Why Cameco Corporation Stock Has Slumped 14% in 2014

Control room at Fukushima nuclear plant. Image credit: Kawamoto Takuo via Wikimedia Commons.

Until the Fukushima Daiichi reactor disaster in 2011, prospects for nuclear energy had never been brighter, and uranium producer Cameco (CCJ 2.94%) stood in a prime position to take advantage of what seemed like limitless potential for the industry. Yet ever since the Japanese reactor facility's meltdown, the tide of global public opinion has moved sharply away from nuclear power, and even three years later, Cameco still hasn't recovered from the hit it took as a result.

Cameco is the largest publicly traded producer of uranium in the world, based in Canada and owning assets in North America and Kazakhstan. Even when you include private companies and government entities, Cameco remains the third largest producer globally, controlling about 14% of world production as of 2012. Let's take a closer look at Cameco to see whether it can finally turn things around.

A look at Cameco

Source: Yahoo! Finance.

What's held back Cameco lately?
Cameco has long been a favorite among investors seeking exposure to the uranium industry. Apart from its size, Cameco's main advantage is that its assets are largely located in politically stable areas of the world, in stark contrast to competitors like Areva and its extensive holdings in turbulent areas of the African continent. With low costs and expansion opportunities available, Cameco has the ability to boost its production whenever conditions warrant.

Unfortunately, those conditions haven't yet improved enough to justify aggressive moves from Cameco. So far, Japan hasn't yet reopened its 50 nuclear reactors, and even though operators have finally started getting approvals to get some reactors back into operation, public sentiment is still nervous and promises to make any restoration to Japanese nuclear capacity slow at best. In Europe, Germany has taken similar views against nuclear power, and Cameco expects 16 reactors to close in the next decade, with only 10 new projects to take their place. As a result, Cameco has chosen not to move forward yet in developing its promising Millennium mine project in northern Saskatchewan, and smaller peers Uranium Energy (UEC 1.20%) and Ur-Energy (URG 2.42%) have pulled back on their production in hopes of better prices in the future.

Millennium project. Source: Cameco.

For the most part, poor conditions haven't hit Cameco nearly as hard as they might have. Because Cameco had the foresight to sign long-term contracts at much higher prices, it hasn't taken the hit that a producer selling at spot prices has felt. Given that uranium prices have fallen by more than half since 2011, Cameco's advantage here is worth a lot to investors.

Will China boost Cameco's future?
Even though global views on nuclear power have been mixed, one country that remains committed to using uranium as a power source is China. The emerging-market nation expects to see 58 new plants in China within the next 10 years, representing more than 40% of all new nuclear-plant construction over the period. India also expects to embrace nuclear power, and as new plants become operational, spot uranium prices should rise to match demand.

Still, investors need to have a long-term view in order to invest successfully in the nuclear space. Given the amount of time it takes to build new facilities and cut through regulatory challenges in many parts of the world, any turnaround for uranium will take years to take shape. Without the patience to stay the course and endure the inevitable bumps along the way, you might find owning Cameco shares to be too risky for your overall strategy.

For now, Cameco has done well to get through the worst of times for the uranium industry, but things appear to be improving from the terrible conditions of the past few years. Although nervousness about nuclear power will likely continue, Cameco remains in a strong position to capitalize on those opportunities that do come up to provide fuel for new nuclear power plants in emerging areas of the global economy.