Uranium prices hit a 12-year low in 2016. This year hasn't been much better, with miners like Cameco Corporation (NYSE: CCJ) and Denison Mines (NYSEMKT: DNN) rallying in the first two months of 2017, but now down slightly for the year. The future for uranium appears bright, but there's no way to predict when the market turns sustainably higher. That's why most investors will be better off sticking to the more conservative of this pair of uranium industry players.
A ways to go
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The long-term outlook for uranium is underpinned by two facts. First is the increasing demand for electricity around the globe. Between 2014 and 2035, the International Energy Agency expects demand for power to increase by more than 50%, driven by emerging markets. Nuclear power plants are expected to be an integral part of meeting that demand. Meanwhile, despite nuclear plant closures in developed markets, there are over 50 new nuclear reactors being built today -- mostly in developing markets in Asia. More power plants mean more demand for uranium, which is the second key support for a positive outlook.
Increasing demand is exactly what Denison Mines is counting on. It is in the process of developing uranium mines, most notably the Wheeler River project. It owns 60% of the project today, with an agreement to bring that stake up to 66% over the next couple of years. The additional 6% Denison is buying is going to come from Cameco, which is a 30% owner today. Wheeler River could be one of the largest uranium mines in Canada once it's built.
That's the fly in the ointment. Denison Mines isn't expecting to get Wheeler River up and running until around 2025. Although the miner owns a 22.5% interest in a uranium processing facility that brings in some revenue, it's basically a money-losing development-stage miner. That's not likely to change anytime soon.
The vast majority of Denison's funding, meanwhile, is going to come from the capital markets. Which, over the past decade, has meant a more than doubling of the share count, diluting shareholders in the name of long-term growth. If there's a problem with the mine, or demand for uranium doesn't live up to expectations, Denison (and its investors) could have a problem on its hands.
In the here and now
All of this is why Denison is really only appropriate for aggressive investors. Most others looking at the uranium space would be better off with Cameco. Cameco is the largest publicly traded pure-play uranium miner. Although it's struggling through a weak uranium market today, losing money in 2016 with losses highly likely this year as well, it's actually producing uranium right now. It's expecting to produce around 25 million pounds this year while selling over 30 million pounds.
It also has plenty of room to expand if demand picks up. It has 415 million pounds of proven and probable reserves and more than 700 million pounds of inferred and measured and indicated resources. Simply put, you aren't giving up on growth by sticking with Cameco -- you're investing in a company that's producing today and can grow if future demand materializes as expected.
But it's also important to think about profitability in the here and now since uranium is a difficult market today. On that score, Cameco's balance sheet is built for tough times. For example, long-term debt makes up just 22% of the capital structure, a modest sum. Meanwhile, the company's current ratio, a measure of a company's ability to pay its near-term bills, is a robust 5.8.
Yes, Cameco is losing money today, but it has the financial strength to handle a few tough years. In fact, the company continues to pay a dividend. It hasn't increased the payout, which makes sense given the deep uranium market downturn, but it hasn't cut it, either. Clearly, Cameco's management believes its future will be brighter than today.
Looking to the future
The uranium mining industry is in rough shape right now, there's no way to candy-coat that. But there are silver linings on the clouds, notably in the massive global need for power. Denison is a leveraged bet that a good portion of that power gets met with nuclear reactors. That's fine if you can handle the risks involved in owning a money-losing company that won't actually have a uranium mine in operation until the middle of the next decade.
Most investors would be better off owning Cameco, which has a solid financial foundation, producing uranium mines, and plenty of room to expand capacity if the expected demand materializes. And, as an added bonus, you'll be able to collect a 3% dividend while you wait for the uranium market to turn around.
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