There's nothing to be too concerned about at uranium miner Cameco Corp (CCJ +1.30%) right now. It's still the best pure-play uranium miner around and remains a very conservatively run company. But you need to keep an eye on its contracts. They are helping the miner immensely today, but as the long uranium downturn drags on they inch closer and closer to being a potentially big problem.
A solid foundation
Let's be clear: I'm not worried about Cameco suddenly turning into a financial train wreck. It's got a solid foundation that includes debt at around 20% of the company's capital structure. That's a very low level, especially in an industry that's as capital-intensive as mining. And its current ratio, a measure of how well it can cover its near-term bills, is robust at nearly six -- a current ratio over one is considered pretty good.
Image source: Getty Images
So you shouldn't be too concerned about Cameco today -- it's built to withstand some hard times. But these facts don't mean you have nothing to worry about at all, because the hard times are here. In fact, the deep downturn in the uranium market pushed the company's bottom line into the red in 2016 as it's adjusted its business to deal with the difficult market. That was the first time the company had lost money in a decade, and another full-year loss in 2017 is highly probable.
But it's not the red ink I'm worried about.
Contractually speaking
What worries me is the uranium miner's contracts. Cameco is a conservatively run company, and that includes a heavy reliance on long-term contracts. These contracts limit upside potential, but also help protect it from market weakness. And that's a big deal. In 2016, while uranium prices were hitting 12-year lows, Cameco's average realized price for uranium was a massive 60% higher than the average spot price for the year.
That's the good news, and shows just how important its contracts are to its results. The bad news, and what I'm increasingly keeping an eye on, is the fact that the miner's contracts won't last forever. Late last year, Cameco highlighted its contract protection and estimated that it's well covered until 2021. That's a long time away to be sure, but the uranium downturn continues to lumber along with no end in sight. So it might not be as long as it appears.
Cameco's contracts start to run out in a few years. Image source: Cameco Corp
Cameco expects contracting activity to pick up over the next few years. However, with spot prices low, power companies have been reluctant to ink new deals. After all, if you can get better prices just buying on the open market, why sign a contract that might lock you into higher prices?
The obvious problem here is time. If contracting activity doesn't pick up before Cameco's current contracts run out, the miner will have a material problem on its hands.
Don't get scared, but don't ignore this issue
Financially speaking Cameco is doing an excellent job of managing through a deep and long industry downturn. I believe it is the best option around if you are looking for exposure to the uranium industry; however, the miner's contract book is an important aspect of that, and there's a clock ticking on how long its contracts last. It's not something to worry about too much today, but as the downturn drags on it will get more and more important. Which means you should start watching the issue now so you aren't surprised later.
