Cameco Corp. (NYSE:$CCJ), the largest uranium miner in the world, is down by more than 80%. It’s fair to say that there are valid reasons for Cameco being near a 10-year low, but with that said, the forecast isn’t all grim. In fact, now might be the time to buy Cameco if you want to invest in uranium.
The downside
Ultimately, Cameco’s problem comes down to a supply glut and too little demand. Aside from that, there are a few issues which help to restrain the price of uranium. One key inflation point, for instance, was the 2011 Fukushima disaster in Japan. This caused Japan to temporarily close all of its nuclear reactors and they pushed other countries, like Germany, to remove nuclear power as well. In this case, one small event caused a massive amount of uncertainty in the uranium sector. Plus, it caused those who typically consume uranium to hold off on contracting for uranium.
When there are low prices in the market, there isn’t a huge need for utilities to secure prices with long-term contracts. There will be lower prices on the spot market. Yet another problem to note in the uranium market is that producers did not cut back production while market prices were falling. There has been a net increase in output since 2011, according to Cameco.
Reasons to invest in uranium
Based on the information provided above, it is not shocking if you want to avoid uranium from here on out. However, it’s crucial to note that uranium still has a bright future. For instance, if you are worried about global warming, you will be pleased to know that nuclear power sources do not give off carbon dioxide, but rather provides reliable base-load power.
If that didn’t convince you to make a uranium investment, you should probably know that the demand for electricity has been predicted to grow as developing countries move up the socioeconomic ladder and developed countries increase their reliance on electricity for their main power source. There will be more than a 50% increase in the demand for electricity between 2014 and 2035, according to the International Energy Agency. Nuclear power will play a defining role in this increase. Furthermore, any nuclear power plants being built today will play a role in the increased demand down the road.
There are over 50 nuclear power plants currently under construction around the world, for instance. Most of these power plants are in Asia, with India and China leading the group. Power plants are also being built in developed countries, but these are meant to offset retirements. Japan, on the other hand, is going to restart its nuclear movement. It is expected that there will be three running power plants and it is predicted that around half of the pre-Fukushima power plants will come back.
Choosing Cameco
Despite the current situation, there are a number of reasons to feel optimistic about the direction that uranium is heading in. Plus, if you want to start uranium investing, there are a few good reasons as to why Cameco is a good option.
First and foremost, Cameco is conservatively managed. This means that management will be willing to give up any upside potential for the chance to increase its resistance to downturns. This is done by the company focusing on long-term contracts, thus allowing it to earn almost $34 per pound of uranium in Q1 compared to a spot price of $24 per pound. As the year progresses, Cameco has predicted that its average realized price will be at around $29 per pound of uranium.
If you want to invest in uranium via Cameco but you’re thrown off by the fact that they lost money during the downturn last year, keep the following in mind. The majority of losses that Cameco experienced were related to the company trying to fix the current market. For example, Cameco has chosen to shut down mines that cost a lot to maintain. This might seem like a bad idea, but it’s actually quite positive in the long run as it will help to keep costs in check and it will pull supply from the market.
Despite Cameco posting red ink in three of the last four quarters, the company’s foundation seems to still be relatively solid. For instance, take long-term debt. This debt makes up roughly 20% of capital structure. As of right now, long-term debt has a current ratio of over five. If that wasn’t enough to convince you, Cameco has maintained its dividend despite troubling times. This shows that they are committed to shareholders, no matter the circumstances. All in all, Cameco looks like it will be able to survive a grim market.
Making your uranium investment
For those looking for a uranium investment, keep Cameco in mind. Mentioned previously, Cameco is the world’s largest uranium miner and they also just so happen to be one of the strongest financially. Of course, it is undeniable that results have been feeble, but Cameco has the ability to take it and bounce right back. Plus, with the demand for electricity and nuclear power steadily increasing, now might be the time to start uranium investing through Cameco.
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