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CAMECO CORP: Exploring the Uranium Opportunity

PREPARED BY: Chris Stanford 

DATE: 6/14/20

During the pandemic, uranium prices have doubled. Prior to this year, prices have maintained a long sustained sell-off. Uranium is an essential element needed in the production of nuclear energy. Nuclear is undoubtedly the most efficient energy source that currently exists. It’s failed to gain mass adoption because of the severity of previous disasters. A lot of innovation has happened in this space, making it a much more viable option going forward. The main price driver right now is supply chain disruptions (something I will address later in this research report). 

I’ve personally been paying attention to this industry for years. Cameco is the world’s largest uranium mining company. The majority of its operations are located in Canada. Canadian miners have the highest yields among uranium-producing countries.  The reason I’m initiating coverage on Cameco is because of the recent resurgence in Nuclear energy across the globe. Uranium is my favorite way to play this trend. I would compare it to trading lithium instead of the electric vehicle producers. 

If we saw dramatic demand increases this could really create a supply and demand imbalance. Uranium is actually an abundant element. So why would we see an imbalance? Uranium has to be refined and enriched in order to be used in a nuclear reactor. This process can take years, and there are only a handful of large uranium miners. Here are some of the major catalysts that I’m paying attention to:

COVID RELATED SUPPLY CHAIN DISRUPTIONS

Cameco and several other uranium miners have had their supply chains massively disrupted by the Coronavirus. A large portion of global mining facilities are operating at a limited capacity. While Uranium demand has been virtually unaffected by the pandemic, supply has been heavily impacted. Cameco and Kazatomprom are the two largest uranium suppliers. 

These two companies have a tremendous impact on the global uranium supply. Cameco is among several producers that are forced to scale back their operations. In the short run this is undoubtedly a negative catalyst. Cameco operates primarily on long term contracts that require continuous delivery of Uranium. Regardless of their circumstances, they still need to be able to make delivery. In order to fulfill their obligations, they have to purchase Uranium in the open market.  but it’s actually a net positive. 

Uranium prices have been steadily declining, as a result of declined interest in nuclear energy.  Despite the fact that it’s currently the most cost-effective form of renewable energy, it is perceived as being extremely dangerous. Over the past decade, nuclear reactors have become extremely safe. Bill Gates is amongst several credible names vouching for this technology. Several years ago he invested in a company called TerraPower, based on his belief that nuclear energy is the future of clean energy.

MARGINAL COST CURVE

Currently, the Nymex spot price for uranium is $30. However, the marginal cost for most uranium miners is around $55-$60. The business model isn’t viable at these prices. A lot of miners have had to stop production, due to the low prices. 

Under international pressure to do more to address global warming, Xi Jinping made a surprise commitment to drastically reduce emissions. They have made several empty promises in the past, but China is already leading the way in the alternativeenergy sector. They’ve recently started becoming very serious about alternative energy, out of desperation to eliminate their coal dependence. The United States currently has the most amount of Nuclear reactors. China is 3rd, but they are gaining ground quickly. At this rate, they will surpass the United States in the next 10 years. 

CHANGES IN THE UNITED STATES

Congress recently approved funding for a 10 year US uranium reserve. Uranium producers have been lobbying legislators to create a quota system that would cap the amount of uranium from foreign suppliers. A large portion of U.S. consumed uranium comes from Kazakhstan. This could be a net benefit for Cameco. Although this isn’t a U.S. company, they have operations in the country.

A LOOK AT THE NUMBERS

Right now the company trades at a $5 billion market cap. When you look at the balance sheet, you’ll see that essentially the company trades at book value.  The reason why it’s trading at such a steep discount is because of a decline in revenue over the past 5 years. Over the past 3 years revenue has declined by 8.5%. Nuclear Energy was previously seen as a failed experiment. Finally, after many years, projects around the world are getting the green light. What redeems Cameco’s lack of revenue growth is the strong balance sheet. They have close to 5 billion in total shareholder’s equity (aka the book value of the company). The market cap is roughly the equivalent of the net assets of the business. What particularly interested me is that Cameco could finally have consistent margins 

INVESTMENT STRATEGY

I want to make one point clear right away, this is not a core holding. My net exposure to this sector is less than 5% of my total portfolio. It’s somewhat difficult to identify a clear winner, as well as a time frame. I would classify this as a Yolo play. That means that the probabilities of the idea being successful are quite low. Nuclear energy being deployed at scale is still largely a pipe dream. Despite the fact that China and other emerging markets are increasing their investments in this space. 

PRICING TARGET

Uranium miners being forced to cut production could have some longer-term pricing impacts. areWhat allows me to justify owning this at all is the proportionate risk vs. reward. Making a trade on $CCJ in the options market creates the ability to potentially make several hundred percent return. The Nymex spot price of Uranium should more realistically be around $60. Right now it’s trading around $30. I looked at the marginal cost associated with mining uranium. The marginal cost is much closer to $45-60 depending on the size of the operation. I wouldn’t be surprised to see the price go up another 50-100% in the coming years. 

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