Paladin hits pay dirt

After several years of struggling to reach a profit, Paladin Energy (ASX: PDN) may have found the solution for future success.

Paladin is a uranium production and exploration company with projects currently in Australia, Canada, and Africa. The Langer Heinrich Mine in Namibia is its flagship project. Paladin aims to establish a global footprint underpinned by significant uranium production to meet the growing demand for nuclear fuel. It seeks progressive development of its uranium resources.

Like the three major Australian-owned uranium producers, Rio Tinto (ASX: RIO); Energy Resources of Australia (ASX: ERA) and BHP Billiton (ASX: BHP), Paladin has been producing uranium for peaceful power generation for many years. Energy Resources, which mines the Ranger Deposit in the Northern Territory, is mainly owned by Rio, which also has a majority stake in the Rossing mine in Namibia. BHP mines uranium as a by-product of operations at Olympic Dam, South Australia.

Paladin confirmed recently that it had completed a sale of 25% of the Langer Heinrich mine in Namibia to China Uranium Corporation, a wholly owned subsidiary of China National Nuclear Corporation. The sale will generate US$190 million for Paladin, which has been facing severe balance sheet pressures on the back of weak uranium prices. Paladin managing director John Borshoff said he was “delighted” to complete the sale, which he said would “largely be applied to debt reduction”. The sale has not yet been approved by China’s National Development and Reform Commission, but Mr Borshoff said those approvals were expected by mid- year.

Let’s look at the mathematics to see what the deal means for each share’s value just for the Langer Heinrich Mine:

Number of shares currently held                  = 837.2 million shares ………A

Price paid for 25% of the mine                      = US$190 million

Times 4 to value 100% of the mine              = US$760 million

Equivalent in Australian currency               = A$904.4million ………………B

(based on the ANZ International money transfer sell rate of 1.19 to exchange U.S. to Australian currency.)

Dividing A by B gives the value of the mine  =  $1.08 per share.

Foolish takeaway

Based on the extrapolated price for the whole of the Langer Heinrich Mine, the value to an acquirer, such as China National Nuclear Corporation, is $1.08 per share. This is substantially more than what the shares are trading for at 56.5 cents, and does not take into account other assets, including the already operational mine, Kayelekera in Malawi, and substantial reserves in Australia.

It is unlikely the Australian government would allow over 50% of Paladin to be held overseas but these calculations indicate the value inherent in the stock. Furthermore, the deal should ensure that Paladin has the opportunity to be a significant supplier to China, which has more reactors being produced and planned than any other country.

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Motley Fool contributor Chris Koenig owns shares in Paladin. 

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