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Cameco Corporation: Is the Dip an Opportunity to Buy?

Cameco Corporation (TSX:CCO)(NYSE:CCJ) dropped more than 10% February 1 on some really bad news.

Let’s take a look at the current situation to see if the pullback is a chance to buy or a signal to head for the hills.

Fukushima pain continues

Six years ago, the Fukushima nuclear disaster in Japan forced the country to shut down its entire fleet of reactors.

The event sent uranium prices into a tailspin with spot prices falling from US$70 per pound to recent lows below US$20.

And producers?

Cameco traded for more than $40 per share before the tsunami hit Japan. It bottomed out below $10 at the beginning of November 2016, but it had soared back above $17 in recent weeks on hopes of Japan restarts and a small rebound in uranium spot prices.

What just happened?

Cameco announced February 1 that Tokyo Electric Power (Tepco), the company that operates the Fukushima plant, has cancelled its supply contract with Cameco.

Cameco gets most of its revenue from long-term supply arrangements with its customers. Some agreements have been terminated with payment, but Tepco is claiming “force majeure” as a reason for getting out of the contract.

The hit is significant for Cameco because it means 9.3 million pound of uranium will no longer be delivered on the contract that was supposed to run through 2028.

According to Cameco, that represents about $1.3 billion in lost revenue.

The news is another blow at a time when the market remains under pressure. Secondary supplies continue to offset production cuts, and while overall annual uranium demand is expected to increase as much as 50% through 2030, the market is not expected to improve much in the near term.

CRA battle

In addition, Cameco is caught up in a battle with the Canada Revenue Agency (CRA) over taxes owed on earnings generated through a foreign subsidiary.

If Cameco loses the battle, it could be on the hook for more than $2 billion in taxes and penalties.

A decision in the case isn’t expected until late 2017 at the earliest.

Should you buy the dip?

Cameco has repeatedly said the uranium market remains challenging, and production cuts planned at the company’s facilities this year suggest management isn’t expecting the situation to improve materially over the next year or two.

The company announced in January that analysts are too optimistic, and Cameco said it expects to report a 2016 loss when the Q4 report comes out February 10.

Given the ongoing struggles in the market, the latest hit from Tepco, and the uncertainty surrounding the CRA case, I would avoid the stock today.

In fact, investors who had the courage to get in at $10 might want to lock in some profits.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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