Cameco Corporation (CCJ 2.94%), the world's largest publicly traded uranium miner, has suffered along with the price of uranium. The miner's business has been repositioned to handle more bad news, but it stands ready to take advantage when the nuclear fuel turns higher again. Still trading near 10-year lows, it may be time to get greedy with Cameco Corporation stock.
The trouble spot
The biggest problem Cameco is facing is a supply and demand imbalance in the uranium market that's pushed the price of the nuclear fuel to painfully low levels. Most investors see a bleak future. CEO Tim Gitzel ticked off the negatives during the company's fourth-quarter conference call in February:
We have seen a reduction in global demand expectations driven by early reactor retirements, delays in reactor construction programs, a slower than expected restart process in Japan, and by changes to government administrations that have created additional uncertainty for the nuclear industry.
Image source: Getty Images.
The end result for Cameco has been two consecutive years of red ink. It also trimmed its dividend from 0.40 Canadian dollars per share per year to just CA$0.08. And yet the CEO described himself as "cautiously more optimistic" during the conference call.
Prepared for better days
There are solid reasons for the positive tilt in Gitzel's mood. First and foremost, Cameco remains financially strong. For example, even after two years of losses, long-term debt only makes up about about 25% of the capital structure. That's a modest amount of leverage for any business. The company's current ratio, meanwhile, is a robust 5.1 times. That suggests the miner can pay its near-term bills five times over. There's no question that Cameco is dealing with a difficult pricing environment, but that hasn't eroded its financial foundation -- the balance sheet remains strong.
On the earnings statement, a quick review of the last two years shows that a portion of the red ink is attributable to one-time charges. Those costs were necessary and shouldn't be ignored since Cameco was curtailing production to better align its business with the current market environment. But here's the thing: The CEO explained that it doesn't make sense to mine Cameco's uranium at current prices because the company can buy low-cost uranium on the spot market to fulfill its supply commitments. The end result is that Cameco gets to leave its uranium in the ground for better days. Cameco is, effectively, taking advantage of the weak market, even if that effort results in some near-term losses.
Uranium demand should improve as planned reactors get built. Image source: Cameco Corporation.
The last bit of positive news that should make investors feel positive about the future is that the long-term outlook for uranium hasn't materially changed. For example, there are 57 reactors under construction today, most of which are being built in developing markets, including China and India. This is important because developing markets are set to see relatively large electric demand growth compared to developed nations, pushing the world's demand for power up nearly 50% by 2035. Nuclear is still set to play a material role in fulfilling these increasing needs.
Things are better than they look
At the end of the day, nuclear power remains a vital and clean source of electricity that developing nations are planning to include in their expanding energy portfolios. That, coupled with curtailments by industry giants like Cameco, should help restore balance to the supply and demand equation. And, as supply and demand align, more rational pricing should take hold.
While Cameco is waiting for that process to unfold, it has hunkered down so it can better weather the low-price environment that exists today. That includes maintaining a rock-solid balance sheet and ensuring that it leaves the uranium assets it has in the ground so they can be mined when prices are higher. There's no question the uranium market is in a bad place right now, but Cameco is ready for it. And with the stock price at decade lows, now might be a good time to get a little greedy, here, so you can take advantage of Cameco's turnaround potential.
