EUR 850.00 For Business Accounts Only

Morningstar | Uranium Market Remains Challenged as Recovery Stalls in 1Q; Cameco Remains Undervalued

We observe no major surprises in Cameco’s first quarter, as performance reflected continued market weakness. Year over year, revenue has fallen more than 30% to $298 million and gross profit more than 75% to $17 million. The bulk of the decline is due to a 25% decrease in realized prices.

Despite results being weak versus the prior-year period, profits were consistent with management’s expectations. As a result, guidance was largely unchanged. Having updated our valuation model, we maintain our fair value estimates of $19 and CAD 25.50 per share for narrow-moat Cameco.

A recovery in spot prices over the course of 2018 stalled during the first quarter, with prices retreating 9% sequentially to $25.33 per pound. On the positive side, prices remain 20% higher than they were a year ago. Nevertheless, continued supply discipline should drive tightening supply, begetting higher prices.

We aren’t particularly concerned by the recent retreat in the spot price, as volumes were very light in both the spot and contract markets. For now, the market continues to digest existing inventory, and Cameco is doing the right thing in meeting its contracted sales with already-mined uranium to reduce oversupply.

In April, the U.S. Department of Commerce submitted its report on the investigation of the uranium supply chain under Section 232 of the Trade Expansion Act. President Donald Trump has 90 days to act on whether the U.S. nuclear reactors’ dependence on foreign uranium imports threatens national security. The case has been an overhang on the broader industry, but we note two things. First, much of the uranium used in the U.S. comes from stalwart allies Canada and Australia, so it would be challenging to classify this dependence as a threat. Second, uranium accounts for only a small portion of operating costs at a reactor, so even if prices rose due to protectionist policies, we don’t expect it to drive any plant closures.

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