Let’s take a look at the two companies to see if one might be an attractive contrarian bet right now.
Cameco’s stock has been falling since 2007, and the outlook remains cloudy at best.
What’s the story?
Things had actually started to improve in the back half of 2010, and by early 2011 investors were feeling a bit better about the company’s prospects. The stock had doubled off its post-financial-crisis low to $40 per share, and uranium traded at a healthy US$70 per pound.
Then the tsunami hit Japan and completely wiped out the recovery.
In the wake of the Fukushima disaster, Japan shut down its entire fleet of nuclear reactors. This set off a global rethink on the use of nuclear energy, and uranium prices fell through the floor.
More than five years later, uranium trades below US$30 per pound, Cameco’s stock continues to fall, and Japan only has three of its 43 operable reactors back in service.
Is there positive news?
Other countries, such as China and India, are forging ahead with their nuclear development in an effort to satisfy growing demand for electricity. In fact, more than 60 new reactors are currently under construction around the globe, and additional sites are in the planning stages.
The new capacity is forecast to boost annual uranium demand by 50% by 2030, which could put the uranium market in a shortage position somewhere along the way as miners have scrapped new development projects due to weak prices.
That sounds positive, and it is, but Cameco has company-specific issues that investors must also keep in mind.
Cameco is in a nasty battle with the Canada Revenue Agency (CRA) over taxes owed on earnings generated through a foreign subsidiary. If Cameco loses the case, which won’t be sorted out for at least another year, the company could be hit with additional taxes and fees of more than $2 billion.
Kinross traded for more than $20 per share at the beginning of 2010. In January of this year, the stock bottomed out at $2.
That’s an ugly slide, and long-term investors can be forgiven for not being overly excited about the recent bounce in the stock.
Kinross spent US$7 billion to buy Red Back Mining just before gold topped out above US$1,900 per ounce.
The company significantly overpaid for the assets and has spent most of the past five years trying to fix the balance sheet. To its credit, the current management team has done a pretty good job in a difficult environment.
The company finished Q2 2016 with long-term debt of US$1.7 billion and US$968 million in cash and cash equivalents.
With most of the Red Back assets written down and debt now under control, Kinross is actually starting to focus on growth again.
The company purchased strategic assets in Nevada earlier this year and is investing US$300 million to boost production by 90% at its Tasiast mine. Tasiast came with the Red Back deal and was supposed to be the crown jewel in the portfolio. If the new investment goes as planned, the site could finally begin to realize its potential.
Which should you buy?
Cameco’s long-term outlook is attractive, but the market situation remains rather bleak. At the very least, I would wait for the CRA situation to get sorted out before buying the stock.
Kinross is making good progress on its turnaround, and the recent investment initiatives should help lower the cost structure in the next few years. If you are a gold bull, Kinross is the more attractive pick today.