Kazakhstan has witnessed a wave of deadly protests since the start of the year. The unrest was sparked by the government’s decision to remove a price cap on liquified petroleum gas, which sent energy prices soaring. As with so many demonstrations in authoritarian countries, the protesters’ initial grievances morphed into greater discontent over other issues such as corruption, economic inequity and political oppression. In response, the country’s President issued a “shoot-to-kill” order, shut off the internet and welcomed in Russian troops to help him regain control.
Though casual investors may not be following the violence in Kazakhstan closely, the country is economically important. Its oil output is similar to Mexico and its uranium production is unmatched. According to the World Nuclear Association, in 2020, Kazakhstan accounted for 41 per cent of the world’s uranium supply. By contrast, Australia, Namibia and Canada are the next largest producers accounting for 13 per cent, 11 per cent and 8 per cent, respectively. This makes Kazakhstan the largest uranium exporter by a country mile.
The protests have abated for now and the unrest did not affect production, but uranium’s spot market price shot up in response nonetheless, going from around US$43.50 a pound to US$47 a pound. This protest and the commodity market’s reaction highlight how global uranium supply is oligopolistic and fragile to shocks. Moreover, these events exemplify why TSX-traded, Saskatoon-based Cameco Corp. (CCO) is so important. While Cameco has a joint venture in Kazakhstan, most of its operations are in North America. In response to the unrest, Cameco stated its five North American mines could be brought back online if needed.
Here at Contra the Heard Investment Newsletter, we purchased Cameco at $11.86 in late 2019, and sold 42 per cent of our position in November, 2021, at $34.14. This trade translates into a gain of 187.9 per cent and takes the initial investment off the table, while still leaving plenty in the game to benefit from potential moves higher. (Cameco shares closed Thursday at $28.73.)
In 2019, our ownership thesis was simple. Cameco, an industry leader with low-cost mines, was the world’s biggest supplier outside of Kazakhstan, and had deep relationships with utilities around the globe. At the time, they also fit into our contrary bailiwick – the post-Fukushima chill still gripped the market, and they faced various legal issues, including with the Japanese utility Tepco and the Canada Revenue Agency. This CRA litigation was particularly important as it pertained to a tax dispute dating back to the early 2000s and tied up more than $2-billion. This meant few investors wanted to touch the company. Yet, behind the scenes, executives were conserving Cameco’s reserves by idling production and buying on the spot market to fulfill long-term contracts. This innovative strategy, the ugly climate change trends and aggressive insider buying made us think it was a good investment.
Fast forward to today and many of these attributes remain in play and the balance sheet looks better than it did in 2019. Back then, the company had cash of $864.4-million and debt of $996.6-million for a net debt position of $132.2-million. By contrast, today, cash is $1.17-billion and debt is $996-million, making for a net cash position of more than $170-million.
Additionally, the CRA case has been “fully and finally resolved” in Cameco’s favour as the Supreme Court of Canada has refused to hear the CRA’s appeal. Nevertheless, the decision to sell a portion of our stake was an acknowledgement that the shares had hit our initial sell target. Insiders had turned into aggressive net sellers, and it’s never a bad idea to take a profit in a cyclical industry – especially when the risk of a nuclear meltdown lurks in the background.
Nevertheless, there may be significant upside left in the name. After a decade in the doldrums, the World Nuclear Energy Association estimates that nuclear fuel demand will expand globally by 2.6 per cent annually over the next decade. Yet over that same time frame, production estimates cover only 70 per cent of projected utility requirements. That is a huge hole to fill, which suggests uranium prices and stocks are going higher – possibly much higher. Furthermore, climate change solutions without nuclear seem far-fetched and most of Cameco’s mines are still idled as management awaits better uranium prices. If higher prices materialize and production restarts happen, the value of its reserves will increase, revenues should pick up, and the bottom line will expand, which collectively will improve valuations.
This outlook may explain why Sprott Inc. (another Contra holding) is betting on uranium. In 2021, Sprott formalized an agreement with Uranium Participation Corp., and together these companies created the Sprott Physical Uranium Trust. The trust’s purpose is to hold uranium. So far, it has had a huge impact on the market. Between August and September, it sent spot uranium prices from roughly US$30 a pound to US$50 a pound, and since July, 2021, the assets under management have climbed from US$630-million to around US$2-billion. That is nuclear growth to be sure.
To make a long story short, we are cautiously optimistic on the future of nuclear. Though numerous risks – including a meltdown – could undo the investment rationale, for now we are happy to hold our remaining stake in Cameco and maintain our exposure to these bullish macro trends.
Philip MacKellar is a writer for the Contra the Heard Investment Letter.
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