Ignore the Noise and Bet on Cameco Corporation

Uranium prices plunged by US$6 per pound last week. But you should stick with companies like Cameco Corporation (TSX:CCO)(NYSE:CCJ).

| More on:
The Motley Fool

Last week, believers in uranium got a cold taste of reality. After surging for the past few months, uranium’s spot price plunged by roughly US$6 per pound (over 13%), the second largest week-over-week drop since 1996. Is now the time to bail out?

Not so fast

Before overreacting, you have to remember one thing: uranium is a very illiquid market. In other words, there are very few buyers and sellers. So this means the actions of just a few players can cause dramatic price swings. Last week, a few buyers exited the market, nothing more.

Still reasons for optimism

One only has to look back a couple of weeks ago, when H.C. Wainwright analyst Jeffrey Wright predicted the spot price would reach $50 per pound in the next 12 months. He has plenty of reasons for believing this.

For one, industry insiders say the marginal cost of uranium is roughly US$65 to US$70 per pound. This is about double the US$38/lb price that the company closed at last week. So as long as uranium prices remain depressed, there is little reason to add new supply.

Furthermore, much of this supply comes from places with high geopolitical risks, such as Niger, Kazakhstan, and Russia. The sanctions against Russia pose an especially big risk to uranium supply, mainly because the country’s big banks are being targeted. This means big uranium projects may have difficulty securing financing.

Reasons to believe in demand too

While uranium supply continues to face restraints, there are reasons to believe demand will rebound too.

The key factor here is Japan’s nuclear restart, which has made some strides recently. In late October, two reactors at Japan’s Sendai nuclear plant received the go-ahead for a restart. Further approvals could eventually follow. Meanwhile, China is constructing 27 new nuclear reactors (out of 71 worldwide), and the country will likely lead uranium demand growth for many years to
come.

Cameco: The best way to make that bet

If you ask fund managers what their favourite uranium stock is, most will answer Cameco Corporation (TSX: CCO)(NYSE: CCJ), and for good reason. Cameco has the world’s best uranium assets – in fact its flagship mine has grades 100 times the world average.

Better yet, Cameco’s production in Canada is insulated from the world’s worst geopolitical risks. So if Russian sanctions continue to squeeze the country, Cameco will benefit.

There’s one more reason to bet on Cameco: price. To illustrate, uranium prices are up by about 35% since May 20. But Cameco’s share price has barely budged at all, up only 3%. The company has run into some short-term issues, such as a worker’s strike, which has depressed its shares.

But longer term, Cameco is primed to take advantage of the uranium recovery. You should ignore the short-term noise, and side with these fund managers.

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

Offshore wind turbine farm at sunset
Energy Stocks

This Renewable Energy Stock Could Be the Best Investment of the Decade

Down over 50% from all-time highs, FSLR is a renewable energy stock that trades at a discount to consensus estimates…

Read more »

Hourglass and stock price chart
Energy Stocks

Where Will Pembina Pipeline Stock Be in 3 Years?

Pembina Pipeline has been a popular dividend stock, so what can investors look forward to in the next few years?

Read more »

energy oil gas
Energy Stocks

3 Reasons Keyera Is a Must-Buy for Long-Term Investors

Keyera stock may not be leading the TSX in 2025, but its long-term growth prospects look stronger than ever.

Read more »

alcohol
Energy Stocks

The $25,000 Approach to Building Lasting Wealth

Making the most of your investment requires making smart decisions. These two TSX stocks are excellent examples of stocks that…

Read more »

Dam of hydroelectric power plant in Canadian Rockies
Energy Stocks

2 Lower-Volatility Stocks That’ll Let You Sleep Easy for the Next 25 Years

Hydro One (TSX:H) and another low-volatility stock that could come in handy once volatility returns.

Read more »

Investor wonders if it's safe to buy stocks now
Energy Stocks

Where Will Enbridge Be in 3 Years?

Enbridge stock is rapidly expanding its gas pipeline business and the next three years will define its position in the…

Read more »

chart reflected in eyeglass lenses
Energy Stocks

1 Energy Stock up 28% to Buy Right Now

CNQ stock is bouncing back from a big slump. Are more gains on the way?

Read more »

oil and gas pipeline
Energy Stocks

Pembina Pipeline: Buy, Sell, or Hold?

Pembina Pipeline offers an attractive dividend yield. Should you buy now or wait?

Read more »