A Couple of Trouble Spots for Cameco

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Perhaps the one good thing about being in a commodity business is that even if the business goes poorly, rising commodity prices can make management and investors appear brilliant. This has been the case over the past year at Cameco (NYSE: CCJ), as skyrocketing uranium prices have led to increased profits, despite operational problems.

Results for the third quarter were more of the same: Earnings increased 25% and revenue grew 89% year over year, as Cameco sold uranium at its highest-ever prices. However, political troubles in Kyrgyzstan led Cameco to renegotiate the royalties and fees it's paying to the government for its mining operations there, leading to an after-tax loss of about $125 million. Cameco continues to work to rekindle its massive Cigar Lake project, which was flooded after part of the mine collapsed last year. In July, Cameco announced that the opening of that mine would be delayed an extra year, to 2011.

The statistic that best reveals Cameco's operational troubles is the pounds of uranium it produced. For the past nine months, Cameco mined 14.3 million pounds, down from 15.5 million pounds in the year-ago period. The company increased its sales of uranium slightly, to 24.7 million pounds from 23.1 million. Cameco continues to sell more uranium than it mines, with about 70% of that spread coming from decommissioned Russian nuclear warheads. This source of extra profit may soon dry up, because Russian partner Tenex has indicated that it wants to renegotiate the price at which it sells its uranium to Cameco, so that it, too, can benefit from high uranium prices.

If uranium prices stagnate or fall, Cameco won't be able to keep growing its earnings. It's quite possible that prices will rise again, though. The prospect of ramping up nuclear energy production has gained traction thanks to near-record oil and natural gas prices. Despite the high cost of uranium, electric companies in the U.S. are looking to build more nuclear plants. In late September, NRG Energy (NYSE: NRG) filed for permits to build a new nuclear plant with two new reactors. Interest in going deeper into nuclear and uranium isn't limited to the U.S., either: The Shaw Group (NYSE: SGR) has contracts to build four new nuclear plants in China.

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