Nuclear energy has been out of favor since the Fukushima accident happened in Japan two years ago. One of the major concerns towards nuclear energy is safety. This recent disaster reminded us how volatile the power plants are, especially when they aren't maintained properly. In Fukushima, the accident's cause turned out to be a lack of diversified power and cooling systems, which went against international standards and recommendations. If the recommendations of international authorities had been followed, most probably the accident could have been avoided.
Despite a few nuclear disasters in history, nuclear energy is still safer than other energy sources. Moreover, it has many benefits such as a large base of accessible uranium reserves, low-cost energy generation, and low greenhouse gas emissions. Despite this the market for uranium, which is the main fuel in nuclear reactors, has yet to recover since Fukushima.
Uranium does not trade on an open market like other commodities. Buyers and sellers negotiate contracts privately. Prices are published by independent market consultants Ux Consulting and TradeTech. According to these consulting companies, the price of uranium is currently near its five-years lows. Much of the fall in price is due to Japan shutting down 52 of its 54 nuclear reactors, following Fukushima. Germany has also said it wants to end its nuclear programs over the next years, in response to negative public opinion.
The shutdown of nuclear reactors in Japan led to a strong rise in oil imports to feed its oil-fired power plants, to fill the gap of lower electricity supplied by nuclear energy. This may also help explain why the country is now running a trade deficit for the first time over the past five years. Given the country's high debt level, this only makes the problem worse and much probably will lead to a restart of nuclear reactors. Indeed, new Prime Minister Shinzo Abe has already been very vocal about this issue.
If Japan restarts its nuclear power plants adding to 64 nuclear reactors under construction around the world, the demand for uranium has a strong base to grow over the coming years. For instance, China wants to quadruple its nuclear capacity by 2020 which will increase considerably uranium demand. In 2022, it is expected that will be 523 reactors operating, up from 423 today. That is a level of growth not seen in the industry for many years. Cameco Corporation (CCJ) is the second-largest uranium producer in the world and the world's largest publicly-traded uranium company. It is also the world's largest producer of U308, a mineral whose only commercial use is to fuel nuclear power plants. Given the growth outlook for nuclear energy over the long-term, the company may be a very good way to play this theme.
Cameco is based in Canada, headquartered in Saskatchewan. In 2012, Cameco had $2.3 billion in revenues. The company generates half of its revenues from uranium mining and another 15% form the conversion process. The company's sales are geographically diversified, with about half generated in North America, 30% in Europe, and 20% in Asia. Cameco's strategy is to increase annual uranium supply to 36 million pounds by 2018, being the focus of the company's growth strategy the uranium segment. Therefore, going forward the company will be even more leveraged to higher uranium prices and increasing demand.
Moreover, the company has a very good financial performance, even tough it faces a challenging environment in the near-term. In 2012, revenues decreased slightly, but the company was able to maintain its high business margins. The gross profit was $723 million, or a margin above 31%. In addition, its balance sheet is very solid with a relatively low level of debt, resulting in investment grade credit ratings.
Cameco's market capitalization is about $8.5 billion currently. Although its dividend yield is not fantastic at 1.9%, it never missed a dividend payment since its IPO in 1991, and has a history of increasing the dividend rate. It is trading at 17x forward earnings-per-share, 1.7x price-to-book-value, and 13.7x EV/EBITDA, which compares favorably with the industry averages.
Uranium prices are at very low levels and should benefit over the long-term from increased demand from nuclear power plants. Cameco as the largest publicly-traded uranium company is the best way to play this growth theme. The company's valuation appears to be undemanding because nuclear energy has been out of favor among investors, but that may change in the short to medium-term. To unlock this value, a short-term catalyst may be Japan's decision to restart is nuclear power plants that were shut down since the Fukushima disaster. Given the deteriorating trade data in Japan over the last few months, that decision may be taken in the short-term and will ultimately benefit Cameco immensely.