CCJ - Cameco: Uranium Price In The Short Term Nuclear Renaissance In The Long Term (Rating Upgrade)

2023-06-20 06:37:31 ET

Summary

• Cameco Corporation is becoming a full-service supplier for nuclear electric generation, with the acquisition of 49% of Westinghouse Nuclear and increasing demand for uranium.
• The company's financial performance has improved significantly in Q1 2023, with long-term contracts for 215 million lbs. of uranium and a healthy balance sheet.
• The global shift towards nuclear power and decarbonization presents a buying opportunity for patient investors in Cameco Corporation.

Investment Thesis

Headquartered in Saskatoon, Canada, Cameco Corporation ( CCJ ) is becoming a full-service supplier for nuclear electric generation. It (1) mines and provides uranium to nuclear electric utilities and (2) provides fuel services including uranium conversion, processing and the fabrication of fuel assemblies for use in Canadian designed CANDU reactors, of which there are 19.

And now CCJ is in the process of acquiring 49% of Westinghouse Nuclear which provides fuel fabrication, operating plant services, and new plant technology, all worldwide. In the near term, CCJ’s financial performance is based upon the price of uranium, conversion to UF ₆ and fuel assembly fabrication. In the longer term their success is a function of these market factors, the performance of Westinghouse and of the nuclear renaissance. Plants are extending their life; new units are under construction (55 worldwide) and new designs are being developed.

In my initial article about CCJ I wrote “At this point, I'm neutral on CCJ but I intend to analyze the results from the February 9 earnings report and conference call and to continue analyzing CCJ as they move forward with the expanded nuclear business.” I am becoming more positive.

The price of uranium is now above $50/lb. It has doubled since the 2020s.

Uranium, unlike oil and gas, does not trade on the open market. The price is influenced and set by the contracts between the supplier and the electric utility customer. As noted below, nuclear utilities have a sizable amount of uranium yet to be contracted.

2022 Financial Results

2021 was not a good year for CCJ and other uranium suppliers. COVID shut many mines so uranium deliveries were minimal. CCJ gross profit was a minimal $2 million. In 2022 and currently, due to the Ukraine war, Russian-supplied uranium is off the table in many countries throughout the world.

2023 Q1

Quarter 1, 2023 yielded tremendous increases in key financial measures.

CCJ has long-term contracts for the supply of 215 million lbs. of uranium. The McArthur River and Key Lake mines are ramping up from the COVID impacts. And the balance sheet is healthy. A paragraph from the April 28 press release:

“As of March 31, 2022, we had $2.5 billion in cash and cash equivalents and short-term investments and $1.0 billion in long-term debt. The final financing for the Westinghouse acquisition will be determined based on our cash balance, future expected cash flow generation, and market conditions at the time of close. We expect a permanent financing mix of capital sources, including cash, debt and equity, designed to preserve our balance sheet and ratings strength, while maintaining healthy liquidity. In addition, we have a $1 billion undrawn credit facility.”

CCJ stock has been on a rising streak. The June 16, 2023 closing price was $31.76 US dollars:

Term Market Looking Good

CCJ deals in the long-term market, not in the spot market. They make agreements to supply uranium on a long-term basis with nuclear utilities, typically 7 – 10 years in advance of their need. Today they are in a demand certainty market. Per CCJ’s 2022 annual report significant uncovered (not yet purchased) uranium exist. And this does not include any new, small modular reactors or advanced reactors currently under development.

According to Grant Isaac, CCJ EVP & CFO utilities need 180 million lbs. of uranium/year. Last year they purchased only 114 lbs., thus below the needed replacement amount.

In recent years the supply of uranium was uncertain. Prices were low, mines were shutdown, due to COVID.

Today demand appears greater than supply. Plants are extending their life keeping demand above what was envisioned with early shutdowns. Plants that had planned to shutdown may not have procured uranium beyond the shutdown date, now need to go back in the market and procure it.

CCJ has lots of capacity. Last year Cigar Lake produced 11 million lbs. This year it will be more towards 18 million lbs. In total CCJ has guided 2023 to be 29 – 31 million lbs.

World’s Largest Uranium Producers and Suppliers

CCJ is the world second largest producer of uranium. According to Investing News Network the top five countries in the world with uranium resources are Australia, Kazakhstan, Canada, Russia, and Namibia.

While Australia has 28% of the world’s resources, it ranks second to Kazakhstan for production. The Kazakhstan company, Kazatomprom (NATKY) is the world’s largest producer.

Kazakhstan has the world’s second largest supply of uranium in the ground. As such, uranium suppliers have joined with them to provide uranium in the free world. CCJ has a 40% owned joint venture, named Inkai with Kazatomprom which has 60%. CCJ has a license through July 2045.

There are some geopolitical risks associated with the ownership in Inkai. These include production issues, transportation, and political stability. In 2023 CCJ expects their share of production from Inkai to be 4.2 million lbs. of a total production goal of 20.3 million lbs. (21%)

Here are the world’s largest uranium companies according to Investing News Network

Some of these companies mine other metals in addition to uranium.

World’s Largest Uranium Suppliers

BHP ( BHP )

Market cap $223 billion

• Market cap $223 billion
• Australian mines with copper and other metal

Cameco ( CCJ )

• Market cap $16 billion
• 18% of the world’s production

NexGen Energy ( NXE )

• Market cap $2 billion
• Focused on Canadian deposits.

Uranium Energy ( UEC )

• Market cap $1 billion
• Focused on US deposits.

Energy Fuels ( UUUU )

• Market cap $.9 billion
• Largest producer of US uranium

There are also numerous small mining companies which are exploring for uranium. Many are diversified Canadian mining companies that extract other metals, e.g., copper, nickel, cobalt, etc. At this point, none are major competitors to CCJ. Once uranium is found it could be 6 – 8 years to get it into production.

Vertical Integration with CCJ and Westinghouse

The commercial nuclear power business involves numerous complex technical areas and suppliers, the details of which would fill a college course. Here is a summary of those technologies and the future vertical integration of the CCJ and Westinghouse integration.

• Uranium Mining CCJ
• Milling CCJ
• Refining CCJ
• Conversion to UF ₆ CCJ, Westinghouse pursuit in UK
• Enrichment No US capacity (see below)
• Fuel Assembly Fabrication CCJ, Westinghouse
• New Plant Design Westinghouse
• Generation/Operations Electric utilities
• Service Westinghouse
• Low Level Waste disposal US companies
• Spent Fuel storage Stored at plant sites
• Reprocessing No US capacity
• Decommissioning Westinghouse

Enrichment

For use in a nuclear reactor, the natural uranium must be enriched to produce a uranium compound that will fission and generate heat. There are no enrichment facilities currently operating in the US and many utility customers are buying enrichment services from Russia or other countries, mostly in Europe. Innovation and investment is underway in the US. Centrus Energy ( LEU ) is working toward restoring a government facility in Piketon, Ohio that provides uranium enrichment services.

CCJ has a 49% interest in Global Laser Enrichment - GLE. At a point in the future CCJ can be in the enrichment business.

Japanese Nuclear Revival, Slow but Ongoing

It’s been nearly 12 years since the Fukushima Daiichi nuclear plant accident in Japan. Following the accident, the Japanese government closed most of the nuclear plants. These plants have been gradually returning to service. Recently the Japanese regulatory authorities approved safety changes that would allow aging plants to preform life extensions. Formal legislation needs to be approved and may occur within a year. Four of the 41 reactors have been approved to operate for 60 years already.

Due to limited energy supplies Japan is evaluating restarting more of their closed plants. It is happening, albeit slowly. Presently only about 10 reactors are operating. There are no active plants under construction, so life extension is important.

18 units are undergoing or planning to be decommissioned or are indefinitely shutdown. Some of these plants remain shut-down due to concerns with possible seismic faults near the plants. But others are reopening on a slow scale.

So, the nuclear tide is slowly turning positive in Japan. And Cameco is a provider of uranium and conversion to Japanese utilities. I don’t have a forecast of the available market over time, but it certainly appears to be increasing from the Japanese low after Fukushima.

US Senate Bill May help the Long Term

Senate bill (S.1111) titled ‘‘Accelerating Deployment of Versatile, Advanced Nuclear for Clean Energy Act of 2023’’ has made its way out of committee. The bill's purpose states: “To enhance United States civil nuclear leadership, support the licensing of advanced nuclear technologies, strengthen the domestic nuclear energy fuel cycle and supply chain, and improve the regulation of nuclear energy, and for other purposes.” While it must go through the entire legislative system it is a visible sign of the current political and administration’s overall view towards the nuclear revival in this country and throughout the world.

The world is moving forward (except for Germany). China has 55 operating nuclear plants and 22 under construction. India has eight under construction. Poland just announced they plan to build Westinghouse designed plants.

Conclusion

The tides have turned. Nuclear power is back in the forefront. CCJ will become a vertically integrated company with the pending acquisition share of Westinghouse covering the uranium mining, fuel cycle, new plant construction, operating plant services and decommission. So, importantly, CCJ is much more than a uranium mining and supply company.

Uranium pricing can be volatile and cyclical. Demand is currently outpacing supply putting short term focus on pricing. In the longer term there is plant life extension, new plants, small modular reactors and advanced designs.

The price of uranium may make CCJ a short-term trade, similar to the effect of oil price on oil stocks. But in the longer term CCJ has the potential to be a world leader in the nuclear renaissance.

Yes, there are issues and naysayers. But the decarburization focus is worldwide. And there is a risk of a nuclear plant incident in Ukraine. If there is a change in the US 2024 election and government administration, the world is still on the path to increase nuclear electrical generation. So, at this point I evaluate CCJ to be a buying opportunity for the patient investor.

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