The global energy market will need to expand, there’s no doubt about that. In a context in which fossil fuels are each day becoming scarcer, nuclear energy is increasingly appearing as a new alternative for many economies. Meanwhile, in the same way as oil and gas reserves are constantly being reduced, the world is also running out of uranium. Summing things up — an augmenting demand for uranium combined with a shrinking supply — the price of uranium should (ceteris paribus) go up.
Of course, this is good news for uranium producers. Hence, it is good news also for stockholders of these companies. At first glance, they shouldn’t have anything to lose. But of course there are producers that will be able to outperform others. A company I consider will be in full capacity to grasp the advantages of the market is Cameco Corp (CCJ, Financial), the largest uranium producer worldwide. Other options which I believe could also be good bets are Denison Mines Corp (DNN, Financial) and Ur Energy (URG, Financial), although their financials do suggest that Cameco should be a better option.
Low Cost as a Response to Volatility
If higher prices were to be a reality for all companies within the nuclear industry, why should some of them look more attractive? A simple reason for this is that, even though in the long-run we expect uranium prices to climb, this trend might be materialized in the short-run by a succession of ups and downs that will, with time, drive prices to a higher level, but may in the way harm firms through intense price volatility (what is to say, income volatility). This may be the consequence of variations in society’s aversion to nuclear power and, of course, of economic cycles themselves. Thus, corporations that will be able to succeed in this unstable context are those with a robust-enough cost structure that will allow them to continue to pursuit benefits even in the down part of cycles.
For this reason, I consider Cameco – one of the world’s lowest-cost producers at about CAD 18 per pound in 2013 – to be a great candidate. Owning some of the highest-grade uranium deposits worldwide, Cameco has a strong comparative advantage with respect to its peers. Knowing this, management doesn’t want to sit on their “superiority,” but instead, works on enlarging the gap (something that makes me trust this management). The company is now looking forward to augmenting its production capacity by the recent acquisition of the Millennium uranium project for USD150 million, the uranium trader NUKEM (USD250 million), and the Yeelirrie uranium project (USD452 million). These initiatives, together with its highly productive Cigar Lake Project, will surely position Cameco in a more elevated level than its competitors.
Denison Mines, which does possess good uranium deposits, is still far from reaching the efficiency levels of Cameco because of its smaller scale. Ur Energy, on the other side, is still on a more incipient position and has, in addition, a different approach: instead of fighting volatility with a low-cost strategy, the company is aiming at having a more dynamic and diversified profile in order to better adapt to the swings of the market. None of these companies has posted positive earnings results in their last reported quarter (third quarter 2013): Denison Mines posted a net loss of USD45.5 billion, while Ur Energy’s net loss was of USD3.2 billion. Conversely, Cameco reported a net profit of USD211 million in the same period and of USD64 million in fourth quarter 2013. This may not necessarily be an indicator of future performance, but it does give us an idea of how well the three companies are steering through this constantly changing economy.
Some of the world’s best recognized investors are already turning to Cameco. Among them is Louis Moore Bacon (Trades, Portfolio), who has just purchased 455,000 shares, and Steven Cohen (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and George Soros (Trades, Portfolio), who have increased their tenancy in 1986.6%, 43.95% and 42.35%, respectively. They might be wrong – yes, they’re human – but I guess this still is a signal of potential gains. Maybe not explosive gains, but gains in the long run all the same!
Disclosure: Damian Illia holds no position in any stocks mentioned.
