EU and UK Energy Rush: Rolls-Royce and Paladin in the Race

Investing in renewable and clean energy can be done in different forms. For example, you could invest in commodities or actual products like solar. 

As local investors anxiously wait to hear how South Africa plans to tackle the ongoing rolling blackouts, we’re taking a look at companies that may expose EasyVSTRs to renewable and clean energy. We also chatted about this with the Financial Mail team who shared insights on a few companies that may present investment opportunities at this time. You can check that out here.  We’re taking a look at two companies that have the potential to be profitable, given the demand fueled by sanctions on Russia that have continued to hinder the supply side of energy.

Paladin Energy Limited (PDN)

The European Union (EU) has been on a journey to reduce its dependence on minerals from Russia through the EU energy strategy 'REPowerEU' released in May 2022. In July, the Union voted in favor of classifying natural gas and nuclear energy as "green," adding them to the EU taxonomy. The EU taxonomy is a system aimed at combating greenwashing, which is the practice of misinforming aspiring green consumers. In the same month, Paladin Energy announced it would be restarting its uranium mine in Namibia by Q1 2024, which has been idle due to low uranium prices. It will also commence exploration activities in the Michelin Project in Canada, which it owns about 70% of. It’s important to note that inflationary factors have taken a toll on the costs associated with restarting the Namibian project.

Australian uranium miners, including Paladin Energy, raised nearly USD 290 million (AUD 400 million) through shares to fund exploration and resuscitate mines during 2022. At the Digger & Dealers Mining Forum in Kalgoorlie, Australia, Ian Purdy, Paladin Energy CEO, highlighted that the current primary uranium supply cannot meet demand, and that secondary supplies and inventory drawdowns are meeting the deficit. 

"The decision to restart production at the Langer Heinrich Mine  (LHM) is supported by strong uranium market fundamentals and continued progress on uranium marketing activities, including the execution of a binding contract for the previously announced Tender Award," the explorer said.

Paladin Energy is an exploration company. This refers to mining companies with little to no operational income. By December 31, 2022, Paladin Energy had an unrestricted cash balance of USD 163.2 million (USD 1 million excluding restricted cash). Expenses for the quarter topped USD 1 million. 

In most cases these companies are overvalued due to not having many operations. Using its current balance and that of June 2022 (average per month), we can assume that the company can go another 70 months or more than five years. Again, this may be affected by various other costs; for example, we can see net loss for the six months increased by 21% because of the LHM operations, finance, and share base expenses.

Considering that Russia is one of the biggest players (suppliers), the sanctions for the US and EU may continue to affect the global uranium supply. Looking at where the explorer will be supplying uranium, it has successfully executed off-take agreements to provide to industry counterparts in the US and Europe. Manyingee and Mount Isa-Australia are two of its exploration projects that are at an advanced stage. As of writing, uranium was trading at a high of $51 per pound. Its Langer project has a 10-year production history.

Rolls-Royce Holdings PLC (RR)

Rolls-Royce Holdings plc is a United Kingdom-based engineering company focused on power and propulsion systems. The company's segments include civil aerospace, power systems, and defence. Through its subsidiary, Rolls-Royce SMR, Rolls-Royce has been making strides in the energy generation market, securing deals with governments around the world. Three UK sites, where the company will produce components of its small modular nuclear reactor (SMR) were revealed in December 2022. SMRs are a class of nuclear fission reactors smaller than conventional ones. Components to be produced while it waits for regulatory approval will be those that will likely change.

According to various sources, Rolls-Royce SMR intends to start producing power to the grid by 2029 (regulatory approval by 2024). In 2021 the company secured capital that amounted to GBP 210 million through the UK government. This, together with GBP 250 million in funding from the private sector, will advance the SMR project. Kwasi Kwarteng, a Member of Parliament of the United Kingdom, said: "Small modular reactors offer exciting opportunities to cut costs and build more quickly. In working with Rolls-Royce, we are proud to back the largest engineering collaboration the UK has ever seen. 

"Our power stations will be built in British factories situated in the north of England or Wales and will generate tens of thousands of long-term highly skilled jobs - accelerating regional economic growth," Rolls-Royce SMR Chief Executive, Tom Samson added. 

On Friday, 23 February 2023, the stock rallied by over 20% following its much-anticipated earnings report.

Stocks tend to be bullish after reporting positive earnings; this may not be a consistent rally. Rolls-Royce seems a bit overvalued as of writing, given its EPS of GBP 0.01. Strong support in earnings may be required to catch up to where it's currently trading. Rolls-Royce, the parent company, is not only focused on SMRs. Civil Aerospace flying hours recovered by 65% on the 2019 levels. Even though China – and Asia in general – experienced lower travel rates because of the zero Covid policy, the US and Europe had a strong turnaround. The defence segment experienced strong growth due to contract renewals and repricing; demand for its power systems remained relatively high. 

The defence book-to-bill ratio of 1.5x (ratio between orders received and billed during a specific period) may reflect high demand in the industry. Power Systems may also continue to see strong demand; these segments had a net margin of 11.8% and 8.4%, respectively. The net margin reflects how much the company makes after costs in percentage. As it stands, the SMR business and electrical division is still operating at a loss which was reported at GBP 132 million (GBP 70 million loss in 2021). The parenting company went from an outflow of GBP 1.5 billion to an inflow of GBP 0.5 billion in 2022, primarily due to Civil Aerospace, and Power Systems. It also had an impressive order book in the business units and defence.

Underlying profits from continuing operations were GBP 652 million ( vs GBP 414 million last year) - this was a 57% improvement; its debt remains relatively high at GBP 3.3 billion (from GBP 5.2 billion in 2021). Rising rates may mean result in rising debt if not serviced. By the end of its 2022 financial year, it reported a cash balance of GBP 2.6 billion and GBP 5.5 billion credit.

Nuclear energy 

Nuclear energy has been a hot topic for years, and many countries are keen to make use of it. Investors should also be aware that the space has been faced with backlash from activists referring to the EU move as greenwashing. This may create a hurdle to making nuclear-powered cities a reality from a macro environment perspective.

Currently, nuclear reactor set-up costs are high. This won't be easy to introduce in emerging markets. In addition, constructing nuclear plants may take up to several years, which may also mean that nuclear energy may flourish more in jurisdictions that already have plants.

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Sources – EasyResearch, Rolls-Royce Holdings plc, Rolls-Royce SMR, Paladin Energy Limited, ASX, Power Technology

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