The Simple Reason I Won't Buy Cameco Corporation Stock

Shares of leading uranium miner Cameco (CCJ -1.68%) hit rock bottom at the end of October following the announcement of its third-quarter 2017 earnings. The new 52-week low was driven by what investors have become accustomed to for the last five years: weakness in the uranium market. Prices have continued to slide in 2017, which has imperiled operations at mines around the world. 

Indeed, in early November Cameco announced that it was suspending operations at its McArthur River mine and Key Lake milling facilities. That news was coupled with a 20% reduction in quarterly dividend distributions from $0.10 per share to $0.08 per share (a move that was long overdue, in my opinion). Investors certainly saw the cost-cutting measures as a step in the right direction, especially with regards to rebalancing supply and demand in the uranium market, and sent shares soaring. 

The rally received another injection of enthusiasm less than a month later when Kazakhstan announced that its state-owned uranium mining company, Kazatomprom, the world's largest uranium miner, would slash annual output 20% from 2018 to 2022.

As a result, Cameco shares are now up 35% from their 52-week lows set in late October. The string of positive news surely means the stock is a buy, right? Not quite. The long-term trends don't look very favorable for uranium miners because of the dwindling support for nuclear power. It's the simple reason I won't buy the stock.

Image source: Getty Images.

Atomic energy's days are numbered

I've done a complete 180 on nuclear energy in the last year. On one side, atomic power is by far the best clean energy source we have at the moment. Plus, there are technologies in development that could alleviate concerns about nuclear wastes and even meltdowns from accidents or worse. There are several strong arguments to be made that nuclear power belongs in any clean energy future, but economics isn't one of them.

That's the other perspective investors need to contemplate. Deploying new nuclear power capacity is simply too expensive compared to wind or solar, even after accounting for the differences in capacity factors (the percentage of time a power source operates at its installed capacity), which of all power sources are the best for nuclear and the worst for solar. Worse still, the emerging threat of hacking has made centralized nuclear power all the more dangerous to society.

Long-tail risks aside, economics will keep a lid on growth in the nuclear power industry. That was the theme of a report by S&P Global Ratings that estimated half of the 99 nuclear plants in the United States -- the global leader in installed nuclear power capacity, with roughly 20% of all reactors -- could close down within 17 years. The country could be nuclear-free within 38 years. 

The United States is hardly alone. France, the world's second-place atomic producer with 58 reactors, is aiming to reduce its energy mix from 75% nuclear today to 50% by 2030. A combination of energy growth and reactor closures will accomplish the feat.

Japan, which has the third-most operable reactors on the planet, continues to encounter obstacles in restarting its fleet. The island nation idled all 54 of its reactors following the Fukushima accident in 2011, including 12 permanently. Today, just four have restarted operations. Another four received regulatory approval to restart, but will delay operations by two months to ensure no parts were caught up in the Kobe Steel quality scandal.  

While Japan's idled reactors represent a major source of industry growth, the global trend is not an optimistic one. Consider the current landscape of reactor shutdowns, restarts, and new construction, and how it may affect future net growth. 

Data sources: Reuters and Nuclear Energy Institute.

While potentially witnessing a net gain of 70 reactors globally sounds bullish, that number doesn't take into account the potential retirements in the United States or France (or elsewhere). Should the U.S. close half of its reactors in the next 17 years, as the S&P Global Ratings report suggests is possible, then the total global net gain of reactors will drop to just 25.

That doesn't account for likely double-digit shutdowns in France, nor for the increased likelihood that Japan fails to restart all of its 38 idled reactors as it begins to explore turning away from atomic energy for good.

Investor takeaway

The enormous headwinds facing the global nuclear power industry represent a significant long-term obstacle for Cameco shareholders. The threat of reactor shutdowns, even spread out over the next two decades, creates a cloud of uncertainty that will continue to hang over uranium prices. Although they could rebound from their current historic lows, there doesn't seem to be any catalyst on the horizon for sustained demand growth. Simply put, nuclear power is on its way out, with new construction likely to be significantly offset by retirements. That's bad news for uranium miners everywhere.