There seems to be a prevailing notion that nuclear is on a decline. The Wall Street Journal put out an article the other day on several nuclear power plants that are going to close. Fortunately for the price of uranium and Cameco (NYSE:CCJ), the markets already know this.
The Journal correctly pointed out that Entergy's (NYSE:ETR) Indian Point Plant, 35 miles of New York City, will soon close. This will make four plants that will close by the year 2025 in the U.S. The article also quotes a manager at Entergy who stated that natural gas from the Marcellus Formation drove down energy prices 45% to $36 per megawatt hour and that it cost Indian Point $160 million in revenues. The U.S. receives about 20% of its power from nuclear, 35% from natural gas, 30% from coal, 7% hydro, 6% wind, and 1% solar.
What the article does not state is that natural gas reached a 17-year low about a year ago and touched $1.64 per million British thermal units. A few weeks ago on December 28, gas reached $3.99 MbTU. Gas has since fallen to $3.15. As you can see, like all commodities, gas is cyclical.
Now to Uranium. One pound costs $20.25. Back in November, it was in the $18 range. A year ago, a pound cost $34.70. Five years ago, uranium cost over $52 a pound. It appears that uranium has bottomed out. So how does one profit off of this commodity that is very difficult to predict?
I will use some data from an excellent article on Seeking Alpha. Cameco's MacArthur River has an ore grade of 10.94%. Can you believe that? Processing a rock and over 10% is pure uranium. Cigar Lake has a grade of 16.7%. The global average is only 0.1%! Cameco averaged $29.90 Canadian this year, down from $34.76 last year.
I'm not going to get into the particulars of increasing plants but China is building more. The problem is that some of these power plants have their own supply of uranium from Russia (actually its satellites to be precise). Of course Donald Trump is now President and that changes everything. His intentions are unclear in regards to nuclear power but the industry is bullish. Here is another excellent article from Seeking Alpha on Trump, nuclear, Cameco, and uranium.
Cameco is the largest, publicly traded player. Actually, it's not that large. The market cap is only $4.53 billion. The stock pays a quarterly dividend of 10¢ Canadian. So to put that in American dollars, it's about 30¢ and the dividend yield is 2.64%. Not bad.
What I like about the stock is that it reached a low of $7.46 back in November. It's up 72¢ today to $11.47. In my humble opinion, it will run hard until Trump's election. I'm also bullish on gold but that's another story. After the election, I think it will keep on running. It may reach $20 (if my clients are lucky). Part of the story is commodity pricing (coming off a low), high gas prices (way off their lows), a low Cameco stock price, and the idea that the new President is friendly to nuclear. The oil lobby dwarfs the uranium lobby so that might not actually play out. Nuclear competes against gas. The thing I like about Seeking Alpha is that you viewers can hold my feet to the fire if I'm wrong. If I'm wrong, feel free to excoriate me.
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.