Cameco Corp: Has the Long Thesis Changed?

Several months ago, I reasoned that Cameco Corp (NYSE: CCJ  ) was a buy because Japan would have no choice but to restart its nuclear reactors -- its weak economy depended on it. I argued that if Japan turned on its reactors, uranium prices would increase and Cameco would rally.

So far, I have been wrong. Four months after writing my article, Japan has not restarted any of its 50 reactors as Japan's economy has, in fact, recovered nicely with annualized GDP growth of 6.7% and inflation of 3.7% in May. Because Japan's economy is doing well, the Japanese government is no longer under any pressure to restart its nuclear reactors. This has in turn caused spot uranium prices to drop below $30/lb and has caused share prices of uranium miners to drop substantially as well. Given that the long case depended on Japan restarting its nuclear reactors, has the long thesis changed?

It's not over until the fat lady sings
Well, just because Japan's economy is doing well now doesn't mean that it will do well in the future. Japan is currently walking a tightrope between deflation and hyperinflation. If the Japan's economy sputters, the country could easily fall back into deflation and not grow again. If Japan's economy becomes too overheated, given Japan's massive government debt to GDP ratio of 227% (versus Greece's government debt to GDP ratio of 175.1%), Japan's economy could easily undergo hyperinflation.

Given that Japan's largest trading partner is China, an economic crisis or significant slowdown in China could easily knock Japan off that tightrope, forcing the government to restart its nuclear reactors to compensate. If Japan restarts its reactors, uranium prices and shares of uranium miners will go higher.

Weak uranium prices present an opportunity
Revenue-wise, low uranium prices are not a problem for Cameco because the majority of Cameco's revenues come from long-term contracts which don't expire anytime soon.   And even if Cameco did a long-term contract in the near future, it would be able to get prices of approximately $45/lb (over 50% higher than current spot price) given that nuclear utilities are willing to pay a premium for long-term guaranteed supply.  

If weak uranium prices continue, Cameco may actually benefit because it may have the opportunity to acquire junior miners like Denison Mines Corp on the cheap. 

The bottom line
Some investors believe the best time to buy a commodity stock is when there is blood in the streets and a catalyst occurs that sends the price of the underlying commodity higher in a sustainable way. So far, the catalyst of Japan restarting its nuclear reactors has not occurred. But just because it hasn't doesn't mean it won't in the future.

Eventually, demand will pick up, and the bearish sentiment will turn bullish. Until that time, Cameco does pay a 1.9% dividend to its shareholders to sit tight. Cameco is the best pure-play uranium miner in the world. The long thesis has not changed.

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