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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 0 comments
    Sep 22, 2010 10:29 AM | about stocks: CCJ, SPY, UEC, URRE, USU, ARVCF

    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
    Themes: Energy, Nuclear Power Stocks: CCJ, SPY, UEC, URRE, USU, ARVCF
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