Cameco Corp (NYSE:CCJ) has just agreed to purchase a 27.94% stake in the Millennium project located in the Athabasca Basin, from Areva Resources Canada (OTCPK:ARVCF). The Millenium project has 50.9 million pounds of uranium resource. When we do some basic math, we see that Cameco has paid about $12 per indicated pound of uranium. The equation below illustrates.
Millenium project indicated uranium resource (50.9 million) * Cameco's Stake (27.94%) / Cameco's payment (151.9 million) = approximately $12 per pound
In light of where I believe uranium prices are headed, to $200 and beyond, I think this purchase represents a great buy that shows the uranium sector is still undervalued and in a buyer's market. Cameco was already a shareholder in the Millenium mine and also the primary operator. Given that, and that the project is located in the Athabasca Basin (a property I've written about that can essentially serve as a keystone of the uranium economy), I think the project is well-positioned to be re-sold if needed. It can utilize existing infrastructure to facilitate mining at low marginal costs and high margins for Cameco, even if uranium prices simply go back to their pre-Fukushima highs.
Of course, the real reason acquisitions look so favorable now is because of what supply and demand in the uranium market is telling us, which is that demand is stronger than supply and that price is going to go higher. To wit, recent comments from Cameco Corp. CEO Tim Gitzel reveal he is wondering how the current supply/demand imbalance, let alone the additional imbalance in light of the reactors already planned or in construction, will get resolved. From this perspective, a higher price seems much, much more likely. And this is why I regard the uranium mining sector (NYSEARCA:URA) as being such a great opportunity in both the short- and long-term.
It's worth noting that shareholder JCU Exploration does retain the right to partially refuse this purchase. The matter will be voted upon shortly.
Ultimately, this acquisition is one I find to be favorable to Cameco. The company has over $2.5 billion in current assets and less than $800 million in current liabilities. As such, I think Cameco has a balance sheet that can support acquisitions. The company's strategy relies heavily on the Athabasca Basin and it's positioned there to reach its goal of doubling its uranium production by 2018. That's a goal I think is very prudent and will reward shareholders well.
Cameco is in a position to take advantage of the excessive, sentiment-driven sell-off in everything nuclear post-Fukushima, and is doing just that. The stock reached an all-time high of $52.24 back in the bubble of 2007. I think another uranium bubble is quite possible, and that this one will be bigger than the last. From that perspective, I think a 100% increase in Cameco's stock price by 2018 is quite possible. A stock price of $23.75 remains a very favorable buying opportunity. The chart below illustrates.
Click to enlarge:
Disclosure: I am long CCJ.