What Will Cameco Tell Us About Uranium?

Feb. 1.12 | About: Cameco Corporation (CCJ)

Cameco (NYSE:CCJ), one of the world's largest uranium producers, will announce its Q4 results next Thursday evening (February 9). As one of the worlds preeminent uranium producers and the operator of the world's largest uranium mine (McArthur River, Saskatchewan, Canada) it is no stretch that what the company says and does has the potential to impact the market.

Cameco is based in Saskatchewan, Canada. The company's operations in Canada, the United States and Kazakhstan account for 16% of global uranium production. Originally formed when Eldorado Nuclear Limited and Saskatchewan Mining Development Corporation (both federally-owned crown corporations) merged in 1988, the company was fully privatized in 2002.

Uranium is an element which is abundantly available in the Earth's crust. Concentrated uranium (low-grade ore and high-grade ore) on the other hand are only available in a few places. Without getting to technical the average concentration of uranium found in the Earth's crust is 2.8ppm (parts per million) U whereas low-grade uranium ore has 1,000 ppm U and high-grade uranium ore has 20,000ppm U. It is the low-grade ore and high-grade ore that are used in nuclear energy and as such worth the time, labor and capital to mine. The primary use of uranium is for nuclear energy. As of January 2010 there were 438 nuclear power plants in operation, by 2019 that number is estimated (by Cameco) to rise to 527 (China 46, Rest of Asia 24, India 11, Russia & Eastern Europe 10, Americas 9, Europe 6, Other 3). China, where nuclear power is poised for the most growth, sits on approximately only 1% of known uranium deposits.

Unlike most of the machines which engineers and advanced technology have given us which tend to use less of a resource as their performance has increased, nuclear reactors work in the opposite manner. A reactors performance is measure by its capacity factor - in 1990 average capacity factor for U.S. NPPs (Nuclear Power Plants) was 66%, in 2008 it was 91.5%. As a reactors performance increases the reactor requires more fuel (i.e. uranium) in order to achieve and maintain that level of performance.

Additionally, uranium is not traded on the open market like gold or oil, rather contracts are negotiated directly between the buyer and the seller either utilizing a spot market (for one transaction) or the long-term market (multi-year contracts). Of all of the uranium transactions that take place, 85% are conducted utilizing the long-term market contract system. The remaining 15% of transactions that take place happen in the spot-market. Spot-market prices are reported by firms like Ux and TradeTech.

So what specifically can we learn about the greater market from Cameco's Q4 results? Ideally, one would like to see a return to revenue levels that match 2009 (approximately $2.3B CAD) - 2010 revenue fell to $2.1B CAD. It will also be very telling what kind of guidance one of the world's largest uranium miners provides investors. Do they feel the Uranium Spot Market has stabilized - especially following the Fukushima disaster? On February 4, 2011 the spot price (TradeTech) for mined uranium (U308) was $73 USD per pound, by March 11, 2011 (date of Fukushima reactor disaster) the price had fallen to $67.75 USD per pound. Currently the price per pound of U308 is approximately $52.50 USD on the spot-market (Ux). Although there was a great deal of price volatility last year in the spot-market we did see volume set a new record. The previous record for volume had been 42.8 million pounds (2010), last year (2011) volume reached 45.8 million pounds.

By its nature energy, particularly nuclear energy, is a longer-term play. The process of proposing a new reactor then satisfying all of the bureaucratic and political hurdles takes years. Given the Fukushima disaster last year Western countries are more cautious than ever regarding the expansion of nuclear power. However, it is very important to keep in mind that companies like Cameco have based much of their projections for growth in the uranium mining business on China and not the West. With people like Bill Gates getting behind NPP development a strong argument can be made that nuclear power is poised for growth over the coming years. It will be very telling to see what Cameco reports for Q4 and what they have to say on the call.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.