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Message: IS URANIUM THE NEXT OIL?
| Gordon Pape - The Canada Report |
 Canada is a veritable treasure chest of resources wealth – oil, natural gas, potash, coal, copper, gold – you name it, Canada has it. But one commodity that has been overlooked lately is uranium so this week let's zero in on the number one producer in the world – which just happens to be, you guessed it, a Canadian company. It's Cameco Corp. (NYSE: CCJ). I've been watching it for some time and I believe we have now reached the point where we should start to build a position. 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. A year ago at this time, the world spot price for U3O8 uranium concentrate, which is also known as "yellowcake", was over US$130 a pound. Recently, yellowcake was trading on the New York Mercantile Exchange at $65 a pound. The sharp decline in price was attributed to oversupply. But the situation is changing. 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 accounts for 19% of global uranium production. 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 in Canada and Australia as part of an intensive global exploration program. It also has a major new development in the central Asian country of Kazakhstan from which it hopes to produce 5.2 million pounds of uranium annually by 2010. The mine entered production this year but the company says a shortage of acid supplies may cause it to miss its initial production target by 50%. This is a company that has had more than its share of problems and the stock price has reflected that. In late October 2007, it 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 and the permanent sealing-off of the affected area. The mine had produced four million pounds of uranium in 2007 prior to the flood. The share price immediately plunged, falling to the $35 range on the TSX in December. It rallied briefly, and then dropped again, hitting a 52-week low of $30.78 in January. It has since recovered but is still well down from last October's high. I believe that at current levels the price represents excellent value. Cameco's Saskatchewan holdings are the richest high-grade reserves in the world. In some cases, the uranium content of the ore is as high as 24%. Moreover, as mentioned earlier, 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. Republican presumptive nominee John McCain says he wants to see 45 new nuclear reactors built by 2030. According to the World Nuclear Association, there are currently 34 power reactors under construction in 11 countries, most of them in Japan, China, Russia, and South Korea. In May, Cameco reported first quarter net earnings of $133 million (37c per share, fully diluted). That was 125% higher than in the first quarter of 2007 due to improved results in the uranium and gold business, however the results fell short of analysts' estimates which were in the 40c a share range. Revenue was $593 million, up 45% from the same quarter last year. 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. In a review of first-quarter results, the brokerage firm wrote: "Cameco's realized profits and earnings are forecast to increase strongly over the next five years. Forecast strong free cash flow beginning in 2008 holds out the possibility of further share buybacks and dividend increases." 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. As one analyst said: "Some of their richest mines are sitting on top of what amounts to a swamp." The company's history verifies the dangers in mining the uranium ore. In 2006, a cave-in and flood at the Cigar Lake development (of which Cameco is a 50% stakeholder) delayed bringing it into production for several years and the company does not expect it will begin operations until 2011 at the earliest. In 2003, an exploratory crew working in the McArthur River mine, which contains about half of the company's total reserves, hit a previously-unknown underground stream. Water gushed in, a section of the roof collapsed, and the whole operation had to be temporarily shut down. The reality is that no matter how skilled the Cameco staff is, geology dictates that something is likely to go wrong at some point. So investors have to be prepared to live with headlines such as "Flood shuts down Canada's largest uranium mine." So 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 long-term investors who want to participate in the next nuclear boom by owning shares on the world's number one uranium producer should add Cameco to their portfolios. Gordon Pape is editor and publisher of The Canada Report |
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