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Cameco Is Not a One Quarter Story

Cameco (TSX:CCO,NYSE:CCO), the uranium juggernaut, announced its Q4 and full year 2012 results this morning and shares were trading down by more than 4% at one point.  Guidance for the first quarter of 2013 was disappointing due to lower expected uranium sales volumes and lower electricity generation out of Bruce Power.  In addition, the company is in a tax spat with the Canada Revenue Agency (CRA).  Perhaps these were the rationale for the stock’s soft open, however, Cameco’s tale is bigger than these rather insignificant issues.

Cameco owns some of the largest, lowest cost uranium reserves in the world.  The supply and demand of uranium dictate the company’s prospects.  Nuclear energy drives uranium demand.  Nuclear energy has been through a rough patch in recent years due to the Fukushima disaster in Japan.  Long-term however, the supply/demand balance appears very favourable for Cameco.

Several key supply/demand updates were provided in Cameco’s quarterly release.  It is here that investors should be focused.

Supply

  • At the end of 2013, 24 million pounds of annual uranium supply will be removed from the market with the expiration of the Russian Highly Enriched Uranium Agreement (HEU).  To put this into context, Cameco, one of the world’s largest producers, expects to produce 23 million pounds in 2013.  The removal of the Russian supply is significant.  The HEU was a 20 year agreement signed back in 1993 by the U.S. and Russia that mandated Russia to convert 500 tonnes of nuclear warhead uranium to nuclear fuel.
  • Throughout 2012 there was a great deal of new uranium supply that was either deferred or destroyed.  Simply, the uranium spot price is currently well below the level where new projects are economic.

Demand

  • The Fukushima disaster in Japan has caused significant issues with the demand side of the uranium equation, as has a general economic slowdown across the globe.  Cameco highlighted two encouraging developments out of Japan.  First, a new Nuclear Regulatory Authority is now in place to draft safety standards that will be used to evaluate reactor restarts.  In addition, the recently elected Liberal Party has a positive history of being nuclear friendly.  Nuclear energy is expected to play a role as they attempt to turnaround the Japanese economy.
  • Cameco now expects total world nuclear generating capacity of 510GW by 2022 vs. 392GW today – average annual growth of 3%.  64GW are currently under construction.  The company compares the growth outlook for nuclear energy to that of the 1970’s when the likes of France, Germany, and the U.S. were building out their nuclear energy programs.

The Foolish Bottom Line

In many ways, Cameco shares a story that is similar to its Saskatchewan based neighbor, Potash.  While both face short-term uncertainties, the supply/demand outlook for their respective industries line up very nicely for these two global leaders.  Cameco’s quarterly results will fluctuate, but the long-term trajectory for this company seems very positive.

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Fool contributor Iain Butler does not own shares in any of the companies mentioned in this report at this time.  The Motley Fool has no positions in the stocks mentioned above.

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