A Cameo JVS operator during a Cameco media tour of the uranium mine in Cigar Lake, on Sept. 23, 2015.Liam Richards/The Canadian Press
Way back in the day, Benj invested in General Public Utilities Corp., the company that owned Three Mile Island, synonymous with the biggest nuclear disaster in U.S. history. Being his contrarian self he bought in after the 1979 accident with the stock decimated, and though it took several years, ultimately he did reasonably well on his investment. Since then, he has not bought into a company in this field, except for GSE Systems Inc., which trains people in the nuclear industry along with other sectors.
Meanwhile, Ben bought into uranium producer Cameco Corp. (CCO-TSX) in December and it has done reasonably well, up from the $11.86 purchase price and currently trading around $14.50. He believes that a double or better from this level is very realistic, and that is not even close to the $55 where it traded in 2007. How might the company regain its former glory?
A higher uranium price would be a good start for this enterprise, which is the biggest supplier of uranium outside of Kazakhstan. The spot price was around US$18 in 2017, and soon after management deemed the low price made it astute to put the huge McArthur River/Key Lake facility in northern Saskatchewan on care and maintenance. That’s costing between $7-million and $9-million a month. The powers that be in Kazakhstan, the world’s largest supplier of uranium, also cut back, with all parties looking to realign supply and demand. It has helped the uranium price to recover and lately it has moved up from US$24 a pound in March to around US$33 today.
One major problem reducing demand was the Fukushima nuclear disaster in 2011. When that happened, Japan shut down the industry, although it has since made something of a comeback there. Numerous other nations have since decided to re-evaluate nuclear. Germany went extreme – it is in the process of decommissioning all 17 of its reactors. Currently, about 440 nuclear reactors are currently operating in 30 countries, with more than 50 under construction.
Cameco management continues to react to challenges, most recently to COVID-19. In March, production was temporarily suspended at Cigar Lake, meaning the world’s second-largest uranium miner, with very low-cost operations, is not mining. Instead it is buying uranium on the spot market to fulfill its obligations to utilities. The risks with this strategy are twofold. First, Cameco may not be able to find enough material on the spot market to meet customer obligations. So far, that has not been a problem. Second, if spot prices jump close to or above contract prices, this will eliminate the profit spread possibly causing CCO to fulfill contracts at a loss.
When restarts do occur, the process is not always speedy. While Cigar would come back online fairly quickly, the McArthur facility would take about nine months to resume production.
The big news of late is that Cameco won a decision last month against the Canada Revenue Agency. There is a huge piece of change at stake: The tax authorities are holding $785-million of the corporation’s money. The CRA has until November to appeal to the Supreme Court and if it does, another couple of years can easily pass before a ruling is made. But winning this round was big for Cameco and if it prevails, it will substantially improve the balance sheet for this entity that has total debt north of $1-billion, around half the level of revenue.
Where will prices for uranium go from here? Some predict much higher prices because of potential shortfalls of the commodity next year. Others seem to think that there will be stacks of supply until 2030. Alas, we are not expert enough with this debate to know who is right, but as the nuclear plants under development are completed, that should boost demand.
Once Cameco reopens one of its mines, that will be a bullish signal and should stimulate the stock price, at least in the short term. Longer term, one of the keys is that there not be another nuclear disaster. Three Mile Island, Chernobyl and Fukushima all dramatically harmed the prospects for this sector. Another catastrophe will only tarnish it further and diminish the probability for a major recovery for years.
There was a radiation cloud recently detected over Scandinavia, but where it came from is unconfirmed. And last week Iran admitted to a damaged centrifuge facility at an underground nuclear site, but it said it is only an “incident.” That seems to be the norm: Playing down accidents until they become too big to sweep aside.
At the end of the day, patient investors buying CCO could be well rewarded. However, this is a very complex sector, where dangers can quickly fill the air.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter
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