I was inspired to have a look at Cameco, one of the world’s largest miners of uranium, when I saw this news from the Energy Information Administration (EIA):
Nuclear power plants play an important role in U.S. electricity generation, consistently providing about 20% of total annual generation. Of the 30 U.S. states with operating commercial nuclear power plants, 12 states generated more than 30% of their electricity from nuclear power.
It seems like weeks ago the only thing I read about in the press concerned the environment and reducing CO2 emissions into the atmosphere. Funny how every time we have a crisis the environment drops from our list of priorities – thank goodness because I’m not a fan of fanatics of any sort. But the truth is that the cleanest form of electricity generation, remains nuclear power. Over the past 40 years, electricity consumption has tripled globally and isn’t about to slowdown anytime soon. Batteries are not the answer – since we need electricity to charge the batteries.
So why Cameco? Utilities around the world rely on their nuclear fuel products to generate carbon-free power. About a quarter of Europe’s power is nuclear. Most of the future growth is expected to occur in expanding economies like India and China. Sixty new reactors will go online over the next few years. The Company operates mines in North America and Kazakhstan, and its Cigar Lake mine in Saskatchewan is the largest in the world.
I decided to check out the spot price of Uranium, and was surprised at the spike recently (FYI the spot price isn’t all that relevant because most yellow-cake is bought on contract – for example to actual realized price Cameco receive in their 4th Q was $44.85/lb).
Could the spike be because, like everyone else Cameco has elected to shut down its mining operations due to coronavirus?
SASKATOON, Saskatchewan, March 23, 2020 (GLOBE NEWSWIRE) — Cameco (TSX: CCO; NYSE: CCJ) announced today that it is temporarily suspending production at its Cigar Lake uranium mine in northern Saskatchewan and placing the facility in safe care and maintenance mode due to the threat posed by the Coronavirus (COVID-19) pandemic. There are no confirmed cases of COVID-19 among Cameco’s workforce at the present time.
Cameco’s share price is down nearly 50% from it’s 52-week high, despite what is normally a low beta stock. The Company has a strong balance sheet and over $1 billion in cash. The only issue is earnings. The P/E ratio is very high, but the $74 million in earnings (before adjustments) for 2019 was a paltry 18 cents per share in an oversupplied market for uranium. Cameco management is aware of this, and to quote their own strategy:
We will not produce from our tier-one assets to sell into an oversupplied spot market. During a prolonged period of uncertainty, this could mean leaving our uranium in the ground. As conditions improve, we expect to meet rising demand with production from our best margin operations.
Like all commodity-like industries, the solution is to reduce supply in order to firm up pricing. This is not an overnight trade story, but if you believe governments will continue to cater to environmental lobbyists by encouraging clean energy, and that electricity demand will continue to grow globally – Cameco should be bought while the pickings are good.