The uranium mining industry is getting hit hard by a downturn in this key nuclear fuel. Look no further than the deep 75% share price decline at Cameco Corp (NYSE: CCJ) over the past decade for proof of that. Cameco is the largest publicly traded pure-play uranium miner. This miner, however, is the best buy in the uranium industry and it isn't just about size.
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Bigger vs smaller
Size is important for Cameco, there's no question about that. There are larger companies that mine for uranium, like Rio Tinto (NYSE: RIO). But uranium is little more than a rounding error for the giant iron ore, copper, and aluminum miner. In 2016 uranium made up roughly 1.3% of revenues and 0.4% of EBITDA. Buying Rio Tinto may or may not be a great idea, but it certainly is not a way to get material exposure to uranium. Cameco basically gets all of its revenue from uranium or businesses related to uranium.
But Cameco is not the only pure play. There are penny stocks like Energy Fuels Inc, which produced and sold roughly one million pounds of uranium in 2016. Cameco's 2016 production was 27 million pounds with sales of 31.5 million pounds. The tiny publicly traded pure plays are basically rounding errors in Cameco's world, lacking scale and diversification. They provide exposure to uranium but the company specific risks are far higher.
Then there are tiny exploration companies like $200 million market cap Uranium Energy Corp. (NYSEMKT: UEC). But money losing companies like this don't actually produce uranium, so they are little more than a gamble on the future of the nuclear fuel. And remaining a going concern generally rests in their ability to get the capital markets to keep funding their exploration projects. With uranium near 12-year lows, that's not a sure bet.
So, size is important in making Cameco the best buy in the uranium industry. But it's not just the best buy because the company is large; there are other reasons to like it.
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Some other things to consider
For example, consider Cameco's balance sheet. Long-term debt makes up around 20% of the company's capital structure. Its current ratio, a measure of its ability to pay near-term bills, is roughly 5.75 -- a massive number on a metric where anything over 1 is considered pretty good. Basically, Cameco's financial foundation remains rock solid despite the long uranium downturn.
That said, Cameco lost money in 2016, but that was largely because of one-time charges related to restructuring efforts to adjust the business to the current weakness in the uranium market. It posted a profit in each of the previous nine years. Cameco is expecting to lose money again in 2017 as it focuses on cost-cutting and continuing to adjust to low uranium prices. However, it expects cash from operations to be higher year over year.
Cash is the lifeblood of a business, not accounting earnings, and Cameco really is doing a good job ensuring cash remains plentiful. To put a number on that, the miner's cash balance was more than double the level of a year ago at the end of the second quarter. Management can't control the price of uranium, but it is clearly controlling the things it can (like costs) to ensure it has the cash to survive the industry downturn.
In fact, the board of directors is even confident enough in Cameco's cash-generating ability to keep paying an annual dividend of $0.40 per share Canadian. Sure, the dividend hasn't been increased since 2011, but that's understandable given the uranium downturn. The current yield, meanwhile, is around 3%, meaning you're getting paid reasonably well to wait out the uranium downturn.
Smaller producers and development-stage uranium miners don't provide this mix of balance sheet strength, history of financial success, cash generation in the leanest years, and dividends. Add in Cameco's size, and it easily becomes the best investment option in uranium.
There are problems
This isn't meant to gloss over the problems Cameco faces. If uranium prices remain at low levels for long enough, even the best company in the industry will become an undesirable investment option. But if you're looking for uranium exposure, Cameco's mix of focus, size, and financial strength makes it the best choice for most investors.
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