Uranium prices hit a 12-year low in 2016, so it's not all that surprising that uranium miner Cameco Corp. (CCJ 0.82%) shares have been on a decade-long downswing. The supply and demand imbalance for this nuclear fuel got particularly bad following the Fukushima disaster in Japan in 2011. And it doesn't look like it's going to get better over the near term. Is there any mojo left for Cameco to get back?
It's been tough
So the bad news at Cameco is that supply and demand for uranium are woefully out of balance. The most recent downswing in demand came after the Fukushima nuclear reactor meltdown in Japan. That event led Japan to shut all of its reactors and drove other nations, notably Germany, to push toward removing nuclear from its electric grid.
Image source: Cameco Corp.
The Fukushima event also highlights one of the biggest problems with nuclear power. Although nuclear reactors operate safely the vast majority of the time, when something goes wrong it's front page news. It's similar to airplanes: You only hear about them when there's an accident. So Fukushima was both a demand issue and a sentiment hit for nuclear power.
At this point, spot prices are so low that power companies have little incentive to lock in prices with long-term contracts. And then there are supply issues with miners like Denison Mines (DNN) working to bring new supply to market. Denison's largest assets are uranium mine development projects. It doesn't actually have any operating mines at this point, but the projects suggest more supply on the horizon despite the fact that there hasn't yet been an uptick in demand at this point.
Uranium prices are at a painful low point. Image source: Cameco Corp.
And it's starting to look particularly bad for Cameco. The miner had managed to remain profitable throughout the downturn... until last year when it started to bleed red ink. The losses kept up in the first quarter of 2017, too. If you don't dig into the losses it looks like Cameco is suffering badly. It is, actually, but there's more to the story than that.
The good news
When you step back and look at Cameco there are a couple of things to note. For starters, it has a solid financial foundation. Despite the long uranium downturn, long-term debt only makes up around 20% of the capital structure. That's a modest level of debt for any company. Meanwhile, it has a current ratio of more than five, meaning it has more than enough current assets to cover its near-term bills. So, despite a 12-year low in the commodity Cameco mines, it remains in rock solid financial shape thanks to a conservative management style.
As for the losses the company is experiencing, they are partly driven by changes Cameco is making to adjust to the current market environment. That includes costs, like severance, to shut down production from higher cost mines. The ultimate impact of these one-time costs will be to transition production to the company's lowest-cost assets, a move that will help profitability. The higher cost mines, meanwhile, can be brought back online when uranium demand and prices justify such a move. Once again, Cameco is doing the right things.
Cameco is earning well above spot prices and its cost of production because of long-term contracts. Image source: Cameco Corp.
Cameco also has a material amount of protection from current spot prices built into its conservative model. This is because its focus is on long-term contracts. Although new long-term contracts are hard to come by, the legacy contracts Cameco has in place have allowed it to earn well above spot prices for the uranium it sells. Cameco was able to charge $34 per pound of uranium in the first quarter compared to a spot price of roughly $24 per pound.
Taken together, the points above suggest that Cameco is in fine shape given the circumstances. And that isn't likely to change in the near term. Which is where the long-term outlook for uranium comes into the picture. The International Energy Agency expects demand for electricity to expand by more than 50% between 2014 and 2035. And with more than 50 nuclear power plants under construction right now, it looks like nuclear (and uranium) is going to be a big part of that.
A lot of that demand is coming from developing nations in Asia, where countries need more power in order to lift their people up the socio-economic ladder. And then there's Japan, which is slowly starting to restart its reactor fleet. Although all of the shuttered reactors won't come back, once enough do the pall that nation's safety decision cast over the uranium market will start to lift.
New reactors are being built today that will lead to demand tomorrow. Image source: Cameco Corp.
Supply, meanwhile, is being curtailed at Cameco and other large uranium producers. Notably Kazatomprom, the world's largest uranium producer, has announced plans to trim production 10% this year. That alone won't solve the supply overhang, but it shows that industry players are starting to make the moves that will eventually do just that.
A matter of time?
Taking all of this together, it looks like Cameco is working hard to survive a deep uranium downturn so it can prosper once the pain subsides. With a solid financial foundation, a conservative management style, large miners starting to curtail production, and new reactors on the horizon Cameco's mojo looks highly likely to come back. It won't happen overnight, but for those willing to take a long-term view of the situation, Cameco looks about as well positioned as you could expect after the commodity it mines hit a 12-year low.
