The uranium mining industry has been hammered in recent years by falling spot prices for the nuclear fuel. Cameco Corp (NYSE:CCJ), the largest publicly traded uranium miner, has weathered the storm relatively well, but isn't immune to the pain. It lost 0.52 Canadian dollars per share in 2017, including restructuring costs, compared to loss of CA$0.16 in 2016, with its realized uranium prices falling 14%. But all of the news isn't bad. Here's what CEO Tim Gitzel wants investors to understand.
1. It is bad out there
According to Gitzel:
At the industry level, we have seen a reduction in global demand expectations driven by early reactor retirements, delays in reactor construction programs, a slower than expected restart process in Japan, and by changes to government administrations that have created additional uncertainty for the nuclear industry, and despite a bit of a lift in uranium prices at the end of 2017, the uranium price still starts with a 2.
That last bit is gallows humor, to be sure, but uranium spot prices in the low-to-mid $20 range is painful for everyone, Cameco included. The list the CEO ticked off pretty much sums up the bad news that's been keeping the industry down lately. But what's worse is that, at this point, there's little sign of the sustained upturn that the industry would need to see a broad-based improvement.
2. We are buying uranium
Cameco has hardly sat idle while uranium prices have plummeted. In fact, 2018 should be a vastly different year when it comes to the way this miner operates. Gitzel explains, "While our plan is to draw down our inventory in 2018, we have three levers we can pull: production, inventory, and purchases. You can expect us to be active buyers in the spot market when it makes sense for us to do so."
Essentially, spot prices are so cheap that, according to the CEO, "It no longer makes sense for us to deplete the world's largest high-grade mine where costs are among the lowest when the market is telling us it doesn't need the pounds." He made this statement while he was specifically talking about the decision to curtail production at Cameco's flagship McArthur River/Key Lake operation. But the big takeaway is that Cameco is looking at the current market and thinking about the very long term, which means keeping its uranium in the ground, while other miners are willing to sell theirs at multiyear lows. That's exactly what you want to see.
3. We're focused on costs
In addition to making sure to preserve the value of its assets in the ground, Gitzel wants you to know that Cameco is also working to reduce its expenses. There's little the miner can do about the price of the commodity it produces, so it's focusing on the areas it can control. For example, "Compared to 2017 expenditures, we expect exploration costs to come down by another 33%, direct admin to be down between 14% and 21%, and capital expenditures to be down by another 24% excluding Inkai's capital expenditures."
All of that said, the cost of curtailing production will lead to an 8% to 14% increase in average unit costs for Cameco in 2018. But don't get too caught up in that number, since it's all part of a long-term plan that should position the uranium company to prosper when prices start to pick up again. And under the surface, Cameco is tightly controlling its spending.
4. Cash is king
The headline number for Cameco is the earnings loss, but at this juncture, cash flow is really more important as the miner looks to survive this deep industry downturn in one piece. On that score, cash provided by operations increased roughly 90% year over year in 2017. And cash generation in 2018 should be good as well.
According to the CEO:
Our financial objective continues to focus on maximizing cash flow while maintaining our investment grade rating so we can self-manage risk; risk like a market that remains lower for longer, litigation risk related to our CRA and TEPCO disputes, and refinancing risk. Ultimately, our goal is to remain competitive and to position the Company to maintain exposure to the rewards that will come from having uncommitted low-cost supply to deliver into a strengthening market.
Cost cutting, curtailing production, and a 2017 dividend cut are all a part of this process.
The real takeaway here is that you should pay less attention to earnings numbers right now and more to the cash flow statement. That's Cameco's priority right now, and it's what will help it survive and prosper when uranium markets eventually rebound.
5. This too shall pass
Cameco's CEO started off his comments by saying, "You have heard me say before that we are cautiously optimistic. Today, I would tell you that we are cautiously more optimistic." A part of that involves the actions Cameco is taking to deal with the downturn. However, there's more backing his optimism:
Although demand estimates have come down, there is still growth in our industry. Today, there are 57 reactors under construction, the majority of which could be online over the next several years, if start ups occur as planned. Many of the countries that are installing nuclear capacity today are countries where massive segments of the population have little or no access to electricity and are demanding more, and those populations are growing.
That includes countries moving up the socioeconomic ladder, like China and India. These nations have a huge need for reliable power and have decided that nuclear will be a part of that picture. At some point, though, there's little way to know exactly when that need should lead to increased demand for uranium and higher prices for the commodity. When that happens, Cameco plans to be there, ready to take advantage of the situation.
Ready for the downturn and the upturn
There's no way to sugar-coat Cameco's 2017 results; it was a tough year earnings-wise. However, there's a lot more going on at this uranium miner. Not only is it protecting itself against the current downturn, but it's also preparing itself for the eventual upturn. And it's opportunistically taking advantage of the weak pricing environment in between by purchasing uranium at ultra-low prices instead of depleting its own mines. When looking at the full picture, then, 2017 was more of a mixed bag than just a bad year. The future, meanwhile, remains impossible to predict, but that's OK because this miner is readying itself for both good times and a continuation of the bad. If you are in the market for an out-of-favor miner, Cameco is worth a deep dive.