02/10/2006 12:00 am EST
Elliott Gue has turned his analytical skills towards the energy arena, with the launch of his The Energy Strategist. Here, he explains why it may be time for investors to look at Cameco, a Canadian firm that is a leading player in the uranium market.
"Cameco Corp. (CCJ NYSE) has fallen in price since it reported earnings in late January, missing analysts' estimates for the fourth quarter. But based on my analysis, I see no reason to change my bullish opinion. It appears that exploration and administration expenses were higher than analysts had been modeling. Stock-based compensation was one major contributor to that jump. Compensation rose because Cameco's stock has performed so well over the past few quarters.
"On the operations front, I see no major changes. Cameco continues to benefit as older uranium supply contracts signed in a much less favorable pricing environment are now expiring and are being replaced by much for favorable contracts. Uranium spot prices also continue to rise, so Cameco's realized prices on new contracts, and market-based sales are impressive. Cameco has also been able to sign contracts that include escalation clauses.
"The company still hasn't received regulatory approval to expand production at two of its bigger mines, something that could be a concern, but this is hardly unusual as regulatory processes can be lengthy. In addition, Cameco management noted the reevaluation of nuclear phase-out plans currently underway in both Germany and the UK. Cameco also noted that it has been talking in depth to China and that China is likely to be a major customer. According to Cameco, China's uranium reserves are not commercial for large-scale production.
"What's more, the Russians are currently supplying roughly 24 million pounds of uranium annually to a world market of 175 to 185 million pounds. This uranium is coming not from mines but from decommissioned Russian nuclear warheads. That convention is set to expire in 2013 and there is significant speculation that it will not be renewed. The reason is that Russia's uranium production has been low in recent years and they will likely need the uranium to run their own plants. This is another key contributor to tightening supply as we look out further into the future.
"The bottom line is that Cameco appears to be on the right track and its long-term story is unchanged. The stock had rallied aggressively for months and it's likely short-term expectations simply were too aggressive. As the stock starts to stabilize from the initial sell-off it will offer an attractive opportunity for investors to jump into the stock and establish positions."