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Writing on the wall for Paladin Energy Ltd

Uranium miner Paladin Energy Ltd (ASX: PDN) faces the prospect of being unable to repay US$212 million due in April 2017 and being forced into liquidation.

The troubled company has seen its share price slump more than 65% this year alone. The planned sale of 24% of its Langer Heinrich Mine (LHM) to CNNC Overseas Uranium Holdings (COUH) for US$175 million appears unlikely to complete before the end of 2016. Now Paladin has been forced to consider other ‘contingencies’ to repay the 2017 convertible bonds.

Not only that but Paladin also needs to raise working capital as it struggles to generate positive cash flow with uranium prices trading under US$20 per pound – the lowest prices in more than 12 years. As Paladin admits, that’s a level that no producer in the world can sustainably break even, and most producers are experiencing negative cash flows.

Uranium price chart

Source: UxC.com

 

That’s a long way away from Paladin’s all-in cash expenditure of extracting uranium of US$38.75 per pound (lb). Even the company’s C1 cash costs of US$25.88/lb are well above the spot price of uranium. Paladin is forecasting all-in costs of around US$30/lb for the 2017 financial year, but it’s clear that even at that level, the company is going backwards.

Energy Resources of Australia Limited (ASX: ERA), majority owned by Rio Tinto Limited (ASX: RIO) faces a similar prospect to Paladin and is likely to shut up shop in 2021, once it has finished processing stockpiles at its Ranger uranium mine.

The problem for uranium miners around the world is that since the Fukushima nuclear incident in 2011, uranium prices have steadily fallen from above US$60/lb to its current price under US$20/lb.

That’s despite reports that China intends to add an expected 30mkW of new nuclear capacity. Japan has also seen another two reactors reaching post-Fukushima safety rules and should be back up and running – although this is not a quick process.

The problem existing nuclear plants face is that they can’t compete with cheap natural gas-powered electricity generators – and gas prices are very low. Alternative green energy sources also receive more funding than nuclear, making them even more attractive.

Paladin faces the prospect of sinking into administration unless it can find a white knight willing to take a minority stake in its mine – or make an outright bid for the whole company.

That appears highly unlikely.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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