In early November 2017, management at Cameco Corp (CCJ +8.13%) announced the widely expected decision to slash the annual dividend paid to shareholders from about $0.31 per share to about $0.06 per share. It was yet another move by the uranium miner to preserve cash and weather out the storm, and was announced simultaneously with the decision to temporarily suspend operations at two of its largest mines. About 84% of the workers at those locations were laid off, although the mines are expected to come back on line after 10 months.
While slashing the dividend wasn't fun for shareholders, it will save Cameco about $99 million in annual payments. In comparison, the current distribution amounts to just $25 million in annual payments. That should be manageable for the uranium miner in the year ahead, which ended 2017 with $469 million in cash and short-term investments.
However, as uranium prices continue to slide, investors may be wondering how long Cameco's dividend can even survive.
Image source: Getty Images.
Uranium prices continue to fall
Cameco is partially insulated from falling uranium prices because a large amount of its supply is sold under long-term contracts, which provide significant premiums compared to current spot prices. Last year that handed the company a 66% pricing advantage over average spot prices.
Nonetheless, the price of the company's long-term contracts are still affected by the continued slide in uranium selling prices. Management summarized the current predicament when announcing the dividend cut back in November: "Uranium prices have fallen by more than 70% since the Fukushima accident in March 2011 and remain at unsustainably low levels. Cameco has been partially sheltered from the full impact of weak prices by its portfolio of long-term contracts, but those contracts are running out and it is necessary to position the company today to generate cash flow if prices do not improve."
Management thinks that global reactor growth will help to lift markets out of their rut in the long term. That may be true, but it's worth considering that China's nuclear investments could have little impact on global uranium prices for several non-obvious reasons. Meanwhile, reactor growth elsewhere could be canceled out by retirements in the United States and Germany.
An investment in Cameco today is essentially making a bet between two outcomes: Either the uranium market improves soon and disaster is avoided, or the company's long-term contracts expire in a weak pricing environment and things really get interesting. Investors are hoping that uranium buyers are simply playing a game of chicken with suppliers in an attempt to extract more favorable prices in their next batch of long-term contracts.
Unfortunately, prices have yet to improve, according to data published by Cameco. Consider how uranium spot prices per pound through the first three months of 2018 compare to recent years:
|
Month |
2018 |
2017 |
2016 |
2015 |
|---|---|---|---|---|
|
January |
$21.88 |
$24.50 |
$34.70 |
$37.00 |
|
February |
$21.38 |
$23.00 |
$32.15 |
$38.63 |
|
March |
$21.05 |
$23.88 |
$28.70 |
$39.45 |
Data source: Cameco.
Uranium spot prices were actually lower in mid-2017 (at around $20 per pound) and in late 2016 (bottoming out at $18 per pound), but aren't starting off the year on the right foot. In fact, this is the first time in the last four years that prices haven't improved from December to January.
What's unusual about that is the fact that Cameco has taken production offline -- as has the entire country of Kazakhstan (the world's largest uranium producer) -- and is instead meeting supply obligations from inventory. If prices are at "unsustainably low levels" as management believes, then that should begin to show up in market prices soon.
The good news for shareholders is that recent cost-cutting measures have resulted in increasing levels of operating cash flow. In 2017 Cameco reported operating cash flow of $472 million, an increase of 91% from the previous year. The company expects to generate significant levels of operating cash flow in 2018, too. Coupled with a strong cash position, the uranium miner will be able to comfortably fund its capital requirements in the year ahead. That includes the dividend.
Looking ahead, there's no reason to believe the company couldn't fund overhead and its dividend for at least a few years. But to do so in a worst-case scenario, it would need to keep its largest production assets offline even longer. Given the stagnant outlook for the global nuclear industry, investors need to consider a future in which the current market storm never really blows over, and Cameco is left in a constant state of crisis management. It may never return to its former glory as a top dividend stock.
Image source: Getty Images.
The dividend is safe for now, but...
Cameco shares have had a miserable existence in the last several years, but it could have been much worse for shareholders if not for the company's excellent management team. Time and time again, it has made the right (and often difficult) decisions to deftly manage sour market conditions. Additionally, smart management of operations in the good times of years past have positioned the company to better manage market headwinds today.
Given the cash balance and expectations for strong operating cash flow in 2018, the dividend should easily survive another year. That said, investors should consider that the global nuclear industry is in decline for good, and that uranium prices may never reach historical levels again. I tend to think that will be the case, which is why I'm not going anywhere near Cameco stock.
