Financing completed for second uranium project

Paladin Energy has just announced completion of debt financing for its second uranium development, its Kayelekera project in Malawi. This follows on from very strong operational news that indicates that the company's Langer Heinrich operation is now firmly on track with regard to production. Despite the recent softness in uranium prices, which has doubtless impacted on Paladin's share price performance, we remain entirely comfortable with the company and the sector, which we believe is still characterised by a strong long-term demand outlook and ongoing supply constraints.

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"Paladin Energy remains our stand-out uranium sector pick."

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Fat Prophets first recommended buying Paladin Resources at 6.06 euros in February 2007 (Fat Euro Mining 10). Our last review of the stock was in January (Fat Euro Mining 54).

Since touching a corrective low of 2.20 euros in January, Paladin has staged a noteworthy rebound. However, despite rallying more than 70% to reach 3.80 euros in the past month, the broader outlook remains dominated by the ten-month downward trend.

After posting such rapid gains, the rebound of any stock would be likely to pause for consolidation. Paladin is no exception. In the weeks and months ahead, we anticipate an extended period of volatile consolidation. Over time, this will potentially provide a platform to support a future revival of the longer-term upward momentum.

Paladin Energy has announced that it has received bank financing totalling US$167 million to develop its second uranium project in Africa, Kayelekera in Malawi.

Politically-motivated action last year by a group of Non-Government Organisations (NGOs) in Malawi had led to doubts in some quarters as to whether the project would proceed, but as we said at the time, we regarded it as more of a speed hump than a road block in terms of Kayelekera's eventual development.

Importantly, the Malawi Ministry of Mines and Energy continues to refute the various claims made by the NGOs and supports the project and Paladin's position.

Paladin is moving forward with its construction schedule and still anticipates first production during late 2008/early 2009. We anticipate cumulative total production of 5.0 million tonnes in 2009 and 6.5 million tonnes in 2010.

Importantly, Paladin's first uranium mine, Langer Heinrich in Namibia, achieved the company's stated production target for the December quarter of 2007. Just as significantly, Paladin also expects Langer Heinrich to produce at its nameplate design capacity of 2.6 million pounds of uranium oxide (U3O8) for the calendar year 2008.

This should all help Paladin Energy regain some of the share market momentum that it lost during the second half of 2007.

As we advised in our most recent coverage of Paladin Energy, the company was hit by a series of unfortunate issues during 2007 that put the brakes on its previously stellar share price performance and impacted on its 2006/07 earnings.

The company was hit with a quadruple-whammy of the stock-market fallout, softer uranium prices, lower than expected production from its new Langer Heinrich mine in Namibia, and opposition from some locals with respect to its second new mine in Malawi. Importantly, all of these issues will be addressed over time and in no way detract from the company's longer-term appeal.

The company is moving forward in all respects, most importantly profitability and production.

Paladin's Langer Heinrich uranium mine in Namibia achieved its stated production target for the December 2007 quarter and Paladin expects Langer Heinrich to produce at its nameplate design capacity of 2.6 million pounds of uranium oxide (U3O8) for calendar 2008.

Production for the first half of 2007/08 was 650,562 pounds, which was in line with the company's production target of 650,000 pounds U3O8. This represents a major milestone for Langer Heinrich, in our view.

Encouragingly, there has also been good progress from a geological perspective. Ore body definition and mine development scheduling has apparently continued to exceed the company's expectations, providing a solid foundation for further optimisation and expansion of the plant.

Work is also progressing on the engineering design and specification for the Stage II production expansion to 3.7 million pounds per annum. Construction is expected to commence early in 2008, with mechanical completion scheduled for the end of 2008.

Paladin's overall operational performance at Langer Heinrich has improved significantly since July and management is confident that this performance will continue. Operating costs are estimated at US$22 a pound when the project is fully commissioned.

At Kayelekera in Malawi, which is on track for completion by the end of 2008-early 2009, Paladin's stated production target of 7 million pounds by 2010 looks firmly on track.

Kayelekera is forecast to reach full production of 3.3 million pounds U3O8 by 2009. Meanwhile, we expect completion of the Langer Heinrich Stage 2 expansion during the latter part of 2008, allowing that project to produce a minimum of 3.7 million pounds annually. We anticipate cumulative total production of 5.0 million tonnes in 2009 and 6.5 million tonnes in 2010.

Therefore, total cumulative production by Paladin during the critical period to the end of 2012 will be around 30 million pounds.

If we use a uranium price of around US$90 a pound, the total revenue generated by the company during this period would be around US$2.7 billion.

It is also of great importance that the vast majority of Paladin's production to 2012 and beyond remains uncommitted and is still available for sale at a time of unprecedented uranium shortage. We anticipate this will enhance the strategic development, acquisition and marketing opportunities available to the company.

Paladin is currently on a relatively high price-earnings multiple of 48 times for 2007/08, before dropping to 15 times for 2008/09. We however remain comfortable with the long-term fundamentals of the uranium industry. We believe demand will continue to grow, whilst longer-term supply looks as constrained as ever.

Paladin Energy therefore remains in the box seat, with growing production at a time of sustained prices and only modest price hedging.

Accordingly, Paladin Energy will remain held within the Fat Prophets European Mining & Resources portfolio.