Paladin Energy

Strong financial position:Paladin Energy Ltd (ASX: PDN) is in the business of producing uranium. In FY2018, the company garnered total revenues amounting to US$72.9 which implies the fall of 24% on the YoY (year-over-year) basis. The entire revenue in the mentioned year was collected from its Namibia segment. During the same period, the company made profit amounting to $392.7 million primarily helped by the other income of $486.2 million. The company recorded a gain on the debt extinguishment of $483.7 million. However, this was a non-recurring event.

In FY2018, Paladin produced uranium of 2.739Mlb which reflects the decline of 34% on the YoY basis. This substantial decrease was on the back of fall in the grade as well as processed ore. During the same period, the company’s financial standing tumbled primarily because of the downward momentum in the spot price of uranium and adverse operating performance of Langer Heinrich mine.

On the other hand, Paladin Energy ended the restructuring of its capital as well as executed its arrangement deed which substantially improved the financial standing of the company. On YoY basis, the company’s cash and cash equivalents experienced a rise of 273% to US$39.1 million as of June 30, 2018. During the same time frame, its net debt witnessed a huge fall of 88% and stood at US$80.7 million as of June 30, 2018.

As of June 30, 2018, PDN’s gearing ratio stood at 43% reflecting the considerable decline. As of June 30, 2017, it was 289%. Further, the top management of Paladin Energy expects that moving forward, the uranium market might witness fundamental restructuring. The nuclear energy utilization growth is currently aimed towards Middle Eastern as well as Asian regions. Notably, Russia, India as well as China can be regarded as the leaders when viewed from lesser emissions, reliability as well as stability view-points.

In FY2018, PDN witnessed net cash outflow of US$44.8 million from operations which implies the decline on YoY basis. In FY2017, net cash outflow was US$51.9 million. The company’s payments to employees as well as suppliers fell from US$132.8 million in FY2017 to US$112.1 million in FY2018. Its net cash outflow from the investments also fell to US$3.3 million in FY2018 from US$6.2 million a year ago.

However, the company’s financing activities improved substantially. The cash inflow from these activities stood at US$76.9 million in FY2018 while in the prior year it was US$9.5 million. This increase was on the back of proceeds with respect to secured revolving credit facility as well as senior secured notes. However, no repayments of borrowings were also the contributor.

Over the past six months, Paladin Energy has managed to deliver the return of 21.21%. Despite the fact that market for the uranium witnessed the positive impacts in the final quarter of FY2018, the incentive costs of the new uranium production are expected to remain higher than the forward price drivers which might restrict new production. According to the company’s management, in FY2019, the broader market would support the uranium developers as well as suppliers. Based on foregoing, we maintain our “Speculative Buy” recommendation on the stock at the current market price of $0.200.
 

Energy Resources of Australia

Decent Outlook: Energy Resources of Australia (ASX: ERA) is in the business of mining, processing as well as selling of the uranium oxide. The company’s top line number stood at $160 million in the 1H 2018 on the back of elevated average realized sales price. However, this positive impact got partially offset by lower volumes coupled with the negative impacts of the fluctuations related to the exchange rates between Australian dollar as well as the United States dollar. In 1H 2018, Energy Resources of Australia recorded the cash outflow of $9 million due to decline in the sales proceeds as well as a rise in the rehabilitation activities. However, in the same period of the prior year, there was a positive cash flow of $19 million with respect to the operations. Coming to the liquidity position of ERA at June 30, 2018, the company had cash at bank amounting to $385 million while as of December 31, 2017 the amount was $395 million.

Apart from the bank balance, the company had $74 million with Commonwealth Government in the form of cash. In 1H 2018, the average realized sales price amounted to US$47.56 per pound in regard to the uranium oxide. In the same period of the prior year, it was US$35.09 per pound. The rise in the average realized sales price was because there were no spot sales in 1H 2018. However, ongoing contract portfolio’s structure was also the contributor. In 1H 2018, the Australian dollar appreciated against the US dollar on the YoY basis which negatively impacted the revenues of ERA. This was because the sales were USD denominated.

In 2H 2018, the market surplus might witness a fall. However, China is expected to provide some stability in the market. The demand from China might offset the negative impacts witnessed because Asian countries (including China) are on track with regards to the nuclear power programs.
In 2018, the company views that the production of the uranium would be between 1600 tonnes-2000 tonnes.

In the meantime, the share price has fallen 40% in the past six months as at September 19, 2018 and traded at 52-week lower level of $0.355. Based on decent outlook, we maintain our “Speculative Buy” recommendation on the stock at the current market price of $$0.370.
 

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