Cameco’s uranium strategy appears out of favor

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 455 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 24% of the world’s primary conversion capacity and accounted for 7% of the total world production in the last year. Cameco’s landholdings, including exploration, span about 1.7 million acres. Its assets include a large portfolio of low-cost mining operations, extensive mineral reserves, and resources, as well as exploration and development projects.  

The company has controlling ownership in tier-one operations including McArthur River (~70% ownership), Cigar Lake (~50%), and Inkai (40%) 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 (~25%) and Asia (~30%).

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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. Its Cigar Lake mine has a production capacity of 18 million pounds per year and accounts for 13% of the world’s uranium.

The pandemic-induced production disruptions at Cameco’s various production facilities including the Cigar Lake mine and the McClean Lake mill, and across all uranium mines in Kazakhstan resulted in lower 2020 global uranium production and an increase in spot market purchases by producers. Cameco produced 30.6 million pounds of uranium in the last year at an average annual realized price of $46.14 per pound. It also withdrew its 2020 outlook.

The company continues to preserve its Tier 1 assets to deliver into a long-term contract portfolio. Though long-term contracting was delayed in 2020, Cameco successfully added 12.5 million pounds to its portfolio of long-term uranium contracts and 17.1 million kilograms in the fuel services segment.

Dividends

Cameco has consistently made dividend payments since 1991. The yield does not sound attractive at 0.39% and the company also sports a high payout ratio. The company continues to take steps to improve margin and cash flow such as the reduction of dividends in 2018 and restructuring activities to reduce operating, capital, and G&A spending. The company declared a dividend of $0.08 per share in 2020.

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 well-positioned to benefit from rising prices and emerging green energy trends, supported by oil headwinds. 

More than 40% of CCO’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 kg. Cameco ended the quarter with $943 million in cash and a $1 billion undrawn credit facility, which it does not anticipate drawing 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 a strong balance sheet position Cameco well for long-term shareholder value creation.

Cameco (CCO) historical Yield
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Competition

Cameco enjoys controlling ownership in the world’s largest high-grade reserves and low-cost operations and accounted for 7% 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.

Moreover, government-driven trade policies could be disruptive for the uranium market as nearly 90% of uranium consumption occurs in countries that have negligible primary production.

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Bottom Line

The COVID-19 pandemic has disrupted global uranium production. Investors have reasons to worry about Cigar Lake production suspension and restricted trade policies. However, Cameco has plans to restart production in April at Cigar Lake and uranium spot prices have also increased by more than 35% since March- April 2020. Cameco should gain from a growing pipeline of uranium business. The company is confident to take advantage of a market where demand for nuclear power and risk to uranium supply is growing.

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Cameco (CCO) historical PE
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