Why You Shouldn't Own Cameco

A few years ago, when the uranium boom was in its early stages, one stock that was coming up on everyone’s uranium picks was Cameco (CCJ). However that has all changed. Although many still recommend Cameco as a good way to play the rising uranium price, we do not and here are a few reasons why you should not be owning Cameco as a uranium stock in your portfolio.

Cameco is literally the biggest player in the uranium market, with a market capitalization of about $13 billion. No other uranium stock can match it for size. Companies like BHP Billiton (BHP) and Rio Tinto (RTP) of course are much larger, but they are diversified mining companies with only a fraction of their earnings coming from uranium projects, whereas Cameco is pretty much a pure uranium play. Although they do have some gold interests, owning 53% of Centerra Gold Inc. (CG) but compared with uranium, gold is a very small part of Cameco.

So Cameco remains the biggest uranium company as the world’s largest uranium producer with four operating mines in Canada and the US as well as controlling ownership of the world’s largest high-grade reserves and low-cost operations in northern Saskatchewan, Canada with ore grades 100 times the world average. No company can match them for size, with 550 million pounds of proven and probable reserves, but big is not always best.

Since Cameco is so large it’s stock price tends to move more slowly than other smaller uranium companies. Therefore investors can not get the percentage returns with Cameco that they can get with smaller uranium stocks. Cameco was moving well earlier on in the uranium boom, but it seems to have slowed down and appears to be even a bit “sluggish” in moving higher with higher uranium prices. If it is not achieving capital gains in its stock price, then it should at least be generating significant income for shareholders. This is not the case. The last few dividends have been about 4 cents, which is poor for a $35+ stock, giving it a P/E ratio of near 40. So Cameco is large, but slow in making gains or paying any significant dividends.

For some time the major argument for buying Cameco has been that it will be the uranium company that funds will look to invest in, as the others are all far too small. This used to be the case, but the uranium boom has now formed a number of billion dollar companies that could be used as an alternative uranium investment vehicle for funds as opposed to Cameco. Denison Mines now has a market capitalization of over $1 billion and SXR Uranium One’s is over $2 billion with some more companies like UEX Corporation trading at around a $1 billion market cap. This shows that there are now other fish in the pond and investment funds could look elsewhere for other uranium companies, of significant size, to invest in. Equally, other investors who are not comfortable with the risk of investing in smaller uranium stocks, can make their investment in companies other than Cameco, whereas before Cameco was the only large uranium company.

There is, of course, a cloud hanging over Cameco: Cigar Lake. This is the largest undeveloped high grade uranium deposit containing proven and probable reserves of more than 232 million pounds of uranium at an average grade of 19%. All was going well, as a construction license was received in December 2004 and construction began in January 2005 on a uranium project that should have had a life of 20-30 years, but then there was the flood. The flood at Cigar Lake is probably the single most damaging thing that has happened to Cameco in recent years. The situation is still not totally clear, although Cameco are understandably downplaying the flood, but there might be problems moving the existing water or fixing the problem, otherwise more water could flood it.

The silver lining on this cloud is that the longer production at Cigar Lake is delayed, the more Cameco will receive for the uranium that will be mined there, providing the uranium price continues to move higher. This is because of the way Cameco have written the contracts, most of them are based on the current uranium spot price as a floor. So the higher uranium prices rise, the more Cameco will get for their uranium.

But how long will this take? Will the project ever come online? If they cannot fix the problems with the flood, it is possible that Cigar Lake may have to be abandoned, or that Cameco or another uranium company could be trying to fix the problems for decades. If Cigar Lake is delayed by that much time, it is possible that the boom in uranium prices may have come and gone, therefore Cameco would have failed to cash in on this formerly promising project, and even more promising uranium price.

This could be one of the major reasons why Cameco’s stock price has not risen with the rise in the uranium price and with the price of other uranium stocks. In the last year the uranium price has risen from just above $30/lb to $85/lb a gain of over 150%. Yet Cameco’s stock price is up only a bit more than 5% in the last year as we write. We can get 5% returns in the bond markets, but that is not why anyone is investing in uranium, we all expect extraordinary returns in double or triple percentage terms. Cameco is not moving with the trend and so you cannot afford to be invested in Cameco, if it is not going to outperform, or at least track the uranium price.

Many other uranium stocks are doing more that just tracking the uranium price, they are outperforming it. An example of an uranium stock that is outperforming the uranium price is Fronteer Development (FRG) which is currently up over 200% in the last year. There are many other uranium stocks that should generate and are generating much better returns than Cameco, therefore you are better off investing in these uranium stocks, in our humble opinion, if you want higher returns on your investments.

CCJ/FRG 1-yr comparison chart

Disclosure: Author has a long position in FRG, and has no position in any of the other above-mentioned securities.

Comments

[DonRadcliffe]

Sam has just given me the best reason in the world to buy Cameco--compared to the other uranium stocks, its currently UNDERVALUED.

[morris cohen]

well written article

[WitzConslt]

I agree with donradcliffe that Cameco is undervalued. They have the preeminent world class deposit that is just going to take longer and cost more to bring into production.

[Bob Kirtley]

I fully appreciate what you guys are saying, Cigar Lake and Cameco are undervalued in terms of a possible mine.

However, at the moment the issues with flooding make this a <em>potential<... world class deposit, but it is not much use if the flooding makes it impossible to mine. We still do not know when or if Cigar Lake will ever be operational.

You can invest in CCJ on the chance that they manage to fix the problems that they are having, but I would stay out of the stock until they do. I would prefer stocks like FRG as they are generating 200% annual returns, where Cameco is hardly producing any at all.

In conclusion to ride this uranium bull one should be buying stocks like FRG which are moving upwards with the uranium price. If one wants to bet on Cameco fixing the problems at Cigar Lake, then one should be buying Cameco, but it will not move much higher until the issues with Cigar Lake are sorted out.

[DonRadcliffe]

Suit yourself, but after 25 years in the uranium market, I know that

1. Cameco is the largest producer of uranium in the world, and was profitable when the price of uranium was 10% of today's value.

2. Its mines are licensed, and it has the ability to increase production from other deposits while it is sorting out Cigar Lake.

3. FRG's deposits have an average grades 0.1% or less, while some of Cameco's average 20%. Its is unlikely that FRG will ever produce a pound of uranium.

Yes, its possible to make money by speculating on FRG, holding it on the way up and shorting it on the way down. However its also possible to lose money by speculating on FRG. If your investment philosophy leans toward buying and holding, Cameco is as near to a sure thing as any stock in the market.

[Sam Kirtley]

Cameco has indeed been doing very well and it was profitable when uranium prices were 10% of todays price.
But at the moment, Cameco has a lot of supply hedged at prices half the current spot.
It is being sold off by investors due to the cigar lake issues.
It has only gained about 5% in the last year but stocks like FRG are making three figure percentage returns.
To make very significant gains one not should invest in Cameco as, although it is not likely to go down, it will only give moderate returns.

[REBEL]

InfoForInvestors : Cameco has entered into a 50/50 pact with Tenex of Russia ,(as of March 14, 2007), to explore and produce uranium. Hope this helps their share price. Yes, there are other uranium mining companies whose shares are blasting off, but let's see who can stay in the ring with Cameco. You pays your money and takes your chances.

[JaimeSimkovitz]

Could you mention seversl other Uranium regardles of their size.

[brianoh]

I was coming to the same conclusion. The likely future rise in
Uranium prices could still make it a winner, but there are likely
better buys.