Cameco Corp (NYSE: CCJ) released its 2021 financial results last week, and the stock spiked but has since fallen back. Over the past year, CCJ stock is up by 31%. Do Cameco shares make a good long-term investment?
What is Cameco?
Cameco Corp. engages in the provision of uranium. The company operates uranium mines in North America and via its stake in Kazatomprom in Kazakhstan. The company operates a Uranium segment and a Fuel Services segment.
Its Uranium business explores, mines, mills, buys and sells uranium concentrate. In contrast, its Fuel Services unit refines, converts, and fabricates uranium concentrate and buys and sells conversion services.
Cameco Corp was founded in 1988 and is headquartered in Saskatoon, Canada. Cameco was government-owned in the nineties, then privatized in 2002.
How does Cameco make money?
Cameco makes money selling uranium or processing the uranium via fuel services. It also earns dividends on its joint venture deals. For instance, Cameco earned $40m worth of dividends from JV Inkai in 2021.
Nuclear power plant operators rely on Cameco nuclear fuel products to generate power in their reactors.
Director, CEO and President Timothy Gitzel commented:
“At Cameco, we are well-positioned to respond to the changing market dynamics and benefit from the long-term growth we see coming, driven by the need around the world for safe, reliable, affordable and carbon-free baseload electricity.”
Why is the CCJ stock price losing momentum?
When the price of uranium climbs, so do Cameco’s costs. To fulfill its contractual obligations, it has to buy uranium on the spot market. It does not have an enormous store of uranium to draw from. Therefore, the average price CCJ paid for uranium in Q4 2021 rose 43% Y/Y.
However, it does sell its uranium at agreed prices, but this means It won’t reap significant returns the higher the uranium spot price soars. In the event of a $140 uranium spot price, Cameco would realize an average price of $65/lb today or $58/lb in 2024.
Additionally, most of Cameco’s profits come from its Fuel Services segment rather than uranium. Therefore, much of the share price run-up on uranium hype has been speculative.
The Cameco leadership team plans to continue to ramp production over the coming year.
Cameco's McArthur River/Key Lake project has been lying idle since 2018 but the company recently announced it will reopen. This will be expensive to get up and running, but Cameco's target at McArthur River/Key Lake is 15 million pounds per year in capacity by 2024.
Speculation around this news is keeping investors interested in CCJ stock.
CCJ Financial Overview and Metrics
P/BV: 2.3
P/E: 109
P/S: 7.5
Market cap: $8.7bn
Dividend yield: 0.43%
Cameco Q4 2021 Fiscal Year Highlights:
Cameco released its Q4 2021 earnings report on February 9.
Revenue: $465m (down 15% Y/Y)
Uranium Revenues: $323m
Fuel Services Revenues: $140m
Net earnings: $11m
Gross profit: $56m (down 48% Y/Y)
Adjusted net earnings: $23m (down 52%)
Cash position: $1.3bn
Restarting uranium production at its McArthur River/Key Lake project (lying idle since 2018).
Cameco declared a dividend increase, raising it to $0.09 per share.
CCJ Stock: $30.76 Price Target from CIBC Capital Markets
Research Analyst, Bryce Adams at CIBC Capital Markets, raised his price target on CCJ stock to $30.76, with a Buy rating.
MACRO Outlook
Uranium market fundamentals are in good shape. Demand is growing as the world moves to tackle climate change with electrification. Uranium can help with the clean energy transition, but hesitancy exists.
Many western nations are moving away from nuclear power plants, while China and Asia are ramping up construction.
In the past, low uranium prices led to a reduction in supplies. Now there’s rising demand and lack of supply, pushing up prices. Supplies remain at risk as some regions cut back and others face disruption due to COVID and supply chain challenges.
It’s a complex space.
Is CCJ stock a good investment?
CCJ stock is a market leader in the uranium space. As the world accelerates its transition away from fossil fuels, nuclear energy is an increasingly appealing option. This will be a tough sell, but interest in the space is gradually rising. This leads investors to consider uranium stocks.
As uranium supply tightens and demand grows, utility companies are willing to pay more for their uranium supplies to secure them.
Tim Gitzel, President and CEO, Cameco Corp:
“the developments in our industry over the past year further support our belief that there is durability to demand that I'm not sure we've ever seen in our industry before.”
And the fundamentals are pointing to a transfer of risk from the suppliers of uranium fuel to the users.
There is likely to be significant pushback against nuclear energy for some time. Therefore, although uranium prices may stay elevated, there’s also a good chance volatility will be rife. This makes investing in uranium stocks speculative.
Cameco is focusing on securing long-term contracts to supply uranium. It’s also heavily investing in new mines over the next three years. This should raise revenues and profits in the coming years.
With CCJ stock already up over 148% in the past two years, it could be considered expensive and may not have much further to run.
Certainly, its financial metrics indicate an expensive stock.
Nevertheless, FactSet analyst consensus on CCJ stock gives it a Buy rating.
If you’re interested in energy stocks, why not check out solar stock Enphase Energy.