Uranium Mining and Exploration

[Lone Clone]

Cameco’s brief respite from the uranium slump coming to an end
Tim Shufelt - INVESTMENT REPORTER

http://www.theglobeandmail.com/globe-investor/inside-the-market/camecos-brief-respite-from-the-uranium-slump-coming-to-an-end/article33905766/

The Globe and Mail
Published Sunday, Feb. 05, 2017 4:52PM EST
Last updated Sunday, Feb. 05, 2017 9:29PM EST

The financial aftershocks of the catastrophic 2011 Japanese earthquake continue to ripple through the uranium market, which, six years later, cannot seem to escape its perpetual slump.

The latest reprieve from the brutal selloff is starting to look like yet another false start, merely interrupting an otherwise downward trajectory.


Canadian uranium-mining champion Cameco Corp. itself sought to rein in the market’s budding enthusiasm by calling the Street’s earnings estimates unrealistic in mid-January and warning of a 2016 loss. How big a loss will be revealed when the company reports its financials this Thursday.

“I think it’s a no-touch situation from an investment perspective for at least a year,” said John Stephenson, president of Stephenson & Co. Capital Management.

Another bad year would extend a downtrend in Cameco’s shares that’s more or less been in place since March, 2011, when a 9.1-magnitude earthquake struck off the coast of Japan, triggering enormous tsunami waves that killed thousands and triggered meltdowns in the reactors of the Fukushima Daiichi power plant.

The accident brought about a global shift in attitudes toward nuclear power. As Japan shut down its entire nuclear industry – the third-largest in the world – other countries, such as Germany, also decommissioned reactors.

And since the market for uranium is almost exclusively driven by demand for fuel in nuclear reactors, a pall descended over the green metal. From shortly before the Fukushima meltdowns, up to last October, uranium spot prices fell by almost 75 per cent. Cameco’s stock tracked that descent by the same proportion, over about the same time frame.

Many times over those years, the bottom has been called in both uranium prices and Cameco shares.

The bull case for both relied on an eventual rebalancing of the commodity, with a global supply shortage predicted for some point in the future. As it stands, the world is awash in excess uranium.

Annual supply exceeds demand by about 15 per cent, according to the World Nuclear Association, while existing stockpiles alone could satisfy three years’ worth of global demand, according to a 2014 estimate.

“Our supply/demand analysis suggests that the uranium market will not be balanced until 2024, with large surpluses in the intervening years,” RBC Dominion Securities analyst Fraser Phillips wrote in a recent note. While 39 of Japan’s 42 functioning reactors remain offline, the country has continued to honour its long-term contracts with suppliers, resulting in a vast hoard. Those kinds of contracts have allowed Cameco to hedge against the falling price of uranium by locking in prices years well in advance.

Last month, however, Tokyo Electric Power Company Holdings Inc. (Tepco) said it wanted out of the arrangement, issuing a termination notice for a supply contract with Cameco by claiming “force majeure,” which can limit liability in the event of an unavoidable catastrophe. The move casts doubt over $1.3-billion worth of uranium deliveries over the next 12 years.

“The obvious question is whether other Japanese customers might follow suit,” Mr. Phillips wrote. While Cameco said it is optimistic it can successfully defend the contract, Mr. Phillips notes that a previous cancellation took 30 months of arbitration to resolve.

Recent headwinds such as the contract dispute have stifled what was the strongest rally in Cameco shares in years.

The industry recently began to demonstrate some long-awaited discipline over supply, as Kazakhstan’s state-owned uranium producer Kazatomprom, the world’s top supplier, cut its 2017 production by about 10 per cent, while Cameco also reduced capacity.

And in January, Cameco’s chief executive officer Tim Gitzel said the industry had received indications from U.S President Donald Trump’s team that the new administration would be supportive of nuclear power.

Cameco’s stock rose by more than 75 per cent between November and January. At that point, the company’s management gave guidance on its earnings, which it said would fall significantly short of sell-side estimates. Combined with the unwelcome notice from Tepco, that pushed Cameco’s stock down by more than 20 per cent over the past three weeks.

“It’s a really good company. That’s not the issue,” Mr. Stephenson said. “While I think the bottom has probably been put in in the commodity, to get back to the heady days of uranium prices is probably not going to happen for years.”