CCJ - Cameco: The Tide Has Turned Bet On Momentum

Summary

• Cameco Corporation is in the middle of a substantial turnaround, which investors could soon price.
• The company's financial results improved in 2022. More importantly, it has secured a record number of supply contracts.
• An increase in ownership in the Cigar Lake project and planned ramp-ups enhance Cameco's net earnings estimates.
• Cameco may benefit from a lower capital structure before its Westinghouse acquisition, lending it a higher probability of achieving an accretive deal.
• Yes, the stock still possesses valuation concerns. However, the momentum anomaly is set to play its hand.

In our previous coverage of Cameco Corporation ( CCJ ), we stated that there would be an inflection point, leading to greener pastures for Cameco's stock. It is over a month and a half later, and the security has risen by more than 7% after Cameco revealed a comprehensive fourth quarter earnings beat. Moreover, vital operating activities are on the up.

Although Cameco's recent fortunes signal a turnaround, the company hosts a history of unstable operating performance, primarily due to the volatility of uranium prices and geopolitical events. As such, we felt it necessary to provide investors with our updated outlook.

Today's thesis is titled "Cameco: The Tide Has Turned, Bet on Momentum"; here is why.

Operational Update

Price Support

Looking backward while trying to discover a fair stock price is often unproductive, as you need to look at where the tide is going instead of where it has been. However, Cameco provides an exception as the company's year-over-year recovery needs to be emphasized as it is still unrecognized by many market participants.

As illustrated in Figure 1, Cameco's income statement skyrocketed during the past year due to higher realized Uranium prices and, more importantly, ramp-ups of its mines.

A look into 2023 suggests that Cameco could benefit from commodity price momentum. Although a sole indicator, futures contracts suggest uranium prices are likely to remain elevated. A qualitative argument indicates that uranium prices might go either way as ramp-ups for renewable energy projects in regions such as China and supply chain reopenings (which could result in excess supply) provide a juxtaposition.

Despite potential headwinds, we remain bullish on uranium prices. Moreover, investors need to remember that Cameco halted its pre-pandemic Canadian operations due to unfavorable prices, which certainly is not the case at the moment. In our opinion, Cameco's exponential ramp-ups are a sign that Cameco's management anticipates prolonged price support.

A Lot Of Good News To Consider

Cigar Lake Ownership Increase and Guidance

First and foremost, it is critical to note that Cameco recently increased its share of Cigar Lake to 54.5% from the previous 50%. The ownership increase does not change the method of accounting, but higher reported income/losses and investment gains/losses are now a possibility.

Cigar Lake is forecasted to run at 18 million pounds a year. Additionally, it is worth mentioning that McArthur/Key Lake is forecasted to contribute an additional 18 million pounds per year while Inkai could resurface soon, albeit at 20% below capacity.

For more on Inkai and obstructions caused by the Russia/Ukraine war, visit our previous article .

Contracts Secured

Cameco recorded a record number of long-term supply contracts during 2022, onboarding 88 million pounds in additional supply deals.

Furthermore, the mining company has continued its success into 2023 by engaging in an agreement with SE NNEGC Energoatom, which would see Cameco delivering 25.7 million pounds of natural uranium hexafluoride. Although no final agreement has been met concerning volumes, prices, and duration, matters are advancing and should be wrapped up in due course.

If Cameco's deal with SE NNEGC Energoatom is successful, its backlog will stand at approximately 147 million pounds. The exponential growth in Cameco's backlog is advantageous for two reasons, 1) It enhances earnings quality, which investors could price, and 2) It allows the firm to fix prices at high levels.

Enhanced Balance Sheet and Cost Structure

The final bit of good news to report is Cameco's improved balance sheet, which might lead to a more favorable capital structure.

According to Cameco's fourth quarter financial report, the company hosts $2.3 billion in cash and equivalents and $997 million in short-term investments. Additionally, Cameco's latest ramp-up of tier-1 assets bodes well with the credit rating agencies.

Corporate credit spreads are receding in the U.S., indicating that more favorable capital structures are on the horizon for many firms, including Cameco, as the aforementioned reasons will play a critical part.

If Cameco manages to improve its capital structure, it will be able to secure more affordable financing for its Westinghouse acquisition and its planned ramp-ups at existing assets.

Technical Analysis

We believe much of today's commercialized technical analysis is bogus as it advertises an "easy to implement" framework derived from high-level algorithmic trading. However, I would like to pitch an alternative technical analysis method to you today, which is called factor investing or market anomalies .

Market anomaly investing employs a process that backtests security returns by pricing assets from the perspective of investors' historical risk attribution. One of the most renowned anomalies is called the " momentum anomaly ", which states that investors have a high probability of beating the market by investing in momentum stocks until their fundamental drivers shift.

Cameco has formed a momentum trend based on its cross-sectional performance and time series price movement. On top of that, we think that market fundamentals remain unchanged since our latest article about Cameco. As such, the stock will possibly benefit from the momentum anomaly until its key influencing variables (the qualitative variables mentioned throughout the article) change course.

Noteworthy Risks

Although Cameco's operations are recovering, we are still talking about a stock trading at 2.74 times its book value and 60.66 times its net earnings. Sure, the company's financial statements are likely to improve as time passes. However, the market is a value-seeking environment, and many investors might seek value elsewhere if subtle unwanted changes such as a drop in uranium prices or prorogued delays at Inkai occur.

Another risk factor to consider is the current broad-based underperformance of basic material stocks. As things stand, investors are not overly enthusiastic about primary producers as most commodity prices have tapered . Thus, Cameco could easily find itself pressured by systemic risk.

Final Word

Cameco Corporation continues to show signs of an exponential recovery, which has resulted in a favorable environment for its stock price. In our opinion, Cameco's stock will benefit from additional operational momentum coupled with an enhanced credit outlook.

Furthermore, the company's stock price is outperforming the broader market cross-sectionally, which might lure momentum-based investors. Thus, we remain bullish on Cameco and assign a buy rating with an indefinite horizon.

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