Based on a recent survey from Reuters, it is possible that just one third of Japan's nuclear reactors will be restarted. Seeing as Japan is one of the world's biggest nuclear power users, this complicates Cameco's (NYSE:CCJ) future. Now is the time to reexamine uranium forecasts and figure out how to deal with a world where uranium prices do not increase as quickly as once thought.
Japan's impact on the world nuclear reactor count
The World Nuclear Association proudly states that there are 434 operable nuclear reactors in the world. Note that operable is not the same as operating. The 434 number counts 48 Japanese reactors. Using Reuters' conservative estimate that only 14 reactors will be restarted, the world's operable reactor count falls 7.8% to 400.
Japan's reactor shutdown definitely has an impact on the market, but it is not end of uranium demand as we know it.
The Fukushima disaster sent uranium prices downward, but this cannot continue indefinitely. The global marginal cost of production is around $40 per pound, so spot prices need to start heading upward. With the 2014 supply demand balance expected to hit a net deficit for the first time in many years, it looks like falling prices are slowly finding a floor.
Cameco and the uranium market structure
Cameco is a large producer, and in the fourth quarter of 2013, total cash and non-cash cost of produced and purchased uranium was $29.55 per pound. This is just a sliver below spot costs, but excluding purchased uranium brings its cash and non-costs down to $25.03 per pound. This shows that even at current spot prices, Cameco is still above water. It is worth noting that long-term prices are much better off at just below $50 per pound.
Cameco's long-term future is not in danger
Concentrated market power helps margins. If a market is split between a limited number of suppliers, it is easier for suppliers to administer prices and maintain margins.
Back in 2008, the OECD noted that the uranium mining industry was actually becoming more competitive as big miners like BHP Billiton were trying to increase their market share. Falling prices have helped to stop some of this competition. Back in 2012, Cameco bought BHP Billiton's Yeelirrie project for $430 million.
Cameco has an extra insurance policy with its fuel services division. The business of converting U3O8 to UF6 is more concentrated than the mining sector, and Cameco is active in both. While its uranium sales provided $1,633 million in revenue in 2013, its fuel service segment provided $319 million, a lesser but still significant number.
Smaller miners are a different story
Drilling out deposits is a challenging process, even when commodity prices are not at record lows. The small miner Denison Mines (NYSEMKT:DNN) is working on a number of properties in Mongolia, Canada, Mali, and Zambia.
Denison Mines does make some money from its McClean uranium mill, but the revenues are paltry compared to its exploration expenses. The $0.5 million in expected 2014 consolidated cash flow from its Canadian operations is nothing compared to $13.9 million it expects to spend on its Canadian exploration. Given the riskiness in such small companies with negative cash flows, Cameco is more attractive for conservative investors.
The Global X Uranium ETF (NYSEMKT:URA) is a popular uranium ETF with Denison Mines as its second largest holding at 11% of net assets. Given Denison Mines' negative cash flow and lack of big producing assets, it is best to invest in uranium through other vehicles.
The big players
Rio Tinto (NYSE:RIO) is another miner to consider if you just want to dip your toe in the uranium market. This large miner has a number of different interests, and uranium only composes a small portion of its portfolio.
In 2013, its Rössing Uranium operation was able to achieve $30 million in savings. At the same time, Rio Tinto's Energy Resources of Australia shut down its open-pit mining operations in 2012 and is not expected to see its Ranger 3 Deeps underground produce until late 2015. If uranium spot prices do not recover soon then there is the chance that Ranger 3 Deeps may not go forward.
At the end of the day Cameco is still worth following
Japan's tepid reactor restarts are hurting the global uranium market, but Cameco's market power and existing production base allow the company to continue plowing ahead. Cameco is pricey with its current price-to-earnings ratio around 30, but the company is not going away anytime soon.