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Will Cameco Corp. Survive?

Cameco Corp. (TSX:CCO)(NYSE:CCJ) continues to struggle with a weak uranium market, and investors are wondering how long the company can hold out.

Let’s take a look at the current situation to see if Cameco should be in your portfolio.

Fukushima effect

At the start of 2011, uranium sold for US$70 per pound, and Cameco’s stock fetched about $40 per share.

Then the tsunami hit the coast of Japan, and everything changed.

The Fukushima nuclear disaster forced Japan to shut down its entire fleet of nuclear reactors, and many countries put their nuclear energy programs on pause.

As a result, uranium spot prices went into a tailspin, falling below US$20 per pound last year. At the time of writing, the spot price is about US$26.50 per pound, and shares of Cameco are trading below $14.

Japan is working hard to get its reactors back in service, but operational and legal challenges have delayed the process. Only five of the country’s 48 operable reactors have resumed commercial operations, although several more have received approval and could restart next year.

CRA battle

Cameco is caught up in a nasty battle with the Canada Revenue Agency over taxes owed on income generated through a foreign subsidiary. The first round of the process has worked its way through the court and a decision is expected in the next six to 18 months.

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

Dividend cut

Cameco reported a Q3 net loss of $124 million and an adjusted net loss of $50 million. Lower average realized prices hit margins, and the loss of revenue from a disputed contract also hurt the company’s results.

Shortly after the Q3 numbers came out, Cameco announced a major cut to the dividend. The company has reduced the annualized payout from $0.40 per share to $0.08.

The company has also decided to suspend production at its McArthur River mine and Key Lake milling operation.

Will Cameco survive?

The near-term situation looks bleak, but Cameco should make it through the downturn. The company owns some of the richest uranium reserves on the planet and is a low-cost producer.

Uranium prices have started to recover as a result of production cuts by Cameco and other producers, and while the company anticipates difficult times continuing in the near term, the industry should recover.

Japan’s restarts are expected to ramp up in the next few years, and more than 50 new reactors are under construction around the globe.

One report says annual uranium demand could increase 50% by 2030.

Should you buy?

At some point, the uranium market might actually find itself in a shortage situation, and if that happens, Cameco will likely surge.

That said, there probably isn’t a rush to buy the stock today. The recent jump in uranium prices might turn out to be another head fake, and Cameco remains a risky bet until the CRA case is resolved.

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fool contributor Andrew Walker has no position in any stock mentioned.

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