A Uranium Stock That’s Not Radioactive

08/06/2008 12:00 am EST

Focus: STOCKS

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Gordon Pape, publisher of Internet Wealth Builder, says Cameco, the world's largest uranium producer, offers good value at current prices.

Cameco Corp. (NYSE: CCJ) is the world's number-one producer of uranium. With oil apparently in retreat, uranium could be the next big commodity story. The spot price is down more than 50% from a year ago and with increasing talk, and political commitment, to build more nuclear reactors, we could see some interesting developments in the next few years.

Uranium has a boom-and-bust history and recently it has been going through a bust stage. The sharp decline in price was attributed to oversupply.  But demand is slowly increasing, just as many suppliers, including Cameco, are warning of production shortfalls. We're not going to see prices back at $130 a pound any time soon, but a gradual upward move from here seems likely.

Cameco, headquartered in Saskatchewan, Canada, is the world's largest uranium producer, accounting for 19% of global production from its mines in Canada, the US, and abroad. It holds more than 500 million pounds of proven and probable reserves and has premier land positions in the world's most promising areas for new uranium discoveries. 

[Last year the stock] reached a high of $52.33 on the NYSE. Then Cameco was hit by a string of misfortunes including a flood at its Rabbit Lake operation in northern Saskatchewan that forced the temporary closing of the mine.

The share price immediately plunged and has since recovered, but is still well down from last October's high. (It closed below $33 Tuesday-Editor.)

Cameco's Saskatchewan holdings are the richest high-grade reserves in the world. Moreover, I believe that international demand for uranium will rise in the coming years as more countries choose to build new reactors in response to the combination of high oil and natural gas prices and growing public demand for action to curb greenhouse cases.

RBC Capital Markets forecasts that Cameco will earn $2.63 a share in 2008, increasing to $2.83 in 2009 and $3.04 in 2010.

[There are some risks, however.] Although Cameco owns some of the world's richest uranium deposits, the geology of the region in which they are located creates the potential for frequent mishaps. So, investors have to be prepared to live with headlines such as "Flood shuts down Canada's largest uranium mine."

This is not a stock for the faint of heart, because of the constant risk of a production disruption and a resulting drop in the share price. But I believe that at current levels the price represents excellent value. Long-term investors who want to participate in the next nuclear boom by owning shares in the world's number-one uranium producer should add Cameco to their portfolios.

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