CCJ - Cameco Q1 Earnings: Bull Case Taking Hold Before Your Eyes

2023-05-01 13:19:25 ET

Summary

• Cameco Corporation's prospects continue to steadily improve, with 2023 setting up to be a great year for investors.
• A discussion of the bear case facing uranium prices.
• I discuss why Cameco is a top investment for investors that want peace of mind, without the volatility of commodity prices.

Investment Thesis

Cameco Corporation ( CCJ ) is the sort of investment that I recommend for investors that are bullish on uranium but are not actively seeking high volatility in their investment.

After all, Cameco contracts out its uranium volumes, meaning that if uranium prices were to plummet or rapidly rise, Cameco would continue to tick along nicely.

On the back of its Westinghouse Electric acquisition , Cameco is now a fully integrated producer/electrical utility.

Rapid Recap

In my previous Cameco analysis , as we headed into earnings I discussed the dynamics of supply and demand facing uranium. I stand by what I articulated before and won't needlessly repeat it now.

Instead, I'll highlight this quote from Cameco's earnings call that I believe best articulates my overall argument.

We understand that to create long-term value and provide supply reliability for our customers. We must build homes for our production under long-term contracts before we pull it out of the ground.

A bit unusual for a mining company, but then again, we are more than mining and a bit unusual for commodity, but then again, uranium is unlike most other commodities.

Essentially, this is the bear case. When it comes to uranium volumes on the secondary market, nobody knows how much more inventory there is in the secondary market.

There are a lot of estimates and assumptions, but nobody has any hard and tangible data. It could still be a lot left. Or it could be starting to dry up.

Outlook for 2023 Improves

Cameco's Q1 2023 delivered 60% y/y revenue growth rates. And while that's pretty awesome, the following consideration is even more bullish.

Below is the outlook for 2023, that Cameco provided together with its Q4 2022 results, at the start of 2023.

What follows is the updated outlook provided last week.

The outlook at the high-end points to a more than 4% revenue increase. And you may contend that this isn't a big deal. However, I'll rapidly retort that even if you believe that the market's performance after Cameco put out this upward revised guidance wasn't particularly strong, it's important to put these newly revised revenues in context.

Let's Get Some Context

The way the market works is through reflexivity. There's not a large following for the nuclear space in general. If this were a highly followed tech stock, the after-hours reaction would have been extreme.

And the reason why the reaction was muted, wasn't so much that investors didn't believe in this outlook. But rather, that the energy market is so out of favor with investors, that there's widespread investor apathy.

After all, investors are not really thinking about the long-term implications of energy demand, particularly when oil prices are struggling to go beyond $80 WTI.

Future Energy

This is my core contention. There's a huge need for energy that investors are not fully grappling with. And it's not only coming from emerging markets.

In fact, I argue that in the U.S. in the coming 3-5 years, there's going to be a very rapid need for more energy supply, on the back of the push for AI technology.

Let me provide one example, training one model can burn more electricity in a year than 100 U.S. homes in a year.

Meanwhile, the training of ChatGPT-3 used up more electricity than 110k U.S.-based houses. For this assumption, I've gone on ChatGPT-4 and checked that each U.S.-based house uses about 11 MWH per year.

Yes, the data above is outdated. Yes, ChatGPT-4 is likely to be substantially more energy-consuming. But it points us in the right direction.

There's a huge need for energy in AI. And we are only on the cusp of getting started.

The Bottom Line

There are two different contradictory aspirations in the world. One, there's the significant need for more and cheaper energy.

While at the same time, there's a thrust to decarbonize our energy supply. I won't boldly declare that nuclear fuel is going to be alone in solving our energy problems. But it is a source of clean , carbon-free energy source, that can provide highly reliable, flexible, and cost-effective energy.

And it appears that for now, for the first time in a long time, uranium prices are starting to firm up and move higher. Meanwhile, investors remain unenchanted and unenthused to invest in Cameco Corporation.

To those investors I say, let's see where we are at the end of 2023 with Cameco Corporation, shall we?

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