The Green Glow of Uranium
August 31, 2011
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The Green Glow of Uranium
The event that caused a rapid decline in Uranium prices caused by Fukushima may be at an end. The act that may have indicated that it is time to move on was shown in the subtle form when industry leader Cameco Corp (NYSE:CCJ) ended talks with Hathor Exploration Limited (TSE:HAT) about a possible takeover and its intention to make a hostile bid of $3.75 a share (a premium of around 40% per share).
The interesting aspect is that at the time of the Fukushima meltdown the price of Hathor was around the $3.30 mark, effectively making the Cameco offer look more opportunistic before the uranium price rises again. Maybe this is the signal that the uranium prices have bottomed out at around the $50 area. The fact that Germany intends to end its nuclear problems as well is not a very interesting prospect to when you look at Chinas intent to increase its consumption of the fuel through building 60 new reactors in the coming ten years. Cameco even states the following:
“Reports from China indicate the country plans to increase its nuclear capacity from the current 9 gigawatts (GW) to at least 70 GW by 2020. A further increase to 120-160 GW or more is planned by 2030.”
The greatest thing about this is that we haven’t even taken into account for India and its potential growth.
The next thing to consider is that the US- Russia HEU agreement will end in 2013. This agreement relates to the dismantling of Nuclear bombs of which this enriched uranium actually used for nuclear energy. Considering that the world consumed 180 million pounds of uranium in 2010 when production through mines was only 140 million pounds you can start to see the factors of supply and demand come into play. Other factors that need to be considered is the lack of any significant Uranium mines made in the last ten years.
But lets look at the facts. Currently Cameco is looking at producing an annual output of 40 million lbs of U3O8 by 2018, and considering that in 2010 it produced 22.8 million lbs, that is equal to a 75% output increase. That is impressive growth coming from the largest Uranium producer in the world.
Considering that this is a mining company and not a company like Coca Cola we need to look at valuation a bit differently. Considering that the P/E for Cameco during the last major Uranium spike was 61.7 and that in 2008 it was 16.6 at its lowest, the current P/E of 20 makes it a reasonable buy.
Debt to equity stands at 0.20, and Caecos record of maintaining this ratio over the past ten years shows relative stability. Also looking at the Price/ Book at 1.9, again we see that during the previous peak it was at 6, emphasizes the possible price shift we can see when the supply and demand factors come into play on the uranium prices. Cammeco is currently seeing a negative cashflow for the first time in the past ten years, this comes mainly from recent events as well as its current efforts in developing additional mines. The ROE has also been between 10% and 15%. In fact in 2009 it saw a ROE of 26.3% due to increased uranium prices so again we need to take into account of higher uranium prices in the future.
The PEG ratio is currently at 0.4. And this is where the gem and I believe true potential of Cameco shows since its true value lies in its growth.
Furthermore based on the DCF the value of CCJ is around the $59 mark, giving investors a margin of safety of around 60%.
*Note: Hathor owns territories in the Athebasca Basin near Cameco, and is possibly exploring building its own mines instead of selling towards Cammeco due to existing infrastructure in the region. However that’s an entirely different and very interesting story and I would encourage you to look into if you like Cameco and enjoy taking a risk in a potential future major developer.
*Authors note - I currently have long positions in both CCJ and HAT
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