Cameco Powers Up

“While the day will come when we can rely on solar, wind or geothermal energy to meet most of our electricity needs, today is not that day.”

—Benjamin Shepherd, Global Investment Strategist

The uranium story over the past five years can be roughly divided into two chapters: pre- and post-Fukushima.

The March 2011 disaster, in which a major earthquake touched off a 50-foot tsunami that washed over Japan’s Fukushima Daiichi nuclear station, resulted in an accident that rated a 7 on the International Nuclear Event Scale—the same level as Chernobyl 25 years earlier.

Uranium prices had been gaining strength in the year leading up to the tragedy, reversing a downward trend in the wake of the financial crisis. The spot price rose from $42.38 a pound in early January 2010 to $72.63 in January 2011. It pulled back slightly in February, then, weighed down by the disaster’s aftermath, began a multi-year decline to today’s level of around $35.

Pre-accident uranium demand was fueled by developing nations like China, which planned major nuclear expansions to handle rising electricity use and cut their reliance on coal. After the accident, however, global demand cooled as some developed nations rethought their nuclear plans. Japan—which had relied on nuclear power for about 30% of its energy needs—idled all of its remaining 48 reactors.

Japan: Flicking the Switch?

The good news is that uranium looks like it’s finally about to break out of its slump. According to a recent forecast from Cantor Fitzgerald metals and mining analyst Rob Chang, prices will average $43.25 a pound in 2014, rising to $62.50 next year and $70 in 2016.

Once again, Japan is a major catalyst.

Global Investment Strategist editor Benjamin Shepherd explains why in an article in the March 19 issue:

“When Japan’s prime minister, Shinzo Abe, took office a bit more than a year ago, he promised to rethink the government’s decision to idle all the country’s nuclear reactors,” Shepherd wrote. “In the wake of the shutdown, Japan has become heavily dependent on natural gas to fuel its electricity needs, driving a spike in the price of Asian liquefied natural gas (LNG).”

“The LNG price spike has resulted in higher heating and electricity prices in Japan and across the region,” Shepherd added. “Consequently, Abe’s government has proposed restarting at least some of the country’s nuclear power stations in its recently released Basic Energy Plan.”

It’s not clear how many Japanese reactors may come back online or when, though 10 may open this year, according to a recent survey of analysts by Bloomberg. Abe’s plan also leaves open the possibility of building new facilities.

Meanwhile, developing countries mostly stuck with their nuclear plans post-Fukushima. According to the World Nuclear Association, China now has 20 nuclear reactors in operation, 28 more under construction and others in development. In all, the country aims to more than triple its nuclear capacity by 2020, with further increases planned after that.

In all, Canada’s Cameco Corp. (NYSE: CCJ, TSX: CCO), one of the world’s largest uranium producers, predicts that there will be 526 reactors in operation worldwide in 2023, up from 433 now.

That increase is one part of the formula for higher uranium prices. The other is an expected tightening of supply, as today’s low prices force producers to shutter higher-cost mines and hold off on building new ones. According to Bank of America Merrill Lynch, the uranium market will be balanced until 2016, when it will swing to a deficit that could widen to as much as 20 million pounds by 2020.

New Production Needed

Over the next five years, Cameco forecasts that 20% of uranium demand will have to be met through new production, an area Shepherd sees the company as perfectly positioned to fill.

The company accounts for about 15% of the world’s uranium production and has over 400 million pounds of proven and probable reserves. It has producing mines or properties under development in Canada, the U.S., Australia and Central Asia.

Cameco also boasts the industry’s lowest costs. Last year, its total cost per pound produced averaged C$27.87, while its average selling price was $48.35 U.S. ($1 Canadian = $0.92 U.S.)

Its assets include the 70%-owned McArthur River mine in Saskatchewan, Canada, which contains ore grades about 100 times the world average. That’s a key element of the company’s cost-competitiveness, because it allows it to produce a lot more uranium while mining much less ore. Cameco also owns 100% of the Rabbit Lake operation, also in Saskatchewan, which opened in 1975 and is North America’s longest operating uranium mine.

In all, Cameco produced 23.6 million pounds of uranium in 2013, up 8% from 21.9 million in 2012.

Big New Mine Adds Long-Term Potential

In addition, the company has just started up its 50%-owned Cigar Lake mine in Saskatchewan after numerous delays, including two caused by flooding, which led to significant cost overruns.

Nonetheless, Cigar Lake has considerable potential: it’s the world’s second-largest high-grade uranium mine, after McArthur River. When it reaches full production in 2018, it will churn out 18 million pounds a year.

During the fourth quarter, Cameco’s revenue rose 15% from a year earlier, to C$977 million, thanks to higher production. However, adjusted earnings per share (EPS) were off 35.6%, to C$0.38, largely because of a 4.4% decrease in its average realized selling price of uranium in the quarter, to $47.76 U.S. from $49.97. 

The company’s full-year results were more encouraging, with revenue rising 29%, to C$2.44 billion, and EPS gaining 2%, to C$1.12. Cameco’s average realized price was also up 1%, from $47.72 U.S. in 2012 to $48.35 in 2013.

The bottom line? “Going forward, while [Cameco’s] quarter-to-quarter results are likely to remain somewhat volatile, I look for a substantial improvement in earnings,” writes Shepherd.

Analysts are largely onboard with that view: the average estimate calls for earnings of C$0.92 a share this year, down from 2013, but rising to C$1.32 in 2015.

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