CCJ - Cameco: Digging For Precious Uranium Ore
2023-07-19 00:16:16 ET
Summary
- Cameco, a company that mines uranium and produces fuel assemblies for nuclear power plants, is well-positioned to benefit from the global energy crisis and the transition to clean energy in Asia and the US.
- CCJ is expected to benefit from the growing demand for electricity, which is expected to triple by 2050, driven by the transition from fossil fuels to electrification in areas such as transportation and industrial processes.
- Despite the potential complications in the uranium market due to possible sanctions on Rosatom, prices for uranium ore are expected to hold steady at a high level, with Cameco.
Investment thesis
Cameco ( CCJ ) is a unique company that mines uranium and produces fuel assemblies for nuclear power plants. The company successfully navigates the phases of the uranium demand cycle by either mothballing or restarting its deposits. Cameco also has a number of dormant and young projects, such as Millennium, Kintyre and Yeelirrie.
Cameco is another company that's positioned to benefit from the global energy crisis and the transition to clean energy in Asia and the US. Rating is HOLD.
Cameco and industry outlook
In order to move on to the outlook for the industry, let's take a moment to get some insight into how uranium concentrate is made.
There are three main ways to mine uranium:
- Open pit mining. Uranium ore is extracted from open pits. The method is suitable for deposits that lie no deeper than 300 meters from the surface.
- Underground mining. This method is more expensive and makes economic sense only when the ore has a high content of uranium.
- In situ recovery mining. During in situ recovery, a leaching or acidic solution is injected down drill holes into the uranium ore deposit. The resulting uranium-rich fluid is then pumped back to the surface for further processing.
Here's a chart of how triuranium octoxide (U 3 O 8 ) - or yellowcake - is made.
Invest Heroes
Cameco is one of the world's largest companies that mine uranium and produce fuel for nuclear power plants. According to the World Nuclear Association , Cameco accounted for about 12% of the world's uranium production and more than 80% of uranium mined in North America in 2022. Uranium mining in North America is mainly done in Canada and makes up about 15% of global production.
The end users of enriched uranium are mainly nuclear power plants, which account for ~10% of all electricity generated worldwide. The leaders in nuclear power generation are Western and Central Europe, North America and Asia represented by China.
According to McKinsey , the world's demand for electricity will triple by 2050 under different scenarios. The expected increase in demand will largely be driven by transition from fossil fuels to electrification in such areas as transportation (electric vehicles), construction and industrial processes (low-carbon steel production). The resulting demand for new low-carbon and zero-carbon generation will be unprecedented in the history of global energy generation.
McKinsey
It means the period of stagnation for peaceful nuclear power, which followed the Fukushima explosion, has come to an end because in order to meet future demand, the number of completed and operating nuclear power plants worldwide should reach at least 832 by 2050. Currently , there are 436 operating stations around the world, 59 are under construction, 100 are planned and 323 are under consideration. All of this fits into the basic scenario of nuclear energy adoption.
Asia , in particular China and India, continues to be the leader in nuclear build-up, amid faster growth in demand for cheap electricity as economies grow and coal and gas generation is phased out.
The development of the EU nuclear industry has almost stalled over the past years when the bloc has come to rely on cheap gas from Russia. Some countries, such as Germany, have completely scrapped nuclear power plants. But how long will the industry wither away? Not for long. In March 2023, the EU proposed a project to reform the energy market under the Net-Zero Industry Act , which mentions small modular reactors as "advanced technologies". Plans for building reactors were announced by the countries that relied on Russia for their energy: Poland, the Netherlands, Latvia and Bulgaria. France, despite the protests of Europe Ecology - The Greens party, continues to be a leader in NPP construction and operation.
Amid the growing demand, gradual depletion of existing reserves and the cessation of uranium ore production in existing mines, the shortage of triuranium octoxide could reach 75 million pounds by 2035, according to UEC . That could push the prices for the metal to a new phase of growth.
We don't see uranium prices dropping below $40 a pound over the medium or long term (even with the onset of a global crisis) because in that case more than 20% of uranium production will not be profitable, including production at Cameco's Cigar Lake and McArthur River mines.
However, the situation on the uranium market could become more complicated if extensive sanctions are imposed on Rosatom. Although Russia accounts for just ~6% of primary feedstock production, its capacity to enrich uranium to produce fuel pellets and then assemble fuel bundles makes up 46% of global capacity. The World Nuclear Association predicts that Rosatom will maintain that share at the current level for the next 7 years.
Therefore, we expect prices for uranium ore to hold steady at a high level, at about $54 a pound, until 2025, while the price of uranium enrichment will settle at an all-time high, given limited available enrichment capacity around the world.
Cameco's business
The company's revenue is generated by two main segments: uranium ore mining and fuel assembly production (processing and enrichment). That means Cameco is a full-cycle company, except for the lack of capacity for processing spent nuclear fuel.
Let's take a more in-depth look at the company's main assets in the segment of uranium concentrate mining. Most uranium ore is mined at the McArthur River mine (stake of 69.81%) in Canada's Saskatchewan Valley. The licensed capacity for ore mining and processing is 25 million pounds per year, and the deposit reserves are estimated at 275 million pounds with an average content of uranium oxide (U 2 O 3 ) in the ore at 2.23%. The company brought ore production at McArthur River to a complete halt in 2018, citing unfavorable market conditions.
In 2022, the company resumed operations at the mine as prices rose amid the energy crisis. It expects to produce at least 15 million pounds of ore (or 10.5 million pounds, given its 70% stake) in 2023. We expect that ore production at the mine will approach 80% of its total capacity by 2025, which is equivalent to 20 million pounds of ore per year (or 14 million pounds of ore, given the stake of 70%).
Cameco's second most significant asset is the Cigar Lake mine, where the mining is done under the ground. The company owns a 54.6% stake, giving it the right to consolidate production into its financial results. The licensed mining capacity at the Cigar Lake mine is 18 million pounds of uranium ore per year. The deposit is estimated to hold reserves of 85.5 million pounds with an average uranium oxide (U 2 O 3 ) content in the ore being 5.62%. However, due to the small volume of reserves, the estimated lifetime of the mine is eight years, running until 2031. The company did not stop mining at Cigar Lake during the period of extremely low prices, unlike what it did at McArthur River, due to the high uranium oxide content in the ore.
The company's third most important project is the development of a deposit in Kazakhstan through the joint venture JV Inkai, where Cameco controls 40%, and the remainder belongs to Kazatomprom. Because Cameco controls less than 50% of the joint venture, the revenue from uranium sales goes into the "earnings from equity-accounted investee" item.
The joint venture was set up in 1996. Ownership was split equally between KATEP, the predecessor of Kazatomprom; Germany's Uranerzbergbau GmbH (the company essentially provided the technologies for uranium leaching, which Cameco didn't have); and Cameco. Subsequently, ownership was split 40-60 between Kazatomprom and Cameco, respectively. Later on, when the extraction license was extended in 2018, Cameco's stake shrank to 40% in exchange for access to resources and the opportunity to take shipments of uranium at a low cost of production (<$20 a pound)
The licensed capacity for uranium ore mining is 10.4 million pounds per year, and the reserves are estimated at 108.7 million pounds with an average uranium oxide content of 0.03%. The company expects to mine 8.3 mln pounds of uranium ore in 2023. We expect that the plant's capacity utilization will be around 80% until 2025, which is equivalent to 8.3 mln pounds of ore per year.
The company's portfolio also includes dormant projects, such as:
- Rabbit Lake (equity stake of 100%). Production at the mine started in 1975, but was suspended in 2016 as prices for the commodity fell. The licensed capacity for ore production is 16.9 million pounds per year. The current mining license expires in October 2023. Although the company currently has no plans to resume mining, the license is expected to be renewed.
- US deposits: Crow Butte and Smith Ranch-Highland with 100% ownership interest. Due to unfavorable market conditions, both deposits have been mothballed. The company currently has no plans to restart production.
- Millennium is a uranium ore mining project in Canada's Saskatchewan Valley with an effective ownership interest of 70%. It has estimated reserves of 53 mln pounds. The deposit was discovered in 2000 and preparations for ore extraction were made from 2000 to 2013. The project is on hold until the price environment improves.
- Kintyre and Yeelirrie are projects in Australia with 100% ownership interest. Their Estimated reserves are 54 mln and 128 mln pounds with the average ore grade of 0.53% and 0.15% of U 3 O 8 , respectively. The projects are so far dormant.
Let's move on to the fuel services segment. The segment includes the refining/conversion of uranium ore into UF 6 (uranium hexafluoride) and yellowcake, as well as the production of fuel pellets.
- Blind River Refinery is one of the world's largest commercial operations to refine uranium concentrate into yellowcake. Its licensed capacity is 18 mln kg of uranium oxide a year.
Company data
- Port Hope Conversion Facility is the only plant in Canada that converts uranium into UF 6 (Uranium hexafluoride). Its annual capacity is 12.5 mln kg of UF 6 and 2.8 mln kg of yellowcake.
Company data
- Cameco Fuel Manufacturing Inc. is a manufacturer of fuel pellets for Canadian-made heavy water nuclear reactors.
Company data
We expect fuel assembly production amounting to 13.5 mln kg of uranium concentrate (+3.8% y/y) in 2023, which corresponds to the utilization of 40% of the company's capacity. We expect capacity utilization to total ~40% until 2025, compared with the average level of 30% over the last 8 years, due to the gradual resumption of programs to restart reactors on the back of the recent energy crisis and as demand moves away from Russian suppliers.
The next important aspect for understanding the company's business is how much it sells, under what types of contracts, and what are the prices in the contracts?
The uranium ore mining segment is dominated by contracts with a variable component that is linked to either spot prices or long-term market prices, while the fuel services segment has fixed-price contracts. The difference is due to the fact that the main business segment functions as a mining operation and the other segment is a service to customers with an average life expectancy of 40 years.
We expect that over the forecast period to 2025 the share of fixed-price contracts in the uranium ore mining segment will make up ~31% of the total, which is in line with the average historical level, and in the segment of fuel assemblies fixed-price contracts will maintain their share of 97% of the total.
Uranium sales exceed the main production figures. That's because Cameco also sells uranium it purchases from the Inkai project. We expect uranium ore sales to reach 30.5 mln pounds (+19% y/y) in 2023 and rise by 10% y/y to 33.6 mln pounds in 2024. An unusual growth of sales over the next few years will be attributable to the resumption of production at the McArthur River mine amid a favorable pricing environment.
In the fuel segment, our the base-line scenario is that the company will sell everything it will produces to enhanced demand from foreign customers amid the escalation of the situation with the supply of fuel assemblies from Russia. Fuel segment sales will be at 13.5 mln kg (+22% y/y) in 2023, and the figure will be unchanged from a year earlier in 2024.
When selling uranium ore, the company is guided by both short-term and long-term market prices. Long-term prices for uranium concentrate have a low sensitivity to spot prices when spot prices exceed the threshold of $60 per pound of uranium oxide. That's primarily because when prices rise, uranium is perceived as a scarce commodity, and utilities seek to protect their long-term costs by entering into contracts at prices that are above historical levels but to a certain point, which is higher that the breakeven price of reliable suppliers. That eliminates the impact of spot price fluctuations on their future costs.
The company does not disclose the parameters for revising contract prices, but provides guidance on long-term prices depending on current spot quotations.
We expect spot prices to hold stubbornly high at around $54 a pound until 2025 on the back of the resumption of nuclear power programs that have been driven by an outlook for a potential new round of energy crisis, as fossil fuel shortage will be rising toward the end of 2023.
The company sells its products for Canadian dollars. We expect the CAD/USD FX rate to remain at 1.35x. Thus, we expect that, taking into account the types of contracts, the average realized price of uranium concentrate sales will be $65 (Canadian dollar) (+13% y/y) in 2023 and it will rise by 3% to $67 Canadian dollar in 2024.
As the situation in eastern Europe heats up, prices for uranium ore conversion into uranium hexafluoride and yellowcake and uranium enrichment shot up by 100% in 2022 to an all-time high, settling at $40/kg due to fears of a shortage of processing capacity as Russia holds about 40% of such capacity. We forecast processing prices to remain stubbornly high at $41/kg of uranium concentrate (+24% y/y), with the price reaching $43/kg of uranium hexafluoride (+5% y/y) in 2024.
Therefore, we expect the company's revenue in the segment of uranium operations to jump by 33% y/y to $1968 mln (Canadian dollar) in 2023, and rise to $2253 mln (Canadian dollar) (+14% y/y) in 2024. Here are the main reasons for revenue growth in the segment: ore prices will hold high, while physical shipments will rise following the restart of the McArthur River mine.
The company's revenue in the fuel services segment is estimated to surge by 51% y/y to $550 mln (Canadian dollar) in 2023 and climb further to $576 mln (Canadian dollar) (+5% y/y) in 2024. Here are the main reasons for revenue growth in the segment: prices for ore processing will hold high, while physical shipments of enriched uranium will increase as more of the existing capacity will be utilized.
Financial Results
As such, the company's total revenue is set to shoot up by 35% y/y to $2531 mln (Canadian dollar) in 2023 and rise to $2846 mln (Canadian dollar) (+12% y/y) in 2024.
The total costs of the uranium mining business are made up of 2 main components: mining costs and uranium purchasing costs.
Mining costs can be cash and noncash. Cash costs break down into costs of labor, materials and services. The pace of growth in cash costs is stied to US inflation.
The costs of purchasing uranium were tied, with a spread, to the average uranium selling price. Therefore, we expect that the average cost of mining will reach $32.6 (Canadian dollar) per pound through the end of 2025, and the cost of purchasing uranium ore will be $63.3 (Canadian dollar) per pound.
We expect that higher uranium prices will help the segment to steadily achieve the COGS-to-revenue ratio of 60-70% and maintain it through the end of 2025 because total production costs remain stable, ranging from $30-$40 (Canadian dollar) per pound.
The company doesn't give a detailed breakdown of costs in the fuel services segment. We expect that costs to produce 1 kg of UF 6 will rise in line with US inflation. Therefore, the average costs to produce 1 kg of UF 6 will total $26.2 (Canadian dollar) through the end of 2027.
We expect that higher prices for processing services will enable the segment to steadily achieve the ratio of COGS to revenue of 60-70% and hold at that level through the end of 2025 because total production costs will remain stable, ranging from $26-$27 (Canadian dollar) per 1 kg.
Given the revenue growth and a high operating leverage, we expect the company to boost EBITDA by 227% to $631 mln (Canadian dollar) in 2023, and to $744 mln (Canadian dollar) in 2024.
The company's net income is set to surge by 557% to $497 mln (Canadian dollar) in 2023, and will reach $603 mln (Canadian dollar) (+21% y/y) in 2024.
Valuation
The fair value for the stock is $38.5. Rating is HOLD.
Conclusion
The global uranium market is now on the verge of its renaissance after a protracted consolidation caused by the disaster in Japan at the Fukushima nuclear reactors.
The global energy crisis in 2022 pushed energy-deficient regions (EU, Asian countries) to revise their energy consumption policies towards LNG, renewable energy sources and nuclear energy.
We think that the company's shares are an excellent bet on accelerating the trend of decorbanalization in the long term, and therefore we recommend keeping the asset in the portfolio.
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Cameco: Digging For Precious Uranium Ore