During some troubles in Australia's uranium sector at the end of last year, I wrote an article questioning whether 2014 was the year to invest in uranium.
The answer to that question has been a resounding no, with Australia's listed uranium companies all remaining stagnant or losing value so far this year.
The largest and most promising of them, Paladin Energy Ltd (ASX: PDN) today announced a capital raising to cover the company's bond obligations and leave it fully funded until 'at least June 2016'.
Aiming to raise a total of A$205 million, the issue consists of two parts:
- An issue of around 145 million shares to Singaporean private equity firm HOPU Clean Energy at $0.42 each
- A further 1-for-2 underwritten entitlement aiming to raise another $144 million from existing investors at $0.26 a share
There are several very important points readers will want to consider before making a purchase.
First is the low offer price, which is appealing in the context of higher uranium spot prices and forecast rising demand from shrinking supply, increasing Chinese nuclear power and the restart of Japan's nuclear power program.
Second is the huge amount of shareholder dilution to take place; a successful raising will see an extra 600+ million shares added to the current 965m – an increase of more than 60% of the shares on issue.
Needless to say, this is going to wreak havoc on earnings per share predictions and I fully expect the negative effects of the dilution to significantly outweigh the benefits of a stronger balance sheet and improving uranium markets.
Third, a weaker AUD against the USD is favourable for Paladin, but the improvement in sales price is unlikely to make a major difference to financial performance in the context of a 60% dilution in earnings per share.
Fourth, are the obvious risks associated with the statement that the company will be fully funded until 'at least June 2016'. Thankfully Paladin's management has used conservative assumptions, but even so there are obvious risks with assuming the company will a) meet its production forecasts and costs guidance and b) that a spot price for uranium of US$38/lb will persist.
Fifth, is the curious nature of HOPU's investment at a substantial premium to market prices. I think this is an ill-advised decision, particularly considering Paladin shares are likely to fall to the issue price of $0.26 when trading resumes. It does however, make the company eligible for the Entitlement Offer and will increase the cash benefits for Paladin and 'dollar cost average' the price for HOPU.
The addition of Mr Wendong Zhang to Paladin's board may well have a significant positive effect on Paladin's interactions with Chinese industry, but it's not a game changer powerful enough to overcome the pressure of wider market forces.
Sixth, Paladin does look likely to maintain profitability once its target C1 (cash costs, exclusive of admin and royalties) costs of A$20/lb are reached at its flagship mine. Combining this with AU-US currency effects makes the company look pretty insulated from failure in the foreseeable future.
Finally, seventh, there are substantial, highly relevant risks to assuming that the uranium market is improving. Fellow contributor turned Motley Fool analyst Claude Walker wrote a comprehensive article on uranium earlier this year which I highly recommend to all readers considering Paladin's offer.
Overall, there are several positives and negatives to Paladin's proposal, and in this case I believe that the latter outweighs the former.
In fact I will be absolutely gobsmacked if Paladin can increase earnings over the next three years to match the level of shareholder dilution that will occur.
