Cameco Is Going With The Flow, Riding Uranium's Wave

Cameco Corp CCJ, the largest publicly traded uranium company, might be up for a solid foreseeable future. Uranium price has shot up to its highest since 2015, thanks to Sprott Inc SII and its Sprott Physical Uranium Trust (SPUT).

What lies ahead for the uranium giant, as both spot price and decarbonization have lifted the prospects for the nuclear industry and uranium demand?

A Solid Stage   

According to the latest Nuclear Fuel report by the World Nuclear Association, the grand decarbonization goals of the world’s main economies need a great deal of low-carbon nuclear energy. 

This, in turn, will increase a demand for uranium that could not be fulfilled, should new mining projects not emerge quickly. Meanwhile, Mining.com reports that Sprott has accumulated more than 24 million pounds of uranium, sometimes buying more than 500,000 pounds in a single day.

On top of that, the biggest uranium mining firm, NAC Kazatomprom JSC –Joint Stock Company National GDR (FRA:0ZQ)– said at the beginning of 2021 that it would keep mining at a low at least until 2023, meaning a lower supply to the market.

So, in this scenario, RBC Capital Markets asserts in a report: “We believe the combination of a rising spot price and a strong undercurrent of positive sentiment for the uranium sector may support elevated valuation multiples for Cameco for the foreseeable future.”

The SPUT Effect

There is no doubt about the impact SPUT has had on uranium spot prices, which have gone from $31 and $32 a pound in mid-August to a solid $37. This is due to the trust’s ATM offering launched on August 17, intended to raise funds and fast-acquire the heavy metal during a brief period.

Analysts at RBC Capital Markets assert that a potential NYSE listing this year could make way for an even greater pool of capital, as investors’ interest in uranium intensifies. 

“While the depth of capital available and willing to invest in SPUT is unknown, every pound sequestered in the trust accelerates a uranium market recovery and supports a rising spot price,” they say.

The intelligence firm seems to underline the obvious: “Strong investor sentiment, SPUT, and rising spot price combine to keep valuations elevated.” 

Besides, although uranium’s social media activity has tailed off recently, it hangs on at a high when compared to the historical trend. This only goes to show how investors are manifesting their interest in the commodity.

Cameco Impact

RBC Capital analysts believe that a mix of strong investor sentiment and SPUT alone could create a feedback loop. In this sense, sentiment could drive capital into the trust to push up spot prices, which in turn “drives more positive sentiment.” 

In sheer stock terms, the firm has also switched its rating to “Sector Perform” from “Underperform,” while increasing Cameco’s price target from $17 to $26.

Further, amid the positive investor sentiment and limited options for exposure to proven uranium operators, Cameco's valuation could continue on a high as an incumbent producer with idled capacity. 

Reasons To Be Wary?

“We have revised our valuation to 1.75x P/NAV, in line with recent premium valuation levels,” RBC Capital analysts say.

On top of RBC Capital’s positive assessment, Scotiabank –Bank of Nova Scotia BNS– adjusted its target price from $25 to $27. 

Still, RBC points to a downside risk if capital flows into SPUT slow, “resulting in less upward pressure on uranium prices. Cameco would benefit most from rising term prices, which requires utilities to return to the market.” 

There is a possibility that rising spot prices entice utilities to re-enter the market sooner than expected, but buyers remain on the sidelines for now.

Disclosure: No positions