It's been almost eight years since the Fukushima Daiichi nuclear disaster in Japan rattled the global uranium and nuclear industries, but the fallout lingers to this day. All things considered, the management team at Cameco (CCJ -0.14%) has done a remarkable job navigating the persistent headwinds. Shares of the uranium miner and fuel fabricator are down only 2% in the past three years.
A tendency to make the correct and often difficult decisions time and again is paying off. For instance, last year Cameco made the difficult decision to suspend operations and lay off workers at one of the world's largest uranium mines to preserve the balance sheet for the long haul. Its long-term supply contracts, entered into years ago, have allowed the business to realize some of the highest uranium selling prices in the world. And as those expire, management is holding off on signing new ones at the market's current low prices in an attempt to force customers to properly value the atomic fuel source. Simply put, long-term thinking is dominating each decision.
This year may be the year it all pays off. Global uranium prices finally began to recover in the second half of 2018, which could create an opportunity for the industry leader. Here are three things for investors to watch for from Cameco in 2019.
Check out the latest Cameco earnings call transcript.
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1. Market purchases of uranium
Cameco management spent years telling investors that the uranium market couldn't possibly remain in the gutter forever. That was difficult to believe as uranium prices continued to find new lows, but the market may have bottomed out.
In April 2018, uranium spot prices -- lower than prices the company earns from long-term supply arrangements -- hit $21 per pound. While that wasn't the lowest price since 2011, the important thing is that prices have increased in seven of the nine months since. The spot price for the week ending Jan. 21 of this year was $28.80 per pound, or 37% higher than rates from April 2018.
Not surprisingly, Cameco shares have gained 32% in that span. That's because the trajectory of selling prices is a good indicator that the global supply glut is finally being cleared out -- and the miner is certainly doing its part to keep the trend going in the right direction. In addition to curtailing its own production and drawing down inventory last year, it also expected to purchase up to 3 million pounds of product from the market. In 2019 it expects to purchase as much as 12 million pounds of uranium from the market. Recent data suggest sticking to that plan will work out for shareholders.
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2. The pace of Japanese reactor restarts
The Fukushima Daiichi nuclear disaster in Japan was both indirectly and directly responsible for the current state of the uranium and nuclear industries. For instance, it tainted the political and social goodwill nuclear energy had built up as a clean energy source. The catastrophe was the main reason Germany decided to send its 17 nuclear reactors to an early retirement. They'll all be offline by 2022.
More devastating for Cameco, the disaster also led to a temporary moratorium on nuclear energy in Japan. Consider that Japan had 54 operating nuclear reactors, representing approximately 13% of the global total, before the disaster. Each was taken offline. At least 20 will be permanently decommissioned.
The silver lining is that as many as 34 reactors will restart in Japan -- and the pace is picking up. While only four nuclear reactors were restarted from 2015 to 2017, five were restarted in 2018 alone. Another six reactors have received regulatory approval to restart and another 12 reactors are being reviewed by regulators. That will provide a significant shot in the arm for Cameco. After all, it's easier to restart an idled reactor than build a new one.
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3. Will Chinese growth matter?
China inevitably comes up in any discussion about the future of uranium ore and nuclear energy. That's not too surprising. The country began furiously building nuclear reactors years ago in a push to have 58,000 megawatts of atomic power capacity online by 2025. It's close to achieving its goal.
After bringing eight new reactors online since the end of 2017 (the only other country to add capacity in that span was Russia, with two reactors), China has climbed into third place on the global leaderboard of operating nuclear capacity. Its 42,800 megawatts ranks only behind France (63,130 megawatts) and the United States (99,333 megawatts). It has another 10,860 megawatts under construction, which is nearly twice the next most ambitious country.
The not-so-obvious question for Cameco and its shareholders is, does China matter to the business? While one might assume that China will tip the scales of the global market by increasing demand for uranium, that's not exactly a slam-dunk assumption. The country has increasingly turned to Kazakhstan, not Canada (read: Cameco), for its uranium supply. Much of that uranium supply is new, meaning Chinese consumption might not affect the global market at all, but rather be contained within its own closed-loop market with Kazakhstan.
It's an important question to answer. After all, without Chinese reactor growth, the global nuclear industry is expected to lose ground for decades to come.
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A big year for Cameco
A global price recovery that began in May 2018 has helped to lift Cameco shares 32% in the past nine months. Considering management's recent decisions to address the uranium supply glut, the positive trajectory of selling prices could continue this year. Couple that with the potential for as many as (or more than) six nuclear reactors to restart in Japan in 2019 and it could be a pretty big year for the business. That said, management needs to provide a more detailed look into how -- or if -- China's atomic ambitious will affect the business. That may end up significantly limiting the company's growth potential.
