Canadian uranium miner Cameco Corp. (CCJ, Financial) has been in stellar form lately. The company's post-pandemic recovery has led to its stock experiencing an 85% year-over-year gain.
Systematic support and idiosyncratic stealth have been fundamental to Cameco's recent success. However, some may question whether the stock's form is sustainable.
In my view, Cameco presents a secular opportunity, meaning its stock could experience additional gains in the future.
An updated outlook after earnings
Cameco released its third-quarter earnings last week, revealing a significant triumph as it strolled past its revenue guidance with a $51 million beat. Fueled by uranium price increases and mine ramp-ups, the company's top line increased by 47.8% year over year, illustrating the fundamental support attached to the stock.
Furthermore, Cameco beat its earnings target by 22 cents and raised its full-year outlook. Astonishingly, the company expects its revenue to settle between 2.43 billion Canadian dollars ($1.76 billion) and CA$2.58 billion, which is much higher than its previous estimate of CA$2.38 billion to CA$2.53 billion.
To contextualize the upgraded outlook, Cameco's management stated they have "contracts in our uranium and fuel services segments that span more than a decade, and in our uranium segment, many of those contracts benefit from market-related pricing mechanisms." It was added that the company has "a large and growing pipeline of business under discussion, which we expect will help further build our long-term contract portfolio."
Having followed Cameco for a while, I can outline a few catalysts that support the business' revenue outlook.
First, the company has embarked on a shipment of inventory from its Inkai mine in Kazakhstan. Acting as its largest mine, Inkai was obstructed by the Russia-Ukraine war ever since early 2022. However, the development of alternative shipping routes has allowed Inkai to release its inventory and resume production. Cameco expects the first shipment to be realized before the end of the year, with a second following suit in 2024.
Inkai's mine study shows it hosts the capacity to produce approximately 5.2 million pounds of uranium per year. Cameco has a 60% stake in the mine, which adds a significant boost to its revenue outlook.
Furthermore, Cameco's Canadian operations are running smoothly, with broad-based sales edging up 19% year over year to reach 22,200 pounds. Production may increase even further as the company has renewed licenses at its Canadian assets, including Cigar Lake, McArthur River and Rabbit Lake. Licensing renewals will allow for further mine sequencing and ramp-ups.
Lastly, Cameco has a fuel segment that includes the production of uranium oxide, uranium hexafluoride and heavy water fuel bundles. The word among many specialists is that Cameco's fuel business is scalable, as proven by its 9% year-over-year sales increase in the third quarter. Sure, the fuel business has a long way to go before it reaches full development. However, synergies are highly possible.
Cameco's long-term value drivers
In addition to its short-to-intermediate-term success, Cameco has high long-term potential.
Much of Cameco's potential stems from the fact that nuclear energy, which uses uranium as part of its fuel composition, is developing quickly. For example, China has 21 nuclear reactors under construction with a cumulative 21.61 gigawatts in capacity. Moreover, there is a strong push globally to include nuclear energy in the "green energy" economy because of its velocity. Despite there being political resistance in certain jurisdictions, the pendulum is certainly swinging in the right direction for nuclear energy advocates.
Uranium prices will likely receive additional support if the momentum in nuclear energy implementation is sustained, as the market is grossly undersupplied. Moreover, uranium price support could initiate a secular revenue surge for Cameco as it holds down 11.61% of the market, meaning it is a core supplier to nuclear energy producers.
Source: Statista (Market Share in Uranium Production in 2022)
Further, Cameco is in the middle of a critical joint venture acquisition. The company is set to acquire Westinghouse, an American power plant equipment maker. The deal is said to be worth $7.9 billion, with Cameco owning 49% of the business and Brookfield (BAM, Financial) the other 51%.
Westinghouse will likely bring critical midstream synergies to Cameco's business model and allow for diversified revenue as a means of phasing out uranium price risk. Inspections from industry competition regulators are holding up the acquisition; however, it is odds on to be completed.
Key metrics, valuation and dividends
Cameco's key metrics communicate the progress it is making as a leading uranium miner.
The pandemic sent the company into a tizzy as its Canadian assets required post-Covid maintenance. As if that was not enough, its Inkai mine standstill led to additional strain on its income statement. However, as shown in the following diagram, Cameco's profitability ratios have started to recover.
Furthermore, comparing Cameco's trailing and forward price multiples speaks volumes about its valuation. For instance, notice how much higher its trailing price-earnings ratio is versus its forward price-earnings ratio, which illustrates that the market believes Cameco's profitability will surge in the coming quarters.
An overview of Cameco's dividends implies the stock is quite suitable for income-seeking investors as yet. For example, its dividend yield of 0.18% is nearly negligible, especially if one factors in taxes. However, a subdued dividend policy may not be a bad thing after all, as it allows Cameco to reinvest its liquidity into new projects to expand its market share in the rapidly growing uranium industry.
Guru trades
The magnitude of guru buys has increased substantially since late 2022 as some of Wall Street's investors have speculated on a recovery play. According to 13F filings, the likes of Ray Dalio (Trades, Portfolio)'s Bridgewater Associates and Joel Greenblatt (Trades, Portfolio) have dipped into the stock, suggesting prospects are intact.
Although guru trades do not guarantee success if copied, they provide a helpful tool to supplement a holistic analysis of an asset.
Wrap-up
Cameco's year-over-year surge is backed up by robust fundamentals. Sure, its forward price-earnings ratio of 21.55 is not ideal. However, the company is still in a post-Covid recovery phase.
A holistic view implies that Cameco is set to bolster its revenue even further as its Inkai mine is back online after being delayed by the Russia-Ukraine war. In addition, license renewals in Canada allow for further mine sequencing and production increases.
Lastly, long-term uranium price support is likely given the inclusivity of nuclear energy in the renewable energy mix, which could bolster Cameco's secular prospects as a market leader.
Considering all aspects, I deem Cameco a secular growth opportunity and believe its strong progress will sustain into 2024.
