Shares of Cameco Corp. (NYSE:CCJ) fell nearly 14% in early trading today after Tokyo Electric Power Company (OTC:TKEC.F), or TEPCO, announced it was terminating a supply contract. The world's largest uranium mining company revealed it was rejecting the termination notice and plans to pursue all possible legal actions to claw back value for shareholders, but those attempts may be in vain.
While the Fukushima Daiichi nuclear disaster occurred in March 2011, TEPCO was contractually bound to continue purchasing uranium from Cameco Corp. That's because the the Japanese utility owns 17 nuclear reactors on the island nation with a combined power output exceeding 17,000 MW. The problem is that the Fukushima disaster understandably tanked public opinion about atomic energy in Japan, and led to government-induced moratoriums and phase outs in the last six years.
Cameco Corp and TEPCO have adjusted contracts accordingly in the past, but this time is different. The utility cited a "force majeure" -- government regulations have kept it from operating any of its nuclear plants in the last 18 months -- as sufficient cause to terminate existing contracts running through 2028. It sure makes a lot of sense for TEPCO to pull the cord on supply it simply cannot use.
The uranium supplier's reaction is equally sensible. The now-terminated contract called for TEPCO to purchase 9.3 billion pounds of uranium from 2017 through 2028. All that supply was worth $990 million (in U.S. dollars) in revenue to Cameco Corp., including $96 million in revenue in each of the next three years. That works out to about 5% of the company's total annual revenue.
This is ultimately a battle for which company's misery is more deserving of a bailout. TEPCO is stuck footing a large portion of the bill for the Fukushima Daiichi cleanup and decommissioning, which could take 40 years and cost close to $200 billion. Worse, it lost a significant amount of its power and revenue-generating portfolio to a government clampdown on nuclear energy. It really doesn't make sense for it to continue purchasing uranium in the current market environment.
Meanwhile, Cameco has been reeling from record-low uranium prices in the last several years. Losing the TEPCO contract will hurt revenue for the next 11 years and effectively add 9.3 billion pounds of uranium to an already oversupplied market. The company could be forced to further reduce output, layoff more employees, and/or try to cut costs even further than it already has. Although management has promised to pursue all possible legal options, investors shouldn't expect this contract to contribute to operations from this point forward.