Cameco (CCJ)

Uranium Prices: Demand for uranium is expected to outstrip supply over the next decade. This excess demand will continue to put upward pressure on the price of uranium. This will benefit Cameco given that it controls more than 45% of identified new uranium production that is expected to come to market over the next 10 years. In addition, as the economies of India and China continue to grow so will their demand for energy (See China's Energy Appetite). In 2006, 69 percent of India’s energy came from coal and 2.6 percent from nuclear power. It aims to produce 25 percent of its electricity from nuclear power by 2050. Cameco is in the perfect position to take advantage of this trend.

Rising demand for uranium and the reality of a supply shortfall have caused the price of uranium to steadily increase, reaching $51 per pound in May 2009. Nuclear energy is a cleaner alternative to fossil fuels, and emerging markets will heavily rely on nuclear power to fuel economic growth. According to estimates by the World Nuclear Association, the number of nuclear reactors is expected to climb 30% by 2020 on demand from developing nations like China and India. The European Nuclear Society predicts that 44 new plants are currently under construction in 14 countries, and the International Atomic Energy Agency estimates that world nuclear capacity could double by 2030. In addition to generating electricity for cities, nuclear power could also provide a clean alternative to coal for powering electric cars. According to Alex Klein, a director at Emerging Energy Research, “Nuclear, given its potential for scale, will be looked at as a key form of power generation to facilitate electric power vehicles." Cameco stands to benefit from the increasing demand for uranium in emerging markets. Increasing demand ultimately puts upward pressure on uranium prices, and Cameco's profit margins rise in tandem with uranium spot prices.

60% of the world's uranium comes from just 10 mines. Cameco's MacArthur River mine accounts for 15% of world production and is the highest grade mine in the world (MacArthur is 2,360% richer than the next highest grade mine, Rabbit Lake, also owned by Cameco). Currently, the world demand for uranium exceeds supply, and stockpiles are dwindling. Cameco is positioned to benefit from this trend, and is already in a strong financial position: the stock is trading at only nine times next year’s cash flow, has a strong balance sheet, no net debt, and over $1 billion in cash.

Canada’s Cameco Corp. might be one of the companies to ink a deal. The Saskatoon-based Cameco is the world’s largest uranium miner, making it vital to the global supply.

India will require about 1,600 metric tons of uranium per year to achieve the energy output it desires

The cash-rich Cameco reported an 86% increase in revenue for the fourth quarter of 2008, and Chief Executive Officer Gerald W. Grandey remains optimistic that his company will continue to weather the global financial crisis.

“Our customers are well-established electrical utilities, many government-owned or with regulated rate structures. In tough times, they run their low-cost nuclear plants at full capacity, assuring demand for our products,” Grandey said in a conference call last Tuesday. “Our strategy of seeking price protection in our contracting has reduced the sensitivity of our revenue to softening spot prices and we are seeing the benefit now,”

Uranium use will increase 3% annually over the next 10 years, as new reactors are built around the world, Grandey said. A short-term loan taken last June to help finance investments in new assets has been extended on good terms, and Cameco has also received new credit of $100 million.

Among those scheduled to meet with Indian interests, was Australian Prime Minister Kevin Rudd. However, Rudd decided to postpone his visit when Indian Prime Minister Manmohan Singh became ill and underwent heart surgery.

When the two leaders do eventually catch up with one another, they’ll have plenty to talk about with respect to India’s nuclear buildup. Australia is the world’s second-largest uranium producer, trailing only Canada. Australia exports about 10,000 metric tons of uranium a year - representing a $900 million injection into the domestic economy.

Cameco has approved a 43% increase in its annual cash dividend to $0.40 a share, from $0.28, beginning in 2011. According to CEO Jerry Grandey, "The substantial increase in our annual dividend demonstrates our confidence in our business and in the long-term fundamentals of the uranium market." Cameco has increased its dividend seven times in nine years.

Cameco's uranium production increased 17% in the third quarter of 2010 compared with the third quarter of 2009 and the company raised its output forecast for 2010 to 22 million pounds, from a previous target of 21.5 million pounds. Cameco plans to increase production to 40 million pounds a year of uranium by 2018.

Cameco's growing dividend and its plans to substantially increase uranium output signal an excellent investment opportunity.

Good margin, Good Dividend, Uranium Prices Bottoming.