CAMECO CORPORATION - CCJ / NYSE - TSX
Largest Uranium Producer In The World
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SummaryCameco Corporation offers an attractive risk/reward based on sensitivity analysis. Cameco Corporation and KazAtomProm, which combine for 38% of annual global production, have made significant production cuts in an effort bring balance to the oversupplied uranium market. Current uranium price is unsustainable as spot price is $23.75 per pound compared to the industry average cost of production of $60 per pound
The Story -Since the tragedy in Fukushima, the uranium market has been in a state of oversupply as Japan shut down their nuclear reactor fleet in the aftermath, cutting demand significantly while miners continued to produce at a record pace. In the wake of the tragedy, Germany decided to shutter their nuclear program entirely causing significant doubts over nuclear power's future. The concerns over nuclear's future combined with ample supply and dwindling demand led to uranium enter a bear market as spot prices dropped from the $50-$60 range in 2011 to a low of $18 in late 2016. Uranium spot has slightly recovered from $18 to $23.75 as of January 1st; however, uranium still remains in a bear market. These market conditions have cause uranium miners to be viewed as uninvestable as the industry business model isn't sustainable as described by uranium producer Energy Fuels COO Mark Chalmers when he said, "At today’s spot prices, the primary uranium mining industry is not sustainable."
So why invest in uranium miner Cameco Corporation (CCJ) whose market is currently unsustainable? Because, yes it is unsustainable. The uranium market is at a point where either miners start facing liquidity concerns over the next few years as prices remain too low, or the price corrects upward to a sustainable level that can support further production and exploration. The logic may seem too simple; however, it is a truth the industry faces and echoes comments made by CCJ's CEO, Tim Gitzel, in CCJ's latest quarterly conference call, "At today's prices, or the prices used in those reports, apart from making sure we have uranium to fulfill our contract commitments our supply is better left in the ground." Uranium miners simply can't afford to continue production based on today's prices as there is no current incentive for uranium miners to continue to bring more uranium out of the ground or develop new mines.
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