CCJ - Cameco: Uranium Prices Are White Hot

2024-01-11 07:23:03 ET

Summary

• Cameco is a solid play on the improving uranium and nuclear market.
• The increasing demand for uranium and the acquisition of Westinghouse are opportunities for CCJ.
• CCJ will benefit from rising uranium prices, but given its contract mix, its realized prices will likely trail spot price increases.

Cameco (CCJ) is a solid play on the improving uranium and nuclear market, although the stock is pretty pricey by historical standards.

Company Profile

CCJ is a uranium miner and nuclear service provider. The company owns stakes in three tier 1 uranium mines, as well as in several tier 2 and emerging mines.

Its largest mine is McArthur River/Key Lake in Canada, in which it has a nearly 70% stake. Its proven and probable reserves for its stake sit at about 275.0 million pounds. It also owns nearly 55% of Cigar Lake in Canada, with its share of reserves at 84.4 million pounds. In addition, in owns a 40% JV stake in the Inkai mine in Kazakhstan.

On the fuel service side of the business, CCJ owns the world's largest commercial uranium refinery, a conversion facility, and a manufacturing plant for fuel bundles and reactor components. In November, CCJ acquired a 49% interest in Westinghouse Electric company in partnership with Brookfield Renewable Partners. Westinghouse is a provider of mission-critical technologies and services used across the nuclear power sector. It has products in the areas of VVER, boiling water reactors ("BWR"), and pressurized water reactors ("PWR"), among other areas.

Opportunities & Risks

One of the biggest opportunities for CCJ is the increasing demand for uranium as nuclear power continues to gain acceptance as a way reduce gas house emissions. In December , 22 countries including the U.S. agreed to triple global nuclear energy production by 2050. Meanwhile, China, which wasn't part of the agreement, is in the process of building 22 nuclear reactors. Overall, there are currently 58 nuclear power plants currently under construction around the globe.

With the addition of new nuclear power plants will come with it both the need for more uranium, as well as products and services from Westinghouse as well. Increased demand for uranium should also come with rising prices as well.

CCJ sells its uranium via long-term contracts. Its contracts typically have either base-escalated pricing or market-related pricing attached to them. The base-escalated contracts increase over time, while the market-related pricing is based on prices at time of delivery and usually include floor and ceiling prices. While CCJ has been trying to get more market based pricing contracts given its bullishness on future uranium prices and while it will benefit from increasing uranium prices, in a uranium price bull market, its realized prices will likely trail spot rates given its contract mix. For example, in Q3 uranium spot prices averaged $62.63 in the quarter versus $54.53 in Q2, a nearly 15% sequential increase. Meanwhile CCJ had realized prices of $52.57 in Q3 versus $49.41 in Q2, a just over 6% sequential increase.

Spot uranium prices have only gone up since CCJ last reported its Q3 results.

Discussing contracting on its Q3 earnings call in October, CFO Grant Issac said:

"We're in the early innings of a contracting cycle, it is because we know there are pockets of demand, bigger utility customers yet to come. All of this suggests to us we are absolutely in the right position as Cameco to be strategically positioning our contract portfolio for higher prices, being biased towards market-related long- term contracting that will reference prices at time of delivery out into the future. We have been more selective in ensuring that we're getting that exposure to a rising price environment. We lead the market with respect to the construction of floors and the construction of ceilings; this is exactly where we want to be."

It's also worth noting that CCJ sells more uranium than it produces. The uranium it produces comes at a much lower cost, but it also goes out into the market and buys uranium from other producers to sell. Rising costs have led the company to reduce its amount of purchased uranium, with quantities down -83% in Q3 and -60% through the first nine months of the year.

However, CCJ is looking to ramp up production in 2024. After producing 9.8 million ton of uranium from MacArthur River/Key Lake, the company projects production to rise to 12.6 million tons in 2024. Meanwhile, after some maintenance issues with Cigar Lake, it expects to ramp production back up to 9.8 million tons from 8.9 million tons in 2023. Production at Cigar Lake fell in 2023 due to development of a new mining area and a maintenance shutdown. Meanwhile, its JV partner Kazatomprom has said it plans to significantly bolster production in 2025.

The acquisition of Westinghouse is also an opportunity. The deal certainly makes the company a more full service participant in the nuclear industry, and it should benefit from the current strong growth outlook of the industry. Westinghouse is also developing the AP300 small modular reactor ("SMR") and the eVinci microreactor, which should open new opportunities for the company. At the time of the deal, CCJ noted that 95% of Westinghouse EBITDA came from its core recurring business, which it expects to grow between 3-4%.

When it comes to risks, uranium prices while a catalyst also can be a risk as well. The market currently looks very supportive of prices, but like other commodities, it can be a cyclical market. Lack of investment in the industry and industry drawdowns have hurt prices in the past.

CCJ also is a mining operator, which comes with its own risks. Mining is a hazardous venture that is fraught with risks, with the potential of costly accidents. In 2023, the company ran into production delays at Cigar Lake, as it needed to undergo some additional unplanned maintenance. CCJ also ran into operational issues at its Key Lake mill in 2023 with the facility needing additional maintenance.

It's also worth noting that while Brookfield helped turn Westinghouse around and still has majority ownership, the company did file filed for bankruptcy under Toshiba in 2017.

Valuation

CCJ currently trades around 17.1x the 2024 consensus EBITDA of $1.05 billion and about 15.5x the 2025 consensus of $1.16 billion.

It trades at a forward PE of nearly 35x the 2024 consensus of $1.29 and just over 35x the 2025 consensus of $1.27.

Revenue growth is expected to be 13% in 2024.

Historically, CCJ has traded between 9-15x EV/EBITDA before 2021 when its multiple shot up. However, revenue has generally been falling during that period, while now it has been on the rise. Based on a 15-20x multiple of 2025 EBITDA, the fair value of the stock would be between $41-$55, with a midpoint of $48.

Conclusion

CCJ is likely to trade based on the uranium market more than anything, which showed strength in 2023 and whose prospects look strong in the years ahead. That said, the stock looks close to fairly valued at the moment, and the better way to play uranium prices might just be through Sprott Physical Uranium Trust ( OTCPK:SRUUF ), a closed end trust that physically holds uranium and currently trades at about a nearly -10% discount to its NAV.

At this time, I'm going to start CCJ with a "Hold' rating, but would look to be a buyer on any meaningful pullback given the strong prospects of the uranium market over the coming years.

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