About Cameco
When it comes to investing (and life in general), I consider myself to be a very level, unemotional person.
This being said, Cameco has been giving me recent headaches and I’ve been plagued with FOMO (or the fear of missing out), and as a result, if I’m not thinking about life, school, or the markets in general, as of the last couple of weeks, I’ve been thinking about this Canadian uranium producer.
While this company has actually been on my radar for a handful of months now, its stock price has risen around 502% since 2019, up about 30% over the last twelve months, and I’ve been kicking myself, but thankfully, learning a lot in the process, even if it does mean my hair is graying and thinning a little earlier than anticipated.
I keep reminding myself of an adage from one of my favorite investors of all time, Stanley Druckenmiller, discussing how the higher they (stocks) go, the cheaper they look, and I am here to emphasize that this is all too accurate of a phenomenon. It is absolute madness, because on an utmost objective basis, it makes no sense whatsoever. Time after time, investors are preached the importance of channeling our inner Buffett and being greedy when others are fearful, but as Druckenmiller also described, once you see that price go up and the trend set in and the price of a security continue to rise, every single bone in your body wants you to buy that security.
This is exactly what I’ve been experiencing with Cameco.
For those that aren’t as familiar with the firm, Cameco is a global leader in the production of uranium (the second largest in the world, to be more precise, behind Kazatomprom, based in Kazakhstan, where most of the world’s uranium deposits and supplies are, the country holding 15% of the world’s entire uranium resources) and nuclear fueling services, being a mission critical supplier for the nuclear energy sector.
There are many reasons that Cameco has been on my mind for the past few months, but hardly because of the company itself, but the applications and prospects of uranium globally moving forward, not only over the next 18-24 months, but well beyond.
My bull thesis for uranium includes the facts that there is growing demand for clean energy globally, especially as it relates to us being only in the early innings of the artificial intelligence (AI) data center buildout, with some of the world’s largest technology companies already investing in nuclear in order to power such initiatives, not to mention that on a comparable basis in terms of unit costs for a single nuclear power plant, uranium is actually a rather inconsequential cost compared to others, meaning that even if the price of uranium happened to increase ten times over, demand would still more often than not remain inelastic and those building plants would still pay for this crucial resource. Additionally, oddly enough, it is one of the few things that most republicans and democrats agree on, with incoming President Trump touting the merits of nuclear energy on multiple occasions, with democrats largely leaning in favor of clean energy, telling me that the future government spend set to envelop this commodity is going to plentiful, both in the United States, but also abroad, as other nations have pledged to integrate nuclear.
Also, on the rather elementary supply and demand front, in addition to global demand rising in the context of AI and the push for clean energy, the numbers speak for themselves, with 436 fully operating nuclear reactors worldwide, and 173 in the pipeline (as of early December 2024), in 2024 alone production is expected to fall short and meet only 89% of global reactor demand, with current commercial uranium inventories declining at a rapid rate, further putting a strong strain on supply, but a blessing for price.
It’s also worth mentioning how geopolitics plays into the bull thesis, in the primary sense that uncertainty and volatility stemming out of war tend to benefit commodity prices, uranium included. For example, with respect to the Russia-Ukraine war, the spot price for uranium more than doubled between January 2022 and January 2024, rising from $43.08 per pound to $100.25 per pound, the root cause being supply chain disruptions in the uranium market (Russia is a major uranium player) along with sanctions imposed on Russia, in essence cutting supply off from a major supplier, and when demand remains simultaneously high, it boosts the spot price that much more. Outside of this major war, other lesser-known geopolitical affairs impacting the price of uranium include a recent coup in Niger (yet another major uranium supplier).
Other perhaps unorthodox, more overlooked factors contributing to price strength through the lens of supply and demand include stockpiling behaviors observed in both utility companies and nations adding to their stockpiles given their fears of prolonged supply disruption, and unrelated production challenges in Kazakhstan, with the country announcing production shortfalls, inherently tightening supply, inherently pushing the price of uranium northbound.
Yet another current and (in my opinion) still developing tailwind lies within the general rule of thumb that when inflation is on the higher end or rising, commodity prices tend to follow, and while this is not a hard-and-fast rule, the chain of logic is there. More specifically, as inflation rises, utilities tend to fall into the basket of categories that maintain performance or even outperform given their pricing power (and given that it is far from a consumer discretionary category), being a sort of hedge in and of itself, given its role in baseload power generation, with nuclear power plants requiring a consistent supply of uranium.
Another note I’ll add on the supply front is that new uranium mines are known for having lengthy lead times in times of becoming fully operational (10-15 years), making it challenging to swiftly address supply shortfalls, myself viewing this as a more longer-term means of spot price support.
All of this to say, I feel like an idiot, but day after day I am taking my medicine and am all the more intent on not being hesitant about getting on the train, making it all the more painful being that I’ve seen it coming for some time now.
Lesson fully and fairly learned.
You need to respect the game.
At the end of the day, Cameco is a supply and demand play, so long as its core financials (which I am about to investigate momentarily) aren’t atrocious, and for the time being, I am hoping for a short-term supply glut to bring the price of uranium back down to this planet.
This is not a strategy, just me briefly wallowing.
And it also must be stated that just because the price of uranium is historically high, this doesn’t necessarily mean that its run isn’t going to be over anytime soon, but at the same time, my perspective of valuations has recently been evolving in that I’m not really keen on using valuations (think price-to-earnings ratios) as my one and only perspective on valuation. I’ve grown to view valuations as more as a sort of risk barometer, with myself viewing higher-end valuations as the market telling me that the future potential downside is increasing, with lower-end valuations telling me that future potential downside is decreasing, or a stock, market, commodity, or whatever, is derisking (this isn’t necessarily always the case, so remember that context matters).
Also, the uranium market and shifts and trends I just mentioned do not care about valuation metrics at all, so it is just silly to base much of any investment thesis on valuation alone.
If you’re one of those types of people that prefers to avoid the meat and potatoes and get the summary at the end, the headline version of my long-term bullishness on uranium (the commodity that Cameco deals in) is AI data center buildout (powered by nuclear), global government initiatives to implement nuclear, supply disruptions rooted in continued global conflicts, prolonged supply constraints globally due to production shortfalls in Kazakhstan, with a hint of shorter-term inflation (strength in stable, largely inflation-resilient utilities and consistent demand thereof, and increased production costs incurred by companies like this one, allowing it to increase its prices, also causing higher breakeven prices, supporting the spot price of uranium itself).
In the spirit of ensuring that this hasn’t become an analysis on uranium instead of Cameco, a brief word on the company is in order, including that Cameco is actually the owner of the world’s highest-grade uranium mine, Cigar Lake, among other facilities scattered across Canada.
For those that aren’t as familiar with mining companies or commodity markets in general, Cameco explores, mines, and mills uranium, the primary use of uranium being fueling nuclear plants. The company has two main revenue segments, including uranium mining and milling uranium concentrate and a fuel services segment, including refining (purifying the uranium ore concentrate in order to remove impurities), conversion (transforming the refined uranium into a gas called uranium hexafluoride (UF6)), and fabrication (involves converting enriched uranium into fuel assemblies, which are used in nuclear reactors in order to generate electricity).
In brief, some of the more bearish factors to ponder include threats of regulatory scrutiny along with the potential for higher rates (my personal forecast for the federal funds rate in early 2025), which will tighten liquidity, leading to a slower buildout of nuclear infrastructure in the short and maybe even intermediate term.
Still, my resoundingly bullish longer-term stance towards uranium remains, but, as always, I remain thoughtful, adaptive, and flexible.
Enough of my rambling, I am done licking my wounds, let’s walk through some of this company’s core financials.
Cameco’s stock financials
Headquartered in Saskatoon, Saskatchewan, Canada, Cameco is a $23.59 billion enterprise (according to its current market capitalization), with a stock price of $54.19, a price-to-earnings (P/E) ratio of 288.80 while issuing a regular annual dividend to its shareholders in the amount of $0.114, and while I am becoming not the biggest P/E zealot, it is nevertheless an important measurement in terms of risk tolerance in the market or for a particular stock, and my risk barometer is signifying to me that this company’s stock price (NYSE: CCJ) is trading at elevated levels, which anybody with a pulse could’ve determined through deploying some very basic technical analysis. Also, 288.80 is quite a ways away from the standard, fair value benchmark of 20, supplementing my initial valuation perspective on this uranium company.
This all makes sense given where we currently are in the uranium cycle, undeniably at the higher end of an upcycle, which started to ramp up starting in July 2023, again, rooted in the perfect supply-strain storm, including heightened supply chain concerns, geopolitical tensions resulting from the Russia-Ukraine war (leading to supply disruptions, due to the general move away from Russian suppliers as well as supply sources being cut off and transport being hampered due to the conflict), prevailing production shortfalls in Kazakhstan, global government environmental initiatives, along with Cameco lowering its production guidance in this era and political instability in other mining regions, such as the aforementioned coup in Nigeria.
It is absolutely no wonder why uranium has had a hell of a bull run over the last year and some change.
Suffice it to say I am inclined to wait for this bull run to decelerate and present a more attractive potential entry point.
I’m just hoping Santa Claus will bring me a uranium supply glut, but right when I get in, supply constraints exacerbate all of the sudden, but that’s just me being both wishful and selfish.
With respect to the company’s balance sheet, Cameco’s executives are in charge of $7.5 billion in terms of total assets and $2.9 billion in terms of total liabilities, posing a very durable balance sheet, with the company hosting a rather comforting ratio between what it cumulatively owns versus what it cumulatively owes. In getting more from its balance sheet, it can also be found that the company has a debt-to-equity ratio of 22.9%, meaning that for each dollar of shareholder equity, Cameco has 22.9 cents in debt, also hosting an interest coverage ratio of 5.6x, indicating that management can comfortably tend to its interest expenses.
Onto the company’s income statement, Cameco’s annual revenues since year-end 2019 up to year-end 2023 have stayed fairly consistent year-over-year, hanging at around $1.4 billion each year between 2019 and 2022, notably rising to just below $2 billion in 2023, this rise being attributed to the Russia-Ukraine war (again, supply chain disruptions causing the price of uranium to rise) and strong organic demand given my previous mentions of AI and the push for global adoption of nuclear energy. While hardly anybody can predict how the company’s revenues are likely to pan out in 2025 or even bleeding into 2026, I am personally expecting continued growth driven by favorable supply and demand dynamics, and interestingly, the company has recently locked in contracts with uranium price ceilings ranging between $125-$130 per pound, and a lower-bound range of $70-$75 per pound, telling me that this company has it on good authority that the uranium run isn’t likely over.
In the context of its cash flow statement, specifically its total cash from operations, Cameco’s (during and between 2019 and 2023) have shown both the good and the bad, which makes sense given recent circumstances. Primarily, its total cash from ops have ranged between $45 million (2020) and $520 million (2023), this low being induced by COVID putting a great deal of pressure on its operations and market conditions, but, something I think that’s worth mentioning is that the actual price of uranium remained stable, trading at around $25 in this era, prior to its immense rise in the years that followed, uranium as a commodity showing off its relative resilience. As one might’ve guessed, its most recently reported figure, also being a relative high, was mostly supported by the elevated price of uranium and increased sales and production and volumes, which widened this company’s margins.
Suffice it to say that so long as the price of uranium holds up or even mildly increases (which I believe to be the most likely scenario for 2025), this company is going to be able to sustain higher margins and extract more cash from its operations, although anything can happen, and even a somewhat muted glut in supply could do some damage to the spot price of uranium, and this company.
Cameco’s stock fundamentals
Per its most recently reported figures on Charles Schwab’s platform, Cameco has a net profit margin of 4.16%, which, most objectively, isn’t all that phenomenal.
However, in the interest of complete candor, while profitability is important, it frankly isn’t something that I am prioritizing in my analysis of this particular enterprise, as I am more concerned with this company’s growth with AI and other tangible demand drivers, not to mention that this figure is subject to change for any major company that directly deals with sometimes volatile commodity price swings, which impact its top and bottom lines.
All in all, it’s important, but for the time being and at least for the next handful of years, it isn’t something I am going to be checking up on every single second of every single day, even if the company’s net profit margin isn’t the highest, which is mostly due to the scale of its operations (it is significantly larger than the vast majority of its competitors, contributing to higher operating expenses), also prioritizing nabbing more market share and inking more long-term contracts over short-term profitability, which is certainly aligned with my investment values, and the most simple fact of the matter in that mining uranium involves a lot of operational costs, as mining in general is a markedly capital intensive endeavor.
Should you buy Cameco stock?
It is pretty rare when I am bullish on the short, intermediate, and long terms of a company, but this is the case with Cameco.
Uranium is here to stay, and I am mainly just intently waiting for the price of uranium to come down to more risk tolerable levels, as there seems to be a lot optimism already priced in, and even though I am clearly bullish on the future of uranium, I think this company’s stock (NYSE: CCJ) is best categorized as being overvalued in the short-term with the prospects of uranium being undervalued in the long run, and I must remain disciplined and not chase price.
When Druckenmiller explained that the higher they go, the cheaper they look, he wasn’t lying.
Still, prior to concluding this article, I’d like to note a few of the risks associated with the uranium market and Cameco itself. Some of the potential risks I see out there include the potential for unfavorable supply and demand dynamics (but still, such dynamics could be conducive towards presenting an attractive opportunity), general commodity price volatility, recessionary pressures (causing a slowdown in production and buildout in nuclear infrastructure should rates creep back up, which I think they will over the next 18-24 months, mind you), as well as a long-standing tax dispute between itself and the Canada Revenue Agency (CRA), which could lead to significant tax liabilities if the future rulings go against the miner, and also general regulatory challenges associated with building out nuclear globally, as there will assuredly be plenty.
For the sake of considering the next 18-24 months, especially for those that have already enjoyed the ride so far and when incorporating my previous comments, it makes the most objective sense to designate Cameco’s stock with a “sell” rating until the next bout of downward price pressure on uranium, mostly referencing the next supply and demand tilt, where the uranium market becomes oversupplied and/or demand in the short-term weakens, fervently knowing that when these dislocations occur, they will not last for long.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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