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The Wild Hog
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I am a contributor to the Matador Group (http://thematadorgroup.blogspot.com") which looks at individual stocks and overall market conditions, attempting to provide sound advice and analysis.
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  • Fuel Your Portfolio With Cameco and Uranium

    As we continue to pollute and destroy our beautiful planet through the use of fossil fuels, expensive products, and harmful carbons, the search for cheap and reliable energy has become more pressing.  Well look no further my friends, the answer is nuclear power, which is being brought to us by the wonderful element with the atomic number of 92, or as we know it, Uranium. 

    Before I continue with my discussion of uranium, I just want to make a few points supporting the further development of nuclear power across the world, especially here in the US of A.  For starters, nuclear power plants are far more efficient than in recent years.  The development of advanced technology has made these reactors for more durable and safer.  This is evident by the continued building of reactors across the globe (which is described in the next paragraph).  There are no fossil fuels burned through the use of nuclear power and no carbon dioxide is emitted into the air, significantly reducing the damage to the ozone layer.  Safety is also a major concern nowadays, in terms of energy exploration and extraction.  Take for example the 2 oil rig explosions in the Gulf, or the WV mine explosions. 

     

    Uranium goes a long way in terms of producing energy, meaning only a small amount is needed to produce a significant amount of energy.  "In fact, if the cost of uranium doubled, costs would only be increased by 7%. 1 truck of uranium produces as much energy as 1000 trucks of coal!"  If nuclear power is developed and utilized here in the US, it will reduce our dependence on foreign nations to export their oil and other precious metals here.  As we all know the price of oil is subject to supply and demand, amongst other factors, and can be very volatile, i.e.. Summer of 2008.  If we were to be energy independent, as our President so elegantly puts it, this would reduce our need for oil, and other energy inputs. 

     

    I would also like to point out that other forms of renewable energy, like solar and wind, are going to fade out pretty quickly.  For starters they are expensive to maintain.  These forms of energy also require purchasing land to build these turbines and combines, a resource that is running low.  Also, when was the last time the sun consistently shined?  The sun can stay hidden behind clouds for days, and last time I checked, the sun usually shined for about 8 hours a day.  Nuclear power can run for 24 hours a day.  As for using wind as a renewable resource, I will simply say this.  When was the last time it was windy?  I guarantee one cannot string together multiple days of gusts strong enough power an entire city.  

     

    It is estimated that the largest supply of uranium is found in Australia, followed by Kazakhstan, and then Canada.  "The World Nuclear Association says demand is projected to grow by 33 percent in the next decade to correspond with a 27 percent projected growth in nuclear reactor capacity. However, more efficient nuclear reactors, such as "fast-reactor" technology, could extend those supplies by more than two thousand years. Experts say spent fuel can be reprocessed for use in reactors but currently is less economical than new fuel. Currently, there are nearly one thousand commercial, research, and ship reactors worldwide; more than fifty are under construction, and 130 are in planning stages."  There is also an accord for old Russian weapons to be dismantled and turned into fuel for the power plants.  The continued desire for nuclear power will fuel (pun intended) demand for uranium in the years to come, and there is no better company to experience this surge in growth with than Cameco.

     

    Cameco is "major supplier of uranium processing services required to produce uranium fuel" and is the world's second largest producer of Uranium, trailing only AREVA in terms of market share by a slim margin.  Cameco currently has 13 utility customers in 4 countries.  They are expecting to sell over 300 million pounds, due to long term contracts, through 2030.  

     

    Cameco's strategy is to double uranium production by 2018, an ambitious goal to say the least.  They anticipate doing this through increased production and upgrades at current facilities, and by continued thorough exploration of future prospects.  Thus far in 2010, Cameco has spent about $90 billion on exploration, including expanding mines at Inkai and in Kazakhstan.  But, lets start with their exploration in Canada, the home country of both hockey and Cameco.  There is extensive work being done in the Athabasca Basin, located in Northern Saskatchewan and Alberta Canada, which is best know for its high grade uranium.  It is important to note that they higher the grade of uranium, the cheaper it is to utilize and term into energy.  There are currently 23 active exploration projects in Australia, the country containing the world's largest uranium reserves, and Cameco owns the operating rights to 22 of them.  In order for Cameco to be able to benefit from exploration, they must own or have significant interest in junior exploration companies.  Well Cameco does, and these include UE Corp, Minergia SAC, Western Uranium Corp, and Govi High Power Exploration.  Exploration is key to finding deposits, and if said deposits are found through the exploration efforts of the companies above, Cameco will own operating rights to them.

     

    Cameco currently owns and/or operates 7 active mills/mines today, of which 4 are in Canada, 2 are located in the US, and 1 is in Kazakhstan.  2 of the 4 in Canada are the world's largest and cheapest producers of uranium in the world, the McArthur River Mine and the Key Lake Mill.  Cameco owns at least 70% in both units.  Cigar Lake and Rabbit Lake are the mines for the future, also located in Canada.  Cigar Lake is completing renovations this month and is expected to be producing in 2013.  The Cigar Lake mine is expected to produce about 15% of the world's supply of uranium.  Rabbit Lake currently process all ore from Eagle Point deposits and is expected to be used until 2015.  Rabbit Lake is also being updated to be able to handle the increased workload.  Cameco is the largest producer in the US, thanks to the Smith Ranch-Highland and Crow Butte mines.

     

    The big daddy of them all is Inkai, located in Kazakhstan, where the world's largest deposit of uranium can be found.  This mine is expected to last into 2030.  To fuel demand, as well as expected increases in deposits, Cameco is doubling production at blocks 1 and 2 and advancing block 3.  The table below describes production and production potential at Cameco's current mines/mills.

     

    Cameco will report earnings on November 8.  Back in August, Cameco reduced its full-year forecast for the sale of uranium.  This was expected as some customers deferred delivery to next year.  They also expect revenue to slip a hit.  However, lower costs and more deliveries are expected in the future, which will certainly help to absorb the forecasts of declining revenue.  A few positive notes include Cameco beating 4 of the last 5 earnings estimates from analysts, including price targets above $40 a share.  Cameco's production of uranium was also 30% higher than the same quarter in 2009. 


    The chart below compares Cameco with its peers.  Not the strong margins and price to book value.  The company has very little debt compared to its peers and to its own equity.

     

    However, even with the possibility of lower revenue in the future, Cameco has never decreased its dividend and has raised it 4 of the last 5 years.  Cameco also split its shares twice, in 2004 and 2006, on a 3 for 1 and 2 for 1 share basis, respectively.

     

    Their cash flow from operating has continually grown over the past few years as the graph below shows.

     

     

    More importantly, their revenue continues to grow each quarter.  Their net income was lower due to higher costs this quarter, which can be related to a stronger Canadian dollar and declining price of uranium 

     

     

    On a closing note, Ill leave you guys with a table of uranium futures contracts.  Note the expected increase in prices in the coming years.

     

     



    Disclosure: No positions at the time of writing
    Sep 22 10:29 AM | Link | Comment!
  • A Big Fat Greek Yield

    The purpose of this article is to explain why Greece will not default and that there are still some amazing profits to be made from this diamond in the rough, including their debt olibgations and some wonderful high yield funds, which are mentioned at the end.  Although she may look ugly on the outside, this ugly duckling is surely the place to be.  We will start with yield on the current 10-year Greek issue.  Basically market sentiment concerning Greece defaulting on their debt obligations is easing quite noticeably.  Yields are showing this new sentiment as they have come off their highs.  The 10-year yield on the active 10-year Greek note is around 10.3%. 


    The chart below depicts various yield spreads, which were calculated as the yield on the German Bund subtracted from the yield required on each country's respective 10-year issue.  The larger the spread, the greater premium investors demand to hold that particular countries debt, over the so-called safe haven of the European Union, Germany.  As the spread between these yields widens, the risk of holding that countries debt also increases.  This increased risk can stem from numerous reasons but these particular spread explosions have resulted from fears that the countries below, especially Greece, will default on their debt obligations.  Fear of default is derived from massive debt to GDP ratios burdening these countries, as mentioned above.  It is clear that once reports caught wind of how bad things really were in Europe, these spreads exploded.  It should also be noted that the huge decrease in spreads occurred on May 10, the day after the $1.0 trillion Eurozone bailout was passed.  Once again, it appears contagion fears are waning quite a bit.




    The chart below depicts 5-year credit default swap rates.  As you can see, it is priced so that the owner of a CDS on Greek debt must pay a premium of about 8% to the counterparty in order to have the obligations of Greece "insured."  This has come down quite a bit from rates over 11% back at the end of June.




    The next chart shows how 5-year CDS rates have come down from the past couple of weeks.



     Over the past month, rates on just about all Greek debt have come down. 




    Now you might be asking, what was the whole point of all that?  Well it was to explain how market fears have waned and there is still time to get in on the free and virtually risk less debt of Greece.  On Tuesday, Greece auctioned a $2.0 billion (1.625 billion Euro) 26-week bill.  This auction finished with a 3.45 bid cover, down from 7.67 in the previous auction.  The yield came in at 4.65%, which is up from 4.55% in the previous auction.  The most recent US Treasury 6-month bill auction came in with a stopout yield of 20 basis points.  The reason I note that is to show the tremendous spread between US 6-month bills and Greek bills.  Now why would anyone in their right mind purchase a US T-Bill for 20 basis points when you can snag a perfectly good piece of Greek debt for 465 basis points?  Yes, I understand the whole risk thing and such, but right now, there is economic data showing the economy is slowing and most likely heading for a double dip, which is smacking the S&P.  If one were to purchase a piece of any European debt for that matter, their yield will greatly surpass the S&P returns for this year. 

     

    You might also note my use of the 10-year yield on Greek debt.  The purpose of that graph was the following:  Why would anyone lock up money for 10-years in a country with significant default risk, when they can do it for 6-months?  Greece is not going to default, don’t get me wrong, but if you aren’t on the same page as I and have opposing feelings, then we can certainly agree default is not going to happen in the next 6 months.  Greece currently borrows at a rate of 5% to pay down debts from the EU and just raised all new cash at 4.65%, clearly below the rate it can tap the Eurozone at.

     

    So In regards to investments, I would recommend The Touchstone International Fixed Income Fund, TIFAX, which as about 5% exposure to Greek debt.  The overall fund is also invested in debts from Germany, France, Belgium and the UK.  One could also look at Blackrock International Bond Fund (BIIAX).  Both offer perfect exposure to high yielding debt which is sure not to default.



    Disclosure: No positions
    Jul 15 11:19 AM | Link | Comment!
  • Doom Looms over S&P
    After Tuesday's terrible day in the markets, it is clear that a head and shoulders pattern is forming within the S&P 500.  The head and shoulders pattern is a bearish technical pattern, and one that is usually followed by a solid market sell-off.  The S&P closed way below it's 200-day MA on Tuesday.  The 50-day MA is also extremely close to crossing below the 200 day, which would be another sign for the market to take step downward.

    If the support of 1040 is broke, and I mean a solid closing below 1040, then I think the downside risk is huge.  I am not offering an actual prediction for a bottom, but I'm willing to say we could be looking the S&P to bottom around 850-950 in the longer term.  Friday's employment data will be market moving for sure, although we are expecting job losses due to firing of census workers.  However, anything worse than expected will surely lead to a market sell off and thus give us the necessary close before 1040 to conclude that next leg down is in play.




    The chart below gives some indication of why we feel the S&P will drop so much.  The drop is considered finished, or bottomed, when the price declination is equal to the decline from the head to the neckline.  This puts us in the 900s range.  Its tough to offer an exact prediction of where it will finish, but surely things will not be pretty.  Next week, there is limited economic data coming out, due to the shortened holiday week.  However, in 2 week's time we get a slue of data, which will surely move markets.  Can the bulls hold the 1040 line? 

    -The chart above is courtsey of Jefferson Starship. (seekingalpha.com/author/jefferson-starship)

    My prediction is no.  The coming data will be too weak.  If there is a hint of European Growth slowing down, a faltering US recovery, or some kind of negative news from the G20 Summit, things will head south in a hurry. 



    Disclosure: No positions
    Tags: SPY, Economy, Markets, S P
    Jun 30 10:49 AM | Link | Comment!
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