Cameco: Better Times Ahead?

05/11/2015 8:00 am EST


Vivian Lewis

Editor and Publisher, Global Investing

Hot off the presses from Saskatchewan, our recommended uranium producer saw results fall short of Wall Street and Bay Street expectations; nevertheless, it is the forward looking stuff that makes this stock a favorite of mine, explains Vivian Lewis, editor of Global Investing.

Cameco (CCJ) posted a net loss attributed to equity holders for the quarter of C$9 million (2 loony cents per share diluted) compared to net earnings of $131 million (33 cents/share) in Q1 2014.

This resulted from higher mark-to-market losses on forex derivatives. In addition, Cameco posted revenue of $556 million or US$447.7 million, also below forecasts by the brokerages.

The uranium market was flat from end-2014 with continued low contracting activity. But looking ahead, China has begun approving new reactor projects after a hiatus following the 2011 Fukushima disaster, and four reactors under construction bring the total to 26 operating reactors and 23 under construction.

On the supply side, production issues at several large uranium mines threaten to tighten supply in the coming year, although the market impact has been slight.

Japan is unsure about reactor restarts in 2015, with both negative and positive developments in the courts like the recent injunction preventing the restart of Kansai Electric's two Takahama units.

This adds uncertainty about the Japanese government's restart plans. Moreover five older reactors will not apply to restart and will be permanently retired.

The frontrunners for restart continue to be the two Sendai reactors—poised to restart this summer—following final regulatory approvals and pre-operational safety checks.

Without an uptick in fuel demand, operating reactor fuel needs are well covered in 2015; as such, there was only modest movement in the uranium spot price from late 2014. The spot price does show support just below $40 (US).

Canada's Nuclear Cooperation Agreement with India—and Cameco's subsequent supply agreement with India's Department of Atomic Energy—present an opportunity in the world's second fastest growing nuclear fuel market.

The sale, into a market previously closed to Cameco, provides 7.1 million pounds of uranium concentrate under a long-term contract through 2020. Of course, CCJ hopes will lead to a long and positive relationship with a new customer.

And I also expect the loony to regain more of its 2014 losses against the greenback, although I hope after its forex losses in Q1, CCJ under CEO Ted Gitzel will lighten up on its currency hedging.

Raymond James boosted Cameco to outperform from neutral. CCJ's US$ target price was raised to $28 from $22. The vexed Cigar Lake mine was said to have “turned the corner,” and as result, the share can be “re-rated” for “a potential upswing.”

Looking ahead, I expect that this producer of 16% of the uranium used worldwide will become a boom rather than a bomb stock this year.

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