Cameco Should Ride The Uranium Boom

| About: Cameco Corporation (CCJ)
For those with a preference for thematic investing, a current and evolving uranium boom is one possible theme for consideration.

Cameco (NYSE:CCJ) is the world's largest uranium mining and processing company, which may make sense in a thematic approach related to the current boom in nuclear power plant construction and the potential nuclear arms race in the Mid-East between rival states.

The demand for nuclear fuel is satisfied either via primary uranium production or via secondary sources, such as inventory reductions, recycling of fissile materials from spent fuel reprocessing or from military stockpiles or tails re-enrichment. Cameco is an integrated company involved in all of these phases of uranium and nuclear fuel supply. The major mines are owned by a small number of companies, one of which is Cameco.

Nuclear power has increased its share in worldwide electricity production from a meager 2% in 1971 to roughly 17% in 1990, before plateauing, but is now on the rise again. In the three leading industrialized areas, the European Union, Japan and the United States, nuclear energy provides between roughly one-third and one-fifth of total electricity.

Uranium is a dicey commodity with a history littered with business and speculative failures. It went from boom to total bust and now it's in boom phase again. It's a commodity with all sorts of detractors for social and environmental responsibility reasons. Mining, refining and using it for peaceful purposes has sickened and killed many people. That said, it is in boom phase, as the two charts below demonstrate.

The first chart is the Uranium price from 1988 though YTD 2006. The second chart is the 5-year price history for Uranium. Basically, Uranium is up about 600%.

Uranium Long Term Price

Uranium 5 year price

There are currently 440 nuclear reactors in the world, with 16 scheduled for decommissioning and 80 under construction for completion within 10 years. That amounts to an approximate 15% increase in demand for uranium for peaceful purposes. Unfortunately for humankind, but good for speculators, the signs of a nuclear arms race in the Middle East are become every more visible.

Currently Canada is the world's largest producer of uranium [29%], followed by Australia [22%], then several former Soviet states or satellites [Kazakstan, Russia, Uzbekistan, Ukraine, and the Czech Republic] which collectively produce 25% of the world's supply. The US, by the way, produces only 2% of world supply.

World demand for uranium [U3O8] is 170 million pounds today, and is predicted to rise to 187 million pounds by 2010. However, when the 66 net new nuclear plants are operational by about 2016, demand should be about 15% greater than today, even if the military component does not materialize. That prospect is creating an exploration boom.

The mining world is dominated by major companies, but only one public company of investable size -- Cameco (CCJ) -- is a integrated "pure play". There are many small and marginal companies, such as UREX Energy Corp (OTC:URXE) which have no operating mines and no profits, but active exploration programs. Then there are large-cap and mega-cap diversified companies with uranium operations, such as General Electric (NYSE:GE) and BHP Biliton (NYSE:BHP). Finally, many mining companies are state controlled.

As an integrated operator engaged in all phases of the industry, Cameco has recently entered a contract with the Russian company TENEX to process nuclear material from decommissioned Soviet nuclear bombs.

Unlike "wildcat" Uranium exploration companies, Cameco is an integrated uranium company with mining, refining, fueling and decommissioning operations.

Cameco also owns 32% of a nuclear power plant, and 52% of Centerra Gold (NASDAQ:CG), a gold mining company.


Centerra Gold is a gold mining and exploration company, engaged in the acquisition, exploration, development and operation of gold properties in Central Asia, the former Soviet Union and other emerging markets.

The market capitalization of Centerra is $C 3b, which converts to just under $US 2.7b. Cameco's interest in Centerra is equal to roughly 10% of Cameco's market capitalization.

Cameco has an approximate $US 12.4b market capitalization, a 0.4% yield, a Reuters street opinion of out-perform and a 1 year target price of $40 compared to a current $35 market price. Its return on equity is 17.5%, but Y-O-Y quarterly earning are down about 9%. The P/E is 34 and the EV/EBITDA ratio is a rich 27.6. The Current Ratio is about 2.5 and the tangible net worth is $US 1.78b, The revenue is $US 1.1b and the net income is $US 200m.

CCJ is a healthy company in a booming industry. It's worth a look as a niche basic materials company in what appears to be a long term rising demand cycle. We aren't technical analysts, but the price chart does not currently look good, although the fundamentals of uranium in all its forms does look pretty good.

We are not recommending purchase of CCJ, but are suggesting that you take note of it and keep it is mind when and if you decide that a uranium theme is in play.

CCJ 3 yr