Better Buy: Cameco Corporation vs. Denison Mines

By Maxx Chatsko Markets Fool.com

On paper, there are several intriguing reasons to give uranium stocks a closer look. There are 57 nuclear reactors under construction today -- including 20 in China -- with many more in the planning process. Japan, which had 54 reactors operating before the Fukushima disaster, is slowly bringing its fleet back online. Although there are only three reactors operating in the island nation today, another 23 have filed applications to initiate the restart process. Meanwhile, some analysts estimate that the total long-term supply of uranium that remains uncontracted is roughly 800 million pounds.

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Of course, uranium stocks have faced unrelenting pressure in recent years. Falling market prices, weakened demand, and expedited reactor closures have forced miners such as Cameco Corporation (NYSE: CCJ) and Denison Mines (NYSEMKT: DNN) into survival mode. The road ahead is risky and uncertain, but if you wanted to take the long-term view, which stock is the better buy?

Image source: Getty Images.

By the numbers

This matchup isn't exactly fair. Cameco Corp. is a $3.9 billion company that is far and away the industry's leading uranium producer. It also pays investors a dividend yielding 3% to stick around during the turmoil (although it would be better served suspending payouts). Denison Mines is a $290 million company with minority stakes in projects, a stock price under $1 per share, and the need to find outside funding for exploratory work.

That said, here's how the head-to-head matchup looks:

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Metric

Cameco Corp, 2016 Total

Denison Mines, 2016 Total

Revenue

$1.77 billion

$13.8 million

Diluted EPS

($0.12)

($0.02)

Year-end cash balance

$233.6 million

$11.8 million*

Operating cash flow

$227.9 million

($8.1 million)

Dividends paid per share

$0.20

N/A

Data source: Google Finance.*Increased to $43.5 million at the end of Q1 2017.

When weathering an industry downturn, size certainly matters. Cameco Corp. is an integrated uranium fuel supplier, which means it mines, refines, converts, and fabricates uranium for end users. That allows it to capture higher margins than smaller companies that rely solely on selling raw or refined uranium ore. It also allows the company to make strategic investments for long-term payoffs, such as its 24% stake in GE-Hitachi Global Laser Enrichment (General Electric and Hitachi own the remaining 51% and 25%, respectively). If successful, the technology could greatly reduce the energy and time required to enrich uranium for reactor use.

While vertical integration has exposed the industry leader to the full brunt of the recent downturn, it also provides ample avenues to piggyback on an eventual recovery. Whether long-term uranium supply tightens up from announced reductions in output from Kazakhstan's Kazatomprom or Australia's Paladin, or global capacity for enriched fuels declines after Honeywell's 53% reduction in output, Cameco Corp. is well positioned to step in if the market comes calling. Its global footprint and customer relationships reduce the friction for such business deals to become a reality.

The company's management expects that uranium pricing -- currently at multi-year lows -- will pick up momentum in the fourth quarter of 2017. If it materializes, that should allow Cameco Corp. to ramp up sales volumes and begin delivering on the promise of a long-awaited recovery.

CCJ Total Return Price data by YCharts

While a price recovery would also be beneficial to Denison Mines, the windfall from an industry recovery would be far less significant. Sure, both stocks have declined by roughly the same amount in the past three years. But rising uranium prices would fail to have an immediate impact on the business, which has failed to grow revenue much beyond the $10 million mark from 2012. In fact, over half of the company's revenue in the first quarter of 2017 was generated from environmental-services activities. It may turn out that Denison Mines is better at decommissioning old mines than extracting value from viable ones.

Long story short

If you had to buy just one uranium stock, then it's not a difficult choice: Cameco Corp. is hands down the better option. It boasts more expansive revenue streams, customer relationships, and reserves than Denison Mines. That said, given the global glut of uranium and a growing distaste for nuclear energy in the West, the inconvenient truth is that investors are probably better off avoiding this industry altogether.

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Maxx Chatsko has no position in any stocks mentioned. The Motley Fool owns shares of General Electric. The Motley Fool has a disclosure policy.