligence and approval process this time around.
In addition, we think it is highly unlikely that this transaction will require FIRB approval because the asset is in Namibia and sits in a Mauritian subsidiary.
PDN continues to guide that settlement of the sale will happen before the end of 2016. We maintain our Speculative Buy recommendation on PDN with a 12-month target price of 35cps.
Previous sale of LHM – timing
PDN believe the sale of a 24% interest in LHM will be complete before the end of CY16.
Given the sale is to the same owner as the previous sale, and therefore will require a less onerous due diligence process, we think it is reasonable to assume that time to settlement will be less than in 2014.
The previous sale of a 25% interest in LHM took approximately 6 months to complete.
The sale to China Uranium Corporation Limited, a wholly owned subsidiary of China National Nuclear Corporation (CNNC), was announced to the market on the 20th of January 2014 and settled on the 23rd of July 2014.
Sale of LHM does not need FIRB approval
The market may have concerns over PDN requiring FIRB approval to dispose of a further 24% interest in LHM.
The recent decision by the Treasurer to make a preliminary ruling to block the sale of Ausgrid to either Hong Kong listed Cheung Kong Infrastructure or Chinese owned State-Grid may have spooked the market.
It is worth noting that the LHM is owned by a Mauritian domiciled company which is in turn owned 75% by PDN and 25% by CNNC.
At the time of the previous sale the LHM asset was held in an Australian company. The Company stands by previously guidance that only Chinese government approval is required (not FIRB).
Maintain Speculative Buy
Our previous valuation of PDN’s 75% share of LHM was US$884m. We therefore value a 24% stake in LHM at US$283m, less than the transaction value of US$200m.
Assuming the transaction completes, our valuation would fall from A$0.40 cps to A$0.35 cps Importantly, completing the sale to CNNC would reduce net debt from US$341m at the end of June to US$117m.
At the core of our investment thesis for PDN was the ability to deleverage the balance sheet.
We have made minor changes to our earnings forecasts and will review our forecasts after PDN reports FY16 results on the 24th of August.
We maintain our 12-month target price of 35cps and valuation of 40cps. We use consensus uranium price forecasts to value PDN which rise to US$59/lb at the end of 2019.
The key risk to our recommendation remains a delay in completing the sale of the 24% interest in LHM meaning the US$212m convertible bond that comes due in March 2017 will need to be refinanced by alternative means.
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