Cameco: Size Matters

Oct.29.13 | About: Cameco Corporation (CCJ)

Cameco (NYSE:CCJ) was created in 1988 through the merger of two Canadian crown (government-owned) corporations. It's IPO debuted on the Toronto exchange in 1991 and a NYSE listing occurred in 1996. The McArthur River mine, the highest grade mine in the world (16.36% U3O8, 100 times the global average), began production in November 2000. Cameco's share of the proven and probable resources is 264 mil lbs. The mine has produced 230 mil lbs in the last 13 years. CCJ's current year share is over 13 mil lbs.

Cameco's produces around 14% of the world's uranium, with 2012 production of 21.9 mil lbs. They forecast output in 2018 of 36 mil lbs. Its total proven and probable reserves are about 465 mil lbs with another 531 mil lbs in the inferred/measured and indicated categories. That's one hell of a lot of uranium. CCJ's size and resources make it an attractive investment for the moderately conservative investor who is aware that mining is inherently risky.

Here's the good news

(all dollar amounts in Canadian currency)

  • 2012 revenue of $2.321 bil, gross margin of 31%, net earnings of $266 mil (.67/share), adjusted earnings of $447 mil (1.13/share), cash from operations of $644 mil (1.63/share)
  • Estimated profit for 2013 on Yahoo ranges from .53/share to 1.05 with the consensus at .80 corresponding to a P/E of 23. BMO Investorline shows the consensus at .91.
  • Current year and next year estimates are declining slightly with the 2013 current versus 90 days ago dropping from 1.01 to .91 (BMO).
  • 2014 has dropped from 1.30 (90 day) to 1.15 . At 1.15 the P/E is a very attractive 16 given the long term demand for uranium
  • Sales for the first two quarters of 2013: $826 mil
  • Cash from operations through the first two quarters of 2013:$233 mil
  • Cash position as at June 30/13 is $331 mil (.83/share)
  • Current ratio, June 30/13 = 2.58
  • Net debt to equity, June 30/13 = .20. Debt rated BBB+ (investment grade) by S&P.
  • Tangible book value approximately $12/share, 1.54 x current share price
  • Profitable and cash flow positive over the last 10 years
  • Has paid a quarterly dividend continuously since 1996. Current payment of .39/share equals a 2.1% yield
  • The share price is near the bottom of a 2 year range of $16.40-$25.00. Technically neutral, CMF (Chaikin Money Flow) has turned positive over the last 9 sessions, MACD crossover recently, 200 day moving average is above the 50 day. Obviously a beaten down stock, but not to the point of capitulation a la Nov. 2008 at $11.78. Those buyers are up 57% plus dividends. Not out of the park but a decent return over 5 years with some measure of safety.

Uranium isn't like oil or copper. The demand is fairly constant and, in a Fukushima-free world, would be steadily, if slowly, rising. With 60+ reactors under construction and new mine supply a virtual no-show, the market should be a lot more buoyant than it is. But, long term, the uranium market looks strong.

And, Cameco is the way to play it with Mr. Graham's "margin of safety". It's large enough, strong enough and has a long history of dividend payments. The price here looks reasonable although certainly not in the bargain bin. I would scale in to this stock, with the possibility of getting more shares with the same amount of cash when the inevitable correction appears. (If anyone knows when this correction is going to happen, please e-mail me).

If it can go wrong, it will (maybe)

  • The Japanese reactor re-start is delayed. That surplus of uranium continues to weigh on the price
  • Fukushima II
  • The Cigar Lake mine suffers further lengthy delays. This is kind of a two-edged sword as it would probably move the spot price needle, boosting a portion of CCJ's revenue.
  • Growing public opposition to nuclear power, from an environmental viewpoint and/or an objection to the high cost of construction
  • And, of course, the always present possibility of another financial panic, or least an ugly downdraft.

I think the balance of probabilities is in Cameco's favour. For an investor with a longer view, CCJ offers the chance of truly superior gains or, at the very least, a reasonable return on one's money. For those of us who think uranium is going to be lively territory in 5 years, Cameco is the best bet, having some downside support while being leveraged to a rising U3O8 price.

My opinion of my opinion

The preceding is my opinion, of course. There are many other opinions. Some of them worthwhile, others just fluff. Read them, decide for yourself, then make an informed investment decision. The one opinion you might want to discard is your personal broker's. They get paid to make trades. If you make some money along with them, that's just a bonus.

Disclosure: I am long CCJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.