The Technician v The Fundamentalist – Paladin Energy (PDN)

Pure price analysis from The Technician (aka Richard Lie) versus The Fundamentalist (aka ‘The News). Because everyone likes a good argument…

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The Fundamentalist:
Nuclear power became ‘Enemy Number One’ in March 2011, when the Japanese tsunami caused the Fukushima nuclear power plant to melt down, and widespread environmental damage. Uranium stocks – the fuel for Nuclear energy – were hit hard while governments considered their options: Germany announced they would close all nuclear plants by 2022; while China, which is the world’s biggest growth market for nuclear energy, made statements about a more balanced energy program in the future.

It was the perfect storm for Australia’s biggest uranium miner, Paladin Energy- the stock price went into free-fall, dropping from a high of $5.50 in early 2011, to around $0.50 cents today. The company has had three years of consecutive losses, and is currently selling its uranium for around $38 per pound, which analysts say isn’t enough to be profitable, or to repay its $300m worth of debt that matures in 16 months.

Paladin has responded with a preliminary deal to sell a 25% stake in its flagship Langer Heinrich mine in Namibia, for around $200m, which will
free up some much-needed cash. It will also close its high-cost Kayelekera mine in Malawi.

Two weeks ago, and rather fortuitously, the Japanese government declared that nuclear power would be an “important base load energy source” for the nation in the future – with almost 50 nuclear power stations idled since Fukushima, any kind of restart in Japan would help lift demand and therefore uranium prices. Paladin’s share price rose almost 20% on the day of the news, which you can see in late February on the chart.

It’s important to note that the long-term demand story from China isn’t going away either. China’s energy needs are voracious. Today, the country only operates 18 nuclear reactors, providing less than 2% of its total energy output. But it’s building nearly 30 more to feed its growing energy needs.

Conclusion:
Paladin Energy’s immediate future remains uncertain. The company is doing what it can, but is fast running out of cash. It’s future profitability and survival depends on the price of uranium, and that critical variable and timetable is out of its control. This is a stock to watch. I’m neutral to bearish, and need to see uranium prices tick higher before buying it.

The Technician:
There’s no hiding from the fact that Paladin Energy’s stock price has been slaughtered – first by the global financial crisis in 2007/2008, then by Fukushima in 2011. That’s the big-picture view, and I must say it’s rare to find a chart that looks this bad. The relentless march on lower lows and lower highs was confirmed by volume, which rose when prices dropped, and fell when prices occasionally went higher – not a good sign if you’re banking on a turn!

That said, I’m beginning to see green shoots in Paladin – evidence of price demand supported by an improving fundamental story. (Price often leads the fundamentals, but it also has a role in confirming a change in them.

In early August there was a fierce gap-down, accompanied by a large spike in volume – evidence of a possible ‘wash-out’. This is an important question, because major market turns often occur after ‘wash-outs’, when everyone who’s thought about selling has thrown in the towel. Major turns also like to happen quietly, not when buyers suddenly turn up, or when the newsmen shout about them from the front pages, but when the sellers dry up – and we can see evidence of this in the declining volume bars on the ‘quieter sell-off’ between August and the New Year.

Since then, a potential double-bottom has formed around 0.40 cents, which has become an important support level. It looks solid enough so far – and the subsequent price rise was met with increasing volume, indicating fresh buying interest, probably institutional ‘smart’ money, well before the public announcement from Japan. Price also failed to make a new low, below $0.40. These are all positives, and make me think the pendulum might be swinging back to a demand-dominated supply balance. Finally.

There are still some hurdles to overcome, in the form of resistance above. The 28-period exponential moving average – a reliable “line in the sand’ indicator in my experience – lies directly overhead, at $0.55, and is still trending slightly down; and above that there’s the first rally peak, at $0.65. Breaking the $0.65 level on a weekly closing basis would be a major victory for the bulls because it would provide a higher high, and confirm a new bullish pattern of higher lows and higher highs – the textbook definition of an uptrend. If Paladin can work its way through that then it’s clear skies ahead, all the way up to our target, $1.20.

Conclusion:
Paladin is showing signs of a major turn. It’s still early days, but positive sentiment could quickly shift – swift moves down are often met by swift moves in the opposite direction. I’m a cautious buyer, with a stop-loss at $0.40 on a weekly closing basis, targeting $1.20.

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