Cameco's (CCJ +2.12%) core business is producing what amounts to a commodity. That's an important part of the story when you examine this uranium miner. There's one small problem, however, when you consider the valuation being afforded to Cameco today and the typical things that happen in commodity markets.
There's a uranium shortage on the horizon
According to Cameco's estimates, sometime around 2030, there will be more demand for uranium than there is supply of the nuclear fuel. Currently planned production expansions won't even be enough to maintain current uranium production levels. Roughly 15 years after the shortfall starts, the gap between supply and demand will be huge.
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When you have more demand than supply in a commodity market, a few things happen. First, prices go up as customers attempt to buy what little of the commodity is available. Second, there is usually an increase in the capital spending needed to increase supply. To be fair, building a mine and the processing assets needed to make uranium useful is time-consuming and expensive. So, there's no overnight solution to the supply/demand problem.
There could be some upside in uranium prices in the near term as companies try to lock in supplies. Cameco tends to work under long-term supply contracts, so some of the benefit from the expected supply/demand imbalance could already be getting priced into the contracts being signed today. Uranium prices have been moving higher for years after hitting a low point in 2016.
What's Cameco worth?
The problem today is that Wall Street hasn't ignored the changing dynamics in the uranium market. Cameco's stock price is up 40% over the past year, 240% over the past three years, and more than 750% over the past five years. The stock is actually trading near 30-year highs. Investors are pricing in a lot of good news right now.
That's partly because nuclear power is experiencing a bit of a renaissance. Since it doesn't emit greenhouse gases, it is a clean energy source. Due to its ability to provide always-on power (also called base-load power), it is a great complement to intermittent energy sources like solar and wind. There are even new types of nuclear reactors being developed that are expected to be smaller, cheaper to build, and safer to operate.
NYSE: CCJ
Key Data Points
But what about that huge price advance? Right now, Cameco's price-to-book value ratio stands at 7.3. That is near the highest levels in the company's history. So, investors need to go in with their eyes open here. If you buy Cameco today, you are paying a premium price in the hope that things go exactly as you expect on the supply/demand side of things.
However, as noted above, high commodity prices usually bring in more investment. And that investment generally results in lower commodity prices. But there's one more idiosyncratic risk when it comes to nuclear power: reactor meltdowns. They are uncommon, but when they do occur, it is usually worldwide news. The impact on the uranium market and the nuclear power sector is usually negative. Cameco probably isn't a great choice for risk-averse investors, even when the valuation is less dramatic.
Should you buy Cameco?
Given the lofty valuation Cameco is being afforded today and the extremely positive view of nuclear power, it is hard to suggest that the stock is a bargain at the moment. There are reasons to be optimistic about nuclear power and uranium, but it seems like Cameco is being priced for perfection. Unless you actually expect perfection, you might want to tread with caution.
