Is Now Finally the Time to Give Up on Cameco Corporation?

Cameco Corporation (TSX:CCO)(NYSE:CCJ) shares are being crushed yet again. Is now the time to give up?

| More on:
The Motley Fool

For years, shareholders of Cameco Corporation (TSX:CCO)(NYSE:CCJ) have been anxiously awaiting a rebound in the price of uranium. That rebound still hasn’t happened, with prices still stuck at US$36 per pound.

So, is the uranium market finally about to turn, or is now the time to give up?

Why we should be hopeful

When looking at the supply side, US$36 uranium looks unsustainable, with producers losing money left and right. Eventually, supply should take a hit, allowing prices to rebound. According to some estimates, prices need to more than double in order for the market to come into balance.

The demand side tells a similar picture. With uranium prices so low, it provides a strong incentive for countries to use nuclear power. The perfect case in point is Japan, which shut off all its nuclear power reactors after the 2011 Fukashima disaster, only to be stuck with sky-high bills for liquefied natural gas.

It’s not just Japan that could increase its use of nuclear power. China is building 23 new nuclear reactors, and Cameco just signed a big five-year uranium supply agreement with India.

Best of all, Cameco has the world’s most efficient uranium mines, and also has a strong hedging program. So, even if uranium prices remain depressed, the company can withstand the heat for many years as it waits for the market to recover.

Why we should give up

While US$36 uranium looks like an unsustainable price for producers, total uranium supply has held up relatively well in recent years for a couple of reasons. First of all, uranium mines are very costly to shut down, especially when unions are involved. Second, no one wants to be the first to cave in, only to see competitors benefit from higher prices.

Meanwhile, demand may take a long time to rebound. The Japanese restart has been held back by regulators for years, and the country’s citizens are generally opposed to the idea. It looks like the nuclear power companies aren’t holding their breath; Tokyo Electric Power Co. has just decided to sell some of its uranium stockpiles. This will not be a positive for uranium prices.

Making matters worse, Cameco is involved in disputes with the Canadian and American tax authorities. This could cost the company well over $1 billion, something the Financial Post referred to as “debilitating.”

Furthermore, Cameco shares are quite pricey. Including debt, the company is valued at nearly $9 billion, or roughly $20 per pound of reserves.

The verdict

At this point, I would avoid Cameco. Although there’s plenty of upside for uranium prices, there’s just too much uncertainty at this point, and you can certainly find better opportunities elsewhere.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »