The uranium that Cameco Corp (NYSE: CCJ) mines is the fuel that powers nuclear reactors. Nuclear power has a bad rap thanks to a small number of high-profile disasters, and that's led to a supply/demand imbalance that has pushed uranium prices to multi-year lows. Cameco is the top stock to consider buying in uranium now, however, because it has the financial strength to make it through this downturn.
The uranium backstory
U 235 is an unstable version of the element uranium. To greatly simplify a very complex process, this means that U 235 can be broken split relatively easily to create energy and a more stable version of itself (U 238, which is far more common in nature). This is called nuclear fission, and it's what powers nuclear bombs and nuclear electric power plants. When fission is controlled it's a very safe and reliable way to generate electricity. Uncontrolled fission reactions are, to put it mildly, very dangerous.
Uranium miners like Cameco and Rio Tinto (NYSE: RIO) dig up vast quantities of uranium, but since most of that ore is U 238, it must be processed to pull out the heavier U 235 to create the fuel with which nuclear reactors are powered. So while uranium is surprisingly abundant in the world (it's more common than gold), the useful variety is a lot harder to come by.
We've learned a great deal about harnessing the power of uranium. A nuclear bomb is basically uncontrolled nuclear fission, and a nuclear power plant attempts to control that process, using the energy created to generate steam to spin an electric turbine. But the learning process has happened over time, and accidents have taken place. Some of the notable names associated with uranium and nuclear power are Three Mile Island, Chernobyl, and, most recently, Fukushima.
The 2011 Fukushima reactor meltdown was a perfect storm of sorts, caused by an earthquake followed by a tsunami that overwhelmed this Japanese nuclear power plant's safety features. The meltdown was watched in real time the world over. In hindsight, the plant's safety features weren't as robust as they could have been. Japan shut all of its nuclear power fleet in response (it's starting to bring plants back online today), with other developed nations quickly announcing plans to reduce their use of nuclear power as well. This event, and the backlash it caused, led to a severe supply/demand imbalance in the uranium market. Prices have been in a downtrend since that point.
That said, nuclear power plants are still being built around the world. And newer plants have taken the painful lessons learned to increase the safety of these facilities. There are 56 new reactors under construction today, mostly in developing nations in Asia. Cameco expects more will be built. Electricity demand in these countries is expanding quickly as they move up the socioeconomic ladder, and nuclear power still appears likely to be a key player in meeting that demand. However, nuclear power plants are time-consuming to construct, so demand has yet to pick up.
But major players like Cameco are working the other side of the equation by reducing production. So there's a change coming on the demand side, and the supply side is rationing in an effort to bring supply and demand back in balance sooner rather than later. The end of the uranium downturn is impossible to predict, of course, but at this point, Cameco can buy uranium at spot prices for less than it costs to mine its own. Since Cameco's mines are generally efficient, low-cost operations, that's a big statement about the current state of uranium prices -- but it's also a step in the right direction to push prices higher in the future.
Getting from here to there
When it comes to buying a uranium miner there are a few different ways to go. There's giant, diversified miners like Rio Tinto, but Rio only gets around 1% of its net earnings from the nuclear fuel, so it's not a good option for getting exposure to uranium mining. Then there are names like Cameco, which is totally focused on uranium mining, processing, and trading. It's not alone in the space, but it is easily the largest pure-play uranium miner.
To put a number on that, Cameco's market cap is $3.75 billion. Its pure-play peers include Uranium Energy Corp. and Energy Fuels Inc, with market caps of $220 million and $130 million, respectively. These tiny players simply don't have the same scale or reach as Cameco. And then there's $300 million market cap Denison Mines (NYSEMKT: DNN), which is building a uranium mine, but doesn't actually have a mine in operation today. So if you are looking for a direct way to play uranium, Cameco is the cleanest option.
It's also the strongest financially, which is important today. Denison Mines is burning through cash as it builds its Wheeler River project. Since the mine isn't expected to be up and running until 2025, the red ink will likely last a long time yet. Energy Fuels, meanwhile, has made money only once in the past decade. Uranium Energy has lost money every year over that span. That's a troubling trend given that uranium spot prices were much higher a few years ago then they are today.
While Cameco's earnings dipped into the red in 2016, and look likely to do so again in 2017, it remained in the black between 2007 and 2015. That's largely because it makes use of long-term contracts that allow it to charge higher than spot prices for the uranium it sells, protecting it, somewhat, from the commodity downturn. Those contracts will only last so long, but it has an important buffer against low uranium prices. Its efforts to adjust to the changing uranium market, including the costs of shutting mines, have been a driving force in the losses it has recently experienced.
But that's an issue of preparing for the worst-case scenario. When the uranium market finally turns higher again, Cameco will be ready to take advantage of the upturn. That's partly because it's backed by a rock-solid balance sheet: the company's current ratio, a measure of its ability to pay near-term bills, is an impressive 5.4 times. And long-term debt only makes up around 25% of the capital structure. Financially speaking, Cameco is well prepared for bad times, and ready to bring production back online when things start to look up again.
Only one option
You could buy a smaller miner than Cameco that struggled to turn a profit even when uranium prices were higher, or one that's burning cash to build its first mine. But those are unnecessary risks taking. And owning shares in a giant diversified miner like Rio Tinto doesn't provide material exposure to uranium. The combination of focus, financial strength, and business model really make Cameco the best option for investing in the troubled uranium market today, assuming that you have the stomach to wait for the next industry upturn -- which is hard to predict, even though new nuclear power plants are being built and giants like Cameco are taking the steps (like cutting production) to help get supply and demand back in balance.
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