Cameco (CCJ)

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Geoffrey Jordan

Darv.Gosal

Cameco (NYSE:CCJ) is the world's largest producer of U3O8 uranium, a mineral whose only commercial use is to fuel nuclear power plants, and the second largest uranium producer in the world, behind Rio Tinto (ASX:RIO). Nuclear power accounts for about 15% of the world's electricity, and Cameco accounts for 20% of world uranium production^[1], with 500 million pounds of proven and probable reserves.^[2] It is involved in all stages of the uranium mining process, which includes exploration, fuel fabrication, and electricity generation. As one of only three conversion suppliers in the western world, Cameco controls about 40% of the western world's capacity to produce uranium hexaflouride (UF6), a compound used in the uranium enrichment process that produces fuel for nuclear reactors.^[3]

Every year since 1985, the world's consumption of uranium has been greater than its production.^[4] As one of the most economical sources of energy on a per unit basis, nuclear energy is an attractive alternative to fossil fuels. Cameco stands to benefit from the excess demand for uranium, especially as economic growth in the developing world continues to contribute to the rising demand for energy.

In the U.S., however, government funding for renewable energy other than nuclear energy, such as wind, hydroelectric energy, and solar energy, makes it difficult for new nuclear power plants to be installed. In fact, the last commercial nuclear power plant to be installed in the U.S. was the Watts Bar Nuclear Generating Station in 1996.^[5] Though nuclear power plant installations have stalled in the U.S., other countries are rapidly installing nuclear plants. China, India, South Korea, Russia, and several European countries have plans to install nuclear plants and to increase the percentage of energy provided by nuclear energy. Cameco will benefit from new nuclear plant installations as utility operators demand more uranium to run nuclear reactors.

News

Cameco's new chief executive has publicly stated that the current slump in uranium prices resulting from Japan’s nuclear disaster is a chance for the company to take another look at acquisitions that may have been too expensive just a few months ago. Tim Gitzel, now chief executive of Cameco, said Cameco will continue to look for “acquisitions or projects” that would make a good strategic fit.^[6]

Company Overview

The major stages in the production of nuclear fuel are uranium exploration, mining and milling, refining and conversion, enrichment and fuel fabrication. When uranium deposits are discovered, ore is extracted and processed at a mill to produce uranium concentrates. Cameco operates uranium mines and enrichment/fabrication plants that sell uranium concentrates to utility companies that generate nuclear electricity.^[7]

Business Segments

• Uranium (44.7% of total revenue)^[11]

Cameco is one of the world’s largest uranium producers, accounting for approximately 20% of the world’s production with about 500 million pounds of proven and probable mineral reserves of uranium.^[2] Cameco operates four uranium mines located in Canada and the United States and has two mines under development in Canada and Kazakhstan.^[7]

• Nuclear-generated Electricity (47.3% of total revenue)^[11]

Cameco has a 31.6% interest in Bruce Power (BPLP), which operates four Bruce B nuclear reactors in Ontario, Canada.^[12] Cameco provides 100% of the uranium concentrates for BPLP.^[12] Cameco also supplies BPLP and Bruce Power A Limited Partnership (BALP) with all of their fuel conversion and fabrication services.^[12] BPLP’s four B reactors have a combined net generation capacity of about 3,260 megawatts (MW), supplying about 15% of Ontario’s electricity.^[7]

• Fuel services (8% of total revenue)^[11]

The fuel services segment involves the refining, conversion, and fabrication of uranium concentrate. Cameco operates refining facilities at Blind River, Canada, and conversion and fuel manufacturing facilities in Ontario, Canada.^[12] The Blind River facility refines uranium concentrates into uranium trioxide (UO3), an intermediate product in the uranium conversion process.^[12] At its Port Hope conversion facility, Cameco converts the UO3 to either uranium hexafluoride (UF6) or uranium dioxide (UO2). Cameco manufactures fuel bundles for use in Candu nuclear reactors.^[12]

Trends and Forces

Japanese Earthquake and Tsunami Led to Sell-off in Uranium Stocks

The 9.0 earthquake in Japan on March 11, 2011, and subsequent tsunami caused four nuclear power plants in Northern Japan to fail, leading to a radiation release and overheating in the reactors. The Japanese government is struggling to prevent a nuclear meltdown. The Japanese nuclear crisis has shaken confidence in the future of nuclear energy, with Cameco's stock falling more than 20% since March 11.

Japan has closed 11 of its 54 reactors since the earthquake. The affected reactors consume about 340,000 pounds of uranium per month. There could be a short-term impact if the Japanese reactors stay offline since there is a surplus of about 3 million pounds of uranium on the spot market.^[13] However, Cameco has long term contracts to supply uranium which are not affected by the Japanese crisis.

Demand for uranium outstrips supply

Every year since 1985, the world's consumption of uranium has been greater than its production.^[4] To help meet this shortfall, reprocessed uranium and plutonium from the dismantling of Russian and U.S. nuclear weapons has been used.^[14] The World Nuclear Association estimates that uranium mining will need to increase by almost 300% in the next two decades.^[14] Since Cameco's production levels do not satisfy the demand for uranium, the company must purchase additional uranium from other miners at a significant mark-up. As a result, Cameco's overall costs of sales are forecast to rise by 20% to 25%.^[15]

There are 440 nuclear reactors operating worldwide and a total of 111 reactors under construction or planned for completion by 2020.^[16] The demand for processed uranium continues to rise as countries throughout the world increase their reliance on nuclear energy for electricity:

India and China's Uranium Demand is Expected to Grow Sharply

Indian reactor demand for uranium is expected to rise to as much as 10 million pounds in 15 years.^[17] India has 17 reactors operating and six under construction, and another 23 reactors are expected to come on line in the next eight years. India's supply of uranium now comes from mines in Canada, the United States, and Kazakhstan. However, the large uranium miners are seeking out mines in Africa that could help meet the rising demand for uranium in India.^[18]

China has 11 reactors operating, 16 under construction and 35 new plants expected to come on line within the next eight years. China's uranium demand is expected to grow 4-6 times by 2020, as the country increases its annual installed nuclear power capacity to 40 million kilowatts from 9 million presently.^[19]

The sharp increase in the demand for uranium from India and China will continue to raise the price of uranium and increase the profitability of Cameco's uranium sales. Cameco announced its intent to develop the Kintyre project in Australia, with production planned to begin in 2016. Cameco aims to almost double annual uranium output to about 40 million pounds by 2018 to help meet demand from Asia.

Uncertain supply of nuclear weapons for uranium production

The U.S. and Russia are both involved in the Megatons to Megawatts Program which decommissions nuclear warheads and recycles the bomb-grade uranium into fuel-grade uranium. The agreement between the two countries expires in 2013, and the program is not guaranteed to be continued.^[20] If the program is discontinued, it would restrict the supply of uranium and drive up uranium prices. If the agreement is renewed, still there is a limited supply of Cold War-era nuclear weapons and eventually this significant source of uranium will disappear. Currently, 40% of the global supply of uranium comes from the Megatons to Megawatts Program.^[1]

Alternative energy competes with nuclear energy

Wind, hydroelectric energy, and solar energy all compete with nuclear power for a share of the alternative energy market. Production costs are 8.8 cents (U.S.) per kilowatt hour for nuclear, 7.4 cents (U.S.) for coal, and 10.6 cents (U.S.) for natural gas.^[1] Though renewable energy sources will need to become more affordable and more widely adopted in order to become a more serious competitor to uranium, advances in technology are making investment in renewable energy more attractive.

Competition

In 2008, Cameco was the largest uranium mining company in Canada and the largest producer of U3O8 uranium in the world, producing 19.8 million pounds of uranium. In 2007, 11 countries were responsible for 97% of the global uranium extraction.

• Cameco accounts for 20% of uranium production worldwide.
• Rio Tinto (RIO) accounts for 13% of uranium production worldwide (14.2 million pounds of uranium annually).^[22] Rio Tinto's main business is the production of raw materials including copper, iron ore, coal, bauxite, diamonds, uranium, and industrial minerals. Rio Tinto has a 68.4% interest in Energy Resources of Australia, the third largest uranium producer in the world, and a 69% interest in Rossing Uranium in Namibia.^[23]
• Areva (ARVCF.PK), a French company specializing in uranium mining, chemistry, enrichment, combustibles, recycling, stabilization, and dismantling, accounts for 12% of uranium production worldwide.^[24]
• BHP Billiton (BHP) delivers uranium oxide concentrate to utility customers for the generation of electricity in civil nuclear reactors and accounts for 9% of uranium production worldwide. It produced 4,007 tons of uranium oxide concentrate in 2007.^[25]
• Kazatomprom accounts for 9% of uranium production worldwide. It is based in Kazakhstan and produced 3,010 tons of uranium in 2006.^[26]
• Denison Mines (DNN) is a Canadian mining company which owns a 22.5% interest in the McClean Lake uranium project and a 25% interest in the Midwest uranium project, both in Northern Saskatchewan. Denison produced 1.7 million pounds of U3O8 uranium in 2008.^[27]

References

1. ↑ ^{1.0 1.1 1.2 1.3} Montana Environmental Information Center
2. ↑ ^{2.0 2.1 2.2} World Nuclear Association
3. ↑ CCJ 10-F 2009. "The Company" p. 8.
4. ↑ ^{4.0 4.1} About Uranium: World Market
5. ↑ "Nuclear Energy's Role in Responding to the Energy Challenges of the 21st Century" Idaho National Engineering and Environmental Laboratory.
6. ↑ The Globe and Mail: "New Cameco CEO eyeing acquisitions" June 29, 2011
7. ↑ ^{7.0 7.1 7.2}
8. ↑ CCJ Annual Report 2009: MD&A
9. ↑ ^{9.0 9.1} Cameco Complete Business Review: Financial Highlights (p. 9)
10. ↑ The Wall Street Analyst Forum
11. ↑ ^{11.0 11.1 11.2} Cameco Year End Financials, p. 44
12. ↑ ^{12.0 12.1 12.2 12.3 12.4 12.5}
13. ↑ [Reuters: Cameco shares tumble on Japanese nuclear crisis http://www.reuters.com/article/2011/03/14/cameco-shares-idUSN1413594320110314]
14. ↑ ^{14.0 14.1} CNN: "Nuclear power's white-hot metal"
15. ↑
16. ↑ European Nuclear Society: Nuclear power plants, world-wide
17. ↑
18. ↑ The Energy Collective: "Cameco's passage to India" November 15, 2010
19. ↑ China's uranium demand for nuclear power to rise 4-6 times by 2020
20. ↑ Barron's: Saying Yes to Nukes with Cameco
21. ↑ Suzlon FY 07-08 Annual Report, Management Discussion and Analysis, p. 5
22. ↑ ^{22.0 22.1} Rio Tinto Preliminary Results 2008
23. ↑ Australian Securities Exchange: Energy Resources of Australia
24. ↑ ^{24.0 24.1} Areva
25. ↑ ^{25.0 25.1} BHP Billiton: Uranium
26. ↑ ^{26.0 26.1} "Kazatomprom ups uranium production 4% in 2006" Interfax-Kazakhstan
27. ↑ ^{27.0 27.1 27.2} Denison Mines: Home
28. ↑ ^{28.0 28.1 28.2} Google Finance
29. ↑ Rio Tinto Performance
30. ↑ BHP Billiton Business Review 2008
31. ↑ Paladin Energy 2010 Annual Report