CCJ - Up Up And Away! Cameco Confirms The Uranium Bull Case

2023-11-02 17:20:46 ET

Summary

• Cameco Corporation's recent earnings call highlights the growing demand for uranium driven by climate concerns and energy security issues.
• Nuclear energy is gaining widespread support from policymakers and the public, with new reactor designs and bipartisan backing.
• Geopolitical tensions further amplify the demand for nuclear energy as countries seek stable, low-carbon energy sources.

Introduction

Due to my significant coverage of the oil and gas industry, people often assume that I'm against other forms of energy. Although I am not a huge fan of the mass adoption of wind and solar energy due to the resources needed to produce somewhat unreliable energy, I am a big supporter of nuclear energy.

While I'm not writing this article to promote nuclear energy (it will be objective), I believe it's a fantastic way to fuel our modern economies that come with accelerating electricity demand, unreliable fossil fuel supply chains, a wave of related geopolitical risks, and the desire of many to decarbonize.

A single pellet of uranium (1 inch tall) has the same energy density as 120 gallons of oil, 1 ton of coal, and 17,000 cubic feet of natural gas!

With that in mind, on September 3, I wrote an article titled Got Uranium? Why Cameco Remains Unstoppable .

In that article, I highlighted the significant geopolitical risks tied to uranium supply, especially in a situation where demand is rapidly rising.

Here's a part of my article:

If Niger were to fall under Russian influence, the world's dependence on Moscow for atomic energy would increase significantly, given Russia's substantial uranium conversion and enrichment capabilities.

When combined with other major uranium-producing countries like Kazakhstan and Uzbekistan, this would result in over 60% of the world's uranium supply being controlled by Russia and its clients.

Since that article, CCJ has rallied 12%, beating the S&P 500 by roughly 18 points!

The reason I'm writing an update is the company's just-released earnings.

The Canadian Cameco Corporation ( CCJ ) reported stellar earnings, as net earnings came in at C$148 million, up from a loss of C$20 million in the prior-year quarter.

Cameco said it now expects FY 2023 consolidated revenues of C$2.43B-C$2.58B (US$1.75B-US$1.86B) after previously forecasting revenues of C$2.38B-C$2.53B, citing higher expected average realized prices under its contract portfolio for the improved outlook. - Seeking Alpha

On top of that, the company spent a lot of time discussing the uranium market, which gave me so much information to digest and share with readers.

So, let's dive into the details as we get to discuss what may be one of the strongest macro trends!

The Demand Bull Case Keeps Raging On

During its 3Q23 earnings call, the company noted the newfound sense of urgency in addressing the climate crisis, which has accelerated tremendously over the past few years.

According to the company, this urgency is backed by real-world evidence, including rising global temperatures and increased occurrences of climate-related disasters like fires and floods.

Achieving these targets now relies on the inclusion of nuclear power, marking a significant shift in policy and perception.

Furthermore, policymakers are not hesitating to propose nuclear energy as a fundamental component of their energy mix, even reversing prior anti-nuclear stances.

This shift is amplified by the bipartisan support for nuclear energy, as seen in the discussions held at the World Nuclear Association's sessions in London. The growing support for clean, secure, and well-established nuclear technology is a significant change from the past. Even voices in Germany, a nation that shut down all of its reactors, are getting louder to restart nuclear reactors.

What's important to note is that the sector's growth is now expanding beyond Asia, which has traditionally been the primary driver of industry growth.

Over the past few years, growth mainly came from China (and India).

Additionally, there's a notable shift toward the development of new nuclear reactor designs, including small modular reactors ("SMRS") and small advanced micro-reactors.

These designs are not only cleaner but also more adaptable to localized demand, have improved cost and schedule control, and offer applications beyond electricity, such as industrial heat, desalinization, and hydrogen production.

For example, they are now being discussed in Nebraska :

Small modular nuclear reactors, Kent added, take advantage of newer technology with fundamental improvements, such as for safety with the utilization of physics with water pumps to address the cooling of nuclear reactors when they're shut off.

Even in a base-case scenario, we're likely witnessing a rapidly widening supply gap after 2024.

This situation is made worse by the geopolitical situation.

According to the company, geopolitical tensions, amplified by events like Russia's invasion of Ukraine, are influencing the demand for nuclear energy.

Countries are reassessing their energy security and reevaluating their reliance on potentially unstable energy sources, particularly Russian gas.

This change in energy security considerations is occurring alongside the goals to reduce carbon footprints, further benefiting uranium demand.

Based on everything said so far, Cameco believes that the current industry environment is marked by full-cycle demand growth, a significant change from past cycles where demand was often projected far into the future.

In the near term, financial interests are actively purchasing physical uranium, offering better transparency and intrinsic value to the market.

Furthermore, there is a substantial near and midterm demand coming from fully depreciated, operable reactors and reactor life extensions, driven by the desire for low-carbon and secure energy sources.

This supports the supply/demand chart I just showed using the chart above.

Supply Growth Is An Issue, Boosting CCJ

The supply situation is something I discussed a lot in my prior article. Now, there are new developments impacting CCJ and the entire uranium market.

According to Cameco, the uranium supply faces unprecedented uncertainty.

Unlike past cycles where Kazakhstan served as a reliable source of uranium, there is no clear equivalent source waiting on the sidelines to meet demand into the 2030s.

Even the existing uranium production coming out of Kazakhstan is not expected to flood the market as it has in the past. This is because Adam Prom, a key player, has committed production to their long-term contract book. This reduces the availability of uranium supply from a traditionally significant source.

Even worse, the company sees that the secondary supply sources, which have historically filled the supply gap, are under pressure.

So far in the year, there have been nearly 144 million pounds committed under long-term contracts, a level not seen in 10 years, indicating that inventories have been run down. There are no significant programs in place to replenish these inventories.

But wait, it gets worse. According to CCJ, even transportation is now facing significant challenges.

Then there is the matter of actually moving that supply through the cycle. Nobody will say that moving Class 7 nuclear material around the globe has ever been easy, but it's clearly facing new risks and challenges as a result of geopolitics. - CCJ 3Q23 Earnings Call

These developments aren't great for global energy security.

However, they are great for CCJ. After all, it's selling the commodity everyone is after.

Cameco has contracted close to 30 million pounds per year for the 2023-2027 period. It has commitments for more than a decade - most of these deals come with variable pricing!

Furthermore, the Canadian Nuclear Safety Commission recently awarded Cameco 20-year license extensions at McArthur River and Key Lake, double the term of the previous license.

Additionally, a 15-year license extension was granted for Rabbit Lake. These extensions reflect the company's commitment to safety and environmental protection, which allows it to boost production without having to fear being shut down for environmental reasons.

And as we add contracts to our portfolio for the delivery of uranium in the years to come, we also have several already built and permitted Tier 2 assets where costs and economics are established and proven. These are all sources of proven and reliable supply from a preferred jurisdiction.

And, of course, it doesn't end there. We have what we believe are some of the best-advanced exploration projects and most prospective land positions in the business. Today we are more focused on our core expertise, having divested interests in gold and power generation, and as a pure-play nuclear investment, we are very well positioned to maximize value. - CCJ 3Q23 Earnings Call

By the end of this year, the company is expecting to close the Westinghouse acquisition. This deal is expected to diversify its business and complement its high-quality Tier 1 uranium and fuel service assets.

Valuation

Putting a valuation on Cameco is tough. After all, it's a commodity-driven stock with significant long-term secular growth tailwinds.

Looking at the bare numbers, the stock is trading at roughly 81x earnings, as seen in the chart below. Over the past two decades, CCJ has traded at roughly 38x earnings, with big swings in its valuation.

The company could return to a 38x multiple (down from 81x) by 2025 and still return 22% per year through 2025 (also visible in the chart below).

Theoretically, that's only possible because CCJ is expected to grow its EPS by 128% in 2023, followed by 194% growth in 2024 (also visible in the chart above). It also has an investment-grade BBB- credit rating.

Based on this growth trajectory, CCJ shares have room to rise to more than $60, which is my price target.

The current consensus price target is $48, 14% above the current price.

The only reason why I do not own CCJ yet is that I'm still figuring out how to structure my mining exposure. For now, I own Caterpillar Inc. ( CAT ) to somewhat hedge my bets (it supplies most mining companies). However, I'm looking to add real mining exposure.

CCJ is one of the stocks I'm likely to add on weakness.

Also note that despite all of the good news, we could see temporary downturns based on cyclical economic growth and potential geopolitical headlines impacting global uranium supply.

Nonetheless, I really like the long-term risk/reward and believe that $60 is a realistic price target.

Takeaway

In a world grappling with the urgent need to address the climate crisis, nuclear energy is emerging as a game-changer.

It's an energy source that boasts incredible energy density and is gaining widespread support from policymakers and the public.

Cameco Corporation's recent earnings call underscores the growing demand for uranium, driven by climate concerns and energy security issues.

With new nuclear reactor designs on the horizon and bipartisan backing, nuclear power is experiencing a renaissance. Geopolitical tensions further amplify the demand for nuclear energy as countries seek stable, low-carbon energy sources.

Cameco's strong position in the uranium market, coupled with supply uncertainties and challenges, sets the stage for a promising future.

Despite potential economic downturns and geopolitical headlines, the long-term risk-reward profile appears compelling.

A $60 price target may be realistic, making CCJ a stock worth considering, particularly as global uranium demand continues to surge.

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