Uranium price slumps, Paladin Energy in trouble

Chain Reaction #119, Nov 2013, www.foe.org.au/chain-reaction/editions/119

The spot uranium price fell to US$34.50 / lb U3O8 in late July, a price not seen since December 2005 during the upswing of a spectacular price bubble which peaked in June 2007 at US$138 / lb. The 12% price slump in July was the biggest monthly loss since March 2011. Since September 2, the spot price has been still lower, at US$34.00. Those prices are just over half the spot price of US$66.50 / lb on 11 March 2011, the first day of the triple-disaster in north-east Japan.

The long-term contract price has been reasonably stable in recent months at US$57 / lb. At that price, the value of annual global uranium requirements for power reactors is around US$10 billion.

FNArena wrote on September 17: "The issue of low uranium prices discouraging new supply is not just one of the spot price itself but one of the marginal cost of new supply. Producers suggested to Ux that the average marginal cost of production of operating mines is around where the spot price is now, but the marginal cost of developing a new mine is more like US$65-70/lb. From the nuclear energy prospective, respondents rated the most significant demand-side influences as, in descending order of influence, Japanese reactor restarts, Chinese reactor build, the premature shutdown of older US reactors and the emergence of newcomer countries to nuclear energy (about equal), and the upcoming French nuclear licence renewals."

Raymond James analyst David Sadowski expects an average spot price of $40 per pound this year, $52 in 2014, and $70 in both 2015 and 2016. Michael Angwin from the Australian Uranium Association expects low prices until about 2017/18, and a nasdaq.com article states that "the road to recovery for this battered commodity will be a long haul". Rob Atkinson, outgoing CEO of Energy Resources of Australia, says the uranium spot price is woeful, making it extremely difficult to make the case for developing a new mine, and the market will remain difficult for at least another two years.

The industry hopes that reactor restarts in Japan will improve the situation − but restarts will be slow and in many cases strongly contested. The industry hopes that new build in China will improve the situation − but pre-Fukushima nuclear growth projections have been sharply reduced and China now plans to approve a "small number" of new reactors projects each year.

The industry hopes that the end of the US-Russian 'Megatons to Megawatts' program − downblending highly enriched uranium from weapons programs for use in power reactors − will improve the situation. But mine production has met an increasing proportion of demand in recent years − 78% in 2009 and 2010, 85% in 2011 and 86% in 2012 (the shortfall was around 10,000 tonnes of uranium in 2011 and 2012). This suggests that the end of the Megatons to Megawatts program will have a moderate impact. There is scope for weapons material to continue to supply the civil market regardless of future bilateral US-Russian agreements. Ux Consulting noted last year that reduction in demand stemming from the Fukushima accident "essentially negates much of the reduction in supply resulting from the end of the US-Russia HEU deal". Utilities have built up uranium stockpiles in recent years as a result of low uranium prices (the World Nuclear Association estimated commercial inventories totalling 145,000 tonnes of uranium in 2010 − enough to supply global demand for two years).

Jeb Handwerger, described by Uranium Investing News as a "uranium bull and stock guru", says that "Smart money recognizes the bottom." But smart money is heading for the door. At the Paydirt Uranium Conference in February 2012 in Australia, it was clear many companies were looking elsewhere, prompting an industry veteran to quip that copper and gold had never before enjoyed so much airtime at a uranium conference. A year later, attendance was so poor that the conference was reduced from two days to one day and shifted from the Hilton Hotel to a less opulent venue.

Uranium gloom and doom is also being felt in the enrichment sector. Urenco posted a 45% drop in revenue for the first half of 2013 and a 31% fall in earnings (compared to the first half of 2012). Revenue fell to 384 million euros and earnings dropped to 319 million euros. Urenco said it expects a "substantial rebalance" during the second half of the year due to continued capacity expansion in its US facility and the construction of a new unit in the UK. The UK government owns one third of Urenco, as does the Dutch government, with the final third held by German utilities E.On and RWE. All the owners have been looking to sell their stakes but have so far failed to secure a deal.

Paladin Energy

Australian-based Paladin Energy operates two uranium mines in Africa − Langer Heinrich in Namibia and Kayelekera in Malawi. CEO John Borshoff told a mining conference in Western Australia in July that the uranium industry faces a number of "major problems" such as the lack of greenfields development, dwindling investment capital and the sickly uranium price.

Borshoff said: "[T]he uranium industry is definitely in crisis, I believe, and is showing all the symptoms of a mid-term paralysis if this situation does not demonstrably change. How can there not be a problem when you have an effective moratorium with nearly all major companies making no commitment to greenfields development until the price gets about US$70 and it is believed it can stay above that level. And how can there not be a problem when you have a strong chance that some of the more expensive, smaller operations will be mothballed − putting more pressure on current production. ... Only at this price level [US$70/ lb] − and above − can sufficient capital for new products be raised and returns on investment be justified to finally give some risk reward to the shareholder. And this appears to be a long way away."

Borshoff said much of the blame lies with the uranium industry's customers, who he said had focused on the expediency of current cheap prices rather than the supply−demand gap forecast to open in coming years.

Shares in Paladin plummeted on August 5 after the company announced a heavily discounted A$88 million raising through the issuing of 125.6 million shares. The company's cash position dropped to A$78.1 million at June 30, down from A$112.9 million at the end of the previous quarter.

The news followed a decision by the company to scrap negotiations for the sale of its interest in Langer Heinrich. Langer Heinrich produced 5.3 million pounds out of the company's total output of 8.26 million pounds of U3O8 in the year to June 30. Borshoff said: "The current depressed uranium price has meant that it is unlikely that a price that appropriately reflects the strategic value of the asset will be achieved and accordingly proceeding at this time would be detrimental to long-term shareholder value."

Andrew Shearer, an analyst at PhillipCapital Ltd., said: "The decision to terminate the asset sale is contrary to the company's guidance that the process was continuing well and heading toward a conclusion."

Stockbroker RFC Ambrian said: "From a technical perspective, Paladin can be satisfied that it has achieved record sales but the fact remains that it has not had a profitable annual result since commencing operations. Our modelling forecasts continued negative cash flow and the company running out of cash in early 2014 and consequently [being] unable to service its substantial debt position. This was expected to be covered through the strategic sale of a minority interest in Langer Heinrich for cash."

The share offering bought the company some breathing space if nothing else. Paladin had about US$670 million of debt at the end of March 2013 according to data compiled by Bloomberg.

On August 30, Paladin Energy had more bad news, reporting a net loss of US$420.9 million for the 2013 financial year, more than double the previous year's loss of US$172.8 million and not far short of the company's record net loss of US$480.2 million in financial year 2009. Borshoff launched into another spray about the low uranium price, labelling it ''diabolical'', ''extremely depressed'' and ''of great concern''.

Borshoff would not rule out closing one of Paladin's two mines (most likely the Kayelekera mine in Malawi) as part of the company's efforts to cut costs. Analyst Andrew Shearer said the Kayelekera mine was unlikely to be profitable at present prices, but the decision was complex: ''They would have to weigh up the cost associated with putting it on care and maintenance and whether they have any contractual agreements in terms of uranium sales.''

As Paladin does not make enough profit at current uranium prices to meet its debt repayments, the company will once again try to sell down its stake in its Namibian mine. Extra funding is needed to repay US$300 million in convertible notes that mature in 2015.

As of late August, Paladin's share price was A$0.56, barely one-tenth the figure of A$5 the day before the Fukushima disaster.

According to Fairfax journalist Peter Ker, Paladin's "parlous state has some whispering about executive renewal."

Paladin said on October 2 that it would cut more jobs and further reduce spending. Executive pay was reduced in 2012/13, with Borshoff's remuneration slashed to A$2.5 million p.a. − less than half the amount he received in the previous year. Costs at the Kayelekera mine will be cut by 22% over the next two financial years and costs at Langer Heinrich will be reduced by 15%.

Reprinted from WISE/NIRS Nuclear Monitor #768, 26 September 2013

www.wiseinternational.org/nuclear-monitors

A referenced version of this article is available from monitor@wiseinternational.org