Cameco (NYSE:CCJ) released yesterday strong Q2 earnings ($0.20 EPS vs. the Street at $0.18). The group reiterated its uranium sales volume guidance at 31-33m pounds but, on the negative side, lowered its production target to 22.8-23.3m pounds from 23.8-24.3m pounds and raised its capex forecast ($550m up from $495m) following the shift in the production schedule at Cigar Lake (due to problems freezing ground). As the production issues at Cigar Lake were well flagged, we believe they are unlikely to weigh on the stock price.
We highlighted in our June 11 article ("Cameco: Patience Will Be Rewarded") that the company was expected to make money even in a weak uranium price environment as it is the lowest cost major producer. The Q2 earnings perfectly confirm this. Importantly, Cameco shares our positive view on the Japanese Nuclear Restart which is expected to drive investors' appetite for the uranium industry in coming months. In a July 16 article ("Cameco:Light At The End Of The Japanese Tunnel"), we said that newsflow from Japan was finally improving as two Kyushu Electric reactors got the NRA safety clearance and could restart in coming months following a period of public comment. We added that the Japanese government was making the necessary moves to speed up the inspection and restart process of nuclear reactors: the pro-nuclear Tanaka will soon join the five-member panel of the NRA, in replacement of the hawkish Shimazaki.
In all, we retain our positive view on the stock which we expect to display a huge earnings leverage when demand and prices pick up. While the short-term newsflow is improving (earnings and Japan), the long-term picture remains highly attractive with a net increase of 93 nuclear reactors over the next 10 years. Cameco forecasts that this will spark an increase in annual uranium consumption to 240m pounds from 170m, suggesting that a supply deficit is likely to develop soon.
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