Shares of uranium miner Cameco Corporation (CCJ -0.14%) are down over 70% from the highs reached roughly a decade ago. A lot has changed over that span, most notably a deep and painful decline in the price of the commodity this miner produces. However, if prices recover as supply and demand balance out, the recovery potential here could make Cameco's stock a millionaire maker. Here are some things to monitor if that sounds interesting to you.
It's been tough
There's no way to avoid the obvious here: uranium prices are still hovering near deeply depressed levels. That's the result of a supply/demand imbalance that was materially exacerbated by the world's response to the Fukushima nuclear plant meltdown in Japan. That event led developed countries to question their commitments to nuclear power, with some swearing off the option entirely.
Image source: Getty Images
But Japan's reaction provides a telling story. Safety concerns led Japan to shut all of its reactors. The country quickly realized that this wasn't a viable long-term decision based on its electricity needs, however, and has since started to bring a portion of its shuttered nuclear fleet back on-line. The process has been slow and contentious, but it's clear that Japan needs nuclear power.
And so do many of the world's developing economies. In fact, there are around 55 nuclear power plants under construction in the world today, the vast majority in emerging economies like China and India. That makes sense given that demand for electricity over the next couple of decades is going to be driven by emerging market nations. As those reactors come online, demand for uranium should begin to pick up.
Supply, meanwhile, is starting to get some support too. Cameco, for example, has shut several facilities with the intent of reducing production. And in late December Kazatomprom, a major global uranium provider, announced plans to reduce production by 20% over the next three years. The cuts in 2018 should amount to around 7.5% of global supply. As supply and demand get closer, the chance for a uranium upturn looks increasingly promising.
Making it to the other side
There's one wrinkle: There's no telling when a sustained uranium price upturn might take place. But that shouldn't be too much of a problem for Cameco, because it has a rock solid balance sheet. Long-term debt makes up roughly 25% of the company's capital structure. That's a reasonable level of debt for any business. The current ratio, meanwhile, is a robust 5.3 times, suggesting Cameco can pay its near-term bills with relative ease.
Cameco's contracts start to run out in a few years. Image source: Cameco Corp
This is a conservatively run company that is clearly well financed. It also has some built-in protection because its sales are backed by long-term contracts. For example, in the third quarter of 2017 Cameco's realized price for uranium was 60% higher than the spot price. That buffer won't last forever, with the miner's contracts ending over the next few years. But while contracts are still in place they provide Cameco some extra breathing room as supply and demand balance out.
It could be worth the wait
The big story at Cameco, then, is that it's a financially strong company that is doing what it has to do to survive a deep and prolonged downturn. It appears highly likely that it will make it through this period in one piece and benefit when supply and demand get back into balance. And, assuming uranium prices rise materially when that happens, Cameco's long-depressed share price should rebound.
You've got to have a strong stomach to invest in Cameco, and believe that the invisible hand of the market will eventually correct the imbalance that has so deeply depressed uranium prices. But if that sounds like you, Cameco appears to have huge recovery potential.
