Cameco Corporation (NYSE:CCJ), the largest publicly traded uranium miner, has been struggling along with the moribund price of the nuclear fuel it mines. The stock is down over 70% since commodity markets started to tumble in 2011. The early 2016 commodity upturn, meanwhile, has seemingly left uranium behind. Investors have ample reason to worry, but for more intrepid stock buyers, Cameco's low stock price could be a long-term opportunity.
The numbers are ugly
Uranium prices continue to hover around decade-long lows. For evidence of the painful commodity price decline, you don't have to look any further than Cameco's earnings statement. Revenues have fallen from 2.75 billion Canadian dollars in 2015 to CA$2.16 billion last year. The bottom line, meanwhile, fell from a CA$0.16 profit per share to a loss of CA$0.52 over that span. There are two important pieces to note, here.
First, Cameco makes heavy use of long-term contracts. So the price it earns per pound of uranium is notably above the current spot price. The miner's average realized price in 2017 was a huge 65% above the average spot price for the year. This helps to support the company's top and bottom lines, but it has a downside. Current low uranium prices mean customers aren't looking to sign new contracts as the old ones end. This will become an increasingly material headwind for the company if spot prices stay low. That said, it still has some leeway, noting that Management highlights 2021 as a key turning point for its contract portfolio.
Second, Cameco's red ink is partially driven by write-offs related to efforts to adjust its business to the current market environment. That includes curtailing production and laying off workers. In fact, the spot price is so low that management has decided to buy uranium on the spot market and then sell to its contracted customers instead of mining it. Essentially, it makes more economic sense to let other miners pull the nuclear fuel out of the ground than for Cameco to deplete its own mines. Like the mine closures, this move will help to reduce supply in the market.
Solid as a rock
This is not a particularly great backdrop, and there's currently no indication that the uranium market is set to turn notably higher. However, there's material nuclear power plant construction taking place today, with 57 plants currently under construction (largely in Asia). And with little new mine development in the works, industry participant Denison Mines Corp. is expecting uranium demand to notably outstrip supply at some point in the coming years -- the vast majority of that uncovered demand is going to be from foreign markets. With a global sales footprint, Cameco should be a prime beneficiary as supply and demand balance out and uranium prices start to move higher.
Uranium is, after all, a commodity subject to the same cyclical supply/demand cycles as any other commodity. We are currently in the downside of the cycle, and the problem for Cameco is getting through the downturn. It's making tough calls on the operations front by doing things like curtailing production. But it isn't alone in its efforts to adjust to the changing market. Kazakhstan's Kazatomprom, the world's largest producer, announced its intention to cut production in late 2017. The curtailments at these two miners is expected to reduce supply by nearly 20%, combined, according to industry watchers. That provides a clear catalyst for higher prices, as these efforts help to clear out the current uranium supply glut. However, none of this means Cameco will survive the trough.
Which is where the miner's rock-solid balance sheet comes into play. For example, at the start of 2018, long-term debt made up roughly 25% of Cameco's capital structure. That's a modest level of debt for any company. Its current ratio, meanwhile, was a robust 5.1, suggesting it has enough cash to cover its near-term expenses five times over. Interest costs, meanwhile, ate up around 15% of Cameco's EBITDA in 2017; high, but not unmanageable. Despite the red ink, this is not a company in dire financial distress.
This is the opportunity. Cameco's stock price is near decade lows, driven by a deep downturn in the uranium market. However, there doesn't appear to be any imminent risk of it going bankrupt -- in fact, it looks like it will easily survive this downturn. To be clear, Cameco is not appropriate for risk-averse investors. However, it does look like a good way for more aggressive types to get exposure to a downtrodden commodity that seems to have strong long-term demand fundamentals based on the nuclear construction that's taking place and a near-term catalyst from production cutbacks at two of the industry largest producers.
No telling when
The problem Cameco is facing today is that, despite the positives noted above, there's no way to tell when the uranium market will turn sustainably higher. Given the current dynamics, management is circling the wagons, curtailing production, laying off workers, and buying on the spot market to protect the assets it has in the ground. These efforts are layered on top of a very strong financial position. It looks like Cameco can survive the downturn and be ready for the eventual upturn.
Cameco's curtailments, coupled with those of industry giant Kazatomprom, meanwhile, suggest that supply and demand are likely to balance out sooner rather than later. Cameco is probably the best way for aggressive investors to get ahead of the major reduction in supply that's set start hitting the uranium industry this year. Once the oversupply clears, uranium prices, and the prices of the companies that mine the nuclear fuel, could move quickly higher.