DISCLAIMER: Any written content contained herein should be viewed strictly as analysis & opinion and not in any way as investment advice. No compensation was received for this report. Visitors to this site are encouraged to conduct their own due diligence.
Since our last update in April, the uranium spot price has increased by +12%, going from $50/lb to now reach the current ~$56/lb. Along with the re-invigorated sentiment, uranium equities have accordingly advanced: Whereas only Cameco (CCJ) and Peninsula Energy (PENMF) had positive YTD performance as of our update in April, fast forward to today and Denison Mines (DNN), NexGen Energy (NXE), Energy Fuels (UUUU) and enCore Energy (EU) have also now posted positive YTD performance. We continue to note that utilities uncovered requirements are growing - though material purchases can be delayed/deferred, they cannot be avoided. This will eventually drive pricing going forward. That said, Cameco remains the top performer having (thus far) posted a +43% return since the start of the year. At the most recent close of July 13, Cameco shares have reached a 10+ year, post Fukushima all-time high. Much of this outperformance has come relatively recently and much of it has to do with the market's recognition of last October's transformational joint bid acquisition for Westinghouse Electric.
The assets and book of business as provided from Westinghouse is a unique combination which very rarely comes to market. The market is coming to realize that since the $7.875B joint bid acquisition was announced on October 12, 2022 (Cameco 49%, Brookfield Renewable, 51%), Cameco’s fundamental uranium mining and fuel business has since been augmented/enhanced much more so than to the degree when Cameco was in ownership of the Bruce Power nuclear generating facility (31.6% ownership stake, since divested in 2014). For context, Cameco's +42.7% YTD performance compares to the peer group's average decline of -3.1% YTD. Even more telling is that since the October 12 announced joint bid for Westinghouse Electric, Cameco’s share performance is +45.0%, compared to the very same uranium peer group which declined by an average of -4.8%. These results speak for themselves:
With part ownership in Westinghouse (transaction close is expected later in 2023), Cameco now captures much more of the nuclear fuel cycle and has expanded capabilities when offering itself as a one stop shop for uranium fuel, enrichment services and nuclear reactor (AP1000) support, design and maintenance. Additionally, from a diversification standpoint, recall that conversion and uranium pricing can be volatile, whereas fabrication is more stable. Given the western world’s concerted effort to wean off of Russian uranium supply (and with it decrease reliance on Rosatom VVER nuclear reactor service and builds), Cameco is now in a near stand-alone position to fill the void. This is a sweet spot that neither the French (EDF) nor the Koreans (KHNP) can bundle together with their respective reactor designs. It is our view that to date, the Westinghouse acquisition looks better and better since announcement. The full details of the deal rationale and functionalities can be seen from our October 2022 writeup, found here:
Notable post-acquisition developments have included the following from Central Europe alone:
October 2022: Poland selecting Westinghouse to construct three AP1000s.
March 2023: the Czech Republic selecting Westinghouse to supply nuclear fuel for its VVER nuclear reactors.
March 2023: Bulgaria selecting Westinghouse as part of a joint bid for the construction of two AP1000s.
March 2023: Cameco signing agreements with Ukraine’s Energoatom for 100% of their UF6 needs until 2035.
Cameco has not only benefitted on the European continent but in the US market as well. Given passage of the Inflation Reduction Act, the much needed incentives for utilities are now there to provide a certain level of cash flow certainty. That said, numerous utilities have already announced meaningful nuclear plant life extensions or even the outright cancelations for numerous scheduled plant retirements.
As seen from the graph above, the current decoupling of Cameco’s stock in relation to the other uranium miners/developers is likely to not only persist going forward, but we would argue that the spread would likely be maintained or even be increased as well. That was our view from earlier in the year and that remains our view to this day. At present, it is much more so a story of Cameco re-rating higher (or in the least staying higher) rather than a story of the peers looking to play catch up.
As seen from the graph since 2022 above, Cameco’s performance spread to an equally-weighted index of uranium producers/developers (URG, DNN, EU, NXE, PENMF, UUUU) has only increased. Notice how since the start of 2022, Cameco gained +33.2% while the peer group averaged a decline of -17.8% (ranging from enCore Energy (EU) declining by -43.2% and NexGen Energy (NXE) gaining +3.1%). The spread to peers was evident before the Westinghouse announcement, reaching a peak of 34 in October 2022, just before the announced bid. Post-announcement and bought deal, Cameco’s share price has recovered and the spread has since recovered and widened to the current 52.1. The magnitude of the spread has become even more apparent as the stock price recently reached a new post-Fukushima high.
Due to the game-changing functionalities and services as provided by Westinghouse, we would expect the spread to either widen further from the historic levels, or in the least be maintained, barring a return to a risk-on commodity boom. It is near impossible to find a similar company that can compete with Cameco and provide the same level of service covering the entire nuclear value chain. On a P/CF basis, Cameco has historically traded at a P/CF multiple of ~11.0x. It is currently trading at a ~16.4x multiple on FY/2024 consensus numbers. Note that cash flow numbers are expected to improve significantly given the ramp up at McArthur/Key Lake (15.0M lbs this year with a ramp to 18.0M lbs) and at the Port Hope UF6 facility. Cameco currently has ~$1.0B of net cash in treasury. Recall that the Westinghouse transaction is expected to close in later in 2023 - note that the required Chinese approvals have now been granted.