Cameco Should Ride The Uranium Boom
Cameco (CCJ) is the world's largest uranium mining and processing company, which may make sense in a thematic approach related to the current boom in nuclear power plant construction and the potential nuclear arms race in the Mid-East between rival states.
The demand for nuclear fuel is satisfied either via primary uranium production or via secondary sources, such as inventory reductions, recycling of fissile materials from spent fuel reprocessing or from military stockpiles or tails re-enrichment. Cameco is an integrated company involved in all of these phases of uranium and nuclear fuel supply. The major mines are owned by a small number of companies, one of which is Cameco.
Nuclear power has increased its share in worldwide electricity production from a meager 2% in 1971 to roughly 17% in 1990, before plateauing, but is now on the rise again. In the three leading industrialized areas, the European Union, Japan and the United States, nuclear energy provides between roughly one-third and one-fifth of total electricity.
Uranium is a dicey commodity with a history littered with business and speculative failures. It went from boom to total bust and now it's in boom phase again. It's a commodity with all sorts of detractors for social and environmental responsibility reasons. Mining, refining and using it for peaceful purposes has sickened and killed many people. That said, it is in boom phase, as the two charts below demonstrate.
The first chart is the Uranium price from 1988 though YTD 2006. The second chart is the 5-year price history for Uranium. Basically, Uranium is up about 600%.
There are currently 440 nuclear reactors in the world, with 16 scheduled for decommissioning and 80 under construction for completion within 10 years. That amounts to an approximate 15% increase in demand for uranium for peaceful purposes. Unfortunately for humankind, but good for speculators, the signs of a nuclear arms race in the Middle East are become every more visible.
Currently Canada is the world's largest producer of uranium [29%], followed by Australia [22%], then several former Soviet states or satellites [Kazakstan, Russia, Uzbekistan, Ukraine, and the Czech Republic] which collectively produce 25% of the world's supply. The US, by the way, produces only 2% of world supply.
World demand for uranium [U3O8] is 170 million pounds today, and is predicted to rise to 187 million pounds by 2010. However, when the 66 net new nuclear plants are operational by about 2016, demand should be about 15% greater than today, even if the military component does not materialize. That prospect is creating an exploration boom.
The mining world is dominated by major companies, but only one public company of investable size -- Cameco (CCJ) -- is a integrated "pure play". There are many small and marginal companies, such as UREX Energy Corp (URXE) which have no operating mines and no profits, but active exploration programs. Then there are large-cap and mega-cap diversified companies with uranium operations, such as General Electric (GE) and BHP Biliton (BHP). Finally, many mining companies are state controlled.
As an integrated operator engaged in all phases of the industry, Cameco has recently entered a contract with the Russian company TENEX to process nuclear material from decommissioned Soviet nuclear bombs.
Unlike "wildcat" Uranium exploration companies, Cameco is an integrated uranium company with mining, refining, fueling and decommissioning operations.
Cameco also owns 32% of a nuclear power plant, and 52% of Centerra Gold (CG), a gold mining company.
Centerra Gold is a gold mining and exploration company, engaged in the acquisition, exploration, development and operation of gold properties in Central Asia, the former Soviet Union and other emerging markets.
The market capitalization of Centerra is $C 3b, which converts to just under $US 2.7b. Cameco's interest in Centerra is equal to roughly 10% of Cameco's market capitalization.
Cameco has an approximate $US 12.4b market capitalization, a 0.4% yield, a Reuters street opinion of out-perform and a 1 year target price of $40 compared to a current $35 market price. Its return on equity is 17.5%, but Y-O-Y quarterly earning are down about 9%. The P/E is 34 and the EV/EBITDA ratio is a rich 27.6. The Current Ratio is about 2.5 and the tangible net worth is $US 1.78b, The revenue is $US 1.1b and the net income is $US 200m.
CCJ is a healthy company in a booming industry. It's worth a look as a niche basic materials company in what appears to be a long term rising demand cycle. We aren't technical analysts, but the price chart does not currently look good, although the fundamentals of uranium in all its forms does look pretty good.
We are not recommending purchase of CCJ, but are suggesting that you take note of it and keep it is mind when and if you decide that a uranium theme is in play.
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This article has 2 comments:
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Jeremy Krinn
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2 Comments
Dec 20 10:01 AM-
QVM Group
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238 Comments
My Website
Dec 24 10:39 AMThe concept of the company as a hard asset holding company is similar to that of the gold and silver ETFs traded in the US (GLD, IAU and SLV), however the manager of the assets, Dennison Mines (TSE symbol DML), does not remotely compare to Barclays Bank or State Street Bank which manage those gold and silver ETFs.
The company is managed entirely by Dennnison Mines, a small company, that does not have enough size, history or institutional character for my taste to be the sole party responsble for the uranium participation company.
The amount of information available at the websites for Dennison Mines and for Uranium Participation Corporation are less than I would consider adequate for my purposes and does not give me confort as to the quality of the opportunity.
Dennison Mines' website is still under construction and they do not provide links to download financial statements and the pages to present management have "Under Construction" images instead of information. The company itself is just recently formed by merger of two others.
The participation company shares appear to be trading at a substantial premium to the underlying NAV. The Nov 30 month-end NAV report showed $CD 8.75 per share NAV while a graph of stock prices elsewhere on the site seemed to show approximately $12.50 stock price (a 43% premium). That makes no sense to me as an opportunity.
Only one analyst covers the participation company and that analysts is not a well known name in the USA. You need to do a lot of research before committing money to a situation of that size and character.
My advice is that there are better ways to make money with less risk and far, far more information. AVOID both "U" and "DML"
Here is the DML contact information:
Investor Contact:
Sophia Shane
Denison Mines Corp.
Atrium on Bay
595 Bay Street, Suite 402
Toronto, Ontario
M5G 2C2
1-888-689-7842
sohphias@namdo.com
E. Peter Farmer, President (416) 979-1991 Ext. 231
James Anderson, Chief Financial Officer (416) 979-1991 Ext. 372
Here is the contact information for the one analyst following DML:
Justin Reid
Sprott Securities Inc.
Royal Bank Plaza
P.O. Box 63
South Tower, Suite 2750
Toronto, Ontario
Canada M5J 2J2
Telephone: 416-943-6429
Facsimile: 416-943-6499
Toll Free: 1-800-461-2275
www.sprott.ca/research...
Here is the contact information for Uranium Participation Corporation (U)
Toronto Stock Exchange (TSX.com) Date of Listing: 09 May 2005
Company formation: March 15, 2005
Address:
595 Bay Street
Suite 402
Toronto, ONT
M5G 2C2
Canada
Phone:
(416) 979-1991
Fax:
(416) 979-5893
Web Address:
www.uraniumparticipati...
Investor Realtions Email Address: scolman@denisonmines.c...
Investor Relations Professional: Ms. Sheila Colman
Here is some descriptive information about Uranium Participation Corporation from their website:
Uranium Participation Corporation
Uranium Participation Corporation is an investment holding company which invests substantially all of its assets in uranium, either in the form of uranium oxide in concentrates ("U3O8") or uranium hexafluoride ("UF6"), with the primary investment objective of achieving appreciation in the value of its uranium holdings. The objective of the Corporation is to provide an investment alternative for investors interested in holding uranium. Denison Mines Inc. is the manager of Uranium Participation Corporation.
Securities of Uranium Participation
Uranium Participation Corporation’s securities are listed and trade on the Toronto Stock Exchange. Its common shares trade under the symbol U. It has two series of warrants listed on the TSX: U.WT (exercise price $6.25; expiry May 10, 2007) and U.WT.A (exercise price $12; expiry September 14, 2008).
Net Asset Value
Uranium Participation Corporation's net asset value is calculated and reported monthly. To obtain the latest net asset value per common share reported by Uranium Participation Corporation, click on this link: NAV
Uranium Spot Price
The weekly uranium spot price is posted weekly by The Ux Consulting Company, LLC. To obtain the posted spot price, visit uxc.com.