Investment Matters

Company News: Aveo, Pact, Cardno and uramium

Aveo provided a trading update, along with an update of its strategic review process.

The trading update first – as expected, Aveo’s underlying profit for FY-19 will be ~$50m.  This is lower than FY-18 because of the subdued resi property market conditions (and the tail-off of their non-resi business), but was also lower than expectations.   However, we note a key point from their announcement: underlying operating conditions have improved since May, with momentum evident in Q3 - with 23 net retirement unit sales written per week, up from 19 per week in Q2 and Q1.

In regard to the strategic review, Aveo now has a confidential, non-binding and conditional indicative proposal for a full takeover of the business.  The company has given until the 22nd of July for this proposal to move to announcement and completion.

We are strongly of the view that the downside to Aveo is now low.  It is a large business trading at a substantial discount to its hard book value.

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Paladin Energy this week announced an agreement to sell part of its interest Kayelekera, its higher cost (and economically marginal) mine.

The sale will relieve the company of ongoing care and maintenance costs at Kayelekera, and allows for the return of an environmental bond that is currently held.  It involves a cash, scrip (equity in the purchaser) and royalty component. Thus, the company will continue to retain a significant economic interest in Kayelekera and benefit from future production from the mine (when it is restarted in the future).

More importantly, the proceeds from the transaction will allow the company to maintain its Tier 1 Langer-Heinrich mine for an additional 1.5 years.  This will propel the company further into the time frame for what we see as an impending shortage in uranium supplies globally, and removes any need to raise capital in the immediate term.

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This month we made a small investment in uranium producer Deep Yellow. The investment serves to diversify our exposure to the uranium sector. Deep Yellow is led by the former CEO of Paladin Energy, John Borshoff.

Mr Borshoff and his team were one of few operators who successfully brought mines into production during the last upswing in the uranium cycle. Furthermore, they achieved this in a remarkably short period.  Furthermore, Mr Borshoff and his team have built a strong reputation within the industry (and with customers), due to a history of operational performance.

Deep Yellow is looking to create a diversified portfolio of uranium mines in the near term, which creates greater certainty of supply for utilities (power plants).  We assess this will position the company as one of few reputable and diversified suppliers in the market (alongside Paladin) when the impending shortage in uranium supplies globally is reached.

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Pact Group announced that it has successfully extended $380m of debt, which was due to mature in Jul-20, to Jan-22.  This was secured at what the company assessed as competitive terms.  In addition, Pact has negotiated an additional $50m unsecured term loan.  This will be used to pay down higher ranking debt, giving Pact greater flexibility.

We view debt restructure positively, as it reinforces lenders’ commitment to Pact.  Additionally, it gives the company greater flexibility to implement its network redesign, continue its operational improvement program and complete existing growth projects.

In addition, Pact confirmed it is on track to meet FY-19 EBITDA (earnings before interest, tax, depreciation and amortisation) guidance of $230m to $245m, albeit at the lower end.

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Cardno announced that it is also on track to meet FY-19 guidance - for underlying EBITDA of ~$60m.  It also announced a non-cash impairment change of ~$48m; writing down the holding value of its Asia Pacific business.