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Strong Tailwinds Could Boost Cameco Shares, But The Story Is Not Without Risk


Cameco is the largest publicly-traded uranium producer in the world, delivering 20% of the world's production.

The COP21 Climate Change Agreement supports nuclear energy production, which will bolster long-term uranium prices.

Cameco is taking a strategic, measured approach to growing production.

Cameco Operations and Strategy

Cameco (NYSE: CCJ) is a low-cost, pure-play integrated uranium producer. The company is the largest publicly-traded uranium producer in the world, and the second-largest global producer of uranium overall. Cameco provides about 20% of the world's production, from mines in Canada, the U.S. and Kazakhstan. Cameco's primary product is uranium concentrate in the form of U3O8 (yellowcake), which is sold exclusively to electric utilities for the generation of electrical power. Cameco is also one of only four commercial converters of uranium hexafluoride (UF6), which is used during the uranium enrichment process. The company is also a leading provider of nuclear fuel processing services.

Cameco has an extensive base of 410 million pounds of proven and probable reserves from a diversified supply source across three continents, where its land holdings total 4.0 million acres. These include operations in the uranium-rich Athabasca Basin of northern Saskatchewan at its McArthur River mine, the largest high-grade uranium deposit in the world and largest uranium operation in the world, and its Cigar Lake mine, the highest grade uranium deposit in the world - the Cigar Lake deposit is second in size of high-grade deposits only to the McArthur River mine.

Aerial View of McArthur River Uranium Mine (Source: Wikipedia)

Aerial View of McArthur River Uranium Mine (Source: Wikipedia)

In addition, the company has a joint venture in situ recovery mine at Inkai, Kazakhstan, which is owned 60% by Cameco and 40% by the Kazakhstan government through Kazatomprom.

The company's strategy focuses on optimizing the strong long-term fundamentals and growth opportunities for its products and services, which are driven by a growing global population and electricity demand. To do so, it concentrates on profitably producing uranium at a pace aligned with market conditions.

(click to enlarge)

Inkai uses the environmentally friendly in situ recovery (ISR) technique to extract uranium. (Source: Cameco website)

Global Uranium Market

The annual fuel requirements of the current fleet of nuclear reactors worldwide totals about 380 million pounds of U3O8 (yellowcake). The U.S. consumes more uranium than anyone else in the world - about 50 million pounds of U3O8 in 2016 - yet it produces less than 5 million pounds per year. China produces only 4 million pounds of U3O8 annually, but it consumes some 20 million pounds per year. China's planned increase in nuclear energy will raise consumption to over 70 million pounds by 2030.

Uranium does not trade on an open market like other commodities. Buyers and sellers negotiate contracts privately. Uranium prices plunged more than 50% following the major earthquake and tsunami in Japan in March 2011. Japan had embraced nuclear power to provide some 30% of the country's electricity. However, following the tsunami, which killed 19,000 people and triggered the Fukushima nuclear accident (which killed no one), from around $60 per pound before the Fukushima disaster, spot prices of uranium reached a nine-year low of $28 in 2014 and have continued to be depressed since the accident.

Source: Cameco, MarketWatch and American Association of Petroleum Geologists 2015 report

Japan was the third-largest producer of nuclear energy at that time, behind the United States and France. The country's 50-plus reactors provided some 30% of the country's electricity. This was expected to increase to 40% by 2017. After Fukushima, all of Japan's nuclear facilities were...