Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



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.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3031685, ~/Articles/ArticleHandler.aspx, 9/2/2015 1:13:28 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Jay Yao

Jay is an energy and materials writer. He reports on oil and gas fundamentals and macro trends in the industry.

Today's Market

updated Moments ago Sponsored by:
DOW 16,255.61 197.26 1.23%
S&P 500 1,933.64 19.79 1.03%
NASD 4,696.61 60.50 1.31%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 12:57 PM
CCJ $13.54 Up +0.16 +1.20%
Cameco Corp (USA) CAPS Rating: ****