Shares of Canadian uranium miner Cameco Corporation (CCJ +3.44%), which have more than doubled in price over the past year and hit an all-time high late last month, turned tail and dropped 5.6% through close of trading Tuesday.
The sudden, sharp decline followed Cameco's giving of an "investor day" presentation this morning, which inspired analysts at Canaccord Genuity to downgrade the stock from "buy" to "hold" this afternoon.
NYSE: CCJ
Key Data Points
What Cameco said
And yet, investors' reaction to today's news was a little strange. In today's presentation, Cameco CFO Grant Isaac noted that Cameco is currently "in [a] very advantageous position" with nuclear power utility customers buying uranium in excess of [the] "replacement rate" as they anticipate future needs for more electricity -- and more uranium to feed that need. Furthermore, Isaac noted that Cameco is able to supply the additional uranium from "brownfield" projects -- i.e., existing mines -- rather than needing to develop new mines to get access to the needed uranium.
That's a good start. But here's where Cameco's comments took a turn for the worse and may have spooked investors: Uranium prices took off like a rocketship this year, spiking from less than $47 per pound at the start of the year to as high as $87 per pound today. That's gotten uranium investors excited and powered a lot of Cameco's share-price gains this week.
But according to a report on TheFly.com on Isaac's presentation, "the spot market is actually low quality" inasmuch as relatively little uranium is actually sold at these spot prices. "Fundamental demand" and more realistic prices are more likely to be found on the term market where buyers bid for long-term supply of their uranium needs for periods "two years out and beyond."
What this means for Cameco
The implication, therefore, is that investors may not be able to rely on the skyrocketing spot price of uranium as an indication of long-term trends in uranium pricing or of long-term growth in Cameco's profits.
Commenting on Isaac's comments, Canaccord Genuity today lamented that the executive didn't give investors "something more directionally and definitively bullish" to encourage their enthusiasm about the stock. And because the analyst sees Cameco's guidance as more or less in line with expectations, and because Cameco stock has already gone up so much this year, the analyst decided that it's best to be cautious at this point -- and pulled its buy rating.
Is that the right call? It really depends on how closely gains in the spot market translate into higher supply-contract prices for Cameco. Currently, the stock is trading for more than 100 times earnings and looks, well, quite expensive. Strong term pricing could change that valuation if it results in more profits next year. But for now, I suspect Canaccord is right to be cautious.
This nuclear power stock isn't obviously cheap. I wouldn't buy it until it becomes so.
