Cameco Goes Nuclear (NYSE:CCJ) | Seeking Alpha

Introduction

The Cameco Corporation (NYSE:CCJ) (TSX:CCO:CA) has become a gift that keeps on giving.

I started covering this Canadian uranium miner in November 2022. Since then, I have written five bullish articles, with the most recent being titled “Uranium’s Golden Age: Positioning With Cameco” on February 14.

Since then, shares are up another 32%, giving the company a market cap of more than $24 billion. Over the past 12 months, shares are up 99%.

Even excluding dividends, New York-listed shares are now back at the previous all-time high of July 2007.

As it turns out, the uranium bull case keeps getting stronger, supported by ongoing supply issues, geopolitical decisions, and the ongoing AI application acceleration that will require a ton of additional energy.

In this article, we’ll discuss all of this as I update my CCJ bull case.

So, let’s get to it!

The Uranium Bull Market Continues

On May 26, The Atlantic wrote an interesting article on the return of nuclear energy in the United States.

Essentially, the U.S. may not have a choice if it wants to push for 2050 climate goals, as “traditional” renewable energy sources on their own “almost certainly won’t be enough.“

Another issue is land and resource usage.

According to the article, nuclear energy can generate the same amount of energy as solar and wind energy while using 1/30th of the land.

Even better, nuclear reactors can be built everywhere, regardless of how much the sun shines or how windy it is.

In my prior Cameco article, I highlighted these benefits as well, showing that one tiny uranium pellet produces as much energy as one ton of coal, 120 gallons of oil, and 17 thousand cubic feet of natural gas.

The problem is that nuclear energy is expensive – at least initially due to expensive construction costs.

According to The Guardian, nuclear energy is more expensive than renewables, gas, and coal. This includes storage and transmission expenses required to support renewable energy.

The good news is that targeted government spending and innovation are making nuclear energy more attractive.

Going back to The Atlantic:

The president’s signature climate bill, the Inflation Reduction Act, included generous tax credits that could reduce the cost of a nuclear project by 30 to 50 percent, and the Bipartisan Infrastructure Law included $2.5 billion to fund the construction of two new reactors using original designs. The Department of Energy, meanwhile, is exploring different options for permanent nuclear-waste storage, investing in building a domestic supply chain for uranium, and helping companies navigate the process of getting reactor designs approved. – The Atlantic (emphasis added)

In other words, the U.S. is getting serious about nuclear energy, which could not come at a better time, as energy requirements are exploding!

On May 28, I wrote an article focused on the bull case for natural gas, which is fueled by the AI boom.

• Between 2014 and 2024, gas-fired power demand rose by almost 14 billion cubic feet per day (Bcf/d), with almost no underlying load growth, as it was mainly based on the transition from coal to natural gas.
• AI alone could drive another 10 Bcf/d in incremental demand by 2030!
• Even more bullish estimates could see 18 Bcf/d growth by 2030 – from AI alone…

With that said, on top of strong demand, supply is being pressured.

On May 16, it was reported that President Biden signed legislation to ban the import of Russian-enriched uranium.

That’s a big deal, as Russia is America’s largest foreign source of uranium, supplying roughly a quarter of uranium for its reactors.

Cutting off that supply could raise uranium prices 20%, according to Jonathan Hinze, president of nuclear fuel market research firm UxC. – Bloomberg

Now, the odds are rising that Russia will use its influence to pressure Western nuclear energy, in general.

After all, global supply is massively dependent on nations like Kazakhstan, which have strong ties with Russia.

All of this bodes well for uranium prices and supply from Western producers.

That’s where Cameco comes in.

Cameco Continues To Fire On All Cylinders

Cameco is one of those companies that’s in the right place at the right time with the right product.

With increasing supply risk caused by production challenges and heightened geopolitical uncertainty, utilities are evaluating their nuclear fuel supply chains. As a reliable, commercial supplier, with nuclear fuel assets in geopolitically stable jurisdictions, we are focused on working with our customers to secure long-term commitments that will underpin the long-term operation of our productive capacity, while helping de-risk their nuclear fuel supply chains. – Cameco (emphasis added)

Using Cameco’s data below, we see that U3O8 prices have roughly tripled between 2017 and 2023 when prices of triuranium octoxide (a compound of uranium) jumped from $20 to $60.

In its 1Q24 earnings call, the company confirmed what we discussed in the first part of this article, as it noted demand for nuclear energy is increasing as it is recognized by governments, power suppliers, and industrial consumers as an important part of the ongoing energy transition.

The miner also noted that national security is an increasing driver of growth, as dependence on uranium supplies from unreliable partners could hurt the energy transition.

The ongoing war in Ukraine is a great example of this.

• Russia cut off most natural gas exports to Europe in the early stages of the war.
• Sanctions hurt the uranium supply from Russia.
• Russia could retaliate by pressuring partner nations to reduce uranium exports.

On top of that, it made a very interesting comment regarding AI. Not only is AI, in general, boosting electricity demand, but it is also causing tech companies to get interested in nuclear energy.

According to Cameco, some companies are already securing agreements to ensure their facilities can access nuclear power.

Tech firms and Silicon Valley billionaires have been pouring money into nuclear energy for years, pitching the sustainable power source as crucial to the green transition. Now they have another incentive to promote it: artificial intelligence.

[…] “Fundamentally today in the world, the two limiting commodities you see everywhere are intelligence, which we’re trying to work on with AI, and energy,” he told CNBC in 2021 after investing $375 million in Helion Energy, a nuclear fusion startup that Altman chairs. Microsoft last year agreed to buy power from Helion starting in 2028. Oklo, which Altman also chairs, is focused on the opposite reaction, fission, which generates energy by splitting an atom; fusion does so by merging atomic nuclei. – NBC News

I believe the interest of tech giants and pioneers in nuclear energy is misunderstood, as these people know exactly how demanding their AI applications will be for energy demand and how efficient nuclear energy is.

It’s also reliable, which cannot be said about wind and solar power.

If there’s one thing modern tech applications (or the economy, in general) need, it’s reliable – and affordable – energy!

With that in mind, it helps that Cameco is very reliable and efficient when it comes to producing uranium.

During its earnings call, the company noted its 1Q24 results were strong and in line with its annual guidance, supported by a successful transition back to Tier 1 cost structures.

So we just find it to be very, very constructive because to have an average term price of $77.50 when we’re not even at replacement rate yet, that’s a pretty good place for us to be and a great place for an incumbent producer with Tier 1 assets and brownfield leverage, a great opportunity for us to take advantage of that value capture. So we’re feeling very, very constructive of that underlying market fundamental. – CCJ 1Q24 Earnings Call

In general, the company’s strategy is mainly focused on securing long-term contracts instead of messing around in a much more volatile spot market.

According to the company, this approach has led to a significant increase in annual commitments, averaging about 28 million pounds per year from 2024 through 2028.

Additionally, the company’s investment in Westinghouse is paying off.

Last year, Cameco bought a 49% interest in Westinghouse. Brookfield Asset Management bought 51%.

This allowed Cameco to benefit from rising nuclear energy demand as well as Westinghouse’s nuclear plant technologies, products, and services.

The company continues to expect that its share of adjusted EBITDA from Westinghouse will be between $445 million and $510 million this year.

Even better, this segment is expected to grow at a compounded annual growth rate of 6% to 10% over the next five years!

Valuation

New York-listed CCJ shares are up 29% year-to-date. The 12-month performance is 99%.

As a result, CCJ now trades at a blended P/E ratio of 84.8x, which is way above its long-term normalized P/E ratio of 39.4x – using the FactSet data in the chart below.

However, the situation is less bad than one might think.

Using the same FactSet data in the chart above again, analysts expect 31% EPS growth this year, potentially followed by 57% and 34% growth in 2025 and 2026, respectively.

While these numbers are subject to change, I expect the company to enjoy double-digit annual growth for a prolonged period.

That said, applying a 39x multiple to these numbers, we get a fair stock price of $62, which is 12% above the current price.

While I will maintain a Buy rating, I cannot make the case that the risk/reward is fantastic.

Sure, the long-term bull case remains fantastic, and I’m sure investors will be willing to pay a premium until that changes.

However, I would not invest aggressively at these levels.

If I were looking for CCJ exposure, I would buy gradually. If the stock corrects, investors can average down. If the stock continues to fly, investors have a foot in the door.

With regard to my situation, as I wrote in my prior article, I have invested in Caterpillar (CAT) to cover mining-related demand. Due to aggressive investments in energy and related stocks, I’m not yet expanding my commodity-focused exposure.

Takeaway

Cameco continues to prove its worth, with shares up 32% since my last article.

The uranium market is booming, driven by supply constraints, geopolitical shifts, and a surge in energy demand from AI applications.

Needless to say, nuclear energy’s resurgence, backed by government support and tech industry interest, bodes well for Cameco.

Despite the high P/E ratio, strong earnings growth projections justify a bullish outlook.

However, cautious, gradual investments may be the way to go, given the current valuation.

The bottom line is that Cameco remains a key player in the energy transition, offering reliable, efficient uranium production.

Pros & Cons

Pros:

• Uranium Market Strength: CCJ benefits from a strong uranium market, driven by supply constraints and rising demand from nuclear energy.
• Geopolitical Support: With geopolitical tensions impacting uranium supply, CCJ benefits as a reliable commercial supplier.
• Tech Industry Interest: Growing interest from tech giants in nuclear energy supports its importance in meeting energy demands.
• Earnings Growth Potential: Analysts expect strong earnings growth for CCJ, supporting its current valuation.
• Diversification: The acquisition of Westinghouse was a smart move to differentiate the business.

Cons:

• High Valuation: CCJ’s current P/E ratio is significantly above its long-term normalized ratio, which means negative headlines could hurt its stock price.
• Market Volatility: Like the uranium market, CCJ’s stock price is volatile.
• Uncertain Regulatory Environment: Regulatory changes or shifts in government policies regarding nuclear energy could impact CCJ’s operations and valuation.