Being a uranium miner hasn't been easy lately, with the spot price of the nuclear fuel hovering near 14-year lows. It's no wonder, then, that Cameco Corp. (CCJ +2.66%), the largest publicly traded uranium miner in the world, has seen its shares fall more than 70% over the past decade. Earnings results, meanwhile, have dipped into the red over the last two years. Believe it or not, however, there's a bright side to all this bad news. Here's what you need to know.
Downturns lead to upturns
The first fact to remember is that uranium is a commodity. And commodities tend to go through repeating cycles in which high prices lead to increasing supply, which eventually creates a supply/demand imbalance, which in turn depresses prices. At some point, prices get so low that miners curtail production and stop building new mines, which leads to supply shortfalls and higher prices. The cycle then repeats.
Image source: Getty Images
Recently, there has too much uranium supply and not enough demand to soak it all up. However, the bottom of this cycle could be close at hand. Cameco recently announced that it was going to buy uranium on the spot market to satisfy its contracted demand, suggesting it is cheaper to buy uranium than mine it today. The company has also been shuttering mines to limit production, a tactic also being used by the world's largest uranium producer, Kazatomprom. As two of the largest uranium miners, their decisions have a huge impact -- industry watchers expect these two curtailments together to reduce industrywide supply by nearly 20% in 2018.
Long-term demand, meanwhile, appears set to rise. Nuclear power plants are being built around the world, which should more than offset closures in a number of developed markets. Right now there are 55 reactors being built, largely in Asia and the Middle East. As those reactors start up, utilities will be looking to ensure long-term uranium access. That, along with falling supply, should lead to higher prices and more long-term contracts.
The contract thing
Long-term contracts have historically been a key part of Cameco's business model. Prices are so low today that it doesn't make sense to sign such deals, but the impact of previous contracts are pretty telling. In 2017, Cameco's average realized price for uranium was an incredible 65% higher than the average spot price for that year.
|
Cameco's Contract Shield | ||||
|---|---|---|---|---|
|
2017 |
2016 |
2015 |
2014 | |
|
Cameco realized uranium price per lb. |
$36.13 |
$41.12 |
$45.19 |
$47.53 |
|
Uranium spot price per lb. |
$21.78 |
$25.64 |
$36.55 |
$33.21 |
Data source: Cameco Corp.
This is one of the reasons Cameco has held up so well financially in the face of a difficult market. In fact, the losses over the last two years were partly driven by the company's restructuring efforts (mine-closure and layoff costs) to adjust to the current market environment.
However, there's a ticking clock. In its annual report, Cameco notes that, "The annual average sales commitments over the next five years in our uranium segment is 22 million pounds, with commitment levels through 2020 higher than in 2021 and 2022." Those pounds are backed by contracts.
Taken a step further, however, Cameco could have an issue on its hands if uranium prices don't start to move higher by the end of 2020. At that point, contracts begin to roll off, and there's currently nothing in the pipeline to replace them. That's roughly a year and a half away, which can be a very long time in the commodity world. That said, if the curtailments and new power plant construction lead to demand outstripping supply, Cameco could suddenly find itself operating in a very positive environment for signing new contracts.
A uranium market update from competitor Denison Mines Corp. Image source: Denison Mines Corp.
The World Nuclear Association, which promotes nuclear power, estimates that 24% of utility demand for uranium will be uncovered by supply in 2021, with that number growing to 62% by 2025. These are just estimates, of course, but it is both the direction and magnitude of the change that are important. By 2021, when Cameco's contract portfolio will be rolling off, utilities appear as if they will be increasingly looking for uranium that won't be readily available. That's a great backdrop for Cameco to sign some good long-term deals.
This too shall pass
Life in general moves in cycles ... even more so in the commodity world. Cameco has been hammered by the uranium downturn, but it increasingly looks like the downturn is creating the foundation for the next upturn. This giant uranium miner, meanwhile, has long-term contracts in place that will help soften the blow of the downturn for another 18 months or so. Just about the same time when it looks likely that demand will start to pick up notably. For more aggressive investors, this down-and-out miner could be an interesting long-term opportunity today.
