Submitted by: Zoltan Ban
Summary
- As one of the largest global uranium producers, Cameco is an ideal candidate to invest in, if one believes we are on the verge of a long-term uranium bull market.
- It is sitting on high quality reserves, which are equivalent in size to the tenth largest, if Cameco were a country.
- There is a very real prospect of Cameco & other uranium miners not only benefiting from a secular uranium bull market but also becoming safe-haven investment in case of recession.
As I pointed out at the end of 2016, I started looking at the uranium market as a long term investment opportunity which I thought 2017-2018 will be the best window of opportunity to get in. I started building a position in UR-Energy (URG) last year, and thus far I think I made the right move. One of the main considerations was that it is producing solid results that one can expect will get the company through any potential hard times ahead. At the same time, there is the prospect of reaping significant profits if as I expect, the uranium market starts to rally. Cameco (CCJ) was my second choice, which I just exercised very recently, as its stock price briefly dipped bellow $9. It is often the obvious choice for the uranium investor, given that it is the second largest producer of uranium in the world, with 24 million pounds of production estimated for 2017, which is about 17% of total global mined production.
For 2018, the share that Cameco will claim in the total mined supply will most likely be less, given the announced reduction in production. That announced reduction through its suspension of operations at its Mc Arthur River mine for 10 months, which was producing 12.6 million pounds of uranium per year resulted in uranium prices rising last year. The Cameco move came as Kazakhstan’s state-owned producer also announced a significant cut in production. The fact that Cameco can move prices to such an extent is a testament to just how important a player it is in the industry.
Aside from being a very important player in the uranium mining industry, Cameco is also a very intriguing producer, given that it is sitting on some relatively high-quality reserves, which it can produce in high volume at a decent price. For 2017, it estimated production costs in the $35-$36/pound range, while the average realized price was $47.50, as of its third quarterresults. With over 400 million pounds in proven & probable reserves, mostly of high quality, it is sitting on about 20 years worth of production, based on levels seen in the past few years. Incidentally, if Cameco were a country its reserves would be the tenth largest, just behind Namibia.
As far as its financial results go, for the first nine months of 2017, it produced a net loss of $143 million, on revenue of $1.35 billion. Not exactly the most glamorous result, but we should keep in mind that even though uranium prices bottomed in the fall of 2016, last year was still the worst in over a decade when it comes to average uranium prices. Most indications and forecasts for this year suggest that it will be better than last, therefore Cameco might stand a good chance of at least breaking even on its operations this year. The margin of loss in relation to its revenue was not very wide last year, so it will not take much to bridge the gap.
Uranium miners may be safe haven investment in coming years, in case of recession.
I covered the global uranium supply/demand outlook extensively in the past year, starting with my first article where I announced my intention to start exploring uranium miners as investment prospects back towards the end of 2016. My last article, which focused on Ur-Energy (URG) also focused on not only the particular data and information relevant to the stock, but also on the all-important overall global uranium supply/demand outlook. If I were to once more lay out the details in regards to why I believe we are looking at a uranium price increase in coming years, I’d only be repeating many of the facts & views I already expressed in previous, including recent articles. I will therefore only present one point, namely that the post Fukushima demand downturn has ended.
As we can see, the current decade was heavily affected by the uranium demand downturn in Japan. In the past few years that trend has been reversed and we are most likely looking at a return to robust demand growth. This, within the context of Kazakhstan & Cameco slashing production in response to current prices can only mean that uranium prices will have to rise in order for the market to receive more supply. More supply is clearly needed for the longer term, given the demand outlook. Problem is that there is really no way of telling when that extra demand will show up, given that utilities tend to stockpile this fuel and can just work on bringing their own resources down for a while. One thing that this does tell us is that there is really very little chance of uranium prices heading much lower from current levels, given that producers are already showing a great deal of unwillingness to maintain current production at current prices. This all points to a uranium price bottom, which is when it is time to invest in the sector, which is why I started buying in order to build a long-term position.
Aside from the fact that we seem to have reached the bottom in regards to uranium prices, I want to point out the fact that uranium miners might get a boost due to possible factors playing out outside the uranium & related industry. We should keep in mind that we are now into one of the longest economic recoveries since the Second World War. This of course cannot last forever, even though some people may be increasingly tempted to believe that it can, every time someone screaming “recession” is proven wrong. I personally believe that it has to happen within the next few years and when it does, the big question will be what the safe haven sectors will be within the context of an overall stock market downturn. I personally think that uranium may be that big exception this time around.
The reason why I believe uranium is likely to be a strong performer in the event of a wider stock market downturn, perhaps triggered by another global economic & financial crisis, is because the nature of nuclear power is such that it should not be affected by such a downturn in the shorter term. There are currently 449 nuclear reactors around the world, and it is unlikely that any of them would be shut down in the event of an economic downturn. It is more than likely that other sources of electricity, produced with fuels such as coal, or natural gas would be idled. The reason for this is because the main cost of nuclear power tends to be the sunk cost when it is built. The cost of running the plant as well as providing the fuel are much lower.
Neither will most the 60 reactors currently under construction be affected in any way if there is another economic crisis on the horizon. These are all long-term projects, which would most likely not be delayed in response to economic cycles, because such projects are meant to produce electricity for many decades, in other words will span many economic cycles. As such, fuel sources will have to be secured for any new reactors coming on line, therefore uranium demand should overall be unaffected by any garden variety global economic downturn.
Because the uranium market will most likely enter the next global economic & financial downturn in full bull market mode, it might just end up being the ideal alternative to selling all other assets and just sitting on cash. With the global stock markets selling off, generating a lot of idle cash, a boom story which will be unaffected by the economic downturn is potentially an ideal long term investment story. Given the uranium long-term supply/demand outlook, as well as the odds of the world entering another recession within the next few years, I think the prospect of such a near-perfect scenario might just be something that might become reality. If it does, then owning Cameco stock in the next few years is in my view a must, which is why I decided to start building a position.
Disclosure: I am/we are long CCJ, URG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Source: Seeking Alpha