Uranium miners like Cameco Corp. (NYSE: CCJ) can control only so much about their fates. The nuclear fuel they supply is, after all, a commodity, so its price fluctuates in tune with supply and demand. That's meant trouble for their bottom lines over the last few years, especially in the wake of 2011's Fukushima nuclear disaster in Japan. But Cameco and its peers are controlling what they can, and in doing so, they're setting up conditions that will lead to a big change for the industry.
Uranium prices spiked in 2010, but after an earthquake and tsunami struck Japan, causing the Fukushima reactor meltdown, prices for U3O8 went into a multiyear slump. The disaster led many developed countries to reevaluate their commitments to nuclear power, and from $72.60 a pound in early 2011, uranium spot prices cratered to a low of $18 a pound in late 2016.
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Japan shut down all of its nuclear power plants to ensure their safety, and only a fraction of its reactors have been brought back online. Germany swore off the fuel entirely. And the headwinds against building new nuclear power plants in general became stronger, notably in markets like the United States. Weak demand was suddenly a big problem for uranium miners. The resulting oversupply compounded the issue for the producers: Because of the glut, there was no need for utilities to rush into the market and lock in prices with long-term contracts, so they shifted to waiting and buying on the spot market as needed.
Changing with the times
Obviously, miners can't actually control uranium prices. They have to work with the tools they have. So as uranium prices fell, their response was exactly what you would expect -- they cut costs. This included pulling back on capital investments in new mines, which weren't needed because of low demand. They also curtailed production at existing mines in an effort to balance supply with demand.
Those supply reductions have begun to add up. Canada's Cameco, the world's largest publicly traded uranium miner, suspended production at its Rabbit Lake facility in 2016, taking 4 million pounds of annual production out of the global supply. It followed that up with a suspension at its McArthur River mine in 2018, which cut another 18 million pounds from the picture. Kazakhstan's state-owned Kazatomprom, the world's largest uranium producer, pledged to reduce production by 29 million pounds between 2018 and 2020. And smaller production cuts have also taken place or are planned in Australia and Africa.
Adding to this supply pullback is the fact that mines are depleting assets. Every pound extracted from an existing mine reduces the amount of uranium that will be available in the future. With reduced investment in new mines, supply will naturally decline.
Meanwhile, nuclear power plant construction has continued in developing markets such as China and India. There are 57 new nuclear power plants under construction today around the world. And Japan is slowly turning at least a portion of its nuclear reactors back on. The outlook for future demand appears to be relatively healthy.
At this point there is a big disconnect taking shape, but it won't hit markets for a few more years. Denison Mines (NYSEMKT: DNN), which is attempting to build a new uranium mine in Canada, has forecast that under current conditions, 24% of utility demand for the fuel will be uncovered by 2021. That figure, it asserts, will balloon to 62% by 2025. With supply falling and demand increasing, nuclear power plants are likely to face a pricing shock when they come back to market and try to lock in long-term supplies of uranium. There simply won't be enough available, and prices are likely to rise sharply.
Not there... yet
Since uranium prices hit their low of $18 a pound in 2016, they've rebounded to the $27 a pound range, which indicates that the curtailments in mining by giant suppliers like Cameco are starting to have an impact. However, Cameco isn't shifting its position, and is focusing only on running its highest quality and lowest cost mines to satisfy just its contracted commitments. It's one of the best ways to play the potential recovery in the uranium market.
Meanwhile, the red ink is still flowing: The miner lost money in seven of the last 10 quarters. However, it generated positive free cash flow in seven of the last 10 quarters, including in each of the last five. Long-term debt, meanwhile, is a reasonable 25% of the capital structure, and the company's current ratio is an impressive 6.1 times.
It looks like Cameco has the financial strength to make it through this supply/demand imbalance in the uranium market. And with the stock still down more than 70% from its 2011 peak, aggressive investors have a chance to buy into a well-financed company that looks positioned to benefit when uranium prices rebound. The early stages of that recovery may be starting to take shape right now, based on the increasing prices in the uranium market. And if the curtailments that Cameco and others have made play out as hoped, uranium demand will soon catch up to supply, and bring them even higher prices ahead.
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