The Motley Fool

The Case for and Against Investing in Uranium Miners

Over the past year, the stock price of Cameco Corp. (TSX:CCO)(NYSE:CCJ) has declined by over 15%. This has sparked a debate on both sides of the fence as to whether Cameco is still a worthwhile investment option.

Irrespective of where you fall on the uranium debate, a common consensus is that the root of Cameco’s problems stems from the depressed price of uranium. In the weeks and months following the Fukushima disaster in 2011, uranium prices tanked, falling from US$60 per pound to under US$20 per pound, placing incredible pressure on uranium miners to make up that difference through cost-cutting and efficiency improvements.

And while Cameco committed to several key cost-cutting improvements, the fact remains that Cameco supported mining operations for several years at a high output of a product that nobody wanted and that was declining in price, resulting in a tremendous supply glut.

The case against Cameco

That supply glut remains to this day, and despite a prolonged effort by Cameco and other uranium miners to put a serious dent in the uranium oversupply, a solution of any type is still up to a year away, even with the most optimistic viewpoint.

Cameco has slashed costs, production levels, and, earlier this year, even announced it was slashing the once-impressive dividend it offered, all in the hopes of outlasting the current supply glut.

Unfortunately, the supply glut is not the only problem plaguing Cameco.

Cameco also has a longstanding disagreement with the CRA over taxes owed through a foreign subsidiary. A decision, which is expected over the course of the next few months, in favour of the CRA could see Cameco left with a tax bill upwards of $2 billion. Cameco settled a similar case with the IRS last year.

The case for Cameco

Despite the many cons to investing in Cameco already noted, there are some compelling reasons to consider the uranium miner as an investment.

First, supply is beginning to shift. Cameco’s sizable production cut late last year, which coincided with a similarly massive production cut by the world’s largest uranium miner, is set to take a serious dent out of the current supply glut, eventually applying upwards pressure on prices.

The second noteworthy point has to do with demand. In the years following Fukushima, nuclear power lost much of its appeal, as the disaster effectively scared off investment and construction of new reactors.

That appears to be changing, too.

There are over 50 reactors currently under construction worldwide, and several nations, such as China, India, and the U.A.E., are leading a renewed interest in nuclear energy to power their rapidly growing infrastructure projects.

Finally, while uranium prices are low, the current spot price is not what Cameco’s clients pay. Long-term contracts that can typically span a decade or longer stipulate the agreed-upon price and amount of uranium provided. In other words, Cameco’s existing contracts have a much higher uranium costs associated with them.

Should you invest in Cameco?

There’s no denying the fact that Cameco has potential for investors, particularly over the long term. The production cuts announced earlier this year should finally be deep enough to bring some momentum to prices, and a renewed interest in nuclear power around the world will finally help kick-start demand as well.

Investors contemplating an investment in Cameco should be aware that while there is an opportunity for growth through Cameco, it is more a long-term growth prospect and one only for investors with an appetite for risk.

Investors looking at the more immediate term would be better served by investing in a different company in the mining segment to wait out the depressed uranium climate.

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Fool contributor Demetris Afxentiou has no position in any stocks mentioned. The Motley Fool is short shares of Cameco.

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