Why I do not invest in Cameco at the moment

I think a lot of people should be investing in Cameco. Outside just holding the physical commodity through companies like Yellow Cake Advocate or Uranium Participation Corp, Cameco must be seen as one of the least risky uranium companies. Cameco is therefore perfect for generalist funds that want to get exposure to the sector, or the more risk averse uranium investors. I want to go over why I do not have a direct investment in them.

I have already explained in earlier posts that I believe that this uranium bull market will do very well. The returns can be life changing for many of us. I have explained my strategy of investing mainly in near term producers because I see them to have the higher potential returns given my risk tolerance. I am comfortable with this and think that this market will be as good, if not better than the last bull market.

I have wondered a bit about why Cameco did not do better than they did in the last market. I know that by posting the graph of Cameco during the last bull, you would be crazy to find any of that disappointing. It is just that they had the two biggest high grade mines in the world, and should have been able to use this in their favour to get better terms than their competitors. Cameco has fared a lot better than most of their competitors in the following bear market, but on the cusp of a new bull market I wanted to know a bit more about their strategy. I am therefore very happy that people who were participating in the last bull market have shared their experiences to explain this to us.

Kevin Bambrough, ex Sprott, now a private investor, is the person who has been writing the most about this. (You can find him on Twitter under @BambroughKevin). He therefore gets a lot of credit, and thanks, for sharing from us newer uranium investors. His insights on the last bull market with the genesis of Uranium Participation Corp and how the market behaved last time have been invaluable. He says that the reason why Cameco did not go higher than what they did was that a high percentage of their contracts were at very low fixed prices.

Now, at their most recent quarterly presentation, Cameco said they were very optimistic of the future. When asked in the Q&A part of the presentation they said they were aiming at 60/40 contracts. This is also corroborated from their web page:

We target a ratio of 40% fixed-pricing and 60% market-related pricing in our portfolio of long-term contracts, including mechanisms to protect us when the market price is declining and allow us to benefit when market prices go up. 

My biggest question here is, barring another nuclear accident, what are the reasons why Cameco should be protecting themselves from a falling market price? Are they seeing another supply demand picture than the rest of us?

After a 10 year bear market where uranium producers have been in the “hole”, getting bent over daily, I do not see a reason for this. You do not go and be nice to utilities when the tables have turned and you are in the driving seat. After 2011 uranium miners were small chickens that you could easily scare and chase. This is not the case anymore.

«Pay me». 

Cameco is signaling they will be «nice» to utilities and limit upside somewhat for their shareholders with the unreliable mistress in utilities. This will limit the upside, and sounds similar to what happened in the last bull market. If they believe the price will overshoot $45 by a lot, they should communicate that the fixed price portion will have to be a lot higher than $45. You have the highest grades and a great reputation with the utilities. You should demand a premium compared to untested near term producers (or past producers). This premium you either get by raising the fixed price above $45, or increase the percentage that is linked to spot. Cameco does not have to be the lowest price producer in the market. Especially given their market share and reputation with uranium production.

Another option we need to consider is that Cameco does not believe the price will go over $50 by a lot, or that it will go high quickly, but overshoot and come down hard at a price lower than $45. This is not in line with my thesis on uranium and is therefore not a reason to invest with the company.

We also have to admit to ourselves: the reason why uranium price is as low as it is now is because uranium miners overproduced, not utilities behaviour. As Jeff G, a nuclear professional that goes under @808sandU3O8 on twitter has said; “The utilities didn’t overproduce tens of millions of pounds into an obviously oversupplied, nosediving uranium market from 2012-2017”. The miners did this. The miners had spent several hundred millions, or billions, to get into production, but they should have curtailed production a lot sooner than what they did. (For those who are interested, Jeff G has an excellent blog about the nuclear fuel cycle: 808s Online. It is more on the technical side, but something you might find valuable).

This also goes the other way when the tables have turned. From 2017 to 2021 nothing has stopped the utilities from contracting with uranium miners. We know a select few have topped off inventories, but most of them have been complacent.

Today we are seeing investors who are funding near term producers to get in production at higher prices. Most of these investors will also gladly have the companies wait a bit more for uranium prices to rise. The billions of dollars going into the sector over the last year is not looking for a mere 100-200% return. I remember an interview with Dave Iben, Chief Investment Officer and Lead Portfolio Manager of Kopernik Global Investors. He was on The Grant Williams podcast, saying he invests in uranium and gold producers that have reserves in the ground, but are still far from production. He does not want them to sell their pounds out cheap. Uranium companies are mostly cashed up if they do not spend too much of it on G&A expenses going forward. They should now just mind their own business and let the utilities come to them. Utilities have had the upper hand for 10 years. As John Borshoff, CEO/Managing Director at Deep Yellow Ltd says; as a miner he does not have to contact them, they will need supply and have to come to him.

Conclusion

I think Cameco is a great company. They have been among the biggest producers for years and have a proven track record as a supplier of uranium for the utilities. For the more conservative investor in the uranium sector this company is a must have. Cameco has the least amount of risks, they are operating today, have a skilled workforce, and two of the best assets in the world with Cigar Lake and McArthur River. (Kazatomprom, with higher geopolitical risk, is the only comparison here). It is just that for me this is not tempting enough with the strategy they are using today. I do not see them easily getting 5x from these levels of $20 share price if they put a cap on 40% of their production.