Cameco Corp. (TSX:CCO)(NYSE:CCJ) stock shot up nearly 5% early on Thursday, before giving up some of the gains to close 2.96% firmer as market sentiment became bullish on speculation that the miner’s planned production cut could lift uranium prices in the near term.
Management at Cameco intends to suspend mining production at the world’s biggest uranium mine, McArthur River mine, and to place the Key Lake milling plant under care and maintenance for 10 months next year, citing unsustainably low uranium market prices.
I had written about the stock earlier that day, tabling the case that the announced dividend cut could shake Cameco equity valuation while the production cut “may be good for the stock in the short term,” but I was more inclined towards a weakness in the stock in the news aftermath.
However, the bullish sentiment, which had, earlier on, lifted valuations for almost all other uranium-related investments in Australia, went on to push up Cameco’s shares during North American trading hours.
Why did the bulls rule the day?
Cameco’s planned production cut has been viewed as a significant catalyst for a rebound in uranium prices, with Cantor Fitzgerald analyst Rob Chang being quoted as saying, “this is the type of supply shock that will spur strength in the spot price.”
The uranium market is suffering from a protracted oversupply on the back of dampened demand, since the 2011 Japan Fukushima nuclear disaster that resulted in several nuclear reactor shutdowns and rising uranium stockpiles.
The uranium speculators have been looking for a tangible trigger to turn bullish again, as most recovery theses have failed to hold up for over three years now.
Cameco’s production cut is long overdue, and it could possibly reduce the current uranium oversupply in the broader market and result in a resurgence in spot and contract prices.
Will the rally persist?
Thursday’s uranium stock rally is backed by a strong argument for a near-term uranium market price recovery, as Cameco will remove over 13 million pounds of freshly mined uranium from the open market and reduce the rate of inventory build-up.
However, this is all speculation at this point.
There was a similar move from Kazakhstan early in January, where a 10% production cut at KazAtomProm was announced; the market believed that was the turning point for uranium spot prices.
We are in November now, the Kazakhstani move is almost forgotten, and the market is still down.
Will Cameco’s latest move significantly reduce the market oversupply?
There is so much uncertainty as to exactly by how many tonnes of uranium the market is oversupplied with, as some of the stockpiles are being held by governments that may never reveal the actual size of their inventories for obvious security and strategic reasons.
Combined with a strong secondary market feed of recycled uranium and the processing of military grade product into reactor-friendly enriched fuel, Cameco’s production cut may fail to have a significant impact in fighting market oversupply in just 10 months.
There may be a short-term speculative price improvement as a result of Cameco’s production cut, but for the market recovery to become sustainable, there is need for either a substantial recovery in uranium demand or a coordinated effort by uranium producers to significantly downsize production activities.
The uranium sector remains very speculative and volatile at the moment, and the latest bullish run could be short-lived if Cameco’s competitors do not follow the industry leader’s signal to also downsize operations as well as resist the temptation to quickly ramp up production as spot prices rebound.
Even after the miner’s current loss-making streak, TD Securities has reiterated its buy rating on Cameco and raised its price target on the stock from $13 to $15, expecting a short-term upward pressure on uranium prices.
While a speculative buy on Cameco could yield short term gains, long-term investors should evaluate the potentially disastrous tax dispute involving the Canada Revenue Agency which could cripple the uranium giant.
It may not hurt considering other smaller, less risky uranium names in the industry; they have responded better to the latest speculative move than Cameco.
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Fool contributor Brian Paradza has no position in any stocks mentioned.