We’re feeling particularly bullish on uranium producer Cameco

Benj Gallander, Ben Stadelmann, and Philip MacKellar
January 13, 2022

Kazakhstan has witnessed a wave of deadly protests since the start of the year. The unrest was sparked by the government’s decision to remove a price cap on liquified petroleum gas, which sent energy prices soaring.

As with so many demonstrations in authoritarian countries, the protesters’ initial grievances morphed into greater discontent over other issues such as corruption, economic inequity and political oppression. In response, the country’s president issued a “shoot-to-kill” order, shut off the internet and welcomed in Russian troops to help him regain control.

Though casual investors may not be following the violence in Kazakhstan closely, the country is economically important. Its oil output is similar to that of Mexico, and its uranium production is unmatched.

According to the World Nuclear Association, in 2020, Kazakhstan accounted for 41 percent of the world’s uranium supply. By contrast, Australia, Namibia and Canada are the next largest producers, accounting for 13 percent, 11 percent and 8 percent, in that order. This makes Kazakhstan the largest uranium exporter by a country mile.

The protests have abated for now, and the unrest did not affect production, but uranium’s spot market price shot up nonetheless, going from around US$43.50 a pound to US$47.00 a pound. This situation highlights how the world’s uranium supply is oligopolistic and highly sensitive to shocks.

Moreover, these events exemplify why TSX-traded, Saskatoon-based Cameco is so important. While it has a joint venture in Kazakhstan, most of its operations are in North America. In response to the unrest, Cameco stated that its five North American mines could be brought back online if needed.

We purchased Cameco at $11.86 in late 2019 and sold 42 percent of our position in November 2021 at $34.14. This trade translates into a gain of 187.9 percent and takes the initial investment off the table, while still leaving plenty in the game to benefit from potential moves higher. (Cameco shares closed Thursday at $28.73.)

In 2019, our ownership thesis was simple: Cameco, an industry leader with low-cost mines, was the world’s biggest supplier outside of Kazakhstan, and had deep relationships with utilities around the globe. At the time, it also fit into our contrary bailiwick — the post-Fukushima chill still gripped the market, and the company faced various legal issues, including with the Japanese utility Tepco and the Canada Revenue Agency.

The CRA litigation was particularly important, as it pertained to a tax dispute dating back to the early 2000s and tied up more than $2 billion. Few investors wanted to touch the company, but behind the scenes, executives were conserving Cameco’s reserves by idling production and buying on the spot market to fulfil long-term contracts. This innovative strategy, the ugly climate change trends and aggressive insider buying made us think it was a good investment.

Fast-forward to today and many of these attributes remain in play, while the balance sheet looks better than it did in 2019. Back then, the company had $864.4 million in cash and debt of $996.6 million for a net debt position of $132.2 million. Today, cash is $1.17 billion, while debt is $996 million, making for a net cash position of more than $170 million.

The CRA case has been “fully and finally resolved” in Cameco’s favour, as the Supreme Court of Canada refused to hear the CRA’s appeal. Nevertheless, the decision to sell a portion of our stake was an acknowledgement that the shares had hit our initial sell target. Insiders had turned into aggressive net sellers, and it’s never a bad idea to take a profit in a cyclical industry — especially when the risk of a nuclear meltdown lurks in the background.

There may be significant upside left in the name. After a decade in the doldrums, the World Nuclear Energy Association estimates that demand for nuclear fuel will expand globally by 2.6 percent a year over the next decade. Yet over that same time frame, production estimates cover only 70 percent of projected utility requirements.

That leaves a huge hole to fill, which suggests uranium prices and stocks are going higher — possibly much higher.

Furthermore, climate change solutions that don t include nuclear seem far-fetched, and most of Cameco’s mines are still idled as management awaits better uranium prices. If higher prices materialize and production restarts, the value of Cameco’s reserves will increase, revenues should pick up and the bottom line will expand, all of which would improve valuations.

This outlook may explain why Sprott (another Contra holding) is betting on uranium. In 2021, Sprott formalized an agreement with Uranium Participation Corp., and together these companies created the Sprott Physical Uranium Trust. The trust’s purpose is to hold uranium.

So far, it has had a huge impact on the market. Between August and September, it sent spot uranium prices from roughly US$30 a pound to US$50, and since July 2021 the assets under management have climbed from US$630 million to around US$2 billion. That is nuclear growth, to be sure.

To make a long story short, we are cautiously optimistic on the future of nuclear. Though numerous risks — including a meltdown — could undo the investment rationale, for now we are happy to hold our remaining stake in Cameco and maintain our exposure to these bullish macro trends.