Why Cameco Corporation Is a Good Long-Term Bet

Given the expected rebalancing in the uranium market, Cameco looks like a good long-term bet.

Feb 20, 2014 at 9:14AM

Uranium producer Cameco Corporation (NYSE:CCJ) recently announced its financial results for the fourth quarter and full year ended December 31, 2013. The results highlighted the challenges faced by uranium producers in a weak market. Indeed, the near-term outlook for Cameco remains uncertain due to over-supply. However, the uranium market is expected to balance as miners cut production to adapt to the current market environment. At the same time, demand is expected to improve as several emerging economies shift to nuclear energy. This augurs well for uranium producers such as Cameco in the long term.

The depressed uranium market
Uranium prices have struggled for nearly three years now. Prices slipped after the March 2011 earthquake and tsunami in Japan led to major damage at Tokyo Electric Power's Fukushima nuclear power plant. The meltdown at the Fukushima plant has started a debate whether the risks of nuclear energy outweigh benefits. Since the disaster, Japan, which generated 30% of its power from nuclear plants, shut down its nuclear power plants. This has depressed uranium prices, which are now trading at around $35.50 per pound. Prior to the Fukushima disaster, uranium prices had been trading at around $70 per pound.

Apart from the Japan problem, uranium prices have also struggled as utilities in the U.S. and Europe, who have long-term contracts under which their supplies are covered for the next two to three years, are in no rush to buy as Cameco noted in its outlook for the industry. Other factors such as unexpected reactor shutdowns in the U.S. and temporary shutdowns in South Korea have also hurt demand.

The weak market even led to BHP Billiton (NYSE:BHP) shutting its uranium division in 2012. The company sold its Yeelirrie uranium deposit in Western Australia to Cameco for $430 million back in August 2012. Goldman Sachs and Deutsche Bank are also trying to exit the uranium trading business. While Goldman's and Deutsche's decision to exit the uranium business may stem from increasing scrutiny of banks' physical commodity trading businesses, the gloomy near-term outlook for the uranium market may also have been a factor.

However, the likes of BHP, Goldman, and Deutsche may be exiting the business at the wrong time as the long-term outlook for the uranium market has been improving.

Robust long-term outlook
According to Cameco, the long-term outlook for the uranium industry continues to be very positive despite the uncertainty that exists right now. That certainly seems to be the case if one were to look at some recent developments.

Cameco, which is the world's third-largest producer of uranium, recently announced that it has eliminated its previous 2018 supply target of 36 million pounds. Australia's Paladin Energy also announced recently that it will suspend production at its Kayelekera mine in Malawi until the uranium price recovers. The Kayelekera mine accounts for approximately 2% of the global supply. Additionally, secondary supplies are also moving lower. In 2013, the Russian Highly Enriched Uranium (HEU) commercial agreement ended, resulting in the removal of 24 million pounds of annual supply from the market.

While miners are cutting production, demand is expected improve as countries such as China, India, South Korea and Russia focus on nuclear energy. In its World Energy Outlook, the Paris-based International Energy Agency (IEA) predicts that although the current rate of construction of nuclear power plants has been slowed by reviews of safety regulations, the output from nuclear will eventually increase by two-thirds by 2035. The IEA also notes that China, India, South Korea, and Russia will be the key drivers. BP plc (NYSE:BP), in its recent Energy Outlook, also noted that China will be a key growth driver. According to the report, new capacity additions will match the growth seen in the U.S. and EU in the 1970s and 1980s.

These developments are expected to rebalance the uranium market and boost prices in the next two to three years, especially once Japan's nuclear reactors restart.

Given the robust outlook, Cameco certainly looks like a good long-term bet. 

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Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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