Morningstar | Favorable Section 232 Decision and Tepco Ruling, but Damages Award Well Below Cameco’s Claims. See Updated Analyst Note from 14 Jul 2019
On July 12, President Trump announced his decision regarding the Section 232 Trade investigation into the United States’ uranium supply. The President disagreed with the Secretary of Commerce’s opinion that current reliance on uranium imports threatens national security. As a result, no trade restrictions for uranium were announced, as they had been for steel and other industries. While the President recommended further study, we view the threat that has hung over the industry as having diminished.We believed trade restrictions were unlikely to come, as the U.S. receives most of its uranium from key allies Canada and Australia and few domestic jobs would be gained by protecting the domestic industry. As such, the July 12 announcement has no impact on our model.
Separately, on July 13, Cameco announced favorable results of its arbitration with Tepco. The tribunal ruled that Japan-based Tepco was not entitled to terminate the uranium supply agreement on claims of force majeure. We had anticipated a favorable ruling, but anticipated damages closer to Cameco’s claim for damages of $700 million. The tribunal awarded damages of about $40 million, and no appeals on the decision are allowed.
As a result, we’ve lowered the arbitration settlement amount in our model, leading us to cut our fair value estimates to $16.50 and CAD 21.50 per share, respectively, down from $19 and CAD 25.50, respectively. Cameco’s narrow moat rating remains intact.
Uranium prices remain week, as the spot price is currently around $25 per pound. The favorable Section 232 outcome at least removes a potential barrier from recovery in uranium prices. We continue to think that the market is digesting existing inventory and that today’s prices are unsustainable, especially as nuclear fleets continue to expand worldwide.
For details on our long-term Cameco outlook and our uranium supply and demand forecasts, please see our report "Cameco: Down but Not Out.â€
Cameco and its subsidiaries are engaged in the exploration for and the development, mining, refining, conversion and fabrication of uranium for sale as fuel for generating electricity in nuclear power reactors in Canada and other countries. Co. has three reportable segments: uranium, which explores for, mines, mills, purchases, and sells uranium concentrate; fuel services, which refines, converts and fabricates uranium concentrate, and purchases and sells conversion services; and electricity, which generates and sells electricity through its 31.6% interest in the Bruce Power Limited Partnership, which operates four nuclear reactors and manages the overall site in southern Ontario.
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