What happened
Investors in Cameco Corp. (CCJ +0.49%) were in for a huge surprise in November when shares of the world's largest uranium producer surged 15.5%, reversing all of its October losses and more.
While such a dramatic V-shaped bounce doesn't usually signal a bottom, Cameco's rally last month was fueled by two big announcements that have rekindled hopes of a recovery among investors in not just Cameco but other uranium stocks as well like Denison Mines (DNN +1.14%). Denison shares spiked nearly 17% in November, thanks entirely to Cameco.
So what
In late October, Cameco posted a surprisingly big loss for its third quarter and lowered its production outlook for the full year, confirming that the uranium markets continue to be in a dismal state. It didn't take much for investors to understand that Cameco's future hangs heavily on uranium prices, which is largely an uncontrollable factor.
Or so it seemed until Nov. 8, when Cameco announced a temporary suspension of operations at two of its key mines, McArthur River and Key Lake in Saskatchewan. The news sent uranium stocks soaring, with a company like Denison that's still in development stage also watching its shares jump double-digit percentages. The market viewed Cameco's production cut as a positive catalyst for two reasons: It should help the company clear out piling inventory and prevent further cash burn, and boost uranium prices by rebalancing industry demand and supply, at least to some extent.
Image source: Getty Images.
Interestingly, Cameco's second announcement -- that of a massive 80% dividend cut -- didn't discourage investors either, though it was the uranium giant's first such dividend cut since the Fukushima disaster. While Cameco had maintained its dividend since, its payout was outstretching earnings and pressurizing the company's cash balance, as Tim Gitzel explained during the announcement.
With the continued state of oversupply in the uranium market and no expectation of change on the immediate horizon, it does not make economic sense for us to continue producing at McArthur River and Key Lake when we are holding a large inventory, or paying dividends out of proportion with our earnings.
Now what
I believe it'll take more than just Cameco's production curtailment for uranium prices to stabilize. The fate of uranium as a fuel depends entirely on the nuclear power industry, which has been a mixed bag at best, what with some countries warming up to nuclear power again even as others are giving the fuel a miss.
That said, Kazakhstan -- the world's largest uranium-producing country -- just announced plans to cut production by 20% over the next three years, further strengthening hopes that a recovery could finally be underway. This development, along with Cameco's proactive efforts to maintain cash flows, suggests that the worst is behind the uranium stock.
