Tim Treadgold: Paladin rides the uranium wave

It would be an odd investment decision to buy shares in a mining company that has closed its mines but Paladin Energy is not an ordinary miner. It’s a proxy for the recovery in uranium, a rival with coal for the title of world’s least-loved commodity.

Once a darling of the mining world with a share price that reached $8.25 in early 2007, a time when uranium was selling for $US140 ($191) a pound, Paladin (ASX:PDN) then crashed to 5c in the middle of 2017, a fall of 99.4 per cent, perhaps a record for an ASX-listed stock which has lived to tell the tale.

The cause of Paladin’s share price collapse can be traced directly to the price of uranium which fell to $US20/lb earlier this year, the point at which Paladin decided to mothball its flagship Langer Heinrich mine in the southern African country of Namibia, having earlier closed its Kayelekera mine in another African country, Malawi.

Looked at from virtually any angle and Paladin appears to be an unappetising investment proposition which leads to an interesting question; why has its share price doubled over the past six months?

The answer is that uranium is doing what all commodities do when a price-destroying glut is absorbed. It’s rising — up by $US9/lb (45 per cent) since March to $US29.10/lb

In Paladin’s case the start of a uranium revival, even with its mines in a care and maintenance mode, has seen its shares move up from 11c to 22c, which is still a long way from that 2007 boom-time price but in the world of investing you can’t beat the old saying about the trend being your friend.

Early birds are excited

What’s drawing early-bird speculators with a high tolerance for risk is the prospect of uranium shrugging off its reputation for trouble of the sort seen in three nuclear power-station melt-downs – Three Miles Island in the U.S., Chernobyl in Ukraine and Fukushima in Japan.

It was the Fukushima incident in 2011 which consigned uranium into the investment sin bin, prompting widespread comments about the death of nuclear power as an electricity-generating option.

Like Mark Twain’s famous comment about news of his death being an exaggeration, those reports of uranium’s demise appear to have been premature because Japan is re-starting its fleet of mothballed reactors, China is building more and other countries are returning to the nuclear-fold.

Even the world’s oil-leader, Saudi Arabia, is embracing nuclear power.

Nuclear power is not so on the nose

The return of nuclear as an electricity option can be attributed to a number of factors, not least its ability to produce huge amounts of reliable power required by industry while also claiming to have the same carbon-free appeal as renewables such as wind and solar.

Not everyone accepts the clean-and-green argument put forward by the uranium lobby but enough people do to achieve a primary objective; to soak up a surplus of uranium produced in the boom years and left over by a collapse in power-station construction.

The surplus, according to uranium producers and specialist funds created to buy uranium and wait for the price recovery, is fading fast with indications of power-station operators rushing to secure essential supplies to keep their reactors operating smoothly.

Paladin management is certainly confident that a revival has started, arguing that “the uranium story is compelling” because stockpiles are running down and mine production has dried up even as electricity utilities start to re-stock.

In a presentation earlier this month at Paladin’s annual meeting, the company’s management argued that 35 million pounds of uranium had been removed from the market over the past few years. Exploration had all-but ended, leaving global mine supply “structurally impaired”.

The company’s survival plan is essentially one of selling what uranium stocks it has left while its mines are idle with the aim of having around $US40 million in the bank by the end of December.

Uranium proxy

After that Paladin really does become a uranium-recovery proxy for Australian investors in much the same way a London company called Yellow Cake (after the name of the most commonly-traded form of the fuel) has become a proxy for British investors.

Floated on the London Stock Exchange in the middle of the year, Yellow Cake started life with an 8.1-million-pound horde of uranium acquired from the government of Kazakhstan, the world’s biggest uranium producer.

From July to October 2018, as the uranium price has moved up from around $US20/lb to its latest price of $US29.10/lb, Yellow Cake’s share price has moved in harmony, rising from around £1.96 to £2.40.

Like Paladin, the management of Yellow Cake, which has Australia’s former Foreign Minister, Alexander Downer, as a director, argues that the uranium worm really is turning.

An example of what’s happening is that spot-market transactions (short-term deals) were averaging 6 million pounds of uranium a month in the first half of the year, but since June 2018 they have doubled to 12 million pounds a month as power-station operators are forced to buy fuel.

Japan re-starting its reactors has been a key event. China pushing ahead with its plans to add 15 new reactors to its fleet of 43 is another price-driver.

From an investment perspective there is no doubt that uranium is not an asset class for everyone.

But, from the perspective of a commodity recovery situation after 11 years in the cold, uranium is quite interesting; as are stocks like Paladin and Yellow Cake.