China's dirty skyline. Image Source: Cameco Corp.
Oil is up! Oil is down! Oil is getting way too much attention... Sure, oil is an important global commodity, but there's still no clear evidence that the supply/demand problems facing "black gold" are anywhere near correcting themselves. But there's another commodity, uranium, where demand looks like it's going to dwarf supply in the very near future and there's one company that looks poised to benefit. Here's what you need to know to take advantage of the situation.
Supply and demand
When you look at oil, the big picture is pretty simple to understand. When oil prices were high everyone was drilling. That led to too much supply. Add in slowing growth in China and other developed markets and demand started to fall off, too. Too much supply and too little demand leads to falling prices. But this dynamic affects all commodities, so it's an important lesson.
So is the aftermath of the decline that started in mid-2014, which led to a steep pullback in exploration budgets. For example, ExxonMobil (XOM 0.57%) is cutting its spending budget by 25% this year, with more cuts to come. The industry wide pullback will, eventually, lead to an upturn as demand catches up to supply, but when that actually happens is anyone's guess. And the gyrations in the oil market show that a lot of people are, indeed, guessing!
But there's a commodity market that has gone through its bust and that has a far clearer picture of the future taking shape. What is that commodity? Uranium. And Cameco Corp. (CCJ -1.68%), the largest publicly traded uranium miner, is poised to take advantage of the situation.
The coming imbalance. Image Source: Cameco
What's coming down the line
So why look at uranium? The answer is nuclear power, a source of energy that gets a bad rap because of a small number of troubling incidents, but that doesn't emit greenhouse gases. And while some developed countries, notably Germany, have chosen to shift away from nuclear, construction of new nuclear power plants around the world hasn't stopped. In fact, as you read this, there are 61 reactors being built. About 40 of those are expected to come on line in the next 5 years. That has to be juxtaposed against China's plans to increase its own supply of uranium, but the general idea is the same--uranium demand is set to increase. .
Sure, there are nuclear plants being mothballed, but by 2025 the new construction will easily dwarf the ones being closed down. That, in turn, will lead to more reactors and more uranium demand. China and India, two nations struggling to keep up with the growing demand for electricity as their residents move up the socioeconomic ladder, are the driving forces. Cameco, in case you wanted to know, has supply agreements with both nations.
Indeed, although it doesn't break out individual countries, Asia is a big market for Cameco, representing about 50% of its contracted backlog of uranium sales. That said, the supply agreement Cameco has with India was only inked last year, so any sales in that country are basically new business.
But, here's the really interesting thing, there's already an imbalance between uranium production and demand -- tilted in Cameco's favor. For example, the miner estimates that demand will outstrip uranium production by around 3% this year. That may not sound like a big deal, but with all the new nuclear plants being built and the lingering impact of miners pulling back during the uranium downturn that started in 2011, the disconnect only looks like it will get worse. In fact, the production shortfall this year is up from a nearly 2% shortfall last year. And if no new mines are built the shortfall will be a massive 57% by 2025 by Cameco's estimates!
Obviously, it's highly unlikely that no new uranium mines, or expansions of existing mines, will take place between now and 2025, especially if demand heats up. Rather the point is that uranium looks like it is at an inflection point, where demand is going to start pushing prices up again. And Cameco, with a global footprint and projects waiting in the wings for higher prices, should be a key beneficiary.
More than just a commodity price play
The top- and bottom-lines have been hit hard by the commodity downturn that started in 2011. There's no way to sugar coat that. But, here's the thing, Cameco hasn't posted an annual loss in at least a decade, even at the current weak uranium price levels. Indeed, management hasn't been waiting around for better times, it's been making sure the miner's costs are below what it's getting paid. For example, Cameco's cash cost of production fell 26% year over year in the first quarter because of the investment it's made to ramp up production from its Cigar Lake mine.
Add the fact that long-term debt makes up only about 20% of Cameco's capital structure and you start to see a company that's not only handling the downturn well, but looks like it has the fortitude to stick around for the eventual upturn, too. And, all the while, it's investing in its business to improve operations.
Image Source: Cameco
Down and out
With that positive backdrop, it's worth taking a look at Cameco's stock price. Let's politely agree to call it ugly, with the shares off some 80% from the highs reached late last decade. Will it ever get to those lofty levels again? No one knows, but the beating it has taken seems at odds with the long-term outlook for nuclear power and Cameco's ability to, so far, weather the downturn in stride while maintaining a strong balance sheet and investing for the future.
If you are tired of all the news about oil, perhaps it's time for you to switch gears and examine a commodity that's been through its darkest days and is now starting to see some silver linings on the clouds it's facing. And for that, uranium miner Cameco is probably your best bet.
