Cameco: Uranium Stages A Comeback, The Market Starts To Notice

Summary

• Cameco reported a red hot Q2 result. But what's next for Cameco?
• Cameco's management team failed to revise its full year out upwards. Does this matter?
• For so long investors have heard about the improving uranium fundamentals, that investors are now increasingly asking, if not now, then when?
• I believe that there are enough greenshoots underway to justify paying 6x this year's revenues for Cameco.
• Particularly given that Cameco's bottom line is now becoming noticeably attractive.
• Looking for more investing ideas like this one? Get them exclusively at Deep Value Returns. Learn More »

RHJ

Investment Thesis

Cameco (NYSE:CCJ) reported 12.9% of adjusted net earnings margins. Not only is this a massive improvement from Q1, but it's a truly impressive improvement from the same period a year ago, which was marked by negative double digits in adjusted earnings margin.

That's not to say that the sky is rosy and the outlook is sizzling strong. However, we are talking about a business that is now in a markedly different position from last year and there are reasons to conclude that Cameco's prospects could substantially improve going forward.

I believe that paying 6x this year's revenues is a very fair multiple for this investment. Here's why:

Revenue Growth Rates Likely to Remain Elevated, But Cameco Fails to Revise Its Outlook Upwards

Cameco revenue growth rates

Cameco reported Q2 2022 revenue growth rates of 55%. This was a mightily impressive result, which saw its revenue growth rates accelerate from Q1.

Needless to say that Cameco had a very easy comparable with the same period last year, that if Cameco didn't deliver impressive results, something seriously wrong would have taken place in the quarter.

That being said, Cameco didn't feel confident in its recently found momentum to revise its full-year outlook upwards.

And this immediately begs the question, given all the positive dynamics taking place, why didn't Cameco increase its full-year revenue guidance?

Near-Term Prospects, More of the Same? Or This Time It's Different?

Anyone coming to Cameco is likely to know the bull case already. Nevertheless, if anyone reading this has missed the background, Cameco has neatly summarized the situation as such:

This geopolitical uncertainty has led many governments and utilities to re-examine supply chains and procurement strategies that are reliant on nuclear fuel supplies coming out of Russia.

This is the situation facing uranium companies right now, and is the same as it has been for several months. However, despite positive fundamentals, where supply to North America has been severally restricted, for uranium shareholders, despite this compelling backdrop, investors have not seen Cameco or its peers return to recent highs.

Data by YCharts

As you can see above, many uranium stocks had a pop a few months ago, but have since given back much of their gains. The question is why?

Was it something particular about uranium companies? Or was it that investors en masse turned their backs on commodity companies? I believe it was the latter.

Commodity investors have become so accustomed to losing capital by investing in commodities, that investors didn't have any faith in a potential commodity bull market, least of all, uranium - what some would argue is a second-tier energy source.

Others would passionately argue that uranium is by far the cleanest and greenest energy source per volume, particularly when it comes to its disposal.

Cameco presentation Q2 2022

Then, further complicating matters, as you can see above, the uranium spot market has been volatile, which has translated itself into the equities tied to uranium prospects being even more volatile, with cycles of fear and greed building on themselves.

And to add even more complexity to this puzzle, during Cameco's earnings call, Cameco stated:

Suffices to say we are seeing governments and companies turn to nuclear with an appetite that I'm not sure I have ever seen in my four decades in this business. Therefore, it is easy to conclude that the demand outlook is durable and very bright. (Emphasis added)

So there are a lot of crosswinds, and it's difficult to get a firm sense of the pervasive winning force.

As it stands right now, the unavoidable fact is this, even though uranium should be seeing a huge spike in pricing, Cameco had to downwards revise its anticipated uranium average realized price to $56.60 per pound from $58.60 per pound in Q1.

This is not a substantial downgrade, but at the same time, this appears to be contrary to this running narrative.

On the other hand, was this already priced in?

CCJ Stock Valuation - Priced at 6x Sales

Data by YCharts

I believe that investors had already been pricing in since April a reduction in the price of uranium in the spot market.

Simply put, there's all the negativity and investor apathy already priced in, but very little hope.

We just saw Cameco reporting 12.9% in adjusted net earnings margin. This is the highest adjusted net earnings margin over the past several years.

So again, I ask, could this time really be different?

The Bottom Line

When all is said and done, this is the negative risk factor, uranium prices are volatile and Cameco had to downwards revise its uranium average realized price to $56.60.

On the other side of the equation, I believe that it's an unavoidable fact that we are coming out of a prolonged uranium bear market that lasted 10 years, and that there will be the occasional pull back in pricing along the way.

For now, there's disbelief that Cameco could soon start gushing sustainable cash flows. Nevertheless, we just saw Cameco positively report Q2 results that for many investors would have seemed impossible only a few months back.

Consequently, I believe that Cameco could have what it takes to delight investors. And that paying 6x this year's revenues is not an exaggerated multiple, particularly for a company that's now reporting solid double digits of adjusted earnings margins. I rate the stock a buy.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Comments

[matt.wood]

https://on.ft.com/3TazLGV
Giftlink to FT article today.
Japan is back and they are going to build more Nuclear Power Plants!

"Japan is preparing a big shift on nuclear power, with Prime Minister Fumio Kishida announcing plans to look at the construction of new plants, in what would be a break with more than a decade of energy policy.

With energy prices soaring in the wake of Russia’s full-scale invasion of Ukraine, Kishida said Japan would restart more nuclear plants shut down after the 2011 Fukushima disaster and also study the development of next-generation reactors.

The prime minister had already announced the restart of some plants after Tokyo came close to suffering a power blackout this year, but his tentative plans for new nuclear reactors would be a U-turn on post-Fukushima policy."

[lshiang]

@matt.wood Japan has no choice, but to embrace nuclear power although it seems to carry more risk for Japan and they have to figure out how to make it safer to operate.

[Mark Humphrey]

I've been long CCJ and a uranium fund for 3 years now. I'm reluctant to boost my CCJ because the risks are all political. What if China stops buying uranium from western unfriendly nation-states that are trying to destroy Russia?

I lost some money holding Russian equities, thanks Biden; and before that lost a smaller amount when I was forced to sell some Chinese equities, thanks Trump. So, I'm cautious re political risks which affect commodity producers and everything else. There is no place to hide from all the oppressive edicts, but there are greater versus lessor degrees of political risk.

[Muskiebear63]

CCJ is licking its chops as they seem to be in the proverbial Catbirds Seat.

[lshiang]

Since Russia has weaponized its natural gas during the invasion of Ukraine, the rest of the world seems to have no choice, but to rely on nuclear energy for sustainable power generation.

[User 21359971]

@lshiang
The resulting reliance on nuclear power is not that clear. Other sources for natural gas exist. There may be some lag time arranging new LNG supply lines to Europe. Two giant natural gas fields exist in the eastern Mediterranean that can be connected to the European grid after the fields are developed.

[Gauntlet888]

Thanks for the great article! Any thoughts on LEU Centrus as uranium enricher and broker?

[reganbaha]

@Gauntlet888 certainly not an expert in this area, or much else for that matter, but doesn’t their feedstocks come from Russia?

Ciao

[Gauntlet888]

@reganbaha they are broker, but also have capabilities for refining both LEU and HALEU. Especially now as it was announced that HALEU production goes live in couple of years.

According to my understanding, Centrus HALEU products for test reactor located in Idaho has been validated and approved. It appears that Centrus could be in the driving seat for HALEU fuel transition.

Also it could be that Centrus is involved at LEU production relaunch in U.S due to closure of Russian refining pipeline (hopefully asap.

[reganbaha]

@Gauntlet888 but does the material they enrich/ broker etc originate from Russia in some form. I would expect US growth in the U supply chain to be a long and convoluted process.

If the feedstocks for their HALEU originate in Russia…..then hmmmmm 🤔

As said previously, a bit of an amateur in the subtleties of this geography and part of the process etc.

[User 21359971]

Interesting

[SenBiden]

I invested in CCJ decades ago back when nuclear power appeared to have great prospects as it became increasingly clear Western governments wanted to phase out the most reliable and economic fuel we had for electric generation - coal. CCJ was beset by one operational problem after another which became political problems. Eventually I sold at a loss.
This year presented a new investment catalyst - sourcing uranium away from Russia, Kazakhstan, etc., and closer to home. CCJ looked like the obvious choice. After an initial pop the stock has flopped. My general impression is the mining industry (gold, silver, uranium, other commodities) suffers from a shortage of managerial talent. Very few seem able to capitalize on opportunities or deliver consistent results (BHP an exception). Still long CCJ but watching closely. Fortunately, I also bought nuke generator CEG where results continue to be exceptional.

[soral a raison]

People are starting to talk about workable thorium and fusion reactors again. Of course, its many years away at best, but should either become a reality, uranium mining would instantly become a useless activity. Is this a risk to consider?

[Flubull]

@soral a raison No, it won't become instantly useless. Fission as it is and as the technology develops is very scalable. It can and is being developed for space flight. Even if fusion genuinely becomes a thing it will not be scalable for a long time in the same way. Fussion also requires substantial power input to keep the process running.
Nuclear fission tech is constantly developing. Things like laser enrichment which leaves much less waste and laser re-enrichment techniques which could reduce the half life of waste from a thousand years to 30 to 100 years....
Nuclear is going to be around for a very long time.

[reganbaha]

@soral a raison people complain about regular nuclear’s timeframe to ramp up capacity. Add to that a brand new untested tech at industry scale, reliability and everything else in the multi decade life of a utility investment and you probably don’t need to worry about thorium in the next decade or two, or your lifetime