Cameco Corp. (TSX:CCO)(NYSE:CCJ), Canada’s top uranium producer, posted a quarterly loss last Friday that was unexpected and cut its full-year production outlook due mostly to weak uranium prices and issues at two of its operations.
Because of the bad news, shares tumbled by 12% at market’s opening on Friday, touching their lowest level since January 2016.
A surprise quarterly loss
Cameco lost $124 million, or $0.31 per share, in the third quarter ended September 30, compared with a profit of $142 million, or $0.36 per share, a year ago.
On an adjusted basis, the uranium miner lost $50 million, or $0.13 per share, in the third quarter, compared with a profit of $118 million, or $0.30 per share, in the same quarter last year. Analysts had expected a profit of $0.05 per share, according to Thomson Reuters. Revenue dropped by 27.5% to $486 million.
Cameco’s third-quarter uranium sales volume fell 1% to 9.2 million pounds, and its average realized price for the metal fell 26% to $41.66 per pound.
Uranium prices have fallen more than 50% since the Fukushima disaster in 2011, which forced Japan to shut down all its nuclear reactors. Despite the restart of some of those reactors, prices have remained low, mainly due to oversupply in the industry.
Cameco reacted to this situation by making difficult cuts, including the decision in April 2016 to close its Rabbit Lake mine in Saskatchewan, which cost 500 jobs. Those cuts apparently didn’t produce the expected results, since the company continues to lose money.
Reduction of full-year production outlook
Cameco now expects to produce 24 million pounds of the radioactive metal this year, down 5% from an earlier forecast of 25.2 million pounds. The cut is partly due to production delays at its Key Lake mine and lower production than expected at its Smith Ranch-Highland operation.
The Saskatoon-based miner is also reducing capital spending guidance to $160 million for the year compared with earlier expectations for $175 million.
“We can’t control the timing of a market recovery, so we continue to focus on our tier-one strategy; on being as streamlined and efficient as possible; responsibly managing our production, inventory and purchases; protecting and extending the value of our contract portfolio, and maximizing cash flow while maintaining our investment-grade rating,” president and CEO Tim Gitzel said in a statement.
Cameco’s most immediate goal, he added, is to remain competitive and be ready to be among the first to respond when the demand for uranium rises.
Cameco is in a $2.1 billion legal battle with the Tokyo Electric Power Company (Tepco), which, in February, cancelled a uranium sales contract, worth about $1.3 billion in revenue through 2028. That dispute will go to arbitration in 2019. The issue of that battle could have a material effect on the company’s stock.
Bottom line
Nuclear stocks are becoming less popular with the growing trend towards socially responsible investing. People are more conscious of the impact that companies have on the environment. As a result, many are avoiding companies that are considered to have a negative impact on the environment or the health, such as nuclear companies. I expect this trend to increase in the future, and thus to have a negative impact on Cameco’s shares.
The uranium miner’s shares have been on a downward path for many years, showing a negative return of -12% over 10 years. Year to date, they are down more than 20%.
Cameco’s PEG ratio expected over five years is 2.08, which is high and implies that you’re paying too much for not enough growth.
Cameco is still paying a dividend of $0.10 per share quarterly, but this dividend may be in danger if uranium prices remain low for a long period.
I think that with time and patience, shares will recover, but there are much better opportunities in the market than Cameco, so I would stay away from this stock. There are risks that are simply not worth taking.
