Cameco: Challenges Remain In The Near Term

| About: Cameco Corporation (CCJ)


Cameco could be one of the best long-term investments.

Long-term fundamentals of uranium market continue to improve.

Near-term outlook though is challenging.

I have been bullish on Cameco Corporation (NYSE:CCJ) and the uranium market for over a year now. My bullish thesis is based on the long-term outlook for the uranium market. However, the robust long-term outlook does not reflect in the performance of CCJ shares. In fact, the stock is now hovering near multi-year low levels as the 10-year price chart below shows. And this because the outlook for CCJ and other uranium miners remains challenging in the near term.

Source: Google Finance

The Bullish Case

Uranium prices traded at around $70 per pound in 2011. This was before the Fukushima power plant accident in Japan in March 2011. The power plant accident led to the shutdown of all the nuclear reactors in Japan. Given that Japan is one the most important markets for nuclear energy, the shutdown of reactors led to the collapse of uranium prices. Prices are now languishing below $30 per pound.

In the last two years though, the outlook for the uranium market has improved significantly. The bullish case is built around the improving long-term outlook. According to a recent report by the Energy Information Administration (EIA), global nuclear electricity generation is expected to almost double by 2040. This will be driven mainly by China and India.

Source: Energy Information Administration

Apart from strong demand from China and India, which is a key long-term driver, the outlook for uranium market has also been boosted by the restart of 2 nuclear reactors in Japan. Before the Fukushima disaster, Japan had more than fifty reactors in operation, so we are still a long way away from demand returning to pre-Fukushima levels. But the restart of the reactors in Japan has certainly improved sentiment.

According to Cameco, currently, the world's fleet of reactors consumes 170 million pounds of uranium per year. Cameco expects demand to grow about 220 million pounds per year over the next decade.

As I have noted before, CCJ is one of the best-placed miners to capitalize on this anticipated demand. The company has long-term contracts till 2018, so it does not have any urgent need to sign long-term contracts at current depressed prices. The tax issue is a concern for CCJ, but as I have discussed in an article last year, it is already priced into the stock. In fact, CCJ shares are now trading even below the levels they were at when the note was published last year. Indeed, CCJ is possibly one of the best long-term investments out there right now. However, investors will have to be patient as the near-term outlook for CCJ and uranium market remains extremely challenging.

Near-Term Outlook Challenging

In April, CCJ announced the suspension of production at the Rabbit Lake operation and curtailment of production at Cameco Resources' U.S. operations. These decisions were taken keeping in mind the depressed market conditions. These decisions also highlight the fact that while CCJ is optimistic about the long-term outlook for the uranium market, it expects the environment to be extremely challenging in the near term.

The main reason why we are not seeing a recovery in uranium prices is because utilities continue to remain on the sidelines. Utilities purchase uranium mainly through long-term contracts. Prices are mainly affected by long-term contracting activity. Although several utilities are scheduled to enter into long-term contracts, they have chosen to remain on the sidelines expecting further decline in prices. This is keeping prices low for the month. But the strategy could also backfire as I have noted before. If too many utilities enter the market at the same time, we could see a surge in prices, which in turn could lead to a sharp rise in shares of uranium miners such as CCJ. Indeed, this is the major reason why I am holding on to CCJ.

However, for the moment, there is not much demand from utilities. As CCJ noted in its Q1 earnings release, the first quarter saw only 11 million pounds placed under long-term contracts. Further in Japan, the restart process is taking longer-than-anticipated. CCJ noted last month that not enough units have returned to service to have an impact on market conditions.

The anticipated turnaround in the uranium market is taking longer-than-expected. And this is one of the reasons why CCJ suspended production at Rabbit Lake and curtailed production at its U.S. operations. While these steps position CCJ well when the market recovers, they also suggest that the near-term outlook is going to be challenging.

Disclosure: I am/we are long CCJ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Industrial Metals & Minerals, Alternative Investing, Canada
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