Street Watchdog Starts Cameco at Buy
Price Target $18.00

February 14, 2017

Cameco Corp’s (NYSE:CCJ) stock price rose during the first two years of President Barrack Obama’s presidency and fell for the remaining six years.  The company's downfall began shortly after President Obama and Russian President Dimitri Medvedev signed the New START Treaty and Protocol, restricting the U.S. and Russia to no more than 1,550 deployed strategic warheads each as well as other limitations.  

From a 52-week low of $7.41 right before this most recent election, Cameco Corp rallied to a 52-week high of $13.59 just last month.  We experienced a 52-week low and a 52-week high all within a 3-month period of time.  By all indications, the recent rally would have continued had the uranium miner not thrown a wet blanket over the market’s expectations last month by pre-announcing a net loss for 2016.  Is this company simply a “Trump trade” or a dividend play, or is it a viable long-term holding?  What is the right balance between analysts’ expectations and an over abundance of caution by the company’s management as a result of a difficult 2016?  Based upon our analysis of the company’s fundamentals as well as macro trends in the uranium market, we are cautiously optimistic and consequently are starting Cameco at Buy with a price target of $18.00 by next year.

Who is Cameco Corp? :  Cameco Corporation is a miner of uranium, based in the Canadian province of Saskatchewan.  It was created by the merger of Saskatchewan Mining and Eldorado Nuclear in 1988.  The company is very well managed.  In fact, just this past year, Cameco was named to the Top 100 List for most Sustainable Corporations in the World. 

The Company is engaged in the exploration for and the development, mining, refining, conversion, fabrication and trading of uranium for sale as fuel for generating electricity in nuclear power reactors.  Uranium is a very heavy metal which has been used as an abundant source of concentrated energy for over 60 years.  It is believed to have been formed in supernovas about 6.6 billion years ago.  Its slow radioactive decay provides the main source of heat inside the Earth.

Cameco is one of the world's largest uranium producers, providing about 17% of the world's production from mines in Canada, the United States, and Kazakhstan, and holding about 415 million pounds of proven reserves.  The company is also a leading provider of nuclear fuel processing services, supplying a great deal of the world's reactor fleet with the fuel to generate arguable one of the cleanest sources of electricity available today.  The company has done an excellent job of securing land with exploration and development prospects that are among the best in the world.  In northern Saskatchewan alone, it has direct interests in 1.6 million acres of land covering many of the most prospective exploration areas of the Athabasca Basin. The Athabasca Basin contains upwards of 1.5 billion pounds of high grade uranium, and this region currently produces approximately 20% of the world’s uranium supply.  Many of Cameco’s prospects are located close to its existing operations in this uranium rich region where the company has established infrastructure and capacity to expand.

Cameco’s Operating Segments:  Cameco operates through the following three segments:

1.  The uranium segment, which accounts for 17% of the world’s production, involves the exploration for, mining, milling, purchase, and sale of uranium concentrate.  A portion of Cameco’s exploration, development, mining and milling activities are conducted through joint operations located around the world.  Cameco's Canadian uranium joint operation interests are McArthur River, Key Lake, and Cigar Lake.

2.  The fuel services segment involves the refining, conversion, and fabrication of uranium concentrate and the purchase and sale of conversion services.  Cameco controls 25% of world conversion capacity.

3.  The NUKEM segment acts as a market intermediary between uranium producers and nuclear-electric utilities.  This segment deals in the physical trading of uranium concentrates, conversion, and enrichment services.

Cameco’s Operating Properties:   The company’s current major operating properties include the following:

1.  The McArthur River mine in Saskatchewan, Canada is the world’s largest, high-grade uranium mine. Here ore grades are 100 times the world average.  Nearby is Key Lake mill, the world’s largest uranium mill.  Of the 18 million pounds of uranium produced at this location in 2016 (with the same amount expected in 2017), Cameco’s share is 12.6 million pounds.  Cameco owns roughly 70% of McArthur River and 83% of Key Lake.

2.  The second major uranium operating property is Cigar Lake, also located in Saskatchewan, Canada.  It is the world’s highest grade uranium mine, with grades that are 100 times the world average.  Cameco owns 50% of Cigar Lake mine.  Total production last year was17.3 million pounds, of which 8.7 belonged to Cameco.  Production for 2017 is expected to be 18 million pounds, of which half will belong to Cameco.

3.  The final major uranium operating property is Inkai, located in Kazakhstan, of which Cameco has a 60% ownership stake.  Total production from Inkai was 6.0 million pounds; Cameco’s share was 3.4 million pounds, the same as in 2015.

Uranium Projects Under Consideration:   Cameco owns or controls some of the best undeveloped uranium projects in the world.  These include the following:

1.  The Millennium project, located in Saskatchewan, Canada, is approximately 70% owned by Cameco.

2.  Yeelirrie, located in Western Australia, is 100% owned by Cameco.  This uranium deposit is a near-surface calcrete-style deposit that is amenable to open pit mining techniques. It is one of Australia’s largest undeveloped uranium deposits.  Preliminary research and environmental activities will begin in 2017 at this location.

3.  Kintyre, also located in Western Australia, is 70% owned by Cameco.  This uranium deposit is also amenable to open pit mining techniques.

Current  Results:   As the charts below show, as the price of uranium has fallen over the last six years, so has Cameco’s stock price.
The excerpt below from the company’s 2016 annual report shows a net loss of $62 million for 2016 versus a net profit of $65 million for the prior year.  The loss, however, is due to $362 million in impairment charges from Rabbit Lake and Kintyre in Australia versus only $215 million in impairment charges the prior year. Had the company not had those impairment charges, net earnings would have been a very respectable $300 million.

Despite the impairment charges and the historic low average realized price of uranium last year of USD $41.12, the company still delivered on its annual outlook with an average realized price on its uranium segment that was 60% higher than the average spot price for the year of USD $26.00, and it still managed to end the year with a very strong balance sheet.  Additionally, the company’s annual production in the uranium segment was 27 million pounds – 5% higher than its third quarter forecast.

Looking Forward on the Supply Side:   The global supply of uranium is not guaranteed.  According to the company, producers who have been protected from low market prices under long-term contracts are beginning to emerge from that protection.  As a result, both future supply and existing supply is at risk. Recently, Kazatomprom announced its intention to reduce 2017 output from Kazakhstan by 10%, citing market challenges.  Paladin has announced reduced production from its 75% owned Langer Heinrich mine in Namibia.  Some enrichers are retiring centrifuge capacity, thereby reducing excess capacity in the enrichment space that had contributing to broader oversupply.  Cameco itself has suspended and curtailed three operations.  Coupled with looming uncovered requirements, the risks to future and existing supply are expected to decrease the availability of spot material and increase the pressure for a return to long-term contracting.

Looking Forward on the Demand Side:  Looking out to 2018 and beyond, the company’s prospects appear very promising.  Right now, existing nuclear reactors use approximately 174 million pounds of uranium each year.  The quantity demanded will increase by an estimated 20% with the new reactors currently under construction.  The excerpt below from the company’s annual report shows 58 new reactors expected to come online in the next three years.  Another 149 reactors are in the planning stages or on order according to the IAEA!

According to uranium market analyst David Talbot, up to 20 percent of the uranium supply needed to operate the world’s existing 437 nuclear reactors for the rest of this year and next is not covered, and as much as 800 million pounds over the next eight years is similarly not covered.  The excerpt below from the company’s annual report depicts the estimated uncovered requirements through 2025.​​
A Fair Value:  Our price estimate for Cameco is based primarily upon our expectations of rising demand from uranium as well as rising uranium prices going into 2018, not on any expectation of a share buyback.  According to the company, if it were generating excess cash while there were little or no growth prospects for the company or the industry, then a share buyback might make sense. However, the current view is that the long-term fundamentals for Cameco and the industry remain strong.  The excerpt below from the company’s most recent annual report expresses some cautious optimism:
While the company’s 2017 forecast remains modest, with the decrease in supplies of uranium, coupled with the increases in quantity demanded due to uncovered requirements for 2017 and beyond, we are most definitely bullish on Cameco.  According to uranium market analyst David Talbot, Uranium pound prices could reach $65 by next year, and some mines – particularly those in the Athabasca Basin – will be extremely profitable at this price.  During 2011 when uranium prices were in the mid-$60s, Cameco was trading in the mid-$20s.  Given the positive macro and internal forces, we believe a price target of $18.00 by next fiscal is more than fair.  In answer to the question posed above, Cameco is not simply just a “Trump trade” or a dividend play; it a viable long-term holding.