Cameco Inc. (TSX: CCO) is one of the largest global providers of uranium, which powers nuclear power plants. It’s becoming increasingly clear that nuclear power is a big part of the energy solution for the future. Nuclear power is emissions-free, reliable, and necessary to meet zero emissions goals that have been set globally.
So let’s tackle the question – where will Cameco be in four years?
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The nuclear industry revived
To see where we’re headed, let’s start with a quick review of where we’ve been. Essentially, years of negative sentiment and negative policy decisions resulted in an underinvestment in the nuclear industry. This meant the dismantling and decommissioning of nuclear power plants.
Today, the effects of this stance on nuclear energy are increasingly obvious. Cameco forecasts that within the next 10 years, we will begin to see uranium demand from utilities overtake available supply. This means that pricing will rise, as utilities will be scrambling to meet the energy needs of their customers.
As this problem becomes increasingly clear, policies toward nuclear power plants have become far more constructive. Already, nuclear plant restarts, life extensions, and new builds are driving demand growth. For example, reactor life extensions in Belgium, a new project in Poland, and the restarting of nuclear reactors in Japan are reflective of the improving environment for nuclear power.
Meeting the world’s energy needs
The long-term contracting market in uranium is starting to impress upon fuel buyers the urgency of the situation and the need for planning. The fact is that 3.2 billion pounds of uranium needs to be procured over the next 20 years to meet utility requirements. Yet, they have been slow to show the long-term planning required to address this.
In my view, this will not be ignored much longer. As Cameco’s management says, it’s only a matter of time. Therefore, I would expect to see meaningful demand increases in the coming years.
Cameco is well-positioned
The world is becoming increasingly volatile. This gives Cameco an edge, as it offers a safe and secure source of uranium that the world will value more than ever.
In Cameco’s latest earnings result, the company continued to practice discipline as it awaits the return of higher-priced long-term contracting for uranium. In fact, pricing for uranium in the long-term market is already showing signs of life. It has increased from $68 per pound at the beginning of the year to approximately $80 per pound today. This is the highest level since 2012.
So, while this plays out, Cameco will continue waiting. A simple task, as the company already has an excellent balance sheet, and strong cash flows to take it through. In fact, in the first quarter, cash provided by operations increased 75% to $110 million. Also, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 5% to $353 million.
The bottom line
The fundamentals for nuclear energy continue to be extremely positive. This means that there’s durable full-cycle demand growth in conjunction with limited supply. And economics 101 tells us that strong demand plus limited supply equals a very bullish scenario.
In the next four years, I think that utilities will increasingly take the projected supply shortfall seriously. As a result, they will begin to engage in long-term contracting to fulfill their future requirements. This, along with new investment in nuclear power plants, will drive the price of uranium higher.
Finally, this will drive Cameco’s financial results higher. It will also drive the shares higher. And, as the uncertainty lifts, Cameco stock will command a higher multiple as its positive outlook becomes more evident.
