The much anticipated recovery in the uranium market continues to elude us. In fact, last Monday, uranium prices dropped to a 11-year low. Shares of Cameo (NYSE:CCJ), one of the biggest uranium miners, are now near 52-week lows. However, I am still holding on to CCJ. While a turnaround in the uranium market is not likely to happen in the short-to medium-term, CCJ is less reliant on the spot market. More important, the company has long-term contracts extending into 2018. So it is no rush to sign new contracts in a depressed market.
Uranium Prices Drop to 11-Year Low
Post the Fukushima power plant accident in Japan in March 2011, uranium prices have been crushed. The disaster in Japan led to the shutdown of all of the country's nuclear reactors. Given that Japan was one of the biggest users of nuclear energy, the shutdown of reactors led to a sharp pullback in uranium prices. The market has failed to recover since but the outlook began to change in 2014.
The long-term outlook for the uranium market has turned bullish since 2014 amid anticipated long-term demand from China, India and other emerging economies. China, especially, has been seen as a key long-term growth driver as it tries to cut reliance on coal. The bullish case for uranium prices is based on the fact that the long-term demand will not be met by supplies, which should significantly boost prices. But for all the bullishness, prices have failed to take off. CCJ shares, as a result, are now languishing close to 52-week lows.
Last Monday, uranium prices dropped to a 11-year low. One of the reasons why prices have struggled this year is the slower-than-anticipated restart of nuclear reactors in Japan. According to Bloomberg New Energy Finance, the original forecast was for 10 reactors to come online this year. With the first half gone, we are likely to see just one nuclear reactor come online. Although the Abe government favors nuclear energy as part of its energy mix, public opinion remains dividend in Japan. Bloomberg New Energy Finance notes that some 32 reactors in Japan are subject to lawsuits at the moment.
The other reason why prices have struggled is the lack of long-term contracting activity. Utilities continue to remain on the sidelines, waiting for prices to fall further before they enter into long-term contracts. The chart below shows the slowdown in long-term contracting activity in recent years.
Source: Cameco 2015 Annual Report
As I have noted before, this strategy could backfire as we could have a situation where several utilities come to the market at the same time. Remember that several long-term contracts are going to expire in the next year or so. For the moment though, the wait and watch strategy adopted by utilities seems to be working.
Hold on to Cameco
While the pain for uranium miners is going to last longer than expected, I am still holding on to Cameco. The reason for my continued faith in CCJ is the company's positioning in the uranium market at the moment. In fact, CCJ's current stock price does not reflect its relatively strong position in the uranium market.
While spot prices have fallen to 11-year lows, very little share of CCJ's contracts are in the spot market. In a recent interview to mining.com, Cameco CEO Timothy S. Gitzel noted that most of the company's activity in the spot market is though NUKEM and in the first quarter accounted for less than 5% of sales.
This is not to say that spot prices do not have an impact on CCJ. They do as the price sensitivity table below shows. However, even if prices stay at current levels in 2018, CCJ's realized prices won't be significantly below the levels they are right now.
Another reason to hold on to CCJ is because of the company's present contracting situation. CCJ is heavily committed under long-term uranium contracts through 2018. The company can therefore be selective in considering new commitments. Essentially, like utilities, CCJ can also play the waiting game. And given that we could see a sharp recovery in prices anytime, CCJ is in fact in a better position.
Disclosure: I am/we are long CCJ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.