Monday, December 5, 2016

An AIM Intl Fund Holding: Cameco (CCJ) by Chengbin (Henry) Lu. "Is uranium alive and well post-election?"




Cameco Corporation (CCJ, $8.97): “Is President-elect Donald Trump going to kill alternative energy?”

By: Chengbin (Henry) Lu, AIM Student at Marquette University

Image result for cameco logo



Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary

Cameco Corporation (NYSE: CCJ) operates underground uranium mines and produces uranium to be selling to US, Canada, and Germany. It operates in three business segments: Uranium, Fuel Services, and NUKEM.

• Since the accident at Fukushima over five years ago, people are still very cautious about the safety issue of using nuclear energy. The uranium spot price and term price have decreased 70% and 45% respectively since then.

• The weak current market for uranium is driven by the combination of weak demand and strong supply. The management is expecting to see mitigation of this adverse supply-demand relationship over the next ten years.

•Under the challenging nuclear energy environment, the company is able to achieve average realized prices for uranium above the market prices continuously and maintain a 3.4% dividend yield.

•The management is actively seeking for building long term relationship with several Asian countries including China and Japan.


Key points:

Since the Fukushima reactor accident in 2011, the nuclear industry has been a challenging area to operate. Many nuclear reactors around the world, especially in Japan, shut down and went through thorough reconstruction to ensure the safeness. In the long term, according to Cameco’s management, uranium demand is backed by steady reactor growth as the 57 reactors under construction worldwide.

Despite record-low uranium spot price, Cameco’s contract portfolio has provided good protection for the company and helped deliver a much higher average realized price. Additionally, Cameco has been continuously optimizing its cost structure including reducing operating cost and strengthening agility on the uranium supply side.  

The clean energy sector was supported greatly by President Barack Obama as the concerns about global warming and climate change. However, Donald Trump, who is the next U.S. President, would like to remove Obama administration’s Clean Power Plan (CPP). Even though this might be a concern for the consumption of clean energy going forward, it might be too early to make a reasonable projection for the clean energy path. Additionally, the cost per megawatt of utility-scale solar power in the U.S. is now lower than the cost of coal.

Currently the company is focusing on staying competitive in the market and positioning for price and operating leverage to get prepared for the rising demand in the long term.



What has the stock done lately?

Since its addition into the AIM International Equity Fund on December 2015, stock price has slipped down about 30%, which is reasonable considering the challenging macro environment for nuclear energy industry. The company’s announced its 3Q earnings at November 2 with a surprising estimation beat on higher uranium sales, the stock price has recovered more than 15% since then.


Past Year Performance: CCJ has decreased about 30% in value over the past year largely because the combination of lower average realized price and challenging uranium market. Over the last year, the stock has been as low as $7.46 in November 2016 and as high as $13.11 in March 2016. Even though CCJ does not sell uranium on the spot market, the movement of the stock price has been showing a strong positive correlation with the movement of the uranium spot price. CCJ missed the earnings estimates in the first two quarters of 2016 mainly caused by lower average realized price and flat sales volume of uranium.  


Source: FactSet

My Takeaway

After the meltdown of Japan’s Fukushima nuclear reactor in 2011, demand for uranium as the energy resource has been greatly undermined mainly because people are cautious about the safeness on using nuclear energy. In the long term, with more than 50 new nuclear reactors coming online, CCJ is well-positioned in terms of strong balance sheet and operating leverage to meet to uranium demand.





                                     

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