Shares of uranium miner Cameco Corporation (CCJ 1.65%) are down almost 80% from the highs reached nearly 10 years ago. Over the past year alone, they've fallen 25%. With a focus on providing nuclear power plants with fuel, it shouldn't come as any surprise that a moribund uranium market is largely to blame for Cameco's woes. There's unlikely to be a massive turnaround in 2018 at this miner, but that doesn't mean things won't start to get better.
What it's going to take
The big picture at Cameco is actually pretty simple. The company is a miner producing a commodity. The largest driver of its top and bottom lines is going to be a combination of uranium prices and mining costs.
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Right now uranium prices are near decade lows and Cameco is struggling. That said, its business model makes use of long-term contracts that have provided some protection from the pain. For example, in the third quarter of 2017, the spot price for uranium averaged around $20 a pound, but Cameco was able to charge $32 a pound. That's a good thing, but those contracts are slowly starting to roll off.
At the same time, however, uranium prices are so low that management believes "apart from making sure we have uranium to fulfill our contract commitments our supply is better left in the ground." That's basically why Cameco has been shutting mines and curtailing production. Capital spending has, essentially, dried up at the miner.
So the one thing that could turn 2018 into the best year yet for Cameco is a uranium rally -- a really big uranium rally. Such an outcome, however, appears highly unlikely at this time.
There are some positives
That said, all the news isn't bad. For example, some market watchers believe that Cameco's production pullback coupled with similar actions at Kazakhstan's state-owned Kazatomprom will reduce 2018 uranium production by as much as 20%. That's a huge drop in a single year and should go a long way toward balancing supply and demand. Meanwhile, there is still material nuclear power plant construction taking place in emerging markets, notably in Asia, that should support demand growth over time. But the actual balancing of supply and demand is likely to take some time.
So the big question for Cameco in 2018 is about the miner's ability to weather a continued storm. Just getting through 2018 will be a big success, frankly. On that front, the news is pretty good.
For example, Cameco's long-term debt makes up just 25% or so of its capital structure. That's a reasonable amount of debt for any company. The miner's current ratio, meanwhile, is roughly 5.4. That suggests that Cameco can pay its near-term bills five times over without too much difficulty. In other words, this miner's balance sheet has a strong financial foundation.
It's also worth noting that the company's cash balance increased materially year over year in the third quarter. That 76% increase is largely the result of Cameco's efforts to adjust to the weak uranium market, since it hasn't issued material debt or shares over the past year. A dividend cut in late 2017 will further help to preserve cash as the company moves into 2018.
CCJ Cash and Equivalents (Quarterly) data by YCharts.
The red ink on the bottom line over the last two years, meanwhile, has been a mixture of things. Yes, low uranium prices have hurt. But one-time costs, such as the expense of shutting mines, have been a notable headwind. Those costs will likely continue into 2018, but the heavy lifting appears to have been completed there. That should free up even more cash for the company to use to get through the uranium downturn in one piece. When the upturn eventually comes, Cameco can tap its solid balance sheet to bring curtailed production back.
The best option
Cameco is the largest publicly traded pure-play uranium miner. Although times are tough today, it appears to have the financial strength to survive. If you are looking at uranium, Cameco is a much better option than tiny competitors like Energy Fuels, which lacks scale, or Denison Mines, where the key asset is a mine currently under construction. Sure, the upside for these tiny industry players could be huge, but buying a uranium miner today is really a play on a uranium rebound. In my opinion, it's better to stick with a company that looks positioned to both survive the deep industry downturn and take advantage when the uranium market picks up again.
