NEW YORK () -- Even with its Namibian uranium mine set to open in two months, Paladin Resources [ASX:PDN; TSX:PDN] isn't sitting still. The Australia-based junior today announced it would acquire Valhalla Uranium Limited [ASX:VUL] in a friendly transaction currently valued at about A$175 million (US$130.6 million).
Paladin hopes the move will help bolster its Australian development pipeline, specifically with the addition of Valhalla's 50% interest in the Valhalla/Skal deposits in northern Queensland. The move will add a total 14.2 million pounds (Mlbs) of measured and indicated U308 to Paladin's portfolio of Australian deposits.
The all-stock transaction would exchange 1 Paladin share for 3.16 Valhalla shares. While shares of Paladin and Valhalla have been halted for several days, based upon the previous closing price the offer is equivalent to A$1.45 per Valhalla share.
The only problem? In the current regulatory environment, Paladin cannot legally develop Valhalla's deposits. Queensland, New South Wales, Victoria and Western Australia all currently have regulations in place that prevent the development of new uranium projects. Although Australia has 40% of the world's uranium resources, these restrictive policies have effectively limited production to three major mines nationwide - and led Canada to overtake Australia in uranium production.
The Valhalla purchase reflects a strong bet by Chief Executive John Borshoff that the restrictive mining policies will be overturned at some point. In a February interview with the Australian Broadcasting Corporation, Borshoff said he believes it's only a matter of time before strong global uranium demand from emerging economies makes short work of the provinces' restrictive mining policies.
Much of this demand is expected to come from China, which in April signed an agreement to begin the importation of Australian uranium. Under the terms of the deal, starting in 2010 China can import 20,000 tonnes (about 44 Mlbs) of uranium from Australia. China has recently begun to invest heavily in nuclear power, and may bring as many as 50 new nuclear plants online in the next 20 years.
African Operations Show Paladin's Real Strength
While Paladin's acquisition shows its commitment to the re-emerging Australian uranium industry, the near-term story continues to be the company's African uranium deposits.
Located in Namibia, the Langer Heinrich mine represents Paladin's main operational asset. The mine contains some 44 Mlbs measured and indicated U308, and in September is expected to become the first new uranium mine to begin operations in over two decades.
Langer Heinrich is expected to produce some 2.6 Mlbs over a 13 year minimum mine life. After that, low grade stockpiles are expected to produce just under 1 Mlbs per year for about 4 years. Operating costs over the life of the operation are expected to come in at only US$14/lb., while capital expenditures for the entire project are estimated at US$92 million. With yellowcake recently trading above US$45/lb, Paladin has a hefty profit margin baked in, and the project's payback period is estimated at about 3 years.
This profit margin is even more shocking when one considers that in the midst of a global uranium slump several years ago, Paladin paid only $15,000 for the property!
On the other side of Africa, Paladin is nearing a production decision on its wholly-owned Kayelekera project in northern Malawi. A US$2.3 million feasibility study on the project should be complete by year-end, and Paladin is expected to make a production decision by early 2007. It's believed that from an inferred resource base of 24 Mlbs, the mine may be able to produce 2.3 Mlbs U3O8 per year for 10 years.
Other Australian Operations on the Backburner
If the government of Western Australia relaxes its anti-mining stance, Paladin may also use 2007 to move forward with its Manyingee project. That deposit contains some 24 Mlbs of indicated and inferred resources, and is ready to proceed with a feasibility study.
The company also owns the promising Oobagooma property in Western Australia, as well as partial interests in a handful of other uranium and metals projects scattered throughout Australia.
Conclusion
While Paladin's African assets make up its operational backbone, the company's diverse Australian holdings are nice supplemental assets. With the company's recent move to expand those holdings, it's obvious that management believes the provinces' restrictive mining policies will be relaxed at some point in the near future. When and if that does occur, shareholders can likely expect to see additional upside momentum in Paladin's stock.
