Kirtley opined on May 5, 2021 that investment in the nuclear industry has a strong positive outlook over the coming years. Cameco, as the largest public uranium mining stock, may appear a natural choice. However, Cameco does not offer enough upside exposure through overly conservative management.
Better suited to diversify a low beta portfolio than one targeting aggressive growth. Cameco has enjoyed a strong performance lately, with the stock more than doubling since November as the broader uranium sector has surged, and on a company specific level as it announced it would re-commerce operations at Cigar Lake. One cannot discuss the uranium mining sector without mentioning Cameco. It is the titan of the industry and cannot be overlooked. However, simply because a company is big, it doesn’t follow that it's a great investment choice. Careful consideration should be given to the investor goals and scrutinize how Cameco measures up against those targets.
Cameco Corp.
Being the largest publicly listed pure uranium miner, Cameco accounts for approximately 9% of global production, behind Orano and leader Kazatomprom, both of which are privately/state owned (Source: World Nuclear Association). It offers blue chip style exposure to an industry that sits on both the fringes of the mining and energy sectors. Cameco’s >$7bln market cap comes not only from its headline Cigar Lake operation, but projects with sizeable reserves in McArthur River, also in Canada, and Inkai in Kazakhstan.
In fact, when looking at the longer-term prospects of Cameo, it is these two projects, not Cigar Lake, that are the most pivotal. Cigar Lake is expected to end its mine life in 2029, and therefore the jewel the Cameco’s crown will be phased out to the McArthur River mine over coming years. Its reserves are nearly triple that of Inkai, the other major production site that will still be operating after Cigar Lake winds up. Therefore, Cameco’s value, and longer-term prospects, arguable hinge more on success in these areas, rather than production at Cigar Lake.
The projects speak volumes to the strategy and management style of Cameco. Long term mines with solid reserves. Cameco has the experience, capital and expertise to maximize the value of these deposits and manage them to produce consistent cashflow. Success for Cameco doesn’t depend on exploration results, it doesn’t hinge on if they find reserves or not, these inputs are largely known, and Cameco’s “value-add” comes by maximizing the value of these projects. This adds stability to the company but takes away the potential of the explosive upside that can exist in uranium stocks focused more on the exploration side. However, if one is seeking an investment with exposure to an expanding uranium and nuclear industry, then an investment where the value depends highly on if the company can find uranium is not optional. After all, the initial thesis could be correct, nuclear power could grow and uranium prices steadily increase, but if the uranium explorer stock hasn’t found uranium, or hasn’t found as much as first thought, then the investment will have performed poorly despite the initial thesis panning out.
One thing is for sure; Cameco has uranium, lots of it, and a track record of successfully operating mines and turning that uranium resource into hard dollars - a highly desirable quality and one that is critical to success of ensuring that the investment vehicle matches the investment thesis. If the investment thesis follows that due to nuclear power becoming an increasing part of the global energy mix, uranium prices will increase and therefore uranium stocks are a good investment, this is where Cameco is not a good choice for investors. Whilst it is true that there are a number of reactors currently under construction globally, and these could push uranium prices higher, is Cameco really going to benefit that much?
The truth is Cameco is not set to fully benefit from an increase in uranium prices. The company is not geared that way. By design they have followed a strategy of reducing the sensitivity of their bottom line to the price of uranium. The annual report shows how, by locking in prices for their production in the future, Cameco has reduced its ability to benefit from an increase in uranium prices.
Of course, by the same process, Cameco has limited their exposure to falls in the uranium price. Currently the uranium spot prices are just under $30, and long-term prices just over $30. If prices fall to $20 in coming years, then Cameco will still realize $30 in a few years’ time. If prices rise from $30 to $40, Cameco is set to participate in nearly all of those gain. Uranium price increases from there would have a diminishing impact on Cameco’s bottom line though. Under a scenario where uranium prices go back above $100, Cameco is only realizing around two thirds of that price, whilst at $40 they are getting around 100% of the price.
There is strong rationale for Cameco’s decision here. They have capital intensive projects where the long-term focus is maximizing the value of the assets via efficiently managing the mining operations. Their goal is not to be highly leveraged to the spot price of uranium, reducing this exposure allows them to operate on such a large scale and be awarded an investment grade credit rating. However, if as an investor, one is actively seeking to increase exposure to uranium prices, then investing in Cameco’s management strategy which is actively seeking to decrease exposure to uranium prices, misaligns the investment vehicles with one’s investment thesis and therefore is not appropriate.
The price of the end product drives revenue, but that is just one side of the equation. Costs are another and are particularly important for a large cash flow focused company like Cameco. Unfortunately, the cost per pound for CCJ is not particularly inspiring. Coming just under $40, it's not a picture of a mature company at the “cash cow” stage of its life. Arguably this is where Cameco should be. BP (NYSE:BP) breaks even around $42/barrel for oil, against a spot price of $66. (Source: BP) It costs Newmont Corporation (NYSE:NEM) around $970/ounce to produce gold, against a spot price close to $1800 (Source: Newmont 2021 Outlook)
Cameco have been in the industry for many years. Cigar Lake is the world’s highest-grade uranium mine and it has eight years left. Cameco produces uranium at a cost per ounce slightly over the long-term price. For all the experience, expertise and investment grade balance sheet, one can buy uranium on the open market at a lower cost than Cameco is mining it. Perhaps uranium prices will go much higher and Cameco’s production cost vs spot will look healthier, but as the aforementioned table demonstrates, management’s strategy is to actively decrease the company’s exposure to uranium prices.
So, if Cameco is producing uranium at a higher cost per pound than the long-term price, and has actively decreased its ability to participate in a material move higher in uranium prices, why does it boast a market capitalization over $7bln? The answer is the company’s greatest, perhaps most unique asset; large, economical, proven uranium reserves.
Cameco has 455 million pounds of uranium reserves. Whilst Cigar Lake may not be operating in ten years, the other flagship projects still have over 20 years to run. If nuclear energy is the future, and uranium prices move sustainably higher, Cameco has its hands on an asset poised for a potentially tremendous increase in value. It can still capture a substantial part of the upside associated with expanded adoption of nuclear energy.
Nevertheless, we must return to answering the most critical question; does the investment vehicle match the investment thesis? If you’re looking for a stock that is highly leveraged to rising uranium prices, Cameco is not what you’re looking for. The hedging policy of management negates much of the upside. If you’re looking for a company that would benefit from more nuclear power plants being built, Cameco only indirectly may benefit from this many years down the track, they are not involved in construction or maintenance of power plants. If you are looking to diversify a low beta portfolio, then Cameco is a strong candidate to be put in the mix, with the other large mining and energy companies.
Conclusion
This is not a pioneer stock with the potential for Moon-bound gains. It’s a large, established, conservative mining company with focus on just that, mining. Cameco strives to be good at mining the product it holds large reserves of. It doesn’t aim to risk the balance sheet to knock home runs out of the park. Whether it's the right stock for your portfolio or not hinges simply on whether this matches your investment thesis. For aauthor Kirtley, positioning for a global shift toward nuclear energy warrants backing companies with a more aggressive set of goals and the management with the ambition to deliver outsized returns to shareholders.
Available URL: https://seekingalpha.com/article/4424462-cameco-corp-stock-ccj-maybe-not-right-vehicle-for-uranium-nuclear-exposure
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