Uranium and coal prices are in the dumps. Uranium is still dealing with the shutdown of Japan's nuclear system and waiting for new plants in developing Asian nations to come online. Coal producers have seen their margins collapse as Australian production grows and U.S. utilities expand non-coal capacity.
Falling commodity prices and falling stock prices paint the uranium producer Cameco (NYSE:CCJ) and coal producers in a similar light, but under the surface, the two industries are quite different.
Coal's margin and price challenges
The EPA's decision to target 30% reduction in carbon emissions by 2030 is another headache for thermal coal producers. U.S. thermal coal's big challenge is that the Energy Information Administration expects that between 2012 and 2020 60 gigawatts, or GW, of coal capacity will be retired. That's around 19.4% of the coal generation capacity that existed in 2012. To make things worse coal's expansion of 1.5 GW only accounted for 10.9% of new and expanded generation capacity in 2013.
With the Powder River Basin and Bituminous Thermal operations accounting for 61.4% of Arch Coal's (NASDAQOTH:ACIIQ) first quarter 2014 mining revenue, it's no surprise that its operating margin has taken such a steep fall. Its operating income fell to negative $73.1 million in the quarter.
Alpha Natural Resources (NASDAQOTH:ANRZQ) is in a similar situation as its Powder River Basin and Eastern Steam operations accounted for 58.5% of its first quarter 2014 revenue. Its operating loss took a similar dive to negative $194 million. Such a high reliance on thermal operations leaves both companies heavily exposed to the structural challenges in the U.S. thermal market.
Before paying $103.3 million in expenses Peabody Energy (NYSE:BTU) managed to post a $2.9 million operating profit in its first quarter. Peabody's trailing operating margin of negative 5.96% is better than Arch Coal's and Alpha Natural Resources' margins, but clearly, Peabody is struggling.
According to its 2013 annual report, all of its U.S. mines produced thermal coal. Its first quarter results show that these U.S. operations accounted for 61.7% of its mining revenue.
The end result is that Peabody is heavily exposed to the challenges in the U.S. thermal market just like Arch Coal and Alpha Natural Resources, though Peabody is more geographically diversified. While increased exports would help alleviate pressure on the U.S. thermal market, expansion projects like the Gateway Pacific Terminal have run up against heavy local opposition.
The above chart shows how Cameco's operating margin is still positive. This is more than just a fluke. From the first quarter of 2013 to the first quarter of 2014 Cameco's uranium segment gross margin remained at 34%. Its average realized price, did fall 4% year over year and its costs rose 4%, but currency fluctuations compensated to maintain its gross margin.
Cameco's income from continued operations was just $3.3 million in the quarter. The upside is that uranium's medium term outlook is positive. It remains unclear when a significant portion of Japan's 48 nuclear reactors will come online, but China alone has 28 reactors under construction.
In the world, there are more than 70 rectors under construction. In the long term, coal's pain is shaping up to be uranium's gain. Energy-hungry nations like India and China see nuclear energy as a way to help decrease their dependence on carbon-intensive polluting energy sources.
Apart from the macro situation Cameco's balance sheet is in a good situation to handle the downturn. Its total debt to equity ratio of 0.25 is better than Peabody's total debt to equity ratio of 1.51, Arch Coal's ratio of 2.42 or Alpha Natural Resources' ratio of 0.84.
Watch the numbers
China is using nuclear energy to create stable base load energy that does not pollute. The Middle Kingdom's actions show that uranium's future is not as dark as some paint it. Low still prices hurt Cameco, but its debt load is more bearable than large coal miners like Peabody, Arch Coal, or Alpha Natural Resources.