By: David Milstead, Globe & Mail on August 2, 2018
You’re the pre-eminent producer of a key commodity, and the price outlook for your product is so poor that you shut down your best plants indefinitely, putting hundreds of people out of work. And this is good news?
Perhaps so, argue some of the analysts who follow uranium giant Cameco Corp. The company’s announcement last week that it would continue the shutdown of McArthur River, the world’s largest uranium plant, was seen as a bullish signal by some analysts, who raised expectations for uranium prices and for Cameco stock. In the first day’s trading on the news, the company’s shares jumped and pushed within a few cents of their 52-week high of $15.95.
That was the first day, however. In subsequent sessions, the shares have given back all their gains and more, as investor focus has shifted back to the damage to be done to Cameco’s earnings by low uranium prices and lack of production. The stock closed Wednesday at $14.11.
Meanwhile, the junior uranium companies whose shares had badly trailed Cameco year-to-date are maintaining double-digit bumps since the news last week. At least in the short term, everyone has benefited from Cameco’s shutdown except Cameco itself.
But this will change, according to Greg Barnes of TD Securities Inc. He has upgraded Cameco shares to “buy” from “hold,” raising his target price to $18 from $16.50. “We believe that [the shutdown] underscores Cameco management’s commitment not to deliver high-quality uranium reserves into prices that are still unsustainably low,” he wrote. He expects that McArthur River won’t restart production until the middle of 2021.
That will keep market production below demand into 2020, he believes. The shortages he foresees have prompted him to hike his forecast for uranium prices to US$25.57 this year, from US$23.37. He has also bumped up his outlook for subsequent years and sees prices for the material touching US$45 in 2021.
That optimistic forecast helps offset a “material” reduction in his earnings estimates for 2019, given Cameco’s lower sales volumes, its need to buy uranium in the spot market to meet contractually promised deliveries, and $5-million to $6-million in monthly costs to keep McArthur River idle.
For his part, Andrew Wong of RBC Dominion Securities Inc. says he thinks “uranium prices have clearly bottomed, with production cuts that should lead to higher prices off unsustainably low levels.” And he says Cameco merits a premium valuation to other miners, so he’s jacked up the multiple of EBITDA, or earnings before interest, taxes, depreciation and amortization, he uses to 14 from 10.
Of course, he, too, has had to whack his estimates for the current year – he’s taken his 2019 EBITDA forecast to $412-million from $498-million – so his target price has only increased to $16 from $15.
However, Alexander Pearce of BMO Nesbitt Burns Inc. took last week’s news as an opportunity to downgrade the shares to “market perform.” While Cameco’s move should support industry pricing, he says, he believes there are four years’ worth of inventories available, which would allow utility customers to continue to be “price selective in the near term.”
With his own reduction in estimates, coupled with Cameco-specific risks, he’s reduced his target price to $15 from $16. Cameco continues to engage in a multibillion-dollar squabble with the Canada Revenue Agency and has a contract dispute with Japan’s Tokyo Electric Power.
Investor enthusiasm for the junior companies is less easy to explain, except that they are not Cameco, and may benefit more from increased spot prices for the metal, which jumped 6 per cent when investors learned of Cameco’s plans to purchase uranium on the open market. U.S.-based miners, as well, may benefit from a trade case that country has opened up against importers.
Source: David Milstead, Globe & Mail