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CCJ AT A GLANCE

P/E ► 23.8 AVG EV/EBITDA ► 13.6 AVG ROA ► 8.5% AVG ROE ► 13.2% AVG Debt to Equity ► 0.674 AVG Current Ratio ► 2.16 AVG Interest Coverage Ratio ► 9.14 AVG

 

 

 

 

 

 

Cameco (NYSE:CCJ) is the world's largest producer of U3O8 uranium, a mineral whose only commercial use is to fuel nuclear power plants. Nuclear power accounts for about 15% of the world's electricity, and Cameco accounts for 20% of world uranium production, with 500 million pounds of proven and probable reserves.^[1] It is involved in all stages of the uranium mining process, which includes exploration, fuel fabrication, and electricity generation (the latter through Bruce Power, a partnership with British Energy (LON:BGY)). 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.^[2]

Every year since 1985, the world's consumption of uranium has been greater than its production.^[3] As one of the most economical sources of energy on a per unit basis, nuclear energy is an attractive alternative to fossil fuels, especially as economic growth in the developing world continues to contribute to the rising demand for energy. 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.^[4]

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.^[5]

Business and Financial Metrics

CCJ Revenue and Net Income, 2005-2008^[6]

Second Quarter 2009 Summary
Cameco reported net income of $247 million, nearly 65% higher than net earnings of $150 million recorded in the second quarter of 2008.^[7] This was due to higher earnings in the fuel services and electricity businesses, partially offset by lower results in its uranium and gold businesses.

In Cameco's uranium business, higher costs of sales adversely affected uranium profits in the second quarter. The company's gold business was impacted by lower gold production and higher operating costs during the quarter. However, in Cameco's electricity business, an increase in the realized price of electricity and in generation led to stronger results in the quarter.

First Quarter 2009 Summary
In the first quarter of 2009, Cameco reported earnings of $89 million ($Cdn), 40% lower than in the first quarter of 2008.^[8] This fall in income was due to lower earnings in the uranium and gold businesses, partially offset by improved results in the electricity business.^[8] Cameco's total revenue increased by 3.7% to $615 million ($Cdn) during the first quarter.^[8]

Revenue from Cameco's main business, uranium production, decreased by $2 million to $336 million compared to the same period in 2008 due to a 4% decrease in sales volumes, offset by a 5% increase in the realized selling price of uranium.^[8] Revenue from Cameco's fuel services business was $54 million, a decrease of $5 million from the same period in 2008, also due to a decrease in reported sales volumes and partially offset by an increase in the average realized price.^[8]

Cameco's pretax earnings from electricity generation totaled $44 million compared to $6 million in the same period of 2008.^[8] This increase was due to improved generation efficiency and lower operating costs.

Revenue from Cameco's gold business increased by $9 million to $122 million compared to the first quarter of 2008.^[8] The increase in revenue was due mainly to a change in the US/Cdn foreign exchange rate. However, its gold business was impacted by lower production and higher operating costs.^[8]

2008 Summary
In 2008, Cameco reported net earnings of $589 million, 3% higher than adjusted net earnings of $572 million in 2007.^[5] Also in 2008, Cameco's consolidated revenues reached nearly $2.9 billion, 24% higher than the $2.3 billion in revenue in 2007.^[5] Cash generated by operations was down 12% from $801 million in 2007 to $708 million in 2008. This decrease of $93 million was mainly attributable to higher working capital requirements in 2008.^[5]

In 2008, revenue from Cameco's uranium business rose by 19% over 2007 to $1.51 billion.^[9] This increase in revenue is attributable to a 13% increase in sales volume and a 5% increase in the realized selling price of uranium.^[9]

In 2008, revenue from Cameco's fuel services business rose by 5% to $252 million compared to 2007 as the impact of a decline in reported sales volumes was offset by an increase in the realized price of fuel.^[9]

In 2008, revenue from Cameco's gold business increased by $272 million to $677 million compared to 2007.^[9] The increase was due to a higher realized selling price and higher sales volumes. The realized price of gold rose to $853 (USD) per ounce in 2008 compared to $691 (USD) per ounce in 2007.^[10]

Business Segments

• Uranium (52% of total revenue, 42% of net income)^[12]

Cameco is one of the world’s largest uranium producers, accounting for approximately 20% of the world’s production in 2008 with about 500 million pounds of proven and probable mineral reserves of uranium.^[1] Cameco operates four uranium mines located in Canada and the United States and has two mines under development in Canada and Kazakhstan.^[5]

• Gold (24% of total revenue, 20% of net income)^[12]

Cameco has a 52.7% interest in Centerra Gold Inc. Centerra is a Canadian gold producer that acquires and develops gold properties in Central Asia and Eastern Europe.^[13] Centerra operates two gold mines in the Kyrgyz Republic and Mongolia.^[13]

• Nuclear-generated Electricity (15% of total revenue, 19% of net income)^[12]

Cameco has a 31.6% interest in Bruce Power L.P. (BPLP), which operates four Bruce B nuclear reactors in Ontario, Canada.^[13] Cameco provides 100% of the uranium concentrates for BPLP.^[13] Cameco also supplies BPLP and Bruce Power A Limited Partnership (BALP) with all of their fuel conversion and fabrication services.^[13] BPLP’s four B reactors have a combined net generation capacity of about 3,260 megawatts (MW), supplying about 15% of Ontario’s electricity.^[5]

• Fuel services (9% of total revenue, 19% of net income)^[12]

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.^[13] The Blind River facility refines uranium concentrates into uranium trioxide (UO3), an intermediate product in the uranium conversion process.^[13] 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.^[13]

Acquisitions

In August 2008, Cameco completed the acquisition of a 70% interest in the Kintyre uranium exploration project in Western Australia.^[13] A joint venture comprised of Cameco (70%) and Mitsubishi Development Pty Ltd (30%) purchased the Kintyre project from Rio Tinto.^[13] Cameco has been actively exploring for uranium deposits in Australia since 1997 and has exploration licenses in Western, Northern, and Southern Australia. Its acquisition of Kintyre has expanded its access to uranium deposits in the region north of Perth, Australia.^[14]

Also in 2008, Cameco acquired a 24% interest in Global Laser Enrichment (GLE) based in North Carolina. GLE is focused on developing a uranium enrichment process using laser technology.^[13] The remainder of GLE is owned by General Electric Company (51%) and Hitachi Ltd. (25%), and the acquisition is an indication of Cameco's willingness to invest in research and development of new enrichment technologies.^[15]

Key Trends and Forces

Demand for uranium outstrips supply

Source: World Nuclear Association^[1]

Every year since 1985, the world's consumption of uranium has been greater than its production.^[3] The shortfall in demand for uranium has come from several renewable and non-renewable sources, including reprocessed uranium and plutonium as well as from the dismantling of Russian and U.S. nuclear weapons. In 2006, uranium producers met only 62% of worldwide demand.^[16] The World Nuclear Association estimates that uranium mining will need to increase by almost 300% in the next two decades.^[16]

In Cameco's uranium business, higher costs of sales adversely affected uranium profits in the second quarter of 2009, increasing by between 5% and 10%.^[7] 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, overall costs of sales are forecast to rise by 20% to 25%.^[7]

As of January 2009, there were 436 nuclear reactors operating worldwide and a total of 115 reactors under construction or planned for completion by 2020.^[17] The demand for processed uranium continues to rise as countries throughout the world increase their reliance on nuclear energy for electricity:

• 68 reactors are scheduled to be built in Asia, as energy demand is driven by economic expansion. About three-quarters of this growth is expected to occur in China and India, which have announced plans to build 31 and 18 reactors, respectively.^[17]
• In Russia, Ukraine, and Armenia, it is anticipated that 23 reactors will be built, offset by one closure in Armenia and six in Russia.^[17]
• In Finland, a new European Pressurized Water Reactor is being constructed and, when completed, will bring the country’s total to five nuclear reactors.^[17]
• In France, the construction of a second European Pressured Water Reactor is expected to begin in 2012.^[17]
• South Korea’s generation blueprint anticipates that by 2020 roughly half the country's electricity will be nuclear-generated.^[17]
• At the end of 2008, the U.S. Nuclear Regulatory Commission (NRC) had received 17 applications for combined construction and operating licenses (COL) for 26 new nuclear reactors.^[5]

China and India's Uranium Demand

Cameco will set up a marketing office in India in October 2009 as it expects India's demand for uranium to triple in the next 15 years.^[18] Indian reactor demand for uranium estimated at about 3 million pounds this year is expected to rise to as much as 10 million pounds in 15 years.^[18] India has 17 reactors operating and six under construction, and another 23 reactors are expected to come on line in the next eight years. 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 present.^[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.

Construction of new nuclear power plants is prohibitively expensive

Though there are plans to install many nuclear power plants worldwide, the cost of plant installation is prohibitive. Nuclear power plants typically have high capital costs for building the plant, but low fuel costs. For example, researchers from the Keystone Center consulted with 27 nuclear power companies and contractors and concluded that the cost of building new reactors is between $3,600 and $4,000 per installed kilowatt.^[20] They also projected that the operating costs are 30¢/kilowatt-hour for the first 13 years until construction costs are paid followed by 18¢/kWh over the remaining lifetime of the plant, compared to 10¢/kWh for residential electricity.^[20] In real terms, Florida Power & Light estimated the cost for building two new nuclear units at Turkey Point in South Florida to be $24 billion.^[20] In addition to high construction costs, nuclear power plants incur large decommissioning and nuclear waste storage costs.

Uranium prices are dictated by long term contracts

Uranium spot prices have increased dramatically since 2003, when the commodity was under $10 per pound. Its peak spot price in 2007 was over $125 per pound and has since fallen to about $42.50 as of March 2009.^[21] Cameco's stock price appreciated nearly 13-fold between January 2003 and June 2007 as a result of this increase in uranium spot prices.^[22] Most utility companies secure a significant percent of their uranium fuel through long-term (i.e., multi-year) contracts with companies such as CCJ. These contracts are often priced in accordance to market conditions with uranium spot prices (i.e., short-term purchases for uranium within one year).^[5] CCJ benefits from rising uranium spot prices because it earns more revenue for each unit of uranium concentrate it sells to nuclear power plants and electricity producers when the uranium spot price is higher.

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. In 2008, production costs were 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.^[23] 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.

Legislation restricts the use of nuclear power

Nuclear energy and uranium demand are dependent on key legislation issues, including environmental and safety concerns surrounding nuclear power plants as well as electricity deregulation. For example, due to regulatory hurdles, the last commercial nuclear power plant to be installed in the U.S. was the Watts Bar Nuclear Generating Station in 1996.^[25] Regulators must approve the construction, continued operation, and decommissioning of most of Cameco’s facilities.^[5] These facilities are subject to numerous laws and regulations regarding safety and environmental matters, including the management of hazardous wastes and materials.

Environmental regulation compliance in the U.S. and Canada imposes costs

The world production of uranium in 2005 was approximately 105 million pounds of U3O8, 90% of which came from eight countries, which are, in order of greatest to least production: Canada (30 million pounds, 29% of world production), Australia, Kazakhstan, Niger, Russia, Namibia, Uzbekistan, and the U.S.^[1] Increasingly stringent environmental regulations in Canada and the U.S. result in higher administration costs and capital expenditures for compliance. One example of a regulatory challenge that has significantly impacted Cameco's cost structure is the requirement to reduce the concentrations of molybdenum and selenium in the effluent released from a uranium mill in Key Lake, Canada.^[5] Total capital expenditures to add the molybdenum and selenium removal circuit totaled $30 million ($Cdn).^[5]

Political instability in Kazakhstan

Source: UX Consulting Co., World Nuclear Association^[26]

Kazakhstan, boasting one fifth of the world's uranium reserves, is ruled by an autocratic government known for bribery and ranked near the bottom of Transparency International's global corruption index in 2008.^[16] Since Kazakhstan gained independence after the collapse of the Soviet Union in 1991, Nursultan Nazarbayev, Kazakhstan's leader, has controlled the media through censorship and oppressive media laws. The political situation in Kazakhstan poses risks for Cameco, which has entered into a joint venture with Kazatomprom, Kazakhstan's state-owned nuclear company, to build a 12,000-ton nuclear fuel conversion plant.^[16] Cameco and Kazatomprom are already joint owners of the Inkai mine in Kazakhstan, which has faced delays coming to production due to a sulphuric acid shortages in Kazakhstan.^[27]

A sign of the risky political climate in Kazakhstan was the arrest of Mukhtar Dzhakishev, the head of Kazatomprom, in May 2009.^[16] He was accused by Kazakhstan's KNB security service of illegally taking over state-owned uranium deposits and selling them to foreign companies. Under Dzhakishev's leadership, Kazatomprom turned from an inefficient, near-bankrupt state enterprise to one of the leading uranium producers in the world. Cameco's CEO Jerry Grandley told reporters that the arrest of Dzhakishev created an environment of uncertainty in Kazakhstan which could be potentially worrisome to foreign investors.^[28]

The low cost of uranium production in Kazakhstan and the abundance of uranium deposits make Kazakhstan a leading player in the uranium production market. Kazakhstan in 2007 passed Rio Tinto (RTP) and Areva (ARVCF.PK) as the world's second-largest production company behind Cameco, providing about 5,000 pounds, or 12% of global supply.^[16] Given political uncertainties in Kazakhstan, however, Cameco's investments in that country are exposed to some level of risk, especially through its joint ventures with Kazatomprom.

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 (RTP) accounts for 13% of uranium production worldwide (14.2 million pounds of uranium annually).^[29] 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.^[30]
• Areva (ARVCF.PK), a French company specializing in uranium mining, chemistry, enrichment, combustibles, recycling, stabilization, and dismantling, accounts for 12% of uranium production worldwide.^[31]
• 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.^[32]
• Kazatomprom accounts for 9% of uranium production worldwide. It is based in Kazakhstan and produced 3,010 tons of uranium in 2006.^[33]
• 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.^[34]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4} World Nuclear Association
2. ↑ CCJ 10-F 2009. "The Company" p. 8.
3. ↑ ^{3.0 3.1} About Uranium: World Market
4. ↑ "Nuclear Energy's Role in Responding to the Energy Challenges of the 21st Century" Idaho National Engineering and Environmental Laboratory.
5. ↑ ^{5.00 5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 5.09 5.10} Cameco Management's Discussion & Analysis 2008
6. ↑ Google Finance: CCJ
7. ↑ ^{7.0 7.1 7.2} Cameco Reports Second Quarter Earnings
8. ↑ ^{8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7} MarketWire: Cameco Reports First Quarter Earnings
9. ↑ ^{9.0 9.1 9.2 9.3} Cameco 2008 Q4 Quarterly Report
10. ↑ Goldprice
11. ↑ ^{11.0 11.1 11.2} Cameco Complete Business Review: Financial Highlights (p. 9)
12. ↑ ^{12.0 12.1 12.2 12.3} Cameco Year End Financials, p. 44
13. ↑ ^{13.00 13.01 13.02 13.03 13.04 13.05 13.06 13.07 13.08 13.09 13.10} Reuters: Cameco Corp
14. ↑ Mining Top News
15. ↑ Trading Markets
16. ↑ ^{16.0 16.1 16.2 16.3 16.4 16.5} CNN: "Nuclear power's white-hot metal"
17. ↑ ^{17.0 17.1 17.2 17.3 17.4 17.5} European Nuclear Society: Nuclear power plants, world-wide
18. ↑ ^{18.0 18.1} Bloomberg: Cameco Will Open Office in India as Uranium Demand May Triple
19. ↑ China's uranium demand for nuclear power to rise 4-6 times by 2020
20. ↑ ^{20.0 20.1 20.2} Scitizen: How Much Will New Nuclear Power Plants Cost?
21. ↑ The Ux Consulting Company: UxC Nuclear Fuel Price Indicators
22. ↑ Google Finance: CCJ Stock Chart
23. ↑ ^{23.0 23.1} Montana Environmental Information Center
24. ↑ Suzlon FY 07-08 Annual Report, Management Discussion and Analysis, p. 5
25. ↑ "Nuclear Energy's Role in Responding to the Energy Challenges of the 21st Century" Idaho National Engineering and Environmental Laboratory.
26. ↑ Fortune: Nuclear power's white-hot metal
27. ↑ Cameco and Kazakhstan push ahead on fuel plant
28. ↑ Silk Road Intelligencer
29. ↑ ^{29.0 29.1} Rio Tinto Preliminary Results 2008
30. ↑ Australian Securities Exchange: Energy Resources of Australia
31. ↑ ^{31.0 31.1} Areva
32. ↑ ^{32.0 32.1} BHP Billiton: Uranium
33. ↑ ^{33.0 33.1} "Kazatomprom ups uranium production 4% in 2006" Interfax-Kazakhstan
34. ↑ ^{34.0 34.1 34.2} Denison Mines: Home
35. ↑ ^{35.0 35.1 35.2 35.3} Google Finance
36. ↑ Rio Tinto Performance
37. ↑ BHP Billiton Business Review 2008

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