Fear is one of the most primal of human emotions, it can be used to manipulate and used to motivate, but most importantly it can be used to pick up value when the market's fear has left solid companies beaten and bruised. Cameco Corp (NYSE:CCJ) is one example of such a company. Just like BP's (NYSE:BP) stock was hit hard following the Gulf Incident of 2010, CCJ has been a victim a fear in the aftermath of the Fukushima Disaster in Japan of 2011. While the turmoil of the time period sharply hurt uranium prices and nuclear perception across the globe, the price of uranium will inevitably rebound to pre-disaster levels, it is only a matter of time. Nuclear power, at the current moment, is the only efficient and effective option we have in dealing with climate change, particularly when coupled with the new prospect of electric cars. It may be some time before uranium demand returns to previous levels, but Cameco offers investors the best opportunity to reap the benefits when the time comes, while mitigating risk of loss in the meantime in an industry where many companies can hardly turn a profit.
The Stock Price
There was a time when CCJ was a $50 stock, and in the period preceding Fukushima in 2011, CCJ was marching onward yet again to the $40s, over double its current price. After an immediate 25% drop in price, the company finished the year down 50%. Since then CCJ has returned $1/s in dividends to shareholders, however it has not yet found the traction to bring itself out of the current trading range of between ~$19-23. Buying at the current level provides some technical support to the downside. At it's peak, CCJ was earnings almost $2/s in 2009, and the company was set to increase this number, however EPS has since dwindled to just under one dollar per share. However, they appear to have hit a trough and found support in recent quarters.
The company has solid financial backing behind it, with just over ~$12.50/s in book value and consistent book value growth over the last several years. In addition, the company has returned an increasing amount of cash over the last few years in an effort to placate shareholders, it is important to have a management team that is in touch with a company's stock price, and CCJ's certainly is one of the few. In addition, the company is actually only trading at 1.1 times net asset value, a key metric that has enabled to company to hold strong at the current share price over the last year and a half.
This is where things pick up for the company. Yes, the company was hit hard by the Fukushima Disaster, and yes, the company has lost significant EPS as a result, however this is one of the few companies in the sector that is healthy enough to withstand the headwinds. As Uranium prices declined sharply from their mid $70s/lb pre-Fukushima levels to where they stand now at around ~$30/lb, CCJ has been hit badly, however as the company has held water in these trying times, a bottom was forming. Now, it appears that Uranium prices are set to rebound sharply in the coming months and years. A quote from the aforementioned article reads:
"Japanese utilities have been preparing to restart several of 42 reactors that were shut down after a tsunami caused a meltdown at the Fukushima-Daiichi nuclear plant in March, 2011. Earlier this month, Japan introduced legally binding requirements for nuclear plant operators bolster their tsunami defences, check for active earthquake faults under their plants, set up emergency command centres and install filters to reduce radioactive discharge from reactors."
It remains to be seen if this will materialize, however I think it is an inevitability that prices will return to their pre-disaster levels in the next five to ten years as the focus of public policy shifts away from the recession and back to the environmental landscape. France has shown the world how beneficial effective nuclear plants can be and as China is taking note, CCJ is set to benefit immensely. To sum up the level of skin in the game that CCJ has if prices rebound, I'd like to quote a previous article written by an apparently well researched fellow here on SA:
"Cameco is the world's largest producer of U3O8 uranium, a mineral whose only commercial use is to fuel nuclear power plants, and the second largest uranium producer in the world, behind Rio Tinto. Nuclear power accounts for around 15% of the world's electricity, and CCJ accounts for 20% of world uranium production, with 1010 million pounds of proven and probable reserves (53% more than any other publicly listed company)."
When Uranium prices rebound, CCJ will reap the profits. A number of catalysts exist for this. At the current price levels, investors can enter healthy, quality names like CCJ that stand to benefit from a global shortfall. The following excerpt explains exactly how a shortfall could materialize in the coming months:
" A uranium supply crisis is still brewing and the fundamentals do remain strong. Demand is stable and reasonably predictable. The weak spot price still threatens future mine supply with more closures, cancellations and deferrals of mining projects. The all-important catalyst at the end of this year is the end of the Russia-U.S. HEU "Megatons to Megawatts" program, which in our view will not be renewed. That means 24 million pounds (24 Mlb) of secondary supply comes offline with no replacement − equivalent to the entire production of CCJ. Uranium prices are too low to incentivize new builds right now. We think prices must rise, as will the equities."
Yet the best is yet to come. Anyone who has witnessed what the Chinese are capable of, when the government puts money and people to a task, knows that the future of nuclear growth in China means big money for CCJ.
Fear is an amazing emotion. The same fear that dragged down BP after the Gulf Crisis brought Uranium levels to lows after the Fukushima Disaster in Japan. As a result, many Uranium companies were hit hard, and some have not been profitable since. Cameco Corp has sustained throughout, and even increased it's dividend in the process. The company offers an attractive value play, and appears to be able to withstand market pressures for investors who are willing to wait for a Uranium price rebound. How long it takes, nobody can know for sure, however it is inevitable and only a matter of time. Tim Gitzel is the current CEO at Cameco, and his words on the potential in the Uranium market should offer investors promise:
"So this growth is not just something we think will happen. It's happening as we speak… it's just a question of how long it will take for that growth to become the more dominant force in the market than the challenges currently being faced."
Uranium has not been an exciting segment over the last few years for longs, and many investors have forgotten the opportunity that remains to be taken advantage of. Some however, recognize that the bottom is in, and that there are a variety of catalysts in the coming months and years that stand to propel CCJ forward. According to GlobalData,
"Uranium demand will climb from 105,531 met tons in 2012 to 145,680 met tons in 2020, representing an increase of 38% over the eight year period."
Investors who take note now and park capital in CCJ will be the ones who benefit the most.