EUR 850.00 For Business Accounts Only

Morningstar | Green Shoots Appearing in Slow Moving Uranium Market; Rising Cameco Shares Still Undervalued. See Updated Analyst Note from 11 Feb 2019

Cameco finished 2018 within guidance, delivering 35 million pounds of uranium at a cost of $40.33 per pound, in line with guidance of 35 to 36 million pounds at $40 to $42 per pound. For 2019, the company is contracted to deliver 28 to 30 million pounds at a cost of $41 to $43 per pound. Compared to last year, the company will rely more heavily on purchasing uranium from the market to meet its sales commitments, leading to higher costs. However, with an expected realized price of $46 per pound, Cameco will be profitable, albeit less so than last year.

Most of the Cameco’s production, including the flagship mine McArthur River, will remain in care and maintenance in 2019. However, unlike last year in which the company drew on inventory, the company will need to purchase more uranium from the market to meet its contracts. This will result in compressed short-term profitability but avoids adding more volume to an oversupplied market. As demand has continued to grow and production discipline taken root, uranium spot prices continue to improve. Current spot prices of roughly $29 per pound are more than 30% higher than a year ago. Likewise, Cameco’s share price is up about 25% over the same time period.

Management guided for lower gross profit in 2019, reflective of its continued approach to fulfilling contracted deliveries with uranium purchases rather than production. We’ve lowered our 2019 forecast as a result, although the reduced profitability will only last until the company restarts its low-cost mines under more favorable market conditions. As a result, we’ve slightly trimmed our U.S. dollar-denominated fair value estimate to USD 19 per share from USD 19.50. Changes in currency exchange rates leave our Canadian dollar-denominated fair value estimate unchanged at CAD 25.50 per share. Although its production is largely shuttered due to prolonged market weakness, Cameco’s assets remain some of the lowest cost in the world, leaving its narrow-moat rating intact.

Although green shoots are emerging, we are optimistic there is more improvement to come. Though spot prices are up 30% year-over-year, long-term prices are up just 7%. It appears the producers have not seen prices high enough to enter acceptable long-term contracts let alone restart idled production, which should provide further support for prices to continue to rise. Shares continue to look undervalued, as we think the market continues to underestimate the recovery in prices once oversupply subsides and the market returns to balance.

For details on our long-term Cameco outlook and our uranium supply and demand forecasts, please see our report "Cameco: Down but Not Out.”