2 Strong Signs That Cameco Corp’s (TSX:CCO) Best Days Lie Ahead

Investors have better hopes in Cameco Corp (TSX:CCO)(NYSE:CCJ) stock’s recovery prospects after watching these developments.

| More on:
edit Woman calculating figures next to a laptop

Image source: Getty Images.

Low cost uranium mining giant Cameco Corp (TSX:CCO)(NYSE:CCJ) is battling to survive the prolonged dip in the oversupplied uranium market, but there is new hope among contrarian investors on the stock as recent supplier collaborative efforts are beginning to yield some fruit.

Two important factors favour the prospect of a sustained recovery on Cameco stock, one being the latest favourable tax court ruling that eliminates risk discounts, while the ongoing recovery in uranium spot and contract prices since last quarter could be the most bullish development that investors have been waiting to see for several years.

Should investors start smiling now? A closer look at recent developments could provide some model answer to this question.

Rising spot prices

Uranium spot and long-term contract prices rose significantly during the last quarter.

As market leader Kazatomprom slowed down production growth this year, Cameco decided to indefinitely extend its shut-down of valuable producing assets, the McArthur River mine and related Key Lake milling plant in July, further constraining industry supply.

In response, the uranium spot market rebounded sharply during the quarter to trade around US$27.50 per pound by September, up more than 21% from the June average price. Long-term contract prices rose nearly 9.5% during the quarter to US$31.75 per pound.

Uranium Average Monthly Price Per Pound (June 2016-Sep 2018). Source: Cameco Corporation

While the increase in long-term prices hasn’t been as encouraging as the rebound in the spot market, the increase could be an important sign that the market is warming up to increasing equilibrium prices as mining production recedes.

That said, this short-term recovery isn’t 100% favourable to Cameco.

Unfavourable spot prices?

Management could have been more pleased if contract prices had mimicked the surge in spot prices to allow the company to contract at better terms. Cameco supplies into the long-term contracted market, and is currently a significant buyer in the spot market to augment cover the gap from reduced mining output.

As spot prices rise faster than contract prices, gross margins suffer in the short term, yet the company cannot enter new supply contracts at low long term price points.

That said, the company’s supply contracts include a fixed price leg and a spot price leg at delivery. The respective weighting of the two legs in realized prices remains confidential information, but the company could realize better average prices going forward.

Long-term price recovery lagging

The uranium market has suffered from surplus supplies from both fresh mine production and from secondary material for years. Customers may still be convinced that supply surpluses are still existent, hence the resistance to contract at higher prices even as spot prices increase.

Further, Cameco’s spot market presence today somehow increases demand in the short term, which may contribute to rising spot prices. However, this new demand will evaporate once the company restarts production at its currently idle key assets.

Could the price trajectory then reverse after Cameco exits the spot market and restarts production?

The above remains a puzzling question, but the key question could be: At what contract price range will Cameco restart its suspended production? Production economics kick in at this point, but I would bet that management could start contracting at prices nearly double today’s spot, which is a long way up.

Investor takeaway

A long-term collapse in capital investment and low development in the uranium market due to a low price environment have paved the way for market recovery as new supply capacity dries up. The obtaining recovery could therefore be sustained in the long term, and that’s a bullish factor for Cameco stock price.

Further, the company has scored big in the high value tax case against the Canada Revenue Agency (CRA), but it could still contest the ruling.

Even if the CRA could decide to appeal against the tax court judgement, there is evidently strong legal merit in Cameco’s plea for innocence in the case; the CRA could simply respect the court decision, reimburse claimed taxes and penalties as well as apply the ruling to other tax years.

There’s reason enough to be bullish on Cameco today as the CRA’s case gets shrugged off and uranium market prices tick higher.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Brian Paradza has no position in any of the stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »