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Cameco: Capitalizing on Current Opportunity in the Uranium Space

Less availability of physical uranium from the spot market coupled with growing uncertainty of supply (most notably from Kazakhstan) has slowly dictated to the market that prices must rise in order to reflect production economics needed to ensure reliable supply. That said, the uranium spot price has increased by approximately 40% since last year, while the term price (where the vast majority of utilities contract) has increased by nearly 22%. Amid a backdrop of increased supply unreliability, thus far in 2022 (essentially 5 weeks) Cameco (CCJ) signed nearly 40M lbs worth of term contracts, a figure that easily eclipses the 30M lbs signed over the entirety of 2021.

On the operational front, Cameco announced that it plans to re-start the McArthur River mine later this year, with a target to ramp up to 60% of nameplate capacity by 2024 (while also reducing the operating rate of Cigar Lake by 25%). As such, the goal is to produce approximately 11M bs (attributable) over FY/2022, increasing to approximately 18M lbs (attributable) by FY/2024. This is yet another positive development seeing as the McArthur River mine has been placed on care & maintenance since 2018 and was not expected to restart until 2024 or 2025.

On the financial front, Q4/2021 earnings were surpassed expectations, however the financials were not nearly as material as the operational and contracting update. Revenues came in at C$465M (consensus C$459.8M, C$550.0M in Q4/2020) and adjusted EPS of C$0.06 (consensus C$0.01, C$0.12 in Q4/2020). As of December 31, 2021, the company held $1.3B in cash and equivalents and $996M in LT debt. Note as well that the company announced a 50% increase to the annual dividend, from C$0.08/common share to C$0.12/common share. Though always carrying a premium multiple on most metrics (EV/EBITDA, P/NAV) due to its status as one of only two large, publicly listed uranium companies, Cameco continues to rank well compared to large cap mining peers on a P/B basis.

Though the uranium investment space is a rather small one (the notable, senior public miners being London listed Kazatomprom and Cameco) and the market depth for the underlying uranium commodity is more opaque and less liquid than for traditional metals such as gold, silver, copper, zinc and iron ore, Cameco nevertheless is highly correlated to the XLB Materials Sector ETF, with an R-squared of +0.88. This is very much inline with base metal peers of similar size and liquidity, which mine more traditional gold, silver, iron ore or copper instead .

There has been a lot of attention on the uranium sector since the start of the year as public protests in Kazakhstan (the world’s largest uranium producer) have led to supply concerns along with Kazatomprom (the largest uranium producer) lowering FY/2022 production guidance as announced on January 27. Moreover, in conjunction with the current Russia/Ukraine tensions, more focus has been placed on the potential cancellation of Nordstream2 and the need for alternative energy supplies into the European Union. Just a few weeks ago, in a monumental move the EU proposed to label nuclear power as a “Green Investment” due to its zero carbon footprint, while France has recently proposed to re-launch a nuclear power plant construction cycle with plans for a 30B program to build 14 new reactors and reach carbon neutrality by 2050. Note that even before the French announcement, on the global scale approximately 100 nuclear power plants have been ordered for or planned for while an additional 300+ reactors have been proposed. In the nearer term, a total of 13 newly built nuclear reactors are expected to start up this year alone with an additional 15new reactors expected to be operational in 2023.

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