Long Term Uptake Implications VANCOUVER (miningweekly.com) – ASX- and TSX-listed uranium producer Paladin Energy on Wednesday reaffirmed that it is not to receive any further cash from offtake partner lectricit de France (EdF), saying that contrary to certain recent erroneous media reports, it was merely updating the market on the contractual process to determine the value of EDF's security and the consequences of that process.
Analysts believe Paladin could be a bankruptcy casualty of the uranium price downturn that have ravaged the industry for several years now. In 2016, spot prices fell 37% from $34.70/lb to $18.50/lb on November 14, according to independent market consultant UX Consulting, before turning somewhat positive again to trade at $20.25/lb as on January 2. This is still a far cry from the lofty all-time high of $136/lb hit in 2007.
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The difficult market has forced Paladin to put its Kayelekera mine, in Malawi, on care and maintenance, while forcing it find options to fund its upcoming debt repayments, which includes a $212-million payment due at the end of April, after delays in the divestment of a 24% interest in the Langer Heinrich mine, in Namibia. The stake selling, along with the sale of a 75% interest in the Manyingee project, in Australia, is expected to net some $205-million.
POORER TIMES AHEAD?
In 2012, Paladin entered a six-year off-take agreement with EdF to deliver a total of 13.73-million pounds of uranium oxide for the period from 2019 to 2024, in return for a cash prepayment of $200-million, which it received in 2012. Uranium sold to EdF under the contract will be at prevailing spot prices at the time of delivery, subject to escalating floor and ceiling prices, with the floor price set at a premium to both current spot and long term reference prices.
In simple terms, the offtake agreement is for roughly 2.3-million pounds of uranium a year over the period. However, after the divestment of the stake in Langer Heinrich has closed, Paladin will be left with only 51% ownership in the mine, with cumulative production below that required to service the EdF offtake agreement.
At 51% of the expected output from Langer Heinrich, and including the shuttered Kaylekera operation, Paladin attributable uranium output falls to about two-million pounds, compared with eight-million capacity previously, and below the 2.3-million promised to EdF.
EdF has requested security for the pre-payment further to its existing security more than 60.1% of the Michelin project, in Canada.
While the $200-million prepayment is bound to 44.51% of the 13.73-million contract, it means the company has already been paid for roughly half of the output, and it will receive spot prices for the other half of the contract, all while incurring the full costs to produce the 2.3-million a year of uranium for delivery under the contract.
This scenario is expected to result in extremely restrictive cash free cash flows over the period of the contract, potentially placing Paladin in a position not able to repay the $150-million convertible debenture due in 2020.
EXPERT OPINION
Paladin said Wednesday it might indeed be required to provide additional security and has been discussing the matter and the value of the additional security with EdF.
Late last month, EdF notified Paladin it is of the view that the value of the additional security proposed by Paladin is less than the value required by the offtake contract. Paladin disagrees with the position.
The matter will now proceed to independent expert valuation under the terms of the offtake contract. According to Paladin, while there are no prescribed periods for the independent expert valuation process, if the expert determines that the value of the additional security proposed by Paladin is less than the value required by the contract, the outstanding amount (being approximately $260-million must be repaid within 30 days of that determination.
Concurrently, as part of discussions with key stakeholders regarding potential options to address the company's balance sheet position, the company has made a proposal for EdF to share security over Paladin's assets with Paladin's bondholders. If this proposal is accepted by EdF, the independent expert's valuation would not proceed. 