The uranium market has a problem. A problem for both the miners that dig it out of the ground and their customers, the utility companies that use the uranium to produPostsce electricity.

The problem is the price has been persistently low for since 2012

Uranium has been below cost of production since 2012

Why would a low price be a problem for customers?

The price has been so low for so long, that the suppliers have cut back their exploration and development expenditures. In fact some large mines are coming to the end of their life in the next few years and it will take money and time to replace them.

But its worse than that. The price has been so low for so long, that some of the lowest cost producers in the world have put their mines under care and maintenance till the utilities are willing to enter into long term contracts at prices high enough to make it worth the miners effort.

This has created a big supply imbalance where the utilities have been consuming more uranium than the miners have been producing causing inventories to run down to much lower levels. (There had been a big glut caused by the tsunami in Japan forcing the closure of their nuclear plants, etc. which has meant uranium has been available on the spot markets for very low prices which pulled down the long term contract prices).

Plus with concerns about greenhouse gases coming to the fore, there are now a lot of new nuclear reactors under construction right round the world - all of which will need to draw on that supply of uranium. Some older reactors that were expected to be decommissioned have now been re-licensed for decades into the future as well.

Now it is like a game of chicken - which utility will blink first and enter into long term contracts commercially appealing to the miners before the inventories dry up? Which miners will hold out till they get the right price for their product.

Estimated demand for uranium not contracted for

The above is a very simplified explanation, but it gives you the gist of what has been going on. The other thing to know is that the uranium market is much more complex than most other commodity markets and takes some dedicated research to fully understand. For one, after the uranium is mined, it has to be processed. The price history of that processed uranium might give a clue as to what we might expect uranium to do - the long term contract price has more than doubled and risen above the spot price.

So last year as I was looking for opportunities, I decided to look for a trusted guide i.e. a company I could invest in that I could trust to maximize the uranium opportunity. You see I was not confident I could understand the in and outs of the industry and its pricing well enough to make the real time decisions to be as successful as I would like.

Here is why I chose Cameco $CCO $CCJ

Cameco is one of the largest uranium miners and processors in the world. It owns/controls some of the world's lowest cost mines. This makes it a valued supplier to the utilities who need to know they can count on a reliable supply of uranium for their nuclear reactors. I figured that gave them some pricing power compared to competitors.

Cameco had long term contracts with the utilities at prices significantly higher than the spot price. To maximize shareholder value, they starting putting those low cost mines under care and maintenance (to preserve the asset) and started buying what they needed to supply their long term contracts on the spot market. Their goal was to burn through the excess inventory in the spot market and allow prices rise.

Their financial position seems strong. As I write this they have about a $billion in debt and just a little more than that in cash.  While their revenue has dropped, they have returned to profitability even with these low prices


What I do not like about Cameco is its very low return on assets and return on equity. I guess it is understandable in cyclical commodity markets - the truth is the opportunity would not have arisen if the returns had not been depressed for a sustained period of time to discourage new entrants competing.

At the cross roads - should I hold or sell Cameco?

However the share price continued to drop after I invested and has only recently bought me back to close to break even. I am conducting this review to determine if the opportunity I originally saw still exists. If not, should I sell and redeploy my funds elsewhere.

Cameco describes its focus as:

Our strategy is to focus on our tier-one assets and profitably produce at a pace aligned with market signals in order to preserve the value of those assets and increase long-term shareholder value, and to do that with an emphasis on safety, people and the environment.

But the outlook for 2020 is not looking so hot:

We expect consolidated revenue to be between $1,480 million and $1,630 million, lower than in 2019 due to a decrease in average realized prices in our uranium segment as a result of lower expected prices under our contract portfolio and a decrease in committed sales volumes. We will continue to be active buying and selling uranium in the spot market if it makes sense for us. If we make additional sales with deliveries in 2020, we would expect our revenue outlook to increase.

but importantly:

from a cash perspective, we expect to continue to maintain a significant cash balance. We expect to continue to generate cash from operations however, the amount of cash generated will be dependent on the timing and magnitude of our purchasing activity and therefore, cash balances may fluctuate throughout the year.

This chart sticks in my mind:

Look at the long term contracting between 2005 and 2012 in the chart above - it did not really take off till the spot price rose. Cameco says it tries to do its long term contracting in a high or rising uranium price environment. This chart sticks in my mind because I believe the market fundamentals will force the spot price of uranium to rise significantly within a year or two. As it does, Cameco will have the opportunity to write long term contracts that will set it up for profitable operations for a long time into the future.

Based on that belief - I have decided not to sell my shares in Cameco at this point and may increase my holding if the price dips again.

Your homework

If you are considering investing in Cameco, I would strongly suggest you read their annual report. It is an easy read and I think it clearly conveys both their expertise and their interest in creating shareholder value.

Also there are some interesting people to follow on twitter who share a lot of research and their views about the uranium market in general.

SirUranium (@UraniumSir) | Twitter
De nieuwste Tweets van SirUranium (@UraniumSir). Market investor of 20 + years with current focus strictly on Uranium. Independent thinker with contrarian bias. Opinions are not investment advice
John Quakes (@quakes99) | Twitter
De nieuwste Tweets van John Quakes (@quakes99). Retired Earth Sciences Researcher, Professor, Analyst, Writer, Trekker and Explorer. Invested now in the emerging new #Uranium Bull Market. Vancouver Island, British Columbia, Canada
☢️ Yellowcake U 92 ☢️ (@tsizzle84) | Twitter
De nieuwste Tweets van ☢️ Yellowcake U 92 ☢️ (@tsizzle84). Uranium investor + crypto - reside between west coast and Nations capital - not financial advise
Uranium Insider (@uraniuminsider) | Twitter
De nieuwste Tweets van Uranium Insider (@uraniuminsider). Uranium & junior mining investing. Tweets are NOT financial advice. Musings more than 240 characters sent in a free weekly email. California, USA

Do your homework - invest at your own risk.