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Why the Price of Uranium Might Be About to Rise

Cameco Corp. (TSX:CCO)(NYSE:CCJ) recently announced that it was cutting production and its dividend in response to poor uranium prices. The company posted a disappointing Q3 and, until recently, was trading below book value.

Cameco was preparing to settle in for a rough ride, as the price of uranium has done to the company what oil prices have done to many in the oil and gas industry. Since the Fukushima nuclear accident in 2011, uranium prices have crashed by more than 70%.

Big cuts from the biggest producer

It all seemed gloomy until KazAtomProm, the world’s largest uranium producer, announced that it would reduce its production over the next three years by as much as 20%.

Galymzhan Piramatov, a board member at KazAtomProm, stated, “Given the challenging market conditions, and in light of continued oversupply in the uranium market, we have taken the strategic decision to reduce production in order to better align our production levels with market demand.”

Is this enough to bring uranium prices back up?

Combined with the supply cut by Cameco, this could significantly improve the market for uranium, which currently is oversupplied. The price of uranium is nearly half of what it was just two years ago.

It is the single most important variable in Cameco’s financials and can mean the difference between the company having a great quarter and a disastrous one.

We’ve seen oil prices rise in the back half of this year, and, unsurprisingly, oil and gas stocks have been increasing since. Cameco’s stock has already gotten a boost from the news, and that could just be the start.

If the supply cuts translate into higher commodity prices, then Cameco’s financials will be stronger and will result in a healthier bottom line, which will help push the stock price even higher.

The big question is, how long it will take for the supply cuts to have a significant impact on uranium prices?

Cameco’s stock has taken a beating this year

Over the past five years, Cameco’s stock has declined more than 25% in price, and year to date it is down 6%. The stock is finally trading above book value thanks to this latest news, as it looks to finally build on some positive momentum.

Should you buy Cameco today?

Cameco could have a lot of upside over the long term, especially if uranium prices begin to rise. The company’s financials are strong, and Cameco is well positioned to take advantage when industry conditions become more favourable. However, for investors, the challenge is predicting when that will be the case.

Although Cameco is not a stock suitable for risk-averse investors, it could be a great buy for those looking for value stocks with great growth opportunities. The problem is, this is not the first time we have heard of KazAtomProm cutting its production.

Earlier this year, the uranium giant said it would be cutting 10% of its production in 2017. Unfortunately, that has failed to have any positive impact on uranium prices.

Cameco is an investment that could require a lot of patience from investors, but it could pay off in the long term.

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Fool contributor David Jagielski has no position in any stocks mentioned.

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