Uranium appears to be out of favor for Cameco…

Cameco is one of the largest providers of uranium in the world. It is also a leading supplier of uranium refining, conversion, and fuel manufacturing services. Both uranium and nuclear fuel are used in generating electricity all around the world. Cameco’s reporting segments are Uranium accounting for 75% of total sales and Fuel services constituting ~20%.

Cameco has operations in Canada and Kazakhstan with an annual production capacity of 53 million pounds. In addition, the company holds nearly 461 million pounds of mineral reserves and extensive resources on three continents, North America, Asia, and Australia. Cameco has a presence across the entire nuclear fuel cycle from exploration to fuel manufacturing. The company controls about 25% of world primary conversion capacity and accounts for 9% of the total world production. Cameco’s landholdings, including exploration, span about 1.7 million acres and it has about 25% of the world’s primary conversion capacity. Its assets include a large portfolio of low-cost mining operations, extensive mineral reserves, and resources, as well as exploration and development projects.  

Cameco’s tier-one operations include McArthur River/Key Lake, Cigar Lake, and Inkai in Kazakhstan. The Cigar Lake location is the world’s second-largest high-grade uranium deposit, with 100 times higher grades than the world average. Cameco sells uranium and fuel services to nuclear utilities in 12 countries. By region, the Americas account for nearly 45% of total sales, followed by Europe (~20%) and Asia (~35%).

Investment Data

Revenue Growth & Market Exposure

Cameco is known for safely and reliably producing uranium and nuclear fuel products for generating electricity for the last three decades. The company owns an extensive base of mineral reserves and resources and diversified sources of supply. Cameco is in a good position to gain from the world’s rising demand for nuclear fuel which is touted as a safe and clean energy source. The company is a leading supplier of uranium, which is a critical component used by nuclear energy plants around the world. Comprehensive industry knowledge and long-term contract portfolio are Cameco’s key competitive advantages. 

Utilities around the world are the biggest buyers of Cameco’s nuclear fuel products. Customers trust the Cameco brand for its long-lived, tier-one productive capacity having a proven operating track record. There is growing recognition of the role of nuclear power in providing safe, reliable, affordable carbon-free electricity. The new reactor growth is led by Asia, China, and India with 29 of the 53 new reactors under construction.

The company produced 31.5 million pounds of uranium in the last year at an average annual realized price of $44.85 per pound. The metal is highly sensitive to trade policies by governments. The recent pandemic outbreak has led to many unplanned supply disruptions. The Cigar Lake and Fuel Services segment performed well in 2019. However, the current COVID-19 situation has led to the temporary suspension of production at Cigar Lake, Blind River, and Port Hope. The company thus had to depend on market purchases of uranium to fulfill its delivery commitments which led to higher cost. It withdrew its 2020 outlook. Cameco continues to preserve its Tier 1 assets to deliver into a long-term contract portfolio. Prior to the lockdown, the company had annual average sales commitments of around 19 million pounds over the next five years in the uranium segment.

Dividends

Cameco has consistently made dividend payments since 1991. Though the yield does not sound attractive at 0.53%, Cameco sports a reasonable payout ratio of 44%. As a result of Cameco’s cost reduction measures implemented over the past five years, the reduction in dividend, and the drawdown of inventory in 2018 the company has accumulated significant cash balance.

Cameco’s Uranium segment is complemented by its Fuels Services segment as the latter supports the growth of the uranium segment with its broad range of products and services. Prices are expected to rise as production slows down. Cameco is thus, well-positioned to benefit from rising prices and emerging green energy trends, supported by oil headwinds. Cameco Corp. had slashed its dividend to $0.06 per share from $0.31 in November 2017 to preserve cash.

About 40% of Cameco’s total revenue is derived from fixed-price contracts which are typically based on a term-price indicator at the time the contract is accepted and escalated over the term of the contract. The majority of its fuel services contracts are at a fixed-price per kgU. Cameco ended the quarter with $1.2 billion in cash and a $1 billion undrawn credit facility, which it does not anticipate to draw on.

Nuclear energy is being preferred due to its carbon-free attributes. In the current situation, nuclear is being touted for its key safety and reliability attributes in the healthcare industry. The company expects the current backlog of long-term contracting represents a substantial opportunity. A portfolio of high-quality assets, long-term contracts, comprehensive industry knowledge, and strong balance sheet position Cameco well for long-term shareholder value creation. 

Competition

Cameco enjoys controlling ownership in the world’s largest high-grade reserves and low-cost operations and accounted for 9% of the total world production in the last year. Other leading uranium producers in the world are Kazatomprom, Uranium One, Orano, CNNC & CGN, and ARMZ Uranium Holding. 

Bottom Line

The COVID-19 pandemic has disrupted global uranium production. However, the uranium spot price has begun to gain momentum and has increased by more than 35% since March 2020. Cameco expects COVID-19 not to have a material impact on its 2020 deliveries. As a pure-play nuclear fuel company, the company should continue to provide the fuel required to power the critical infrastructure needed to ensure hospitals, care facilities, and other essential services are available during this pandemic.