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Cameco Continuing to Do Well With Higher Uranium Prices

- By Holmes Osborne, CFA

Cameco Corp. (CCJ) is the second-largest uranium miner in the world. We like uranium because the demand and supply is easier to keep track of than other commodities. The number of nuclear reactors is known and so are the places where the ore is mined. Uranium prices have rebounded strongly.

We bought Cameco two years ago and are at a 10% profit (not including the dividend). Cameco is probably the easiest way for an American to invest in uranium. The stock trades for $12.21 and there are 395.8 million shares, bringing the market cap to $4.832 billion. Diluted earnings per share are a loss of 10 cents. The dividend is 8 cents and the dividend yield is 0.65%.

Sales were 2.4 billion Canadian dollars ($1.824 billion) in 2014, rose to CA$2.75 billion in 2015, fell to CA$2.2 billion in 2016 and fell further to CA$2.2 billion in 2017. Because Cameco has cut production, it now must buy uranium to deliver. The company plans on mining nine million pounds in 2019 and delivering 10 million to 12 million pounds.

Cameco had a dispute with the Canadian government over taxes. The company has received a favorable ruling and hopes to get its CA$303 million in restricted cash back.

In November of 2016, when it was thought that Hillary Clinton would win the presidency, uranium spot prices were $18 a pound. In January 2017, prices reached $24 a pound before cooling off. The price was then in the low $20s for the rest of 2017. In 2018, the price ended the year at almost $30. As low prices have caused miners to shut-in production, the price has risen.

The largest miner in the world, Kazatomprom, located in Kazakhstan, announced in 2017 that it would cut production by 20% for three years. Estimates are for annual production to be at 135 million pounds, down from 161 million pounds in 2016.

In January 2017, 449 commercial nuclear reactors worldwide were producing about 391 gigawatts of electricity. Here is the problem. Many people don't like nuclear. Germany plans to shut all eight of its reactors by 2022. France has 58 reactors producing 72% of its electricity. It hopes to reduce this to 50%. I assume France wants more wind and solar. China has 36 reactors and 21 under construction. The CEO of Cameco said there are 55 reactors under production. Demand in 2035 is projected to fall to 331 gigawatts to a rise of 568 gigawatts according to the Organization of Economic Cooperation and Development.

Half of uranium comes from in situ leaching, 31% underground, 13% open pit and 6% is by product from other mining operations. In situ is pumping chemicals underground into rock. The chemicals cause the ore to dissolve and the liquid is pumped to the surface. Australia holds 30% of identified deposits, Kazakhstan 14%, Russia 8% and Canada 8%. Kazakhstan produces 39% of uranium, Canada 22% and Australia 10%. You need to read the report from the International Atomic Energy Agency. It will tell you everything that you need in greater detail.

Of course, nuclear receives a lot of competition from natural gas, wind and solar, but the Atomic Agency still believes that nuclear will be used. Nuclear is clean and safe (but not in everyone's opinion).

The Department of Energy may invest $115 in an enrichment plan in Ohio. An interesting company went public last year in England named Yellow Cake. The company holds 8.1 million pounds in a facility in Ontario, Canada, which is owned by Cameco.

So is uranium heading up and is Cameco still a buy? We think so. It seems the industry is leery about producing too much and getting burned. The two largest miners want to see the price climb higher before they produce too much. Cameco is the safest way for Americans to invest in uranium. If uranium continues to head up, so will Cameco's stock.

Disclosure: We own shares of CCJ.

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This article first appeared on GuruFocus.