What happened
Cameco Corporation (CCJ 0.16%) shares have displayed remarkable resilience so far this year after ending 2017 on a somber note. The uranium mining stock climbed a solid 27.4% during the first half of 2018, according to data from S&P Global Market Intelligence, fueling investor optimism that the worst is, perhaps, behind the uranium industry.
So what
Uranium prices hold the key to a market turnaround. However, spot uranium prices have barely moved this year, with the average monthly price coming in at around $22.65 per pound in June, compared with $21.88 per pound in January, as quoted by Cameco. For perspective, average uranium price were roughly $23.13 last November.
So why did Cameco shares climb? The rally has more to do with investor expectations of a recovery, and it's not entirely unfounded.
Image source: Getty Images.
You see, Cameco is among the world's two largest uranium producers. So the company's decision to suspend operations at key mines McArthur River and Key Lake starting in January was big news. Meanwhile, the world's largest uranium producer, Kazakhstan's Kazatomprom, is also scaling back production. As I explained in a recent article, these developments have fueled hopes among uranium producers around the globe, even as industry experts project production to drop substantially this year and help ease the supply glut and buoy prices.
Meanwhile, Cameco is aggressively cutting costs where possible, which, combined with lower capital spending, sent the company's cash flows soaring in fiscal 2017, with its free cash flow even hitting multi-year highs. With management projecting cash flow for fiscal 2018 to be similar to last year's, investors hope Cameco is headed for better days.
Now what
Even after its recent run-up, Cameco is trading at historically low price-to-cash flow valuations. That indicates the stock's still a value buy, but the real upside will come only when uranium buyers, primarily nuclear power reactors, return and there's substantive evidence of a recovery in prices. That will eventually dictate Cameco's future, as there's only so much the company can do on the cost front right now.
