Well, CCJ reported earnings and the stock is getting the homo hammer, off 6% on the open (7% on completion of this post). Yesterday’s price ramp is all gone, and whichever trolls were pushing that purchase are now a pool of putrefaction.
The problem with CCJ is this: if you believe that $0.21 quarters are the new normal, this stock is ridiculously expensive. We’re talking somewhere between 20-30X earnings expensive. To rectify that, you’d have to bring CCJ’s price down. A lot.
CCJ would need to be a $13 stock to justify this pricing with the earnings they’ve been reporting.
But here’s the thing. They’ve been reporting these earnings for two years now.
So the real issue is that the stock market is a medium of instant gratification. People want to make money. And they want to make money right now. There is no patience to wait for developments, or to stick out a rough patch. That’s the entire thesis behind buying CCJ is the first place.
Now, I’ve read their release, and I feel the developments were good. CCJ is taking their foot off the pedal on projects. They are forcing the economics to work. And they’re big enough to affect uranium prices.
Now, a reactor only has to refuel once every few years. So CCJ has to be calm and wait. They can get higher prices by one of two means – Wall Street can accommodate them with higher pricing, or they can force higher pricing (they’re something crazy like 20% of global production, on their own). Uranium prices ARE going higher. It’s a matter of when, not if.
That’s what’s happening here, I think. Cameco is intentionally dropping their revenues, with the goal of increasing spot price, which will make the economics of their new mines work which will lead to higher sales volumes and superior pricing. They have the weight to pull it off.
Now, the second point I want to address is their assessment of global demand by 2021. I feel it’s conservative.
For instance, it includes such projections as assuming that net reactors in Europe decrease by 3 over the next 10 years.
Not going to happen.
To assume that, you’d have to take Germany at their word when they say they intend to close down all their nuclear plants. But this same Germany just shuttered any new development of wind energy (throwing in the towel). Solar is next. So what’s taking nuclear’s place? Natural gas? Yeah, Russia would love that – natty is expensive enough in Europe as it is.
Coal? Oil? There’s only so many places the load displacement can come from. Germany’s going to cave, just like Japan is in the process of caving now.
Now, looking at CCJ’s gross profits and sales volumes, it looks like they have a cost of $30 per pound of uranium produced (before expense cuts, which CCJ says they’re looking into). So let’s say that they can push uranium prices back to $50. That would increase their revenues by 43% by itself. Now you’re talking earnings closer to $0.30, putting the company at a more reasonable 15X earnings.
If they can get uranium back to $55, their earnings are going to blow out by 78%.
If uranium hits $60, they’re looking at a 114% increase in earnings. It’s worth noting that $60 is the long term delivery price of uranium right now (Ux LT 308); it’s only the spot price that’s really hemorrhaging – the long term price (which is used for multi-year contracts) has floored at the $60 price.
And it’s here that Cameco looks cheap. This is the situation where I look at CCJ and say, “this company is going back to $27 a share”.
But I don’t think the long term price of $60 is fair. I think the price is going higher.
The long term price of uranium in 2009 was over $90. The spot price was right around $50. If Cameco can force the spot to $60 and start locking in long term contracts for $90, you’re golden. In this situation, you’re talking about Cameco going for $40 to $50 a share.
And I think it’s totally feasible. The supply and demand aren’t matching up here. The expectations for weaning off nuclear energy are just too rosy, and the price is way too low, even if no new reactors come on line. We don’t have enough fuel right now – higher prices are warranted to expand production.
That is the only thesis for owning CCJ right now. But it’s a good one.If you enjoy the content at iBankCoin, please follow us on Twitter