The world's largest uranium miner has been reeling in a long, drawn-out state of misery since the Fukushima nuclear disaster in 2011. Many industrialized nations have revisited their long-term power-generation strategies to include a future without atomic energy. The rise of emission-free wind and solar energy, which continues to outpace even the most optimistic projections, makes it even easier to envision a world with diminishing reliance on nuclear power.
None of that has stopped Cameco Corp (NYSE:CCJ) bulls or management from predicting a brighter future ahead. The company has slashed operations and kept a remarkably healthy balance sheet throughout uranium's multiyear slide as a global commodity. While it appears to be making all of the right moves today, every day the company inches closer to an existential line in the sand: the year 2021.
That is the year most of its supply contracts expire. Given the current uncertainty surrounding nuclear power, investors shouldn't be so sure the next round of renewals will be executed in a shareholder-friendly manner. That leads us to ask, where will Cameco Corp be in five years?
The coming contract cliff
Historically speaking, Cameco has managed its portfolio of long-term supply contracts very well. That has insulated the company from the recent downturn in uranium selling prices. For instance, while spot prices are at 12-year lows today, the uranium miner realized a 60% premium to that for every pound sold last year.
The reason is simple: Power companies were locked into higher prices when current contracts were signed. Although fortuitous today, these same forces may also prove problematic moving forward. Why? Uranium prices have trended down, while the uncertainty surrounding the future of nuclear power has trended up. The result: Power companies are hesitant to sign new contracts today out of fear they'll be locked into higher-than-market prices in future periods.
It's a bit of a game of chicken. After all, if power companies wait until the last minute and bet incorrectly (uranium prices rise), then they'll be locked into higher prices anyway. That would work out for Cameco. And since the miner has a big influence on spot market supply -- which it currently isn't selling into -- power companies hoping to meet future needs through the spot market could be in for a rude awakening.
But Cameco can still lose this game -- and badly. It all depends on whose estimates prove correct. On one hand, the miner thinks global nuclear power capacity will continue to rise, therefore pressuring uranium prices in its favor. It uses optimistic projections in investor presentations to support its argument that between now and 2026, the world will need 800 million pounds of uranium that aren't currently covered by supply contracts.
On the other hand, all of the projections on which Cameco bases its argument could prove disastrously incorrect. Unfortunately for shareholders, every new data point that comes in seems to hint that may be closer to reality.
Consider that Cameco estimates there are 57 nuclear reactors under construction today throughout the world, including 30 in China, India, and the United Arab Emirates. The miner is also optimistic that most of the 49 nuclear reactors currently offline in Japan will restart operations soon.
However, growth in China and India likely won't be enough to save the global nuclear industry. A report by S&P Global Ratings estimates half of the 99 nuclear reactors currently operating in the United States could be taken offline in the next 17 years. That's the equivalent of shutting all nuclear reactors in France or Japan -- the second- and third-largest atomic powered countries, respectively, by installed capacity. The report thinks America could be nuclear-free by 2055.
Worse, changing political tides in Japan don't look favorable for nuclear power. Prime Minister Shinzo Abe recently dissolved the nation's lower parliament in an effort to maintain his party's majority after the general election scheduled for October 22. But in a surprise move, the two largest opposition parties merged into one. A major talking point of the "new" party: making Japan nuclear-free by 2030. Depending on the outcome of the election, the market may know the fate of atomic energy on the island nation well before 2021 -- bad news for Cameco's efforts to renew supply contracts.
Taken together, closing half of American nuclear reactors and all of those in Japan by about 2030 would remove roughly 104 nuclear reactors from operation. Add Germany's eight nuclear reactors that will be shuttered by 2022, and the world could lose 25% of its nuclear power capacity in the next two decades. Planned additions from China, India, and the rest of the world wouldn't come close to offsetting the losses.
What does it mean for investors?
It would be hypocritical to point out that Cameco's optimism is based on projections while neglecting to note the same is true for global nuclear reactor retirements. However, given the global rise of wind, solar, and liquefied natural gas (LNG) -- the last of which is increasingly important to Japan -- the days of nuclear power certainly seem to be numbered. Forces both economic and political will be difficult for the industry to overcome.
If additional announcements are made for closures in America or Japan in the near future, it could jeopardize the company's efforts to sign new long-term supply contracts to replace those that expire in 2021. While there's much uncertainty about where Cameco will be in five years, the current trend doesn't look very favorable. Investors beware.