Cameco: Gold Should Help Offset Floods

The last 3 months have been a terrible stretch to own Cameco (NYSE:CCJ), as the stock is off approximately 33%, compared to the S&P 500’s decline of 10%. This is in part due to the fact that the last three quarters have seen some troubling times for the company. Between mines flooding and uranium hexafluoride leaking, it’s difficult to find the good reasons to own Cameco.

Noteworthy events for the quarter include the resolution of the leak found in July of last year, under the Port Hope conversion facility. That is going to cost approximately $15M to $20M to fix, pending NTSC approval. In November, Rabbit lake started leaking and then was brought back online on January 2nd.

Uranium slipped to $78/lb US, last week, but that is technically after the quarter ended. Since the dollar has stopped falling, and gold predictably surged, there should be very little surprise this Wednesday for investors. That is, assuming the surge in gold was previously priced in. Otherwise, headlines will read “Cameco climbs, profit boosted by gold sales”.

Cameco generated $104M in revenue from the sales of 144,000oz in the third quarter of 2007, with an average price of $680/oz. The same investors will be clutching the edge of their seat waiting to hear the forecasts, predictions, and plans from the leader Gerald Grandey. Rabbit Lake forecasts are something on the agenda, and the run up in gold will likely support a more positive outlook.

Production, however, was expected to decrease for Q4. The list of possible positive deliberations outweigh the negative. That is, the street has priced in uncertainty, and once some of that is alleviated, the sellers should be done getting out. The stock will likely start to steer towards the present value of the sources of uranium sales, even if they do keep getting set back.

In the third quarter report from October, guidance was given under these assumptions:

• no significant changes in our estimates for sales volumes, purchases and prices,

• a uranium spot price of $80.00 (US) per pound, reflecting the industry average spot price at September 30, 2007,
• an average gold spot price of about $650 (US) per ounce,
• no further disruption of supply from our facilities other than as disclosed,
• no disruption of supply from third-party sources, and
• a US/Canadian spot exchange rate of $1.00

The company is expected to release year end and Q4 results on Wednesday this week, before the market opens, then discuss at 2:00 ET.

Disclosure: Long Cameco.

Comments

[Greg Pinelli:]

I happen to like Cameco...eventually it plays out as one of the few major holders of one of the only legit alternatives to real oil.....HOWEVER..you made ZERO case for gold offsetting anything.
Merely asserting something isn't the same as proving..(or even close to). What gold..where..how much..for how long?
Also..how do you know gold has stopped falling? Because you say so?
Either make a real case for this stuff or keep your assertions to yourself..you told us ZIP..NADA...ZILCH.

2008 Feb 05 10:43 AM

[Jeffrey McL...:]

If you're referring the to the drop in gold from it's recent peak, I didn't claim it has stopped falling from that. The surge I was referring to has been the one during the last 3 to 4 months. Maybe that wasn't clear, I'm sorry. My point was that gold was way above the $650/oz used in their previous forecast, during the last 3 months, so when they report; it should help the bottom line and the future forecast. I don’t know by how much, so I didn’t give any predictions. All I wanted to point out is that unless something unexpected comes out tomorrow, gold should help Cameco. If it wasn’t baked into the price of the stock, CCJ will tick north, and the headlines will likely point it out as to one of the reasons why, tomorrow. If it was baked in, then there is little upside going into tomorrow’s earnings. The entire stock market revolves around people's predications of future cash flows. If it was an exact science, and easy, everybody would be rich. I'm sorry for the lack of quantitative details you expected, only to receive my humble 2 cents.

2008 Feb 05 01:19 PM

[boulderman99:]

I found your post comprehensible and I understood your notes on gold average prices during Q3. Seems very straightforward to me. What I would like to know is how much gold they expect to produce in 2008 and 2009.

2008 Feb 06 05:11 AM