Cameco (CCJ) is a major player in the uranium production and processing industry. An overview of company revenues, margins, stock prices, future demand and likely future uranium prices point to a slightly bullish outlook. However, there is an impediment to a more confident prediction of Cameco's prospects: Its Kazakhstan operations are subject to a larger political/legal risk than the company can expect in its North American operations. Central Asia has a social environment more prone to political instability and tendency to settle important matters with methods widely labeled as corrupt and unethical. This is a cultural curveball compared to the bureaucratic stability of Canadian and U.S. operations. Such a risk element may complicate or even jeopardize Cameco's substantial investment in Kazakhstan's Inkai deposits.
Financial History -- Revenue, Net Margin
Cameco experienced a large revenue jump from 2002 to 2008. In FY 2002, the Canadian company logged revenues of $475.5M, only a 10.28% increase from FY 1996 revenues of $431.18M. Though the increase is not exactly linear, minor revenue variation between 1996 and 2002 do not alter the overall gentle slope of the revenue growth trend. Now consider the six years after 2002. FY 2008 revenues jumped to $2.35B. This is a boost of 394.22% compared to 2002 numbers. Since 2008, CCJ revenues were once again relatively flat with only a small dip in 2009-10. The ttm data for FY 2013 shows a meager 0.425% revenue gain compared to FY 2008. Instead of asking the tempting question of whether or not Cameco will experience another income boost like it did between 2002 and 2008, it is worth considering Cameco net profit margin. This is to get an idea of company cost control when faced with flat-growing-flat revenue streams.
Cameco saw a downward trend in net margins between 1996 and 2000, with FY 2000 bottoming out at -11.37%. A rebound to an average of 8.36% net margin over FY 2001-02 helped the company get back on its feet. Over the next six years, CCJ margins did not keep up with revenue. Such a pattern repeats itself from 2009 to the present, with a spike of 30.97% in FY 2009 being the peak of a downward trend to a more humble 12.1% in TTM of FY 2013.
Together, the data shows that Cameco management does not keep a very tight grip on costs relative to incoming revenue. Nevertheless, only one year of negative margin between FY 1996 and now hints that Cameco has a durable strategy to keep operations, mining, debt and other costs from escalating out of control.
Uranium and CCJ Price Trends
Between 1996 and 2002, uranium prices were relatively stable. Monthly prices varied between a maximum of $16.50/pound in the summer of 1996 and $7.13/pound in November 2000. However, as with other metals such as gold, uranium prices shot to great heights in the 2000s, reaching a peak of $136.22/pound in June 2007. Since then, uranium prices formed a cut-off "U" with a local maximum of $65/pound in February 2011. After the $65/pound bump, the uranium price drop continues.
The following chart outlines closing monthly prices of CCJ and U3O8/lb between May 1996 and November 2013. Cameco stock prices are adjusted for splits and dividends, giving a more accurate idea of company value over time. All percentage gains and (losses) are relative to values at the close of May 1996.
Click to enlarge image.
The most interesting feature of note is that CCJ price gains are usually higher than those of U3O8/lb. Aside from meaningless short-term fluctuations where CCJ decreased faster than U3O8, the only substantial slight dip in CCJ relative to was in the late 1990s and 2000. By January 2001, CCJ price fluctuations matched those of U3O8/lb, as evidenced by the green shading disappearing from the negative side of the graph. Since this is a recurring pattern in spring of 2003 and again in spring of 2009 and fall of 2012 and throughout 2013.
The above chart is encouraging for Cameco. It implies that stocks have survived multiple economic downturns and competition from other energy sources over more than 15 years. It is unlikely that any particular management team or other set of internal or market circumstances would play into Cameco's favor so consistently on such a long time scale. Therefore, we can attribute CCJ's stock performance to a successful business strategy.
On Dec. 5, Uranium Investing News put out an article that made a case for rosy uranium price appreciation in 2014. If so, a prospective investor can almost certainly count on even bigger gains from CCJ stock over the next year. Chinese and Indian growing energy needs will certainly include nuclear power. Though Cameco has plans to provide some services to these large energy markets, it is not guaranteed that Cameco will serve China and India to any substantial extent. Nevertheless, the sheer magnitude of uranium and electricity demand is sure to factor prominently in boosting CCJ prices for the foreseeable future.
Uranium market data from 2012 indicates that consumption led production by 8.55%. The difference was made up through various secondary sources like reprocessed used fuel rods and "safety cushion" inventories maintained by governments and power suppliers. Cameco's "Uranium 101" hints very clearly that recycled uranium is becoming increasingly important to overall supplies. Viable reprocessed uranium supply is inevitably subject to steadily diminishing returns. It takes more and more resources to squeeze out fissile isotopes at sufficient concentrations from a given sample of spent fuel. This trend bodes well for future uranium prices and Cameco stock.
In addition to Saskatchewan and U.S. mining operations, the Inkai project in Kazakhstan also has tremendous potential. However, Inkai uranium exploration and development is subject to unique political and economic pressures that can make or break profitable mining operations there. The cultural realities of Kazakhstan -- such as "tips" and bribery as an operative norm -- clash with expectations from shareholders, the public, Western notions of business ethics and law. Of all Cameco's risks as a major player in nuclear power, its investment in Kazakhstan mining is the most prominent wildcard in trying to ascertain future production and profits.
The above company data and related information can be briefly summarized as the following points:
- Adequate, but not exceptional cost control and focus on profitability (as measured by net margin)
- Excellent correlation between U3O8 and CCJ stock prices
- Uranium price increase due to rapidly growing demand combined with steadily greater reliance on secondary/reprocessed uranium
- Substantial political risk inherent in Inkai mining operations
The middle two points argue in favor of CCJ stock as an investment while Inkai risk is a prominent bearish counterweight. Admittedly, buying CCJ stock as a prominent component of an investment portfolio looks tempting. However, the interested CCJ investor would be well advised to take an active role in monitoring new developments in energy commodities and technologies. For example, unexpected new vast fossil fuel finds or progress in solar or biofuels energy technology could derail optimistic Cameco revenue and uranium price projections.