Cameco Corporation (NYSE:CCJ) is focused on one thing: uranium. Uranium prices have been losing ground ever since the 2011 Fukushima nuclear power plant meltdown in Japan. It's been a brutal stretch that's pushed Cameco's shares to near 10-year lows. If you are looking to buy this uranium miner, what you really need to ask is whether Cameco is strong enough to suffer through this downturn so it can benefit from the next upturn.
Here are some facts you'll want to know.
It's not all bad
The first thing to understand about uranium is that there are silver linings currently hanging over the industry. For example, there are currently 56 nuclear power plants under construction today. The vast majority are in developing Asian nations, where demand for electricity is growing more quickly than in developed nations. Once built, these plants will help boost demand.
Despite the negative view of nuclear power in the United States and parts of Europe, it's going to remain an important part of the world's power grid. In fact, even Japan, which shut down all of its reactors after the Fukushima disaster, is starting to bring back the nuclear option. There were 54 reactors running before Fukushima and 21 are in some stage of restarting (five are actually up and running again).
So while supply and demand are out of balance today, leading to painfully low uranium prices, the future looks like it will be much brighter even though there are industry watchers who are suggesting otherwise. But getting from here to there is the problem.
A solid foundation
Luckily, Cameco has a rock-solid balance sheet. For example, long-term debt makes up roughly 23% of the miner's capital structure. That's a fairly modest amount of leverage for a capital-intensive industry like mining. The current ratio, which measures a company's ability to pay its near-term bills, is an incredibly strong 5.4. Cameco's balance sheet is definitely not a problem.
Earnings are another matter, with the company's bottom line dipping into the red in 2016 and results through the first three quarters suggesting another tough year in 2017. A portion of Cameco's losses, however, are being driven by one-time charges. These expenses are largely related to reducing production, including shuttering facilities and laying off staff. That's not inherently a positive thing, of course, but Cameco is proactively trimming its cost structure by refocusing around its best mines. It most recently announced plans to temporarily halt operations at its McArthur River mine, fulfilling its delivery obligations out of inventory. Reducing production in this way will help to solve the broader supply/demand imbalance that's pushed the price of uranium lower.
The cash flow statement paints a slightly better picture. Cameco was able to increase its cash balance by roughly 10% through the first nine months of the 2017 without issuing debt or selling stock. However, because of the still-moribund uranium market, Cameco has finally made the difficult decision to trim its dividend, slashing the payout by 80%. This is an unfortunate move, but it will help the company retain more cash in the near term as it works through the industry-wide downturn.
A shield, for now
Cameco's business is built on a solid foundation and is holding up relatively well given the deep industry downturn. Part of that is driven by the company's use of long-term supply contracts that have somewhat shielded it from low commodity prices. Those will eventually run out, so there are clear risks here. The recent decision to cut the dividend highlights that fact.
However, if you are a more aggressive investor willing to take a glass-half-full view of the nuclear power industry, Cameco should be on your watch list. Management has built a company that can withstand severe headwinds. Although there's no upturn in sight just yet, I believe Cameco will get to the other side of this downturn in one piece and ready to thrive. If you can stomach the uncertainty, I think Cameco is attractive today despite all of the negatives surrounding the company and industry.