Shares of Cameco Corp. (NYSE: CCJ) are down nearly 80% from highs they reached in the mid-2000s. Falling uranium prices have been the primary reason for the decline, since this giant Canadian uranium miner is strictly focused on the nuclear fuel. At this point, there doesn’t appear to be a dramatic and imminent upturn in the uranium market’s future. However, it looks like Cameco is taking all of the right steps to get its mojo back when prices do start to turn higher. Here’s what you need to know before you buy Cameco stock.
We can’t control the price
Uranium is a commodity and the price of the nuclear material is based on supply and demand. Cameco makes heavy use of long-term contracts to help offset the impact of commodity price volatility, softening the blow of low commodity prices. For example, Cameco’s realized price for uranium was roughly twice the spot price in the first quarter. However, that doesn’t change the long-term trend of weak prices in the uranium market. It just makes it slightly less painful.
In fact, from a big-picture perspective, Cameco won’t really get back its mojo back until uranium prices rebound. That’s part and parcel of being a one-trick pony focused exclusively on the nuclear fuel. But Cameco isn’t sitting around and waiting for better days. It’s making moves right now to set itself up for a better future.
One of the most important moves Cameco has made is to trim its production. Its biggest effort on this front came in late 2017, when it announced plans to suspend production at its McArthur River and Key Lake operations. During the fourth-quarter conference call, it further noted that it would start buying uranium on the spot market because that was a cheaper option than mining the uranium itself. In essence, it preferred to fulfill its contractual commitments with other companies’ uranium so it could benefit in the future from its low-cost reserves when prices were higher.
This is the closest that Cameco can come to directly impacting the price of uranium. It is, in effect, pulling supply out of the market to help get supply and demand back into balance. When that happens, uranium prices should begin to rebound. Industry watchers estimate that Cameco’s cuts will reduce supply by 12% in 2018. Other large miners have been trimming production, too. Add these efforts to the expected future demand from continued construction of nuclear power plants, largely in Asia, and there’s a reason to have a positive outlook for uranium prices.
The problem is getting from the low prices of today to a future in which uranium prices are higher. Supply and demand aren’t going to balance out overnight. This is where the second most important effort taking shape at Cameco comes into play. The curtailments the company has been putting in place not only reduce the supply of the nuclear fuel, but they also lower its operating costs. On an absolute basis Cameco’s cash cost for mining uranium fell 38% year over year in the first quarter (planned production cuts led to higher per-pound figures, which can obscure the value of the cuts). It was also able to trim its SG&A expenses by nearly 15%.
Keeping its operating costs low is vital in a difficult market, but that alone isn’t enough. Cameco has lost money in each of the last two years. Although the red ink was partly driven by one-time costs for shutting operations, it has to have a strong financial backstop to survive periods of weakness like this. Luckily Cameco’s foundation is rock solid.
The miner’s cash balance increased by nearly 40% in the first three months of 2018. It didn’t issue stock or additional debt during the quarter, either. The extra money was generated by its business and is an initial sign of success in its efforts to adjust to the current market. The company’s current ratio, meanwhile, is a robust 6.65 times, suggesting it can cover its near-term bills more than six times over. That, by the way, was an improvement from around 5.2 at the end of 2017. A conservative management approach has left Cameco in a good position to deal with any near-term issues.
Looking further out, Cameco is also on solid footing. Long-term debt makes up around 23% of the company’s capital structure. That’s a modest amount of leverage for any company. Notably, it has held long-term debt at roughly the same dollar level for the last three calendar years. All in, it doesn’t appear to be leaning too hard on the balance sheet to keep itself going.
Some mojo around the corner
At the end of the day, Cameco getting back in the groove depends heavily on a recovery in uranium prices. Though it’s doing its part to alleviate the current supply/demand imbalance by trimming production, it still has to wait for the uranium market to improve. In the meantime, it’s cutting operating costs and maintaining a conservative approach with its balance sheet so it can get from today’s difficult market to a future in which increased demand from nuclear construction and reduced supply lead to higher uranium prices. That’s when Cameco’s mojo will be on full display — but it’s building the foundation for that upturn today.
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