Paladin’s Trials and Triumphs

The rush of uranium juniors unleashed on the market by surging yellowcake prices has provided investors with no shortage of speculative exploration plays.

But amid the frenzy, Paladin Resources (PDN-T, PDN-A) has carved out a niche. Still small enough to offer substantial growth potential, the company has at the same time distinguished itself by becoming a producer.

Not many others can boast that. In fact, with the commissioning of its Langer Heinrich project in Namibia at the end of last year, Paladin became the first company to start up a significant uranium mine in 10 years.

What’s more, it did it on budget and on time.

The market has rewarded the company accordingly. Paladin shares have gained roughly 275% since September 2006, and were trading in the $9.70 range at presstime.

But the success has not come without trials — quite literally.

Its acquisition of Valhalla Uranium last year and the 50% stake in the Valhalla and Skal deposits in Australia, triggered a lawsuit from the joint-venture partner on the deposits, Perth-based Summit Resources (SMM-A).

Summit has a resource of roughly 75 million lbs. uranium at its Mount Isa properties, of which Valhalla and Skal form a part.

Summit claims Paladin accessed information that, as per an agreement with Valhalla, was to remain undisclosed. Paladin says it used only publicly disclosed documents to assess the project.

While the case awaits trial, the legal tensions have spilled over into a public war of words after Paladin announced a hostile takeover bid for Summit.

Paladin is offering one of its shares for every 2.04 Summit shares, representing a 34% premium to Summit’s 10-day average price on the day of the bid, Feb. 27.

To help sway Summit shareholders, Paladin has pointed out what it sees as the company’s shortcomings — chief among them that Summit’s exploration team has failed to grow resources at the same pace that Paladin has.

Paladin underlined the recent results from Summit’s Andersons and Watta projects at Mount Isa, where new resources failed to show any significant improvement over the historical resource, despite the fact that cutoff grades were lowered to what Paladin describes as “critical levels.”

“Summit shareholders should compare Summit’s results from the last three years with those of Paladin,” Paladin’s managing director John Borshoff said in a statement in early April. “This shows a stark contrast in performance and delivery.”

Summit, predictably, defended its record, blaming the moratorium on uranium mining in Australia for its poor resource growth relative to Paladin.

Summit said the moratorium prevents it from starting a feasibility study on Mount Isa, while Paladin has not encountered such impediments on its key projects — both of which are in sub-Saharan Africa.

Areva alliance

But Summit’s strongest retort comes in the form of an alliance. On April 11, Summit announced that Areva (arvcf-o) — the world’s biggest maker of nuclear reactors and third-largest supplier of uranium — will buy an 18% stake in Summit.

The news sent Summit’s shares up more than 12% to A$5.80 — eclipsing the premium that Paladin’s deal once offered. On April 11, Paladin’s shares were trading at A$10.38, while 2.04 Summit shares would be worth A$11.83.

Areva will initially buy 19.5 million Summit shares at A$6.20 each — injecting roughly US$100 million in cash into the company. It can increase its stake to 18% by buying additional shares for A$7.20 each.

Bringing Areva on board not only brings in cash, but it also addresses Paladin’s criticism that Summit lacks the technical expertise needed to grow resources, as Areva represents some of the best expertise in the uranium business.

Paladin, however, remains resolute in its offer.

“The Areva offer does not scuttle the deal for us,” Paladin spokesman Greg Taylor says.

The arrival of Areva comes after Summit implied that its shareholders were cool to the Paladin offer. At presstime, Summit said that Paladin had not yet received the approval of even 1% of Summit shareholders.

Taylor, however, says shareholder approval would generally come closer to the offer’s April 16 deadline.

Brian Christie, an analyst with National Bank, says that even if Paladin’s takeover bid fails, it won’t be overly detrimental to the company.

“It’s an interesting project,” he says of Mount Isa, “But Paladin’s already a joint-venture partner on the property. They’re looking at cleaning up some loose ends in an area where it appears the political climate is improving.”

Summit believes the anti-uranium mood is reversing so quickly that deposits at Mount Isa could be in production by 2010; if true, that would back up its contention that Paladin’s bid seriously undervalues the company.

Recent comments from Queensland Premier Peter Beattie reversing his anti-uranium mining stance seemed to support Summit’s position.

Not surprisingly, Paladin disputes Summit’s assessment, saying that subsequent back-pedalling by Beattie showed that Summit was being overly optimistic.

“It doesn’t make sense from a political perspective to say that you’ll see production within two years,” Taylor says.

Paladin says a more realistic target date for production is 2012, given the complexity of the political resistance to mining uranium.

Kayelekera

Focusing too much on the squabble with Summit runs the risk of missing positive news for Paladin out of Africa.

Africa, after all, is where Paladin built its reputation with Langer Heinrich in Namibia, and it’s looking to duplicate that success in another sub-Saharan country — albeit one with far less mining history — Malawi.

By securing its mining licence for the Kayelekera project in the country recently, it took another step towards becoming the world’s next significant supplier of yellowcake.

Kayelekera is expected to cost US$185 million, with much of that funding coming from a recent US$250-million convertible bond raising and the rest likely coming from the same banking syndicate that funded Langer Heinrich.

The plan is to have the project commissioned by September 2008 with full production reached in the second quarter of 2009.

“We delivered Langer Heinrich on cost and ahead of schedule,” Taylor says. “So while I wouldn’t say we’ll definitely do that again, I would say that we’re confident with our cost and our time estimates.”

Annual production at Kayelekera is estimated at 3.3 million lbs. U3O8 with a mine life of seven years. The company has secured some 1,140 sq. km of prospective ground around the main deposit on which it plans to launch an exploration drill program later this year.

As for the question of where all that uranium will go and at what price, Paladin is aware of the Street’s desire to partake in the upside of uranium prices. However, the company had to hedge some of its production into 2012 as part of its loan requirements for Langer Heinrich.

It has contracts with U.S. utilities for roughly 7.5 million lbs. U3O8 for delivery between 2007 and 2012. In keeping with the lack of transparency within the uranium market — largely tied to security concerns — the prices of those contracts have not been released.

But with Kayelekera forecast to reach full production of 3.3 million lbs. U3O8 per year in 2009 and the Langer Heinrich stage-two expansion expected to finish in the second half of 2008, bringing production there to a minimum of 3.7 million lbs. per year, Paladin expects to turn out roughly 31 million lbs. of yellowcake by 2012.

That would leave roughly 23.5 million lbs. uncommitted and available for sale in an environment that experts predict will be heavy on demand and short on supply as China, Japan, India and Russia all ramp up nuclear reactor construction.

Even at a conservative price of US$90 per lb., Paladin says forecasted production into 2012 would generate roughly US$2.8 billion for the co
mpany — money that will no doubt keep it in a buyer’s position, just in case Summit slips through its fingers.