CCJ - Cameco: Our Pick For The Uranium Bullish Cycle

2023-09-25 04:39:08 ET

Summary

• Uranium ore market is entering a bullish cycle due to political instability, global commodity deficit, and new energy projects.
• EU countries need to diversify uranium ore imports, leading to increased volatility in the spot market.
• Cameco's financial results are expected to improve significantly, making it an attractive opportunity for long-term investors.

Investment thesis

Uranium ore is likely to enter a bullish cycle, supported by political instability, the global commodity deficit and the acceleration of new energy projects development around the world. Cameco, as one of the beneficiaries, will see its financial results improve significantly, so we believe this stock is an attractive opportunity for long-term investors and recommend to look for an entry point.

Uranium ore market

Amid the escalating political situation in Niger (~4% of global uranium production), uranium ore prices accelerated their growth, approaching multi-year highs of around $57/lb .

Some international news media reported that amid its anti-Western rhetoric, Niger stopped supplying uranium to the EU market, particularly to France. However, Orano, which has a 63.4% stake in the largest open-pit uranium ore mining project of the Nigerien company SOMAIR in the town of Arlit, reported that operations are continuing as normal and that there is no risk of production being disrupted. We expect that, under pressure from Western countries and the Niger's neighbours (for example, Nigeria has stopped supplying electricity ), the country will gradually lift all restrictions on ore exports. It will also be dictated by economic reasons, as uranium mining makes up more than 15% of the country's GDP.

However, the current circumstances will force EU political leaders to rethink energy security in order to reduce reliance on African countries with unstable political systems. Imports from Niger make up about a quarter of all EU imports of uranium ore, according to Statista . Combined with efforts to replace supplies from Russia (which accounts for another 20% of imports) amid the rhetoric of sanctions, this means EU countries need to diversify about 45% of their annual consumption. As a result, uranium shipments from Russia and Niger that currently head for the EU will be redirected to third countries (provided that these shipments into the EU halt completely or decline), which will only increase the volatility on the spot market as the costs of logistics will rise.

According to the World Nuclear Association , the number of active nuclear reactors remained unchanged at 436 units since the prior survey, while the number of reactors under construction remained at 59 units, of which more than 50% are in China. Here are some important industry news from the past quarter:

• The number of operational reactors worldwide could increase by 4% as soon as September as Japan is returning some reactors to service. Japan's Nuclear Regulation Authority has authorized Kansai to restart the Takahama-1 and Takahama-2 reactors in mid-July and mid-September, subject to approval from the governor of Fukui Prefecture. After the restart of Mihama 3 in 2022, these will be the second and third reactors in Japan to exceed their original 40-year operating license. Besides, the Takahama-1 and Takahama-2 reactors, 10 other reactors have been restarted and another five reactors received NRA's pre-approval (which makes a total of 17 reactors).
• On June 12, South Korea's Ministry of Trade, Industry and Energy approved plans for accelerated construction of units 3 and 4 of the Shin Hanul nuclear power plant . The objective is to reduce construction time by about 19 months and complete the work in 2032-2033. In addition, it was announced in July that the country's energy minister is considering building a new nuclear power plant. Although Korea accounts for a small proportion of all reactors that are under construction around the world, these developments point to potential for a faster pace of energy transition in Asian countries, which are generating most of the demand for nuclear reactors.
• EU countries are beginning to take a closer look at nuclear power. In the Netherlands, for example, the government has allocated more than $350 million in funding for energy and climate initiatives and additional nuclear-related projects, including plans to build two new major reactors and a plan to develop small modular reactors. France has made progress in implementing President Emmanuel Macron's plans to restart the country's program for the construction of reactors, with Electricité de France submitting an application to build the first pair of 1650 MW EPR2 nuclear power plants . The government has also completed the full nationalization of EDF to improve the company's ability to implement new nuclear projects.

We believe that investment in nuclear power is experiencing a real renaissance, which will benefit Cameco.

Cameco operating results

Previously we initiated coverage on Cameco with a HOLD rating. However, we have taken into account several positive input updates, such as the deepening uranium deficit and upgraded status to the BUY.

In 2Q 2023 Cameco sold 5.5 mln pounds (-28% y/y) of uranium ore, down from our forecast of 6.9 mln pounds. The difference is attributable to how revenue is booked. Higher sales will be booked in 3Q 2023 and 4Q 2023. The average selling price was in line with our forecast ($67.05 CAD versus the estimate of $66.9 CAD).

The company maintained its guidance for uranium ore production unchanged, at 20.3 mln pounds (+95% y/y), compared with our forecast of 20.3 mln pounds, but it bumped up projected sales for 2023 from the average of 30 mln pounds to 32 mln pounds (we forecast 31.5 mln pounds). Also, CCJ is predicting higher cash costs in connection with the start of McArthur River and larger purchases of uranium ore from the Inkai project, with the discount to the spot price being small. Cameco has raised its guidance for total mining costs (including amortization and purchases) from the range of $47-$48 CAD per pound to $49-$51 CAD per pound.

Therefore, we have raised our expectations for total costs from the average of $44.2 CAD/pound to $47.6 CAD/pound through the end of 2024.

When computing its gross costs, the company makes an adjustment for inventories. If the company has mined and purchased more than it has sold, it builds inventories. That reduces the cost of sales in proportion with the cost of product going into inventories. On the contrary, if the company taps into inventories, that bumps up the cost of sales. We have revised upward our expectations for inventories in the model of gross costs through the end of 2024, as increasing production and purchases will exceed the volume of sales. Below is an example of accounting for inventory changes in the cost structure.

Driven by the combination of said factors, we have lowered the EBITDA forecast from $631 mln CAD (+227% y/y) to $600 mln CAD (+211% y/y) for 2023 and raised it from $744 mln (+24% y/y) to $842 mln (+40% y/y) for 2024.

Risks section

There are several risks related to Cameco, all of them are company-level. We don't believe regulatory risks are significant, due to all recent initiatives have been aimed at supporting energy conversion.

• Prolonged suspension of production, which will lead to a decrease in the production of nitrous oxide - uranium oxide.
• A more acute labor shortage, which is already affecting the production efficiency.
• Faster growth in production costs due to accelerating diesel prices, which will put pressure on gross margins.

Valuation

We are raising the target price of shares from $38.5 to $45 due to:

• the increased EBITDA forecast for 2024;
• the shift of the FTM valuation period.

Based on the new assumptions, we are raising the rating for the shares to BUY. The upside is 31%.

Conclusion

Cameco 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 inactive and young projects, such as Millennium, Kintyre, and Yeelirrie. The bullish cycle in uranium commodity prices and the development of global energy projects are favorable for CCJ stock, so the stock is also expected to grow rapidly.

For further details see: