Paladin raises $325 million from upsized CB

The uranium miner completes the first international convertible from Australia this year on the day it wins a bid for the right to develop deposits in the Northern Territory.
Uranium producer Paladin Energy has raised $325 million from the first internationally marketed convertible bond by an Australian company this year. The deal, which was launched and completed after the Australian market closed yesterday, came after the company announced strong six-month earnings and coincided with an announcement that the 50-50 joint venture between Paladin and Cameco Australia had been awarded the development rights for the Angela and Pamela uranium deposits in the Northern Territory.

The news boosted the attraction of the CB and allowed it to be increased from an original $275 million by exercising the $50 million upsize option in full. However, analysts are also generally positive on the stock which offers unique exposure as one of the few pure-play independent uranium producers globally. Uranium is primarily used for the generation of nuclear power, which after 20 years of depressed conditions is becoming the preferred choice of energy in several countries around the globe as oil prices climb even higher.

The earlier negative sentiment towards nuclear power has caused a vacuum in uranium supply, which according to the company represents ôa significant opportunity for Paladinö. The company says there are currently plans for 315 new nuclear reactors with a combined capacity of 293GW in 34 countries world-wide. This compares with 439 reactors with a capacity of 372GW currently in use.

The fact that the crude oil future on Nymex closed above $100 a barrel for the first time on Tuesday helped underline the companyÆs marketing pitch and could perhaps not have been more timely.

From a technical aspect, there are enough Paladin shares available to borrow for investors who want to short the stock, meaning the convertible could also be bought as a volatility trade. This would have made it interesting to CB specialists.

However, equity markets remain tricky and the deal was sold on the back of a 3.9% drop in PaladinÆs share price yesterday. Stocks also continued to fall in Europe while the book was building with the FTSE100 eventually closing 1.2% lower and GermanyÆs Dax index ending down 1.5%.

Indeed, investors were not willing to pay just anything to get their hands on the bonds as shown by the fact that the coupon and the conversion premium were both fixed at best terms for investors. It is likely that this was a concession the company was willing to make in order to exercise the upsize option, however. In the term sheet, Paladin provided a detailed outline of how it planned to spend the proceeds, which at the wide end included the $50 million raised from the upsize option.

ôThe CB market is still broadly open to the right issuers, but that doesnÆt mean that people are as aggressive as they have been previously,ö one source notes.

The five-year bonds were offered with a coupon between 4.5% and 5% and a conversion premium of 25% to 30% over yesterdayÆs volume-weighted average price of A$5.76. They were priced with a 5% coupon and a 25% premium. Because the share price closed below the VWAP at A$5.70, the actual premium over the current market price will be a slightly wider at 26.3%, however. The initial conversion price is A$7.20 - or $6.59 if translated into US dollars û which is well below the 52-week high of A$10.70 that was reached in April last year. Even as recently as late October the stock briefly traded above $9.

The coupon will be the same as the yield-to-maturity since the bonds are both issued and redeemed at par. There is no put option, but the issuer can call the bonds after 3 years and 21 days, subject to a trigger of 130%. Citi and UBS were joint bookrunners.

According to sources, the deal was multiple times covered with orders from about 80 investors, including several large European accounts. The buyers also included those who hold an existing Paladin CB, which was issued in 2006 and matures in 2011, who would have been attracted by the fact that the new issue offered slightly cheaper terms, including a lower conversion price and a lower implied volatility. The existing $250 million bond did trade down as a result of the new issue, market participants say.

Sources say there isnÆt really any credit default swaps available in the market to base the valuation on û at least not any liquid ones û and the bookrunners didnÆt provide any credit bid. Based on the fact that the outstanding bonds, which have a remaining life of 3.8 years, trade at a spread of about 450bp they guided investors to a 600bp spread, although some analysts said they used a spread of as much as 800bp in their valuation models.

Using 600bp, a full dividend pass-through and a stock borrow cost of about 3%, the bond floor comes out at 80.9% and the implied volatility at just under 28%. The latter compares with a 100-day volatility above 80% and a 260-day vol of about 70%. The existing CB is indicated at an implied vol of 60%.

The bond floor is quite low though, especially considering that there has been only one other CB issued in Asia this year with a sub-90 bond floor. And even that (a $180 million exchangeable into TaiwanÆs Far Eastern Textile last week) had a bond floor of about 89.2%. But because it is possible to hedge the equity option, investors may not have been too concerned about that.

Paladin said it would use $120 million of the proceeds to fund mining developments, including an evaluation of the Angela and Pamela uranium deposits that it was awarded yesterday, expansions and ongoing M&A activities over the next 12-18 months. About $50 million will be used for the stage-two expansion of its Langer Heinrich project in Namibia, $70 million for ongoing exploration and business development and $75 million for its marketing arm with the aim of developing innovative commercial arrangements to take advantage of the dynamic changes in the global uranium industry that make customers look for more flexible and variable contracts and sales proposals. The costs related to the CB issue are estimated at $10 million.

According to a company statement, the planned Langer Heinrich stage-two expansion will increase its combined mine production to 7 million lb per year. The company will evaluate the potential to increase the production from this project as well from its Kayelekera mine in northern Malawi, which is scheduled to start commercial operations by the end of this year, to boost its total annual production to as much as 9 million lb by 2010.
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