Last quarter, Cameco (NYSE: CCJ ) stated that it was feeling more confident than ever about its position in the nuclear power industry, despite a uranium market that had lost its glow, a lull among utility customers, and a worldwide economic slump. Since then, there has been some clear improvement regarding the uranium market, if not the broader economy. Judging by Cameco's recent purchasing activity, this is just the beginning of a powerful rebound for the radioactive metal.
If a miner like Yamana Gold (NYSE: AUY ) were to report rising cash costs today (and it's not), investors would throw a fit. Fuel, equipment, and service costs are falling, so it's time for cash costs to drop. Cameco, however, reported 38% higher unit costs in the first quarter. Sales volume was only off 4%, so we're not talking about a demand implosion like the one experienced by phosphate miner Mosaic (NYSE: MOS ) . What the heck is going on here, then?
A big reason for the cost jump is that Cameco was very busy purchasing uranium at near-spot prices during the quarter. These costs are dramatically higher than Cameco's cost of production, so margins took a real hit. What could justify such behavior?
Well, think about what happens in the oil industry when near-term prices are far below those attainable via futures contracts. In such a situation, called "contango," oil majors like ConocoPhillips (NYSE: COP ) and Royal Dutch Shell (NYSE: RDS-A ) (NYSE: RDS-B ) make easy money by selling oil at higher forward prices and sitting on tankerloads of it in the meantime.
Cameco has less visibility on future uranium prices, given the much thinner market for this fuel, but the principle is rather similar. The company isn't just saying that prices are headed higher, as Denison Mines' (AMEX: DNN ) outgoing CEO recently did. Cameco is trading on the basis of its well-informed opinion.
With exchange-traded funds and especially Chinese utilities representing two significant sources of demand going forward, I think Cameco shareholders may benefit handsomely from this bottom call.