A few months ago, I wrote an article discussing if it would ever be time to buy Cameco (CCJ, Financial). There are several factors that make this stock a buy now: uranium is up in price from its bottom, natural gas is up in price and there is a perception that President-elect Trump looks upon nuclear energy with favor.
There are a few other reasons why it is time to buy Cameco. One is that the stock seems to have bottomed out just a few months ago and has been on the way up since then. The second is that uranium and Cameco have been out of favor for several years in a row. When a commodity has been losing value year after year, the price usually turns and explodes in an upwards direction.
I am going to use some of the same information from my first article. There are 396 million shares, the stock price is $11.12 and the market cap is $4.4 billion. It pays a 40 cent dividend for a 3.6% yield. Cameco produces 18% of the world’s uranium and has 410 million pounds of proven and probable reserves. The price of U3O8 has gotten pummeled. It is now at $20.25 a pound. It was over $36 a year ago and over $135 before the financial crash in 2008.
When I wrote the previous article back in September, the stock was actually at a multi-year low. The stock would go on to fall another dollar in value, then it turned and ran from $7.50 to $11, where it is today. The dividend yield was almost 5% but looked like it was going to be reduced (cut). The price of uranium was $25 and is now at $20.25, so you can see why I was bearish on the stock. Do not ever stand in the way of a moving freight train, especially when that freight train is a bear market in uranium.
The company says it provides U3O8 to 47 nuclear reactors worldwide. Of which, 31% are in the Americas, 49% in Asia and 20% in Europe. The five largest customers account for 47% of commitments. The company reported 190 million pounds are contracted. Cameco also converts UF6 for 33 reactors worldwide. Reactors that Cameco delivers to are located in Belgium, Canada, China, Finland, France, Germany, India, South Korea, Spain, Sweden, Taiwan and the U.S.
According to the annual report, Cameco expects to mine the following: 14 million pounds from McArther River in Canada, 8 million pounds from Cigar Lake in Canada, 3.6 million pounds in Rabbit Lake, Canada (which is shut this year due to low prices), 1.2 million pounds in Smith Ranch, Wyoming, 0.2 million pounds in Crow Butte, Nebraska and 3 million pounds in Inkai, Kazakhstan. Management pegs the Canadian costs at about $20 a pound, that is mined and milled. Costs for Kazakhstan, Australia and the U.S. are about $40 to $45. Not good with $25 uranium. For the first six months of 2016, costs averaged $43.09, up from $38.64 in 2015.
So as is obligated by any discussion on uranium, we have to chat about the number of reactors under construction. Here it goes: 21 in China, six in India, three in South Korea, four in United Arab Emirates and five in the U.S. The problem is that some of these reactors in China have their own supply of uranium. The Chinese have interests in their own mines and will not be buying from Cameco.
The company got dinged by the IRS and the Canadian government for a few hundred million for underpaying taxes. That is not pleasant. The balance sheet is a little disconcerting. There is $131.5 million in cash and $122.6 million in accounts receivable. The liability side shows $245 million in payables, $235 million in short-term debt and $1.5 billion in long-term debt. Free cash flow was negative $441 million for the first half of 2016.
In the second quarter, CEO Tim Gitzel noted that $2 natural gas and subsidized wind is tough for nuclear to compete with. Net earnings were at a $57 million loss for the quarter. Rabbit Lake had to shut down and took $124.4 million impairment. In addition, one of its customers canceled a contract but had to pay a $46.7 million fee. Cameco also had a truck leak taking ore from its Wyoming operation.
The price of natural gas was $2.50 earlier this year. It is now $3.52. As natural gas is a clean alternative and competition to uranium, this should portend good things for nuclear. If you are a nuclear bull, read this article from Atomic Insights. It shows bias towards nuclear but is a good read. This interview on Bloombergdiscusses how Trump's new cabinet is interested in revamping the famous nuclear waste depository, Yucca Mountain, in Nevada. Again, a good interview to watch. Having said all of this, there is no direct link to any comments from the Donald about nuclear energy. Much of this is just perception.
Guessing where a commodity is headed is very difficult. Commodities do not have cash flows like stocks and bonds, so they are difficult to gauge. It appears these many things work in Cameco's favor and should drive the stock higher.
Disclosure: We own CCJ.
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