Should you buy the dip in Paladin Energy shares? (Hint: Brokers think there's 71% upside!)

Shares of uranium producer Paladin Energy (ASX: PDN) nose-dived on Tuesday following the release of an update of operations at its Langer Heinrich mine in Namibia as well as updated FY25 guidance.

The company warned that ongoing “challenges and operational variability” at its flagship uranium mine had resulted in lower-than-expected uranium production during the month of October. Paladin Energy cited throughput (the speed at which ore can be processed) and grade variability (the grade of the ore processed was lower than expected) as the two main issues.

Throughput at Langer Heinrich was impacted by disruptions in the local water supply. The grade issues relating to the usage of stockpiled ore was flagged in the company’s September quarter report. Management noted this is continuing to persist.

In a conference call following the release of the announcement, company management suggested October production had been impacted by as much as 30%. Moving forward, they assured analysts that consistency of the water supply would improve from next month and normalise shortly thereafter.

On grade variability, management confirmed this item would likely persist throughout the first half of next year until the scheduled commencement of processing of newly mined ore in the second half. (Note, the ore stockpile Paladin Energy is currently working through was originally mined nearly 10 years ago before Langer Heinrich was placed into care and maintenance in 2018.)

As a result of these issues, Paladin Energy revised down its FY25 production guidance from 4-4.5 million pounds to 3.0-3.6 million pounds of uranium – a reduction of 22.5% at the midpoints. Paladin Energy also withdrew all other guidance, noting that lower grades would likely impact both costs and realised prices.

Paladin Energy shares fell 29% on Tuesday to close down $2.80 to $6.88. They steadied a touch on Wednesday, closing at $7.46. The discrepancy between the size of guidance cut and the initial share price decline was most likely due to the impact costs and realised prices would have on FY25 underlying earnings.

Also, there is now a possibility Fission Energy shareholders may use the update as a trigger to break from Paladin’s current takeover of the Canadian uranium developer. The deal, announced in June, will see Paladin Energy acquire all shares in Fission Energy (TSX: FCU) in an all-scrip deal, with FCU shareholders to hold around 24% of the combined entity to be dual listed on both the ASX and TSX.

Paladin Energy shares were in a state of decline prior to the latest announcement. Some of this could be put down to news in August that the Namibian government was considering implementing stricter environmental and operational standards on that country’s mining industry. This could lead to increased costs and operational delays for mining companies more generally.

In addition, the uranium price has been in a steady decline since the 2023 rally was staunched by new supply coming online by new mine commencements and other mines coming out of care and maintenance. Across the two major producers, Kazakhstan’s Kazatomprom and Canada’s Cameco, supply chain issues experienced last year and into early this year appear to be in hand or beginning to alleviate.

Uranium Futures (Front month, back-adjusted) COMEX chart (click here for full size image)

Do the charts suggest buying the dip in Paladin Energy shares?

Paladin Energy (ASX: PDN) chart (click here for full size image)

I note the Paladin Energy chart is in a well-established short term downtrend and its long term is on the verge of transitioning from neutral to down.

The short term trend ribbon appears to be impeding price rallies, and the price action shows failed attempts to reclaim the long term trend ribbon since it was breached on 29 October.

The price action is falling peaks and falling troughs, and the candles are predominantly supply-side in nature (i.e., black-bodied and or upward pointing shadows).

Each of these factors imply a strong degree of supply-side control of the Paladin Energy price in the short term, and increasingly now in the long term.

There are few clear historical points of demand that may provide some support to the Paladin Energy share price in the near term. The closest point of demand is the major trough low of $5.15 set on 30 May 2023.

Should the Paladin Energy price close below Tuesday’s low price of $6.83, there is no technical reason to suggest $5.15 may not be a potential downside target.

As for potential supply zones – these are plentiful. Really, the entire price gap from $7.74-$9.56 could act as a potential zone of excess supply. But within this, I note the historical point of demand at the major trough low of $8.15 set on 9 September 2024 could now act as a point of supply.

Demand-side control would manifest itself as a predominance of white candles, potentially on above average volume (to indicate some supply removal/exhaustion), and by rising peaks and rising troughs. Eventually, demand-side control could be confirmed by the price trading above the short term trend ribbon, and the short term trend ribbon transitioning back to up.

Those who prefer to use a trend following methodology are likely best served by simply monitoring Paladin Energy until these key factors are observed.

NOTE: For a detailed explanation of my technical analysis method, please refer to my TA & ChartWatch Primer.

Do the big brokers suggest buying the dip in Paladin Energy shares?

Paladin Energy (PDN) Broker Consensus vs 12 November Update (click here for full size image)

The big brokers chose to maintain an optimistic approach to Paladin Energy and its near term operational challenges. Generally, they chose to look through these issues as likely being relatively transient in nature, consistent with the typical challenges of restarting production at the Langer Heinrich mine, and unlikely to significantly impact the long term viability of the project or long term production goals.

• Jefferies believed the market response to the latest update was overblown, with little long term impact anticipated.

• Shaw and Partners noted the downgrade was anticipated, and is likely manageable.

• Argonaut Securities noted the scheduled November shutdown would allow Paladin Energy to catch up on the water supply issue, also agreeing the selloff was excessive.

• Morgan Stanley and Citi both expressed one of the reasons for sticking with the stock was their overall bullish stance toward uranium in general.

• Canacord Capital Markets warned that the share price reaction could be an indication the market is “prematurely ascribing production challenges throughout the life of [the Langer Heinrich] mine”.

Let’s now calculate Paladin Energy’s updated broker consensus rating and target price. Note that all ratings and targets are taken from broker research notes collected since July 1 (to keep them current).

To obtain a stock’s Broker Consensus Rating, we assign a value of +1 to any rating better than HOLD/NEUTRAL/MARKETWEIGHT, a value of 0 for any rating equivalent to HOLD/NEUTRAL/MARKETWEIGHT, and a value of -1 to any rating worse than HOLD/NEUTRAL/MARKETWEIGHT.

We then take the average of all assigned rating values and assign a Broker Consensus Rating of BUY to values greater than +0.5, a rating of HOLD for values between -0.5 and +0.5, and a rating of SELL for values less than -0.5.

Paladin Energy’s broker consensus rating is +1.0 (up from +0.89 prior to September quarterly results) resulting in a Broker Consensus Rating of BUY. Its consensus (average) target price is $12.76 (down from $13.77 prior to September quarterly results). This suggests brokers collectively believe the stock is around 71.1% undervalued based upon the closing price on Wednesday 13 November of $7.46.