Uranium miners like industry giant Cameco Corp (NYSE:CCJ) continue to struggle with low prices for the nuclear fuel. There are positive developments still taking place in the uranium market, but investors remain downbeat. Cameco's stock is down 7% so far this year and a painful 80% over the past decade. For most investors, though, Cameco is still a better choice than development-stage uranium miner NexGen Energy Ltd (NYSEMKT:NXE).
Today and tomorrow
With one of the leading names in the industry down 80% over the last decade, you have to step back and ask, what's to like about uranium? Nuclear power isn't exactly winning the public relations race. There are plant closures in the United States because of low energy prices. Construction costs and delays have stalled new domestic development. And don't forget the fallout from the Fukushima reactor meltdown in Japan, which has left most of that country's nuclear fleet idled with significant opposition to planned restarts.
But there really is some good news. There are over 50 reactors currently under construction in the world today. That should help to shore up an oversupplied market. Looking longer term, electricity demand is expected to grow by more than 50% between 2014 and 2035. With a shift toward cleaner fuel options, nuclear stands out because it doesn't emit carbon dioxide and is a reliable base load power source. There's more to the story, but you get the idea: Today is rough, but "tomorrow" could be much better.
All about the future
This is where NexGen comes in. This development-stage miner is developing the Arrow deposit in Canada. It could be a huge opportunity, with updated estimates suggesting it has the potential to be even larger than Cameco's giant McArthur River mine. If the future is bright for uranium, it will likely be bright for NexGen, too.
The catch is that NexGen still has to develop the mine, a long and costly process. For example, NexGen is losing money, which you'd expect from a company that's developing a new mine. But it's telling that the company's income statement doesn't even include a revenue line. It's paying for all of its spending by selling stock and convertible bonds. The most recent cash raise came in June.
The company will continue to bleed red ink until it gets a mine up and running. That's not a sure thing, especially if there's a problem with the mine development process, or if the uranium market doesn't pick up as expected. This is why NexGen is a speculative investment at best.
Struggling, but surviving
Most investors would be better off with Cameco if they are interested in uranium. For starters, Cameco has revenue. That said, Cameco lost money in 2016, which isn't good. But that was related to impairment charges taken to adjust the business to current market conditions. Take those costs out, and the miner would have made a profit, something it had managed in each of the previous nine years despite falling uranium prices.
I don't expect the news to get much better over the near term for Cameco. It lost money in the first quarter, too, as it deals with a business setback (a cancellation of a contract) and ongoing restructuring costs. But it has a real business that management has proven can make money when times are better than they are today. Just for reference, uranium prices hit a 12-year low in 2016.
But don't too caught up in the bottom line. Cameco also has the financial strength to be a survivor. For example, debt only made up around 20% of the company's capital structure at the end of the first quarter. And its current ratio was an impressive 5.3, meaning it has ample resources to pay its near-term bills. Sure, it may be tough today, but Cameco is being run conservatively, and it has a long track record of success, even though today's earnings results are weak.
Take the conservative route
There's no question in my mind that NexGen has significant upside potential if the uranium market picks up again, as it and Cameco expect. However, developing mines from the ground up is a costly and risky effort -- and that's before you even factor in the uranium market's troubles. Only aggressive investors should consider it.
For most, the better choice is Cameco. Yes, the company's results have been weak lately, but it has done a good job of dealing with a long industry downturn (through most of which it turned a profit). And its balance sheet is in rock-solid shape, especially considering the uranium market headwinds it has faced. If the uranium market picks up, it will be there to benefit. And if the uranium market continues to languish, I expect Cameco to adjust and survive -- I'm not sure NexGen would.