1 Beaten-Down Miner to Avoid

The outlook for Cameco Corp. (TSX:CCO)(NYSE:CCJ) is not as positive as many investors believe.

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The Motley Fool

A stock garnering considerable attention is deeply embattled uranium miner Cameco Corp. (TSX:CCO)(NYSE:CCJ). The one-time high flier has had its stock beaten down by the growing unpopularity of nuclear energy and the protracted slump of uranium. Despite expectations to the contrary and claims by some pundits that Cameco is an attractive deep-value investment, the miner’s latest results coupled with recent events signify that a recovery in its fortunes is a long way off. 

Now what?

For the second quarter 2017, Cameco failed to meet analyst expectations, reporting net earnings that were over four times lower than the consensus analyst estimate.

This was despite a significant reduction in operating costs, which were 7% lower for the quarter than they had been a year earlier.

That can be directly attributed to the ongoing weakness of uranium.

The average price of the radioactive fuel over the second quarter was almost 25% lower than it had been a year earlier, and there are signs that the slump will continue. This is regardless of the chorus of analysts claiming that there is considerable upside ahead for uranium because of growing demand and declining supplies.

You see, the uranium market is heavily oversupplied. Despite uranium miners, including Cameco, moving to reduce costs and shutter uneconomic production in the current environment, global production continues to grow.

The massive Husab mine in the impoverished African nation of Namibia is expected to reach full production by sometime in August of this year. That mine is believed to contain 5% of the world’s uranium reserves and is expected to produce up to 6,800 tonnes of uranium oxide annually when reaching full production.

BHP Billiton Ltd. (NYSE:BHP) also has plans in play for a low-key expansion of its massive Olympic Dam copper mine located in southern Australia. While copper may be the mine’s primary product, the production of uranium is an important by-product that is responsible for generating roughly a quarter of the mine’s earnings.

With copper rallying in recent months, there is considerable incentive for BHP to continue expanding the operation.

However, there are no guarantees that future demand for the radioactive fuel will grow.

The newly elected president in the Republic of Korea, Moon Jae-In, is in favour of abolishing the current nuclear-centred energy policy in favour of renewable sources of energy.

Meanwhile, France’s latest president Emmanuel Macron has confirmed his support for his predecessor’s policy of reducing the amount of electricity generated by nuclear from 75% to about 50%. For a country that generates over 540 terawatt hours annually, that represents a significant drop in the amount of uranium to be consumed.

The increasing cost effectiveness of renewables, which now sees many forms of renewable energy, such as of solar, wind, and geothermal power generation being more cost effective per megawatt hour produced, means this trend will spread globally.

This is particularly true when the dangers posed by nuclear power generation and its increasing unpopularity in the wake of the Fukushima accident are considered. That makes it unlikely that there will be a marked increase in the number of new reactors being brought online in coming years.

For those reasons, the number of new reactors will more than likely decrease.

So what?

It is difficult to see how uranium will rebound to the extent that some analysts claim because of softening demand growth and rising supplies globally. While Cameco has done an outstanding job of controlling costs and becoming one of the world’s lowest-cost producers, the sustained weakness of uranium means there is little upside ahead for investors. For these reasons, Cameco is fast shaping up as a value trap, and its stock won’t return to the heady heights of a decade ago when it was trading at over $40 per share.

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 Matt Smith has no position in any stocks mentioned.

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