Radioactive Paladin


If there is a one way bet in the world economy, it is energy. Each year, China adds the equivalent of Britain’s entire annual energy supply and there is little sign of this slowing. So uranium should, as they say, be “part of the mix”. Which should mean that Paladin remains a nice little play. But then, of course, Fukushima happened, and the image of nuclear power took a big hit. But has it been overdone? Paladin has fallen from a peak of $5.50 to $3.15, a drop of over 40%. That’s quite a correction in a company in probably the best sector in the market. And just how much will demand for uranium fall? In China’s Five Year Plan, nuclear power is projected to grow by 40 gigawatts by 2015. That is only a fraction of the projected increase in coal use (260 gigawatts), but still sizeable.

Most of the attention tends to go on the spot price, but this is fairly irrelevant. Nuclear power is a very long term affair, and until the Japanese disaster, the concern was that there would not be enough uranium to feed the demand.

Brokers are generally following the bearish sentiment. Stock Resource has a hold recommendation “around $3.70” and adds this:

Global uranium stocks have experienced an across the board down- rating as a consequence.

The Fukushima Daiichi nuclear accident has changed the structure of the uranium market into the foreseeable future, resulting in a major de-rating of uranium companies.

Paladin has produced another mixed production performance during the March quarter, with significant improvement at the Kayelekera operation in Malawi (despite disruption to diesel supplies) being more than offset by weather related constraints at the Langer Heinrich operation in Namibia.

A negative take. Deutsche Bank in April had a hold and a 12 month price target of $3.50:

Although Paladin continues to under-deliver on production targets, we rate PDN a HOLD as the stock is trading within 10% of our A$3.50 price target. On the operational front, the 134Mlb reserve at Langer Heinrich should ensure that Stage III (5.2Mlbpa) mine life stretches beyond 20 years and will likely support a Stage IV expansion to 8.5Mlbpa, which we include in our base case assumptions. The Kayelekera operation is currently ramping up, although much slower than expected, and should hit design output in mid-2011. This operation should increase Paladin’s production (100% basis) from ~6Mlb in FY11 to approx. 7.7Mlb in FY12. The company’s growth profile remains one of the most aggressive in the uranium industry. The long-term outlook for uranium beyond 2015 is positive, in our view, despite the recent Japanese earthquake and its likely impact on global nuclear power growth in the near to medium term.

It is this last sentence that suggests the sell down of Paladin has been overdone. Yes, there are potential perils. Its net debt to equity is 44.3%. It is not expected to produce earnings until next financial year. There is the question of its exposure to African risk.

But it is trading well below brokers’ target price, the share price has fallen off a cliff and is in a sector in which demand is assured. For the patient investor, there may be a contrarian opportunity. Memories of Fukushima will, sadly, fade. But demand for power will not.


Stock Resource Equities Research

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  1. “Nuclear power is a very long term affair”


    To me the fundamentals point to a long-term upward trend in the price of U in the next 5 to 15 years. The market for physical U is driven by commercial trading and physical accumulation, not speculation. If physical demand is greater than supply
    prices must follow.

    Commercial trading and accumulation is things like nuclear plants securing supply. Construction of plants in China has been strong in the last few years. Additionally very recently Saudia Arabia commissioned the construction of four new plants to secure the long term energy needs. India is also looking to expand their nuclear base-load power, as evidenced by the fact they really want us to sell them some Uranium.

    When financing is secured for new plant construction, generally what happens (this is how i understand it) is the plant locks in some long term supply contracts for physical Uranium. The price of U in these LT supply contracts has been greater than the spot price and this demand supply dymnamic was propelling spot U upwards, until the incident in JPN which halted activites in the Uranium market across the globe and stopped plans for new plants in some countries.

    The problem with U equities is that they tend to move up faster and higher than what is happening in the underlying physical market, so i personally thought they ran too hard before the incident in JPN. The JPN incident saw a corection above and beyond what was needed imho, given the LONG TERM fundamentals point to a BULL mkt for Uranium

    When the underlying supply/demand dynamic returns and people realise the world still wants Uranium and the required supply isn’t there the equities will run again.

  2. The Fukushima accident will dwarf Chernobyl by a factor of ten. There are 3 reactors in meltdown right now and one other is not too far away.

    The Chernobyl plant in the Ukraine is currently encased in a concrete sarcophagus that needs 6 inches of new concrete added to its walls every year due to radiation fatigue. If this process continues for 30,000 years, the Chernobyl sarcophagus will be the size of Luxemburg.

    Uranium powered plants are not the answer. After 40 years of operation the metal casing around the reactor fatigues due to heat stresses and needs to be replaced. There are grave concerns in the US whose aging plants are beginning to show these signs of fatigue. The ROI on nuclear plants from what I’ve been told is negative – even after 40 years. Not only are these plants not cost effective, but also highly dangerous. Furthermore, what do we do with the spent fuel rods?

    Japanese industries in the north are currently experiencing rolling brownouts disrupting industries. This has impacted Japanese exports which will have a flow-on effect in Australian exports to its second largest customer.

    Here’s a couple of links that may help, but understate the problem:

    Could Fukushima be the trigger that may send world markets into freefall when the true extent of this tragedy is realised?

    • I calculate 6 inches a year for 30,000 years as a dome roughly 9km in diameter. Google maps seems to say that Luxemburg’s narrowest point is about 50km across so you might want to check your facts there. Also it’s kind of silly to extrapolate like that over 30,000 years anyway – I’m sure materials science will have produced a better solution by then.

      I think the major point you’re missing is the intrinsic value that national governments place on not just the energy security that nuclear offers, but also the military security.

      Most major countries would be willing to endure a lot to ensure cheap and reliable energy for their economies. The added benefit of having a large number of experienced nuclear engineers in the country and a viable nuclear industry that could be quickly militarised probably makes it easier to sleep at night also.

      • also makes it cheaper to buy almost brand new Los Angeles class nuclear submarines off the USN instead of wasting tens of billions building them here to buy votes and placate a misinformed public.

        Not that I’m cynical about Defence Department procurement processes or anything…and they did c%ck up the LST purchases. and the Kaman Seasprites….and.and…and… 😀

        • OT perhaps, but you have a good point. Why on earth are we even considering designing and building diesel power subs from scratch when there are many great and proven ‘off the shelf’ options available for much less cost?? Seems like another crazy way to blow a lot of taxpayers dollars.

          Personally I would rather a Maglev train between Melb, Canb and Syd, but hey…

      • Oops, I meant to type 6 feet.

        Adam, I would hope science will come up with a solution to neutralise radiation in the near future.

        Security is indeed an added cost, but the real cost is in its construction.

    • I’m all for U but this quote rattles me a bit…

      From wiki “The half-life of uranium-238 is about 4.47 billion years and that of uranium-235 is 704 million years”

      We couldn’t wait that out. 🙂

  3. I’m no expert Nod, but is it fair to compare reactors designed 40 years ago with those available today? Isn’t that like comparing a Cadillac Eldorado convertible with a Hyundai Accent? I would have thought today’s reactors would be a lot safer and produce less radioactive by products, as well as operate more cost effectively.

    Would that be a fair counter-point?

    • Q, I have an interst in these sort of things due to my engineering background, but I too am not an expert.

      From what I’ve read a safer and cheaper option would be to use Thorium instead of uranium.

      In terms of improvements in the metal housing around the reactor – not much has progressed in the past 40 years. In terms of monitoring and flashy lights – absolutely.

      When designing nuclear reactors, one of the key challenges is finding materials that can withstand the extreme environment. Materials are constantly bombarded with radiation, extremes in temperature, physical stress and corrosive conditions. Exposure to high radiation alone causes significant damage on a nanoscale level. Materials over time become brittle, swell and harden and can lead to catastrophic failure in the reactor.

      Just think of the fuel rods (all combined) making one giant kettle element which is used to boil water within a housing and in a closed loop system. This super heated water heats up a separate chamber which also contains water creating steam to drive a turbine.

      BTW, I reckon a Cadillac Eldorado convertible will outlast a Hyundai Accent any day and has far more character. 🙂

        • Real alternative energy – now you’re talking!

          I wonder how long it will take before the oil companies will be helpless to stop it from manifesting?

    • Another counter point. Remember that Nuclear power is one of the few real alternatives at the moment to fossil fuel for base load power.

      Consider the land mass that is being rendered uninhabitable by the digging up of coal for coal fired power plants. Consider also the land mass surrounding all the Coal fired power plants in the world that many people (including I am guessing yourself) would consider uninhabitable due to increased risk of lung cancer.

      I’m not saying nuclear power is the answer and that there are no risks, but all too often in the nuclear power “debate” the risk / reward equation is forgotten.

      Before crowing about how terrible nuclear power is a baseline of the following facts would be useful for Nuclear power vs. alternatives:

      1. deaths per kwh generated
      2. contaminated land per kwh generated
      3. emmissions per kwh generated

      how can you confidently say anything either way without these facts, or at least estimates of these figures?

      • Given that estimates of deaths from Chernobyl range from 8 to 400,000, no 1. will probably be difficult to ascertain for nuclear. Also impossible for coal as it’s too hard to disentangle various causes of death.

        The fact that you can’t insure privately for damages caused by a failed nuclear plant indicate that nuclear is probably uneconomic at present.

        • I think the uninsurability argument is a long bow. Just because no company is prepared to price a risk and it reverts to the government doesn’t mean the true price is infinite. By your argument we should close Australian banks.

          Nuclear power risk certainly has a much fatter tail than coal. Unfortunately (fotunately?) this means it lends it self to hysterical scare mongering much more easily than coal.

          • “By your argument we should close Australian Banks”

            My argument is that no insurer will cover physical damage caused by a nuclear plant failure.

            A failing bank will not cause physical damage.

            You seem to be referring to the government’s insurance of depositors, which is another taxpayer subsidy of private companies that should be withdrawn.

            Banks have in the past, and can in the future, operate perfectly well without government subsidies. Nuclear power plants can’t.

    • True, and the reactor in JPN that went ‘boom’ first was planned to be decommissioned a week or so after the earthquake.

      Talk about bad timing.

  4. Whatever happened to SynRoc? I quite agree that the return on investment over 20,000 years is, well, a little problematic. The best argument against nuclear power is the financial one (not that this relates to Paladin’s share price especially).

  5. i have read that the Japanese are now considering running the back up generators for the cooling systems off their mini nuke series the Toshiba S4, which generate enough electricity to power 10,000 homes,these are considerably cheaper than a full size nuke power station, however the issue is that they use sodium which is highly combustible. I think nuke power shouldn’t be written off.

  6. The fact that it is impossible to buy private insurance to cover damages caused by a failed nuclear power plant indicates that nuclear power is probably uneconomic.

    All nuclear power is subsidised by governments through their implicit provision of this cover. Without this huge hidden subsidy there would be no nuclear power industry.

    Coal has externalities that are steady and quantifiable. It is possible for those externalities to be incorporated into the price, and hopefully one day we will see a global carbon price to accomplish just this.

    Nuclear has externalities that are sporadic, unpredictable and potentially catastrophic. It is not clear whether these can be accurately priced, or whether that cost would ever be bearable. The fact that private insurance won’t cover for nuclear catastrophes indicates that nuclear externalities cannot be priced, at least at present.

    Technology improvements may change this, but at this point they have failed to do so.

  7. To get back a little to the original point.

    there is a lot of rubbish being talked about neuclear power – some of it in the comments above – but the odds are that while the current designs are uranium dependent, the next level are moving away from uranium to Thorium. This addresses many of the saftey points and is also a more widely available fuel …

  8. As an investor I put Paladin in the too hard basket. Yes it could make a health recovery but why bother when there are plenty of less “toxic” stocks to invest in.

  9. Nice summary. Thorium sounds interesting. Time to put a big short on Paladin for me.

  10. Yes and don’t forget one of the wealthiest men in the world Bill Gates is investing into future nuclear reactor systems and designs.

    Generation 4 reactors can actually consume spent fuel rods and decommissioned warheads and reduce the need to mine for new uranium. However these reactors are only at design phase.

    As for nuclear fusion, it’s still very far away and cold fusion is for people who watch too many SciFi movies.

    It doesn’t help when the government is cutting funding to R&D, I mean look at America, Obama promised to get a man to the moon again. That went down the toilet when saving failed industries become more important.

    XKCD has an excellent portray of political foresight in America. Though it might be a bit esoteric.