About three months ago I argued that the world's leading uranium producer would be better off suspending its dividend than maintaining it. While Cameco Corp (CCJ +2.34%) shareholders certainly aren't complaining about the 4.1% dividend yield, given the historically weak uranium market and no recovery in sight, it may make more sense to conserve cash today that could be invested if and when the rut ends.
Well, another quarter has passed, and management has provided an update to full-year 2017 expectations. Revenue is expected to increase, while earnings are expected to be below 2016 levels. However -- and most important as far as the dividend is concerned -- operating cash flow is expected to increase from the year-ago period.
Does that mean Cameco Corp's dividend will survive after all?
Image source: Getty Images.
"We continue to face difficult market conditions"
The updated guidance wasn't exactly a reason to begin popping champagne. President and CEO Tim Gitzel provided sobering comments about the difficult yet diligent decisions Cameco Corp has made in light of a stubborn uranium market. Some (lowering operating costs) are designed to protect the business in the short term, while others (not entering into long-term contracts or selling supply into the spot market at today's historically low prices) are designed to protect the business in the long term.
We continue to face difficult market conditions, with the average year-to-date uranium spot price down 13% compared to the 2016 average. Our weaker outlook for 2017 compared to 2016 reflects the low uranium prices and the effects of the actions we have taken to address them. These actions are part of a very deliberate and disciplined strategy to strengthen the company in the long term. In the current environment, we have reduced supply, avoided selling into a weak spot market, resisted locking-in long-term commitments at today's low prices, and of course, we have significantly reduced costs.
The company's updated guidance is built on increased sales volume, which will lift revenue for 2017 over previous expectations. Cameco Corp also reduced its outlook for capital expenditures as well thanks to lower spending at two mines. And, of course, it expects operating cash flow "to be higher than the $248 million reported in 2016."
That's important for two reasons. First, the current dividend requires about $126 million per year. Second, operating cash flow dropped 31% from 2015 to 2016 as it continued its multi-year plunge. Reversing that trend will be key to ensuring that dividend payments are sustainable.
It's pretty impressive that Cameco Corp has found ways to responsibly manage a difficult uranium market. It hasn't issued any new shares to fund operations, and while its cash pile has dwindled in recent years, it ended June with $224 million in the bank. So if the company really does find a way to increase operating cash flow from 2016 levels, then the current dividend is almost sustainable.
Consider that in 2016 the company reported a net change in cash of negative $110 million, which included $126 million in dividends paid. Full-year 2017 guidance makes it sound as if management expects to bring the business closer to cash neutral this year. A combination of improved operations and reduced financing and investing requirements should help.
Here's how the current cash flow items compare to full-year 2016 totals:
|
Cash Flow Item |
First-Half 2017 |
Full-Year 2016 |
Full-Year 2017 Pace |
|---|---|---|---|
|
Cash from operations |
$97.3 million |
$248 million |
On pace for $194 million, so it must increase to meet expectations. |
|
Capital expenditures |
$42 million |
$173 million |
On pace for $84 million, which is much lower than in 2016. |
|
Net change in cash |
$30 million |
$110 million |
On pace for $60 million, but improved operating cash flow in the second half will lower this further. |
Source: Google Finance.
Whether or not Cameco Corp's second-half 2017 performance is enough to close the $118 million gap that existed between operations last year and potential cash-neutral operations remains to be seen. However, if operating cash flow really does exceed last year's total as expected, then investors should be encouraged that the company could likely achieve cash neutral operations -- even in this awful uranium market.
What does this mean for investors?
Cameco Corp may just be able to pull this whole thing off -- that is, maintain just enough operational cash to stay afloat without hurting shareholder value by issuing shares or debt or even suspending the dividend, and then, when the market recovers, open the faucets to supercharge growth.
Then again, there is no end in sight for the uranium market's woes, and suspending annual dividend payments of $126 million would provide a nice cushion for the business. But knowing what we know today, it seems that the dividend will survive for at least a few more quarters.
