Cameco's Less-Than-Explosive Earnings

On Thursday, August 14 before the market open, Cameco (CCJ) reported Q2 ‘08 earnings of $0.39 per share (excluding items) or $142 million (all dollar amounts are expressed in Canadian dollars – CAD, unless otherwise stated), which was 30% lower than a year ago but beat an average analyst expectation of $0.381 per share.

Revenue was reported at $620 million, down 14% a year ago. This was due to lower earnings in 3 units (uranium, fuel services, electricity). Both the uranium and fuel services units experienced lower sales volumes.

However, earnings for the first half of 2008 increased by 9% due to higher realized selling prices in uranium which compensated for lower earnings in CCJ’s other units.

Shares gapped down $0.73 USD to open at $30.26 USD and closed at $31.21 USD, up 0.7%.

Performance by unit:

• Revenue for the uranium unit decreased to $329 million, down $129 million due to a 44% decrease in sales volume resulting in a 22% decrease in earnings to $166 million from $214 million. This was offset by the appreciation of the CAD of roughly 27%. Global production for uranium is seen to decline in the next 10-12 months. From 1996-2006 production increased at an average annual rate of 1.9%. In 2006 alone, production dropped 6% and Canadian producers reduced production by 15%. By 2020, of the 10 largest mines, 6 will deplete, 2 will be producing at their final stages, 1 will be upgrading, and only 1 will produce. I expect global demand to continue to increase as production decreases.
• Revenue for the fuel services unit decreased 19% to $54 million compared to a year ago and, as a result, the unit reported a loss of $6 million.
• The electricity unit saw a 58% decrease in earnings to $13 million, down from $31 million a year ago. This was due to lower electricity generation (81% vs. 91% a year ago) and higher costs at the Bruce Power LP plan, which CCJ owns a 31.6% stake.
• The gold unit posted a 22% increase or $22 million in earnings to $143 million, up from $117 million a year ago. This was due to the fact that the average realized price of gold rose to $889 [USD] per ounce vs. $667 [USD] a year ago. CCJ owns a 53% stake in Centerra Gold, Inc., which operates a gold mine near Kumtor in the Kyrgyz Republic (Kyrgyzstan) and the Boroo mine (95% owned by Centerra Gold) in Mongolia. CCJ is currently exploring a mine in Elko, Nevada and conducting a feasibility study at the Gatsuurt deposit (100% owned by Centerra Gold), also located in Mongolia.

The Port Hope project may experience a delay as a result of a disagreement between CCJ and its supplier of hydrofluoric acid [HF]. HF is a highly corrosive acid that is used to dissolve metal oxides and is used to purify uranium and other metals as well as dissolve silicate compounds such as rock samples before analysis. This acid is required to produce UF6 (uranium hexafluoride), which is the fuel for nuclear reactors and weapons. For the price of UF6, see below.

CCJ’s Cigar Lake project, located in northern Saskatchewan and 48.75% owned by CCJ is experiencing a delay indefinitely due to additional flooding. The mine is the richest deposit of undeveloped uranium and has the potential to supply 10% of global demand. Originally expected to begin production in 2007, expectations are now set back to at least 2011, according to management. CCJ will give an update on remediation on September 24.

Currently, 15 analysts publish recommendations for CCJ. To date, there are 6 “Buy” ratings and 9 “Hold” ratings. On Monday, August 18, 3 firms maintained their “Buy” ratings for CCJ. Credit Suisse reiterated their “Outperform” rating but reduced their target price to $50 from $55 CAD. RBC Capital Markets also maintained their “Outperform” rating but reduced their price target to $44 from $50 CAD. UBS also maintained a “Buy” rating, reducing their price target to $41 from $48 CAD.

Technically, CCJ is in a sharp downtrend, having broken through numerous supports, including a major level at the $31-$32 level. In fact, a 3-year chart must be analyzed to determine the next area of support, which is around $27.50. The MACD and RSI are both bearish and the volume pattern indicates distribution. I expect a continued downtrend for the intermediate-term. I expect a short-term pullback from extremely oversold levels up to the $31-$32 resistance level.

Disclosure: none