Investors in Cameco Corp (TSX: CCO)(NYSE: CCJ) enjoyed a nice rally in the stock price in 2018 as deliberate production shut ins by producers and emerging new demand helped reduce excess supply and pushed equilibrium prices higher during the year. Could we see further share price gains this year?
A combination of company specific and market factors will decide the fate of Cameco’s equity valuation in 2019, and I will touch on a few that I think will be the major determinants of share price movement during the remaining 10 months of this year.
Uranium market prices
The biggest factor to watch in 2019 is the long-term contract market price per pound of uranium. Spot market price growth gained strong momentum last year as production cuts and a return to demand growth as well as improved market sentiment pushed equilibrium prices, but long-term contract prices have remained largely static over the past twelve months.
Average annual spot prices sequentially grew 13% for 2018, while the average annual long term price saw a 5% marginal decline. This was not a favourable development for Cameco, which sells into the contract market and is now a significant buyer in the spot market after suspending production at McArthur River and Key Lake assets. If sustained, this scenario significantly hurts margins.
News of demand growth last year were encouraging. Uranium consumption finally picked up during the year to pre-2011 levels, but the strong presence of financial buyers isn’t the kind of demand the market is looking for, as these agents will bring the purchased pounds back onto the market when the price is right for them.
Further, the reduction in supply surplus coming from curtailed production by large producers isn’t sustainable, as the shut-in pounds will quickly flood the market as market prices rebound, causing a new wave of price weakness.
A stronger long-term contract market will suit Cameco better, but this may depend much on the next factor highlighted below.
Trade policies
The United States is the single biggest consumer of world uranium production.
After suspending operations at key producing assets, Cameco produced just 9% of global production last year; thus, more than 70% of world primary uranium production is now from state-controlled miners, with Kazakhstan accounting for 40% of global mine production in 2018. Some of the leading uranium producers can’t be said to be friends of America.
Understandably, the U.S. is now concerned about security of supply, and a new trade policy’s focus on origin could limit exposure to the major global uranium suppliers and create significant trade distortions. The outcome of the investigation initiated by the U.S. Department of Commerce under Section 232 of the Trade Expansion Act will be key, with surveys and comments expected to be submitted by April. President Trump will have 90 long days to make a decision.
Cameco’s supplies aren’t likely to be impacted by the investigation, but the uncertainty to United States utilities is paralysing, and they may not be active in the long-term contract market until the dark blanket of uncertainty is lifted.
Long-term market prices may be significantly impacted if this policy is finalised this year.
Legal judgements
The September 2018 tax court ruling on the troublesome Canada Revenue Agency (CRA) tax dispute came in Cameco’s favour, but the CRA has appealed the judgement. It will take almost two years to see the outcome of the appeal, but the company may receive a $38 million reimbursement of costs incurred during the dispute this year.
The company’s TEPCO dispute arbitration hearings were concluded in January. The dispute involved a contract worth about $1.3 billion in revenue to Cameco, and the company is seeking damages to the tune of US$700 million plus interest and costs. Post-hearing steps expected to be complete by May; if the arbitrator rules in favour of Cameco, the company could receive a significant windfall that could allow it to easily decide to settle its $500 million maturing debt this year.
Other important factors to watch
A labour agreement at a key producing asset is expiring this year, and any potential labour disruptions at this asset may cause severe turbulence in the stock.
Further, there could be an emphatic return of China into the contracts market this year. The country’s 2010 purchases drove a wild rally in uranium prices that year, and the signed contracts are nearing expiration. However, China has been on the market consistently since then, so we shouldn’t get too excited.
Investor beware: just a mere promise of new uranium supply growth could create downward pressure on market prices and pull the stock price down.
