Cameco: A Nuclear Powerhouse Unleashed (NYSE:CCJ)

HT GanzoIntroduction As most of my readers may know, I have a bullish long-term view of oil and gas. This is also the reason why I’m bullish on uranium. While nuclear energy comes with much higher upfront costs than oil, gas, and renewable energy, it has an unbeatable energy density. Over the past few centuries, humanity has benefitted from increasingly dense energy sources. We started with wood and slowly moved to coal, followed by oil and natural gas. This provided incredible growth in prosperity. One pellet of uranium has the same density as 17 thousand cubic feet of natural gas and 120 gallons of oil. It also replaces one ton of coal. Energy Information AdministrationWith that in mind, my favorite nuclear energy proxy has been the Cameco Corporation (NYSE:CCJ). I started covering the company at the end of 2022. Since then, shares have returned more than 80%, roughly twice the return of the S&P 500. My most recent article was written on June 2, when I went with the title “Cameco Goes Nuclear.” Since then, shares have lost 24%, as the uranium trade has seen some headwinds. Data by YChartsAlthough this is a substantial setback, I am convinced it’s nothing more than a correction in a strong long-term uptrend. In this article, I’ll update my thesis, starting with bullish news from Kazakhstan. So, as we have much to discuss, let’s get right to it! Buyers Are Back! On August 23, Bloomberg published the bullish headline “Uranium-Miner Shares Gain on Kazakh Output-Guidance ‘Miss.'” BloombergEssentially, North American investors jumped back into stocks like Cameco after Kazatomprom reported that it would produce less uranium than initially expected. Shares of North American miners surged Friday after Kazakhstan’s state-owned uranium miner said overnight that it would produce 25,000 tons to 26,500 tons of uranium next year. Analysts say that’s higher than 2024 levels, but notably below agreements that require it to produce within a specified range for the year. – Bloomberg (emphasis added) This is a big deal, as the company is the world’s largest uranium producer. As we can see below, no other nation comes close to Kazakhstan’s production levels. In the past three decades, the nation has expanded its footprint while nations like the U.S. and Europe have become irrelevant. This also has geopolitical implications, as most uranium nations are not part of the “democratic Western bloc.” Visual CapitalistWe are now in a situation of geopolitical issues with limited supply growth and utilities who are willing to pay almost any price: “This is a structural problem — they cannot ramp up,” said Nick Lawson, chief executive of Ocean Wall, an investment house that is bullish on uranium. “It won’t just be the west saying this is an issue for us; it will also be Russia and China saying it’s a problem for our new nuclear power plants.” Utilities hold large stockpiles of uranium to power their nuclear reactors but they are willing to secure the nuclear fuel at almost any price, creating the conditions for volatile surges in prices of yellowcake. Per Jander, director of nuclear fuel at WMC, a trader, said that Kazatomprom’s downgrade “should be a cause for concern for western utilities. The geopolitical developments and writing on the wall has been the Russians getting closer to the Kazakhs.” – Financial Times (emphasis added) I believe the quote above hits the nail on the head, as Russia has strong ties with uranium producers. It can pressure Western nations by keeping supply growth subdued. Bear in mind that the government of Kazakhstan owns 75% of Kazatomprom. Russia and Kazakhstan are very close, as both are founding members of several trade organizations and are heavily engaged in the trade of commodities. Moreover, the Bloomberg article I just mentioned wrote that this move “brings the entire production curve guidance down by several years.” Production guidance was so low that the company had to ask for regulatory permission to downgrade its production at several key sites. That’s a big deal and another sign of government involvement. While we can only guess what is going on behind closed doors, one thing is for sure: this bodes well for Western uranium producers. The Cameco Bull Case Remains Strong When it comes to commodities, it’s hard to avoid Canada, as it has enormous reserves of natural gas, oil, gold, uranium, and many other critical commodities. Cameco, for example, has three Tier 1 operations, two of which are located in Canada: Cigar Lake and McArthur River. Using the company’s own words, these are the “world’s highest-grade uranium mine” and “the world’s largest, high-grade uranium mine/mill.” Cameco CorporationOn top of that, it has an Inkai mine in Kazakhstan, and a wide range of Tier 2 assets on top of fuel services, and a 49% stake in the Westinghouse Electric Company, which provides technologies and services for nuclear power operators. This adds diversification and growth. Cameco expects adjusted EBITDA from Westinghouse to range between $445 million and $510 million this year. Over the next five years, it expects to compound growth at an annual rate between 6% and 10%. Cameco CorporationIn addition to geopolitical tailwinds, the company benefits from unprecedented growth in power demand due to technologies like data centers. So far, this has resulted in 59 new nuclear reactors being under construction. Asia (including China) will be home to 35 of these. Cameco CorporationAccording to the company’s view, current expectations already indicate severe supply shortages, as rising demand is meeting a long-term expected decline in primary and secondary supply. Cameco CorporationThis also explains why geopolitical headlines have such a big impact on the market. Hence, during its 2Q24 earnings call, the company explained that as supply in the uranium market tightens due to geopolitical developments and a lack of significant new greenfield projects, its assets are becoming increasingly valuable. The company is also prepared to scale production at its McArthur River and Key Lake operations, potentially increasing output from 18 million to 25 million pounds per year. It is also important to mention that the company saw a “quiet” second quarter, which is expected to be followed by better-than-expected future growth. While the industry-wide contracted volumes suggest a quieter second quarter, our long-term book of business continued to grow. Our average level of commitments over the next 5 years increased from 28 million to 29 million pounds per year. And with a pipeline of potential new business under negotiation, that is keeping the marketing team very busy. – CCJ 2Q24 Earnings Call Cameco CorporationOn top of that, the company is focusing on its financials. In the second quarter, Cameco focused on debt reduction. This included repaying $100 million of its term loan related to the Westinghouse acquisition. Moreover, as we can see below, the company also refinanced $500 million of senior unsecured debt and plans to maintain financial flexibility with a new base shelf prospectus. It holds an investment-grade rating from S&P Global and has close to $1.4 billion in available liquidity. Cameco CorporationSo, what does this mean for shareholders? Valuation Valuation-wise, we are dealing with a company trading at a blended P/E ratio of 69x. Although this seems like a dangerous valuation, analysts expect the company to grow EPS by 9% this year, potentially followed by 103% growth in 2025 and 30% growth in 2026. In fact, while the CCJ stock price has declined since my June article, longer-term EPS expectations have increased by roughly 4% (2026E EPS). FAST GraphsApplying a 40x multiple will result in a $65 stock price, 48% above the current price. Although I expect the company’s multiple to drop on a long-term basis as the industry becomes more mature, I do not see an end to elevated growth for the time being. If anything, growth could get an unexpected tailwind from major markets like Europe and the U.S. once we figure out, we simply do not have the electric capacity to support both the energy transition and major growth in data centers. As such, I remain bullish and expect corrections to offer great buying opportunities. And, in case you are wondering, the only reason why I do not own CCJ is my significant exposure to oil and gas. Although I’m bullish on CCJ, I need to make sure I keep a balanced dividend portfolio. Takeaway Despite recent setbacks, my long-term bullish view of Cameco and the uranium sector remains very bullish. Kazakhstan’s production cuts, combined with increasing geopolitical tensions, only reinforce the potential for higher uranium prices. This bodes very well for Western producers like Cameco. The company’s top-tier assets, strategic partnerships, and solid financial position put the company in a great spot to benefit from the growing global demand for nuclear energy. While the current valuation may seem high, expected earnings growth and potential supply shortages support a “high” price target. Hence, I see recent corrections as opportunities to buy into a long-term growth story that’s far from over. Pros & Cons Pros: Strategic Assets: Cameco owns world-class, high-grade uranium mines in Canada and Kazakhstan. This makes it a “mission-critical” player for Western buyers. Geopolitical Tailwinds: Rising tensions and supply constraints, especially in Kazakhstan, favor uranium producers like Cameco. Strong Financials: The company is focused on debt reduction, has an investment-grade rating, and healthy liquidity to provide financial stability. Growing Demand: Increasing global nuclear energy demand, especially in Asia, supports long-term growth prospects. Cons: Cons: High Valuation: CCJ’s current P/E ratio is significantly above its long-term normalized ratio, which means negative headlines could hurt its stock price. Market Volatility: Like the uranium market, CCJ’s stock price is volatile. Uncertain Regulatory Environment: Regulatory changes or shifts in government policies regarding nuclear energy could impact CCJ’s operations and valuation.

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