Cameco (NYSE: CCJ ) looks poised to benefit from an increase in production in 2014 and stands to benefit even more if uranium prices rise.
Cameco is planning to ramp up production gradually from the 21.9 million pounds it produced in 2012 to 36 million pounds annually by 2018 (Cameco website). Cameco's Cigar Lake project is expected to begin production in early 2014 and produce nine million pounds annually once it reaches full ramp up. Cameco is also undertaking a production increase at several of its other mines with an overall strategy of increasing production while at the same time exploring for and developing new resources.
Cameco has been very successful at producing and purchasing uranium at low costs, which has kept it profitable even in current market conditions with the low spot price of uranium. In Q3 2013, Cameco produced 5.8 million pounds at an average all-in cost of $28.31 per pound. Cameco also purchased 3.6 million pounds of uranium at an average cost of $16.57 per pound during Q3, 2013.
The crux of Cameco's contracting stategy is a mix of long term and short term contracts, which allow it to remain profitable even when the spot price of uranium is low. Many of Cameco's long term supply contracts are based on the long-term price of uranium, which is currently substantially higher than the spot price, allowing Cameco to continue to be profitable. Cameco also strives for a ratio of 40% fixed-price contracts and 60% market-related contracts, meaning Cameco benefits when the spot price rises, but protects itself and remains profitable when the spot price falls.
Cameco will benefit even more if several near term and longer term catalysts drive the spot price of uranium higher. Japan is expected to restart several of its 50 idle nuclear reactors in 2014, which should signal a big confidence boost for nuclear energy. While the process for restart approval is very tedious and slow-moving it seems almost certain that at least a few reactors will be back on this year.
We may also see a supply-demand imbalance in 2014 as global demand for uranium is expected to continue to grow and new uranium projects are delayed due to poor economics. The end of 2013 signaled the end of the twenty year U.S.-Russia Highly Enriched Uranium Purchase agreement, a deal where Russia converted highly enriched uranium from nuclear weapons to low enriched uranium and sold it to the U.S. This agreement accounted for up to 50% of nuclear generated electricity produced in the United States and nearly 10% of the total electricity produced in the United States.
With Cameco paying a dividend of roughly 1.9% based on the current stock price, it seems like it is worth being patient as near-term catalysts should lead to an increase in the uranium spot price.
In the longer term, there are over 60 nuclear reactors under construction globally with many expected to come online over the next several years. In the United States, Southern Company (NYSE: SO ) is building two new nuclear units at its Vogtle nuclear power plant. These will be the first new nuclear power units in the United States in over 30 years. With global uranium demand projected to increase steadily over the next several years, a longer term supply demand imbalance is likely to occur, which should lead to higher uranium prices over the longer term.
Another uranium company to consider is Denison Mines (NYSEMKT: DNN ) , which is a uranium exploration and development company with interests in exploration and development projects in Canada, Zambia, Namibia, and Mongolia. Denison Mines is an interesting story as it has switched from being a uranium producer to a uranium explorer and developer. In 2012, Denison Mines sold its US division in order to focus on exploring and developing a strong portfolio of strategic uranium deposits. Its most important project is the high-grade Wheeler project, and Denison's portfolio consists of 49 projects, including many joint ventures with uranium industry leaders. Denison also has a 22.5% ownership interest in the McClean Lake joint venture, which includes the McClean Lake uranium mill, one of the world's largest uranium processing facilities.
With a market cap of just under 600 million, Denison's stock could be a big mover with an increase in the spot price of uranium. However, Denison is a risky play as it will continue to eat up cash to fund its exploration program. Denison currently expects to have enough cash to allow it to fund exploration until the end of 2014, but after that it may be forced to tap the equity market, which would further dilute shareholders.
While both Cameco and Denison Mines are compelling stories for 2014, Cameco looks like a more stable play. With its increased production over the next several years and solid contracting strategy, Cameco looks truly poised to outperform.
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