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Paladin Energy Is Trying To Survive

Summary Paladin could be breaking even this year, as it will be able to reduce its production costs per pound of uranium at Langer Heinrich. However, the main unknowns here are the overhead costs and the expenses to keep its Kaleyekera mine on care and maintenance. Paladin bought more time with its debt restructuring, but the clock is ticking and a higher uranium price would be very welcome. Introduction As the current glut in the uranium market will have to end sooner rather than later, I am keeping my fingers on the pulse of some uranium companies to make sure I’m making an informed decision when I’m ready to sharply increase my exposure to this commodity. Paladin Energy (OTCPK: PALAF ) has released its full-year financial results and has updated its outlook for the current financial year, so it could be a very interesting moment to check up on how the company is doing. Source: annual report Paladin Energy has more liquid listings on both the Toronto Stock Exchange and the Australian Stock Exchange, and I’d recommend to trade on the ASX. The ticker symbol there is PDN and the average daily volume is a pretty decent 9 million shares. The current market capitalization is approximately $230M, so its market cap is almost twice as high as the information page on Seeking Alpha would want to make you believe. The full-year financial results are showing the impact of selling uranium at the spot price Paladin has produced 5.04 million pounds of uranium and has sold almost 5.4 million pounds as it had some uranium in inventory which it sold during the financial year. Unfortunately, Paladin has not entered into any long-term contracts and it was definitely feeling the pain of the low uranium price on the spot market as the average received price was just $37/lbs for a total revenue of $199M . Source: financial statements This resulted in a gross profit of just $1.8M as Paladin also had to record an $8M impairment charge on the value of its inventory as the uranium price continued to decrease. The after-tax net loss was a stunning $300M and this was predominantly caused by a $240M impairment charge (of which $1M was attributed to an aircraft). I’m a little bit relieved the net loss was mainly caused by an impairment charge as that’s a non-cash charge and shouldn’t have an impact on the cash flow numbers. Source: financial statements So, let’s have a look at those cash flow statements; unfortunately, the situation doesn’t look much better here as the operating cash flow was negative, resulting in a total negative free cash flow of $40M. Keep in mind the cash flow statements exclude the impact of an impairment charge so there are no excuses at all here. What will Paladin do different this year? The company has now just one mine which is still in production, Langer Heinrich in Namibia. The mine will produce approximately 5-5.4 million pounds of uranium in the current financial year so there might be a small production increase, but the impact will be minimal. However, there will be an impact on the total production rate attributable to Paladin Energy, as the company sold a 25% stake in Langer Heinrich to a Chinese consortium for $190M last year. This cash infusion was be very welcome, but it also means Paladin is giving up on a lot of future potential cash flow. Langer Heinrich has a total resource estimate of 150 million pounds, so the company has sold 37.5 million pounds for $190M, or just $5 per pound. This decision is understandable, as it needed to improve the balance sheet, but should the received price per pound of uranium increase to $50+ again, Paladin might regret the sale. Paladin expects the production cost per pound to decrease by 7-14% to $26/lbs, but despite an uranium price of $35/lbs, this doesn’t mean the company will be free cash flow positive. There still is an ongoing cost of approximately $12-15M per year, which equals approximately $4 per attributable pound of uranium produced at Langer Heinrich. Throw in an additional $20M for exploration and administration (another $5/lbs) and you clearly see Paladin needs an uranium price of approximately $35-38/lbs to be able to even start thinking about breaking even. And that will be a difficult task in FY2016. Don’t get me wrong, it is possible as Paladin expects to receive a premium of $4/lbs over the spot price, but you surely shouldn’t expect any miracles from Paladin this year. Investment thesis Paladin’s re-financing activities in the past financial year have reduced the pressure on the balance sheet, but Paladin has just bought some more time, as it doesn’t look like the company will be able to generate a substantial amount of free cash flow in the current financial year, which could have been used to reduce the net debt. Paladin is a leveraged play on the uranium price and there will be a huge difference between a uranium price of $35/lbs and $50/lbs as, at the latter price, Paladin should be generating a pretty decent amount of free cash flow. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Guide To Interest Rate Hikes And ETFs: 4 Ways To Play

Amid spiraling woes, the China-led global deceleration fear in particular, the question that Wall Street is raising is whether the Fed will finally raise the first interest rates in almost a decade later this month. While the recent global rout could put a pause on the September lift-off, a series of upbeat data on the domestic front is supporting the prospect of a rates hike. Data Supportive of Rates Hike The U.S. economy is on a firmer footing, having expanded 3.7% in the second quarter. The number is well above the initial reading of 2.3% and 0.6% growth in the first quarter, suggesting that the U.S. could easily withstand the China turmoil and global growth worries. Trade gap narrowed 7.4% from June to $41.9 billion in July, the smallest since February. Exports rose 0.4% amid a strong dollar and weakness in major trading partners such as China and Europe. Consumer credit has been on the rise over the past four years, a sign of confidence amid low gas prices and steady job creation. Further, the housing market has been firing all cylinders thanks to soaring demand for new and rented homes, rising wages, accelerating job growth, affordable mortgage rates and of course increasing consumer confidence. The August job data, which is the most important indicator of the Fed policy, has been mixed. Though the U.S. added fewer-than-expected jobs tallying 173,000 in August, the drop in the unemployment rate and acceleration in average hourly wages kept the prospect of a September lift-off alive for later this month. In fact, the unemployment rate dropped from 5.3% in July to a seven-and-half year low of 5.1%, a level that the Federal Reserve considers as full employment while average hourly wages rose a modest 0.3% from the prior month and 2.2% from the year-ago level. These suggest that the labor market is healing. Inflation remains soft, but has been increasing steadily this year and is expected to touch the 2% target on a improving economy, marked by a steady labor market and a strengthening housing sector. However, uncertainty still looms around the timing of interest rates given the turmoil in China, trickling oil prices, and a slowdown in key emerging markets. Any Reason to Worry? Higher rates would attract more capital to the country from foreign investors, thereby boosting the U.S. dollar against the basket of other currencies. This would have a huge impact on commodity-linked investments, reflecting that a rising rate environment will hurt a number of segments. In particular, high dividend paying sectors such as utilities and real estate would be the worst hit given their higher sensitivity to rising interest rates. Further, securities in capital-intensive sectors like telecom would also be impacted by higher rates. In this backdrop, investors should be well prepared to protect themselves from higher rates. Here are number of ways that could prove extremely beneficial for ETF investors in a rising rate environment: Insurance Insurance stocks are one of the prime beneficiaries of a rate hike, as these are able to earn higher returns on their investment portfolio of longer-duration bonds. But at the same time, these firms incur loss as the value of longer-duration bonds goes down with rising interest rates. Nevertheless, since insurance companies have long-term investment horizons, they can hold investments until maturity and hence, no actual losses will be realized. While there are number of insurance ETFs, SPDR S&P Insurance ETF (NYSEARCA: KIE ) could be a good bet. This fund follows the S&P Insurance Select Industry Index and offers an equal weight exposure to 52 stocks, suggesting no concentration risk. About 39% of the portfolio is allocated to the property and casualty insurance while life & health insurance accounts for one-fourth share. The ETF has managed $523 million in its asset base and trades in a moderate average daily volume of over 96,000 shares. It charges 35 bps in annual fees and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. Financials A look to the broad financial sector is also a good option, as a steeper yield curve would bolster profits across various corners of the segment. Not only will insurance stocks climb, banks and discount brokerage firms will also be the winners in a rising rate environment. A broad way to play this trend is with Financial Select Sector SPDR Fund (NYSEARCA: XLF ), having AUM of $17.4 billion and average daily volume more than 33 million shares. The ETF follows the S&P Financial Select Sector Index, holding 90 stocks in its basket. The top three firms – Wells Fargo (NYSE: WFC ), Berkshire Hathaway (NYSE: BRK.B ) and JPMorgan Chase (NYSE: JPM ) – account for over 8% share each while other firms hold less than 5.9% of assets. In terms of industrial exposure, banks take the top spot at 36.9% while insurance, REITs, capital markets and diversified financial services make up for a double-digit exposure each. The fund charges 15 bps in annual fees and has a Zacks ETF Rank of 1 or a ‘Strong Buy’ rating with a Medium outlook. Short-Duration Bonds Higher rates have been cruel to bond investors, especially the longer term, as an increase in rates has always led to rising yields and lower bond prices. This is because price and yields are inversely related to each other and might lead to huge losses for investors who do not hold bonds until maturity. As a result, short-duration bond are less vulnerable and a better hedge to rising rates. While there are several options in this space, iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) seems to be intriguing choice. It has a solid $12.5 billion in AUM and is highly traded with more than 1.2 million shares a day on average. The ETF follows the Barclays U.S. 1-3 Year Treasury Bond Index, holding 83 bonds in its basket with average maturity of 1.87 years and effective duration of 1.84 years. It has 0.15% in expense ratio and has a Zacks ETF Rank of 3 with a Low risk outlook. Inverse ETFs Investors worried about higher interest rates could also go short on rate sensitive sectors like utilities and real estate via ETFs. There are a number of inverse or leveraged inverse products currently available in the market that offer inverse (opposite) exposure to these sectors. While a leveraged play might be a risky option, inverse ETFs are interesting choices and provide hedging strategies in a rising rate environment. In this regard, ProShares Short Real Estate ETF (NYSEARCA: REK ) seeks to deliver the inverse return of the daily performance of the Dow Jones U.S. Real Estate Index. The product has amassed $34.4 million in its asset base while volume is moderate at around 81,000 shares a day. Expense ratio came in at 0.95%. Original Post

TECO Energy: What A Difference A Day Makes

Over the past decade or so TECO Energy has shown stagnant growth and average investment results. Recently the company received a bid to be acquired at a much higher share price. This article shows the difference that just a single day can have on an investment. Over the past decade or so, Tampa, FL-based TECO Energy (NYSE: TE ) has been what I would classify as an “average” investment. You have a slow growing business that just sort of plugs along and pays out a large percent of its earnings in the form of dividends. It’s the classic utility model. I’ll show you what I mean. Here’s a look at the company’s history from the end of 2005 through the end of 2014: TE Revenue Growth -1.8% Start Profit Margin 7.0% End Profit Margin 8.3% Earnings Growth 0.1% Yearly Share Count 1.3% EPS Growth -0.6% Start P/E 17 End P/E 22 Share Price Growth 2.0% % Of Divs Collected 43% Start Payout % 76% End Payout % 93% Dividend Growth 1.6% Total Returns 5.6% TECO began the period with a little over $3 billion in revenue and ended with a bit less than $2.6 billion, or a compound growth rate of -1.8% per annum. Granted certain operations have been sold or discontinued, but it remains that the company as a whole was not growing on the top line. Based on the $3 billion in revenues, TECO earned about $211 million – representing a profit margin of about 7%. By 2014 the margin had expanded to 8.3%, resulting in a net profit of $213 million. In other words, despite the revenue decline, the overall company profitability increased ever so slightly. Yet this slight advantage did not remain for shareholders. At the beginning of the period the company started out with roughly 208 million shares outstanding. By the end of the period this number had grown to 235 million. As such, the earnings-per-share growth also was negative – coming in at -0.6% annually. At the end of 2005 shares of TECO were exchanging hands around $17, resulting in a trailing multiple of about 17. By the end of 2014 the share price had climbed to $20.50, indicating a multiple closer to 22. This is why it’s important to allow for a wide range of possibilities. During this same time frame a company like Union Pacific (NYSE: UNP ) was providing 20% EPS growth, yet it saw P/E compression . On the other hand, TECO was providing negative EPS growth yet saw a higher multiple. When you suggest anything is possible, it’s not just a coverall – strange things happen in the investment world. Due to this multiple expansion, shareholders saw the share price increase by about 2% annually. This is nothing to text home about – especially over a decade period – but still something considering the growth headwind. The real story for TECO has been its dividend. The company, like many utilities, has committed to paying out a large portion of earnings in the form of dividends. Although this payout did not grow much, it did allow for a solid and consistent cash flow. Over the period an investor would have collected about $7.50 per share in dividend payments against capital appreciation of just $3.50. In total this equates to total annual returns of about 5.6% per year. Hence the beginning reference to “average.” Actually it’s slightly impressive given the lack of growth, but basically investors received the dividend payment along the way and not much more. Had you owned a couple thousand shares it could have paid for your electric bill, but there were certainly better wealth providers during this time. Both the business and investment performance of the company wasn’t especially inspiring. Yet this changed a bit due to a recent announcement. On September 4, 2015, TECO announced that Canadian-based Emera Inc. ( OTCPK:EMRAF ) would acquire TECO Energy for $27.55 per share, representing a 48% premium to the July 15th price and roughly 31% higher than the previous close. As a result, shares opened the next trading day over 20% higher, moving to about $26 per share. This is the sort of thing that transforms an investment. During the past decade, shares of TECO Energy have provided about 5.4% annualized returns (quite similar to the exercise above, but moving away from the 2005 and 2014 year-ends.) As a result of the buyout offer, shareholders suddenly have a 7% annualized gain. Over the past five years shares have provided 8.5% annualized returns (incidentally, demonstrating what a move from a low to high earnings multiple can do in the face on a stagnant business.) As a result of the higher price on September 8th, this 8.5% annualized return is suddenly a 12.5% annualized gain. Naturally you can’t predict whether or not a buyout offer will come. Yet the above result is instructive. For one, it shows that business performance and investment performance can vary. The typical investor over the last decade or so actually saw their underlying earnings claim decrease. Had you owned the entire business you would have had a slightly greater claim, but due to share issuance common stockholders were diluted. Still, even though the growth rate was negative, overall returns were still positive. This happened for two reasons. First, investors were willing to pay more for less earnings power. Strange things happen in the investment world, so you can never count out multiple expansion (or contraction). Investor sentiment waxes and wanes as the business results tend to be a bit steadier. Yet even if the multiple had remained steady, thus resulting in negative share price appreciation, your overall returns would not have been negative. Due to a solid and slow growing dividend, you were able to accumulate cash payouts along the way. There’s a lot to be said for collecting dividends while you wait for something good to happen. Of course these payouts can’t always “protect” you, but they can still provide a nice return buffer. You won’t shout in joy over 4% returns, but it’s not an awful consolidation prize. Further, you can reinvest these payments to increase your income. In a more abstract sense, this example demonstrates why it can pay to remain patient. Had you purchased shares a few years ago with an earnings multiple below 15 (or higher), the subsequent decline in earnings and rise in share price resulted in a multiple over 20. You could have then elected to sell, but naturally that would have concluded in missing out in a 20%-plus higher price today. Of course you can’t predict this, but the idea is to be ready for the outcome. If that sort of “missing out” would bother you, then perchance there are worst things in the world than collecting a solid dividend payment while a company regains its footing. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.