June 23, 2008 - Demand for enriched uranium is projected to heat up with the anticipated construction of a new generation of power plants to generate electricity without contributing to global warming. Advocates contend that nuclear power is badly needed as a clean, carbon-free source of energy. We reluctantly realize that nuclear will inevitably be in the mix of alternative energies being adopted on a much wider scale for the foreseeable future. Our reluctance lies primarily in the concern that nuclear energy could very well bring its own set of problems that rival fossil fuel sources – the biggest of which, in our opinion, is the fact that to date, nobody has produced an acceptable storage solution for spent fuel rods.
In any case, in light of the fact that we are focused on covering clean tech and alternative energies here at Small Cap, and in light of the fact that as realists, we accept the fact that the nuclear industry is poised for substantial growth for the foreseeable future, we thought we should begin talking about some of the key companies to look out for.
Cameco CP (NYSE:CCJ) is one of the world’s largest uranium companies. It also owns 53% of Centerra Gold, Inc. which owns and operates two gold mines, a 31.6% stake in a nuclear electricity generation business (Bruce Power Limited Partnership) and operates a fuel services business. The uranium business accounts for 56% of the company’s revenue posted in the most recent quarter.
Despite the fact that the market for uranium is heating up, Cameco’ stock took a hit with delays on one of its mines that flooded while the property was in development. Regardless of the delays (which have been priced into the stock at this point), the company continues to post pretty solid performance (based on legacy contracts).
Financial Performance:
• Reported Q1 earnings of $133 million, or $0.37 per share diluted, up 125% on a Y/Y basis on revenue of $593 million, up 45% on a Y/Y basis.
• Gross profit margins for Q1, 2008 were 50%, up from 33% on a Y/Y basis.
• Sales volume for uranium increased to 7.4 million pounds, up from 6.3 million pounds on a year-over-year basis.
• Production volume declined to 3.7 million pounds from 4.5 million pounds on a Y/Y basis.
Recent Highlights
• Bought 24% stake in a General Electric (NYSE:GE), Hitachi (NYSE:HIT) joint venture.
• Signed a deal with Tenex to purchase uranium derived from dismantled Russian nuclear weapons. Under the terms of the deal, Cameco will purchase about 7 million pounds of uranium each year through 2013. In addition, the pricing Cameco gets through 2010 will be based on an agreed to price back in 2001, when uranium prices were substantially lower. Cameco has agreed to a new pricing structure on the uranium it purchases from 2011 to 2013. In what seems to us to sound like a really bad joke, Cameco originally entered into an agreement with Tenex with two partners named AREVA and Nukem back in 1999.
• Established joint venture entity with Kazatomprom called Ulba Conversion LLP which will result in a conversion plant for uranium. The two companies are also involved in another JV called Inkai which is a recovery mine and mill with plans to ramp to 5.2 million pounds in annual production in 2010.
Our take:
We don’t see too much upside in the near term from current levels based on what we believe is a modest assumption for top-line growth in 2008 at 19% on a Y/Y basis. Weighted against the current P/S multiples, we think this would turn out a $41 stock price, and if we weighted against our forecasted earnings (based on 19% assumed top-line growth), we think the stock is already factoring in the price looking – forward. The wild-card for us is uranium prices, which, if they rally like they did last year, can create substantial upside in the company’s sales volume and earnings and would also warrant upward adjustments in our valuation metrics.
What the analysts are saying:
• June 11 – UBS upgrades to Buy from Neutral. The stock closed at $37.63.
• March 11 – HSBC Securities downgrades to Neutral from Buy. The stock closed at $37.73.
• February 22 – BMO Capital Markets initiates at Market Perform. The stock closed at $36.94.
• February 14 – RBC Capital Markets upgrades to Outperform from Sector Perform. The stock closed at $36.12.
Disclosure Note: SCPEditor does not hold any position in CCJ.