Is 2020 the Beginning of the End for Cameco (TSX:CCO)?

The outlook for Cameco Corp. (TSX:CCO)(NYSE:CCJ) remains poor, making it a stock to avoid in 2020.

| More on:

The world’s largest publicly listed uranium miner, Cameco (TSX:CCO)(NYSE:CCJ) has been roughly handled by the market over the last five years, and there are signs that it will continue to perform poorly in 2020 after losing 25% since the start of 2019. The primary reason for Cameco’s dismal performance has been a long-term decline in the price of uranium after Japan’s Fukushima Daiichi nuclear disaster in March 2011. Since then the radioactive fuel has fallen into a protracted slump because of a sharp decline in the use of nuclear power across the globe.

Declining demand

While there is growing optimism surrounding the outlook for nuclear power and uranium, there are indications that the radioactive metal will remain caught in a protracted slump which bodes poorly for Cameco. After peaking in 1996, the use of nuclear energy, which is essentially a carbon-free power source, has fallen significantly because of safety and environmental concerns.

In the wake of Fukushima, there has been a concerted push to phase out nuclear power across the globe. France has committed to reducing the share of its power produced by nuclear plants by up to 50% and to close 14 reactors by 2035. Switzerland is committed to switching off five nuclear power plants and permanently switched off the first in December 2019. South Korea is another nation committed to a nuclear phase out.

The pace at which the popularity of nuclear power is declining has been accelerated by the rise of renewable energy, which over the last decade has become increasingly cheaper and more reliable. According to the International Energy Agency (IEA) renewable energy is expected to expand by 50% between the end of 2018 and 2024. The increasing uptake of renewable electricity production can be attributed to a sharp reduction in the cost of production which now sees hydro, solar and wind competitive with fossil fuels and nuclear. Renewables are also vastly less hazardous and have a far lower impact on the environment while reducing carbon emissions and slowing the advent of global warming.

A key indicator that pundits point to when laying out the bull case for Cameco is that there are around 50 nuclear reactors under construction globally which they claim will lead to a significant increase in demand for uranium.

However, most of those reactors aren’t expected to be completed until 2021 or later and many are to replace existing plants that have reached the end of their productive life and are to be shutdown. Others may also never be completed due to growing pressure across the world to phase out nuclear power.

Those factors don’t bode well for a significant lift in demand for uranium, which is part of the reason why prices remain soft.

Another aspect of the equation is supply, and there is no shortage of uranium. Even after Cameco shuttered its MacArthur Lake operations, the price of uranium failed to rally significantly and has softened since then, even after the miner announced that the production suspension was indeterminate.

According to the International Atomic Energy Agency, current uranium production is more than adequate to meet global demand for the radioactive fuel regardless of the role played by nuclear power in the world energy mix.

For those reasons, it is highly unlikely that supplies of uranium will become constrained, as some pundits are predicting.

That certainly doesn’t bode well for higher prices, explaining why Cameco’s stock continues to languish. For the third quarter of 2019, Cameco reported further poor results with revenue declining by 38% year over year, gross profit plunging by 68% and a net loss of $13 million compared to a profit of $28 million a year earlier. Even a substantial decrease in expenses, which saw third-quarter administration costs fall by 38% year over year and exploration spending decline by $2 million have done little to boost Cameco’s profitability.

Foolish takeaway

A sustained recovery of uranium appears increasingly unlikely and that bodes poorly for the fortunes of Cameco, the world’s largest miner of the radioactive fuel. The miner reported a net loss for the first three quarters of 2019 and there are no signs of any respite in sight. The poor outlook for uranium, because of the growing unpopularity of nuclear power, makes Cameco a stock to avoid.

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 Matt Smith has no position in any of the stocks mentioned.

More on Metals and Mining Stocks

nugget gold
Metals and Mining Stocks

Should You Buy New Gold Stock While It’s Below $8?

New Gold is a TSX mining stock that has more than doubled in the last 12 months. Is NGD stock…

Read more »

Metals
Metals and Mining Stocks

Should You Buy First Majestic Silver Stock While It’s Below $12?

First Majestic Silver is a TSX mining stock positioned to deliver outsized gains to shareholders over the next 18 months.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Metals and Mining Stocks

A $7,000 TFSA Investment Strategy That Focuses on Quality

TFSA investors could consider holding quality undervalued TSX stocks and benefit from outsized gains over time.

Read more »

dividends can compound over time
Metals and Mining Stocks

3 Reasons This Sold-Off TSX Stock Is Primed for a Big Rebound

Teck stock is trading well below its peak, but here’s why its next leg up could be closer than most…

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Metals and Mining Stocks

1 Magnificent Materials Stock Down 3% to Buy and Hold Forever

Allied Gold is a TSX materials stock that offers significant upside potential over the next three years, given its growth…

Read more »

People walk into a dark underground mine.
Metals and Mining Stocks

Where Will First Quantum Minerals Stock Be in 3 Years?

First Quantum is a TSX mining stock which could deliver outsized returns to shareholders in the next three years.

Read more »

A worker wears a hard hat outside a mining operation.
Metals and Mining Stocks

If I Could Only Buy and Hold a Single Mining Stock, This Would Be it

North America's uranium giant dominates the nuclear boom with 10-year growth runway ahead.

Read more »

Safety helmets and gloves hang from a rack on a mining site.
Metals and Mining Stocks

Where Will Teck Resources Stock Be in 4 Years?

Down more than 30% from all-time highs, Teck Resources is a mining stock that trades at a discount in May…

Read more »