Cameco Corporation – InvestorsFriend.com

Cameco Corporation (CCO, Toronto, CCJ, New York)
RESEARCH SUMMARY
Report Author(s):	InvestorsFriend Inc. Analyst(s)
Author(s)’ disclosure of share ownership:	The Author(s) hold no shares
Based on financials from:	2022 Y.E. +Q3 ’23
Last updated:	December 19, 2023
Share Price At Date of Last Update:	$ 59.03
Currency:	$ Canadian
Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual):	Highly Speculative Weak Buy at CAN $59.03
Qualifies as a stock that could be bought with confidence to hold for 20 years?	Yes, if one expects a resurgence for the nuclear power industry
Has Wonderful Economics?	No
Has Excellent and Trustworthy Management?	Probably, yes
Likely to grow earnings per share at an attractive rate over the next decade?	Yes but very cyclic
Positive near-term earnings outlook?	Yes
Valuation?	Appears unattractive
SUMMARY AND RATING: In this our second look at Cameco we have not graphed the past earnings. But earnings and revenues over the past decade have been poor since the nuclear plant failure at Fukushima Japan in 2011. The Value ratios based on trailing year earnings would suggest a rating of Sell. Management quality appears quite strong. In particular the annual report provides an extraordinary level of transparency and detail about the industry and Cameco’s strategy. The insider trading signal is negative but is not likely a strong indicator. Insiders exercised substantial options and sold shares as the share price rose rapidly in the past year. And executive compensation is reasonable. The outlook seems positive but earnings need to increase very sharply in order to justify the current share price. This is a very tough and competitive business where only a low cost producer is likely to make good returns. This is also a very risky business. Cameco is a low-cost producer but the industry has also suffered from excess capacity and this could be the case until and unless the number of nuclear power plants in the world grows substantially. Management projects that the over-supply situation is abating. There is some expectation that the nuclear power industry will now enjoy a renaissance driven by the push to net-zero carbon. This is clearly a speculative investment. The reason to invest in Cameco would be based on an expectation of quite a strong revival of the nuclear power industry. The financials are strong and there is essentially no danger of the company going broke. At this time we rate it as a Highly Speculative Weak Buy. A reasonable strategy for those interested in the industry would be to take only a small position and continue to monitor the business.
MACRO ENVIRONMENT: There is currently a renewed interest in Nuclear Power due to the move to net zero carbon and due to the energy shortages in Europe caused by the Ukraine war. There are 439 nuclear reactors world-wide and 52 under construction which would increase the total by 12%. There is also growing interest in Small to medium, nuclear reactors.
LONG TERM VALUE CREATION: Cameco created value since its inception in 1988. But the value creation in the past decade has been poor after Nuclear power fell very much out of favor after the Fukushima nuclear per plant failure in Japan in 2011 and due to nuclear unpopularity with environmentalists because of the issue of storing radioactive nuclear fuel waste.
DESCRIPTION OF BUSINESS: Cameco recently announced that it will be purchasing about 49% of Westinghouse Electric which is the largest builder of nuclear power plants. This is description does not include Westinghouse. Cameco is one of the world’s largest miners and processors and suppliers of uranium to fuel the world’s nuclear reactors. In Saskatchewan they have: 50% ownership and are the operator of the Cigar Lake mine, the world’s highest grade uranium mine. This mine only has about nine years of life left. They operate and own 70% of McArthur River mine – the world’s largest high grade uranium mine. This mine has not been in production since 2018 but will resume production before the end of this year. They operate and own 83% of an associated processing mill called Key Lake. They also own 40% of a low-grade uranium mine called Inkai in Kazakhstan with 60% owned by he government. This mine is producing but currently has great difficulty shipping out the product presumably due to the Ukraine war. They own an idle low-grade mine at Rabbit Lake which has not produced since 2016 due to low demand. They also own idle mines in the U.S. And they own 70% of a potential future mine called Millennium in Saskatchewan. And they own two potential future mines in Australia. They own 100% of a fuel services refinery (basically upgrading uranium) at Blind River Ontario. They own 100% of a fuel conversion facility at Port Hope Ontario. 100% Cameco Fuel Manufacturing in Ontario which produces CANDU fuel bundles. The fuel services facilities also upgrade uranium for other producers. Cameco sells most of its uranium under long-term contracts. Given an over-supply of uranium for probably the last decade Cameco has idled a number of its mines and buys uranium on the spot market to satisfy much of its contracted delivery obligations.
ECONOMICS OF THE BUSINESS: In recent years, the economics of Cameco’s business has been very poor. There was an over supply of uranium and prices have been too low. Cameco expects the situation to improve greatly in the next few years.
RISKS: There are many risks. See the annual report for a full discussion. In the past they have suffered lengthy mine closures due to water infiltration. They have money invested in idle mines which ties up capital at a time of higher interest rates. The price of uranium is highly unpredictable.
INSIDER TRADING / INSIDER HOLDING: Checking from October 1, 2022 to December 29, 2023: There was a clear pattern of exercising options and rights for cash (this may have been required in some cases). This is understandable as the price rose very substantially but is still negative. The insiders in most or all cases still owned a material amount of shares. Overall, the insider trading signal is negative.
WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is simple to understand and predict (fail given the complexity of mining and unpredictable nature of uranium prices and the future acceptability of nuclear generation), has favorable long-term economics due to cost advantages or superior brand power (Probably pass due to its high grade ore properties), apparently able and trustworthy management (pass), a sensible price – below its intrinsic value (possible pass), Other criteria that have been attributed to Buffett include: a low debt ratio (pass), good recent profit history (fail) little chance of permanent loss of the investors capital (pass) a low level of maintenance type capital spending required to maintain existing operations excluding growth (pass)
MOST RECENT EARNINGS AND SALES TREND: Revenues per share have increased substantially in most recent quarters. Adjusted earnings per share have swung to an increasing profit (sharply higher) in recent quarters after losses in 2021.
COMPARABLE STORE SALES OR INDUSTRY SPECIFIC STATISTICS: A key variable is the price of uranium on spot and long-term markets. These prices have been trending up strongly since mid 2021 and the price is expected to continue to rise as Nuclear Power gains support as a solution to carbon reduction.
Earnings Growth Scenario and Justifiable P/E: Earnings will have to rise very substantially to justify the current stock price.
VALUE RATIOS: Based on a price of $59.03. The Price to book value ratio of 4.2 is difficult to interpret. On it’s face it is not a bargain since we are paying so much more than book value. But its assets in the ground may in fact be easily worth this premium. The value depends mostly on the outlook for uranium prices. Recent adjusted profits have been too low resulting in a trailing P/E ratio of 89 which is highly unattractive. The P/E based on analyst estimated earnings in (presumably) 2024 is also not attractive at 27. The dividend yield is miniscule at 0.2%. The ROE is poor at 5.2% (but has about doubled int he past year) Clearly, these value ratios would point to a rating of Sell.
TAXATION FOR SHARE OWNERS: Nothing unusual.
SUPPORTING RESEARCH AND ANALYSIS
Symbol and Exchange:	Cameco
Currency:	$ Canadian
Contact:	0
Web-site:	0
INCOME AND PRICE / EARNINGS RATIO ANALYSIS
Latest four quarters annual sales $ millions:	$2,268.0
Latest four quarters annual earnings $ millions:	$266.0
P/E ratio based on latest four quarters earnings:	95.4
Latest four quarters annual earnings, adjusted, $ millions:	$285.0
BASIS OR SOURCE OF ADJUSTED EARNINGS:
Quality of Earnings Measurement and Persistence:
P/E ratio based on latest four quarters earnings, adjusted	89.0
Latest fiscal year annual earnings:	$89.4
P/E ratio based on latest fiscal year earnings:	283.9
Fiscal earnings adjusted:	$135.0
P/E ratio for fiscal earnings adjusted:	187.9
Latest four quarters profit as percent of sales	12.6%
Dividend Yield:	0.2%
Price / Sales Ratio	11.19
BALANCE SHEET ITEMS
Price to (diluted) book value ratio:	4.20
Balance Sheet: The $7.437 billion in assets are comprised as follows: 45% is Property Plant and Equipment (57% of this is land and buildings, 22% is plant and equipment, 17% is capitalised exploration and evaluation expenses and 4% is items under construction). 18% of assets are cash and short-term investments and 12% are other current assets (mostly inventory and accounts receivable). 13% of assets are deferred income tax. The deferred tax asset is expected to be used to reduce future income taxes and related to depreciation and reclamation expenses that were higher for GAAP purposes than allowed for tax purposes. Also some of it related to past losses that can be used to reduce future income tax. 8% of assets are long-term receivables and investments. A large portion of this relates to an expected refund of disputed income tax payments. 3% is a investment in a joint venture mine in Kazakhstan. 1% is purchased intellectual property that appears to be akin to goodwill. The value of the land is not broken out separately from buildings but they own 2.1 million acres which is on the books at 98 cents which includes the value of the buildings. It’s possible that most of the land is so remote that it is not worth anything other than its use for mining. But it could be an under-valued asset. It appears that the building have been very substantially depreciated and so are on the books at well below replacement cost. The $7.52 billion in assets is financed as follows 65% by common equity (which in turn is 55% retained earnings and 45% shareholder capital invested) 13% by debt, 12% by provisions for future reclamation, 6% by accounts payable and other current liabilities and 4% by other long term liabilities. With cash exceeding debt and despite the uncertain cost of future reclamation this appears to be a strong balance sheet. And it is appropriate for this company to have limited debt since its cash flows and profits can be highly variable.
Quality of Net Assets (Book Equity Value) Measurement:
Number of Diluted common shares in millions:	435.1
Controlling Shareholder:
Market Equity Capitalization (Value) $ millions:	$25,684.0
Percentage of assets supported by common equity: (remainder is debt or other liabilities)	70.1%
Interest-bearing debt as a percentage of common equity	16%
Current assets / current liabilities:	3.8
Liquidity and capital structure: The balance sheet is strong. The debt level is lower than the cash level.
RETURN ON EQUITY AND ON MARKET VALUE
Latest four quarters adjusted (if applicable) net income return on average equity:	5.2%
Latest fiscal year adjusted (if applicable) net income return on average equity:	2.5%
Adjusted (if applicable) latest four quarters return on market capitalization:	1.1%
GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE
X years compounded growth in sales/share	not available
Volatility of sales growth per share:	$ –
X Years compounded growth in earnings/share	not available
X years compounded growth in adjusted earnings per share	not available
Volatility of earnings growth:	$ –
Projected current year earnings $millions:	not available
Management projected price to earnings ratio:	not available
Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in (adjusted) earnings per share?	No
Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained:	2.1%
More conservative estimate of compounded growth in earnings per share over the forecast period:	not available
More optimistic estimate of compounded growth in earnings per share over the forecast period:	No prediction
OUTLOOK AND AMBITIONS FOR BUSINESS: The outlook is positive based on higher uranium prices and boosted by the weak Canadian dollar. Cameco’s ambitions are to continue to be a very major supplier of uranium and to move into the nuclear plant business with the pending acquisition of Westinghouse Electric.
LONG TERM PREDICTABILITY: Uranium commodity prices are inherently unpredictable. But the outlook appears quite positive as Nuclear gains traction as a solution to carbon reduction.
Estimated present value per share: Trailing year earnings are too low to form a basis for this calculation.
ADDITIONAL COMMENTS
INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition based on the following four tests. Barriers to entry (pass). No issues with powerful suppliers (pass). No issues with dependence on powerful customers (probable pass), No potential for substitute products (pass) No tendency to compete ruinously on price (fail, in a commodity industry price competition can be ruinous). Overall this industry appears to be of questionable attractiveness due to its commodity nature and the fact that it is an over-supplied state.
COMPETITIVE ADVANTAGE: Cameco owns the highest grade uranium mine in the world (Cigar Lake) and the world’s largest high grade uranium mine (McArthur River)
COMPETITIVE POSITION: Cameco is one of the largest players in its industry. In 2021 produced 9% of the world’s production but have the capacity to produce far more.
RECENT EVENTS: Cameco announced in October that it will acquire 50% of Westinghouse Electric. They have issued shares to fund the purchase.
ACCOUNTING AND DISCLOSURE ISSUES: Due to its nature there are many accounting issues. Liabilities for future reclamation can only be estimated and may be understated. They are required to expense major costs for idle assets but it is possible that those costs are in substance adding to the value of those assets. They have booked a large receivable relating to an income tax dispute and it is possible they could lose the dispute.
COMMON SHARE STRUCTURE USED: Normal, one vote per share.
MANAGEMENT QUALITY: Cameco appears to be well managed. The annual report is extremely detailed exhibiting an unusual level of transparency. This has been a very tough industry for a number of years and management has shown the discipline to curtail operations and has managed to build cash despite tough circumstances.
Capital Allocation Skills: This perhaps remains to be seen. They have substantial capital tied up in idle mines.
EXECUTIVE COMPENSATION: For the five named officers in 2021 ranged from $1.8 million to $6.7 million and was not much changed from the prior two years. This level of compensation seems reasonable.
BOARD OF DIRECTORS: Warren Buffett has suggested that ideal Board members be owner-oriented, business-savvy, interested and financially independent. The nine members here appear to be very well qualified and able to act independently. They have a variety of mining and investment and business experience.
Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry.
DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice.
© Copyright: InvestorsFriend Inc. 1999 – 2023. All rights to format and content are reserved.