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Thursday
Mar082007

Reasons NOT to Own Cameco

Cameco Logo CCJ

A few years ago, when the uranium boom was in its early stages, one stock that was coming up on everyone's uranium picks was Cameco. However that has all changed. Although many still recommend Cameco as a good way to play the rising uranium price, we at Uranium Stocks do not and here are a few reasons why you should not be owning Cameco as a uranium stock in your portfolio.

Cameco is literally the biggest player in the uranium market, with a market capitalisation of about $13 billion. No other uranium stock can match it for size. Companies like BHP Billiton and Rio Tinto of course are much larger, but they are diversified mining companies with only a fraction of their earnings coming from uranium projects, whereas Cameco is pretty much a pure uranium play. Although they do have some gold interests, owning 53% of Centerra Gold Inc. but compared with uranium, gold is a very small part of Cameco. So Cameco remains the biggest uranium company as the world's largest uranium producer with four operating mines in Canada and the US as well as controlling ownership of the world’s largest high-grade reserves and low-cost operations in northern Saskatchewan, Canada with ore grades 100 times the world average. No company can match them for size, with 550 million pounds of proven and probable reserves, but big is not always best.

Since Cameco is so large it's stock price tends to move more slowly than other smaller uranium companies. Therefore investors can not get the percentage returns with Cameco that they can get with smaller uranium stocks. Cameco was moving well earlier on in the uranium boom, but it seems to have slowed down and appears to be even a bit “sluggish” in moving higher with higher uranium prices. If it is not achieving capital gains in its stock price, then it should at least be generating significant income for shareholders. This is not the case. The last few dividends have been about 4 cents, which is poor for a $35+ stock, giving it a P/E ratio of near 40. So Cameco is large, but slow in making gains or paying any significant dividends.

For some time the major argument for buying Cameco has been that it will be the uranium company that funds will look to invest in, as the others are all far too small. This used to be the case, but the uranium boom has now formed a number of billion dollar companies that could be used as an alternative uranium investment vehicle for funds as opposed to Cameco. Denison Mines now has a market capitalisation of over $1 billion and SXR Uranium One's is over $2 billion with some more companies like UEX Corporation trading at around a $1 billion market cap. This shows that there are now other fish in the pond and investment funds could look elsewhere for other uranium companies, of significant size, to invest in. Equally, other investors who are not comfortable with the risk of investing in smaller uranium stocks, can make their investment in companies other than Cameco, whereas before Cameco was the only large uranium company.

cigar lake location for cameco

There is of course a cloud hanging over Cameco, Cigar Lake. This is the largest undeveloped high grade uranium deposit containing proven and probable reserves of more than 232 million pounds of uranium at an average grade of 19%. All was going well, as a construction license was received in December 2004 and construction began in January 2005 on a uranium project that should have had a life of 20-30 years, but then there was the flood. The flood at Cigar Lake is probably the single most damaging thing that has happened to Cameco in recent years. The situation is still not totally clear, although Cameco are understandably downplaying the flood, but there might be problems moving the existing water or fixing the problem, otherwise more water could flood it. The silver lining on this cloud is that the longer production at Cigar Lake is delayed, the more Cameco will receive for the uranium that will be mined there, providing the uranium price continues to move higher. This is because of the way Cameco have written the contracts, most of them are based on the current uranium spot price as a floor. So the higher uranium prices rise, the more Cameco will get for their uranium.

But how long will this take? Will the project ever come online? If they cannot fix the problems with the flood, it is possible that Cigar Lake may have to be abandoned, or that Cameco or another uranium company could be trying to fix the problems for decades. If Cigar Lake is delayed by that much time, it is possible that the boom in uranium prices may have come and gone, therefore Cameco would have failed to cash in on this formerly promising project, and even more promising uranium price.

This could be one of the major reasons why Cameco's stock price has not risen with the rise in the uranium price and with the price of other uranium stocks. In the last year the uranium price has risen from just above $30/lb to $85/lb a gain of over 150%. Yet Cameco's stock price is up only a bit more than 5% in the last year as we write. We can get 5% returns in the bond markets, but that is not why anyone is investing in uranium, we all expect extraordinary returns in double or triple percentage terms. Cameco is not moving with the trend and so you cannot afford to be invested in Cameco, if it is not going to outperform, or at least track the uranium price.

FRG vs CCJ Chart

Many other uranium stocks are doing more that just tracking the uranium price, they are outperforming it. An example of an uranium stock that is outperforming the uranium price is Fronteer Development (FRG) which is currently up over 200% in the last year. There are many other uranium stocks that should generate and are generating much better returns than Cameco, therefore you are better off investing in these uranium stocks, in our humble opinion, if you want higher returns on your investments. Such uranium stocks are documented on our website www.uranium-stocks.net for free and you can receive regular uranium stocks updates by subscribing to our uranium stocks newsletter, also free of charge.

08 March 2007

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Reader Comments (8)

Hi, I have a different opinion about Cameco

Cameco stock price has a correlation with uranium spot prices but not as mush as other uranium players. It is due to the fact that Cameco in the past years has hedged their uranium at 41$ (which was the spot prices at that time) and these contracts will end by Q407.

Cameco is a solid holding that will not outperform like FRG because they don't do quite fit in the same business.

"Cameco is primarily engaged in the exploration for and the development, mining, refining and conversion of uranium for sale as fuel for generating electricity in nuclear power reactors in Canada and other countries. The Company has a 31.6% interest in Bruce Power L.P. (BPLP), which operates the four Bruce B nuclear reactors in Ontario. (...)Cameco has four segments: uranium, fuel services, nuclear electricity generation and gold." google

As for FRG "Fronteer Development Group Inc. is involved in the acquisition, exploration and development of mineral resource properties and has not yet determined whether these properties contain resources that are economically recoverable." google

I mean this is not the same thing!

Cameco is rated as a hold or buy for the moment. Most portfolio managers owns Cameco in their portfolios, because it is a a strong long term holding. What might happen though is that Cameco could respond positively to an increase in the prices of oil or natural gas.

Surely the stock is stable and there are no drastic upward changes, but a least you know that you will not loose money on the company, even if you find that the P/E is too high and that the dividends are too low. After all when i invest i plan on making money not loosing it.

On the other hand SXR-T does provide an alternative to Cameco and it will be producing a lot of uranium, but they are at the same time, spending a lot of money in exploration in Kazakhstan, with the new UrAsia merger. The only edge to that company is that they introduced the ISL (in situ leaching) procedure. Instead of doing open mining they use chemical in order to get the uranium ore from the ground. Cutting on the exploitation costs of a regular mine. Thus the company reacts strongly to uranium spot prices because this is mostly all they do. They do have mines of gold, but represents a small percentage in their revenues.

To finish, I don't know what will happen to the Cigar Lake mine. I really don't think that they will pass on such an opportunity. They continue to work on the flooded mines until its completion. So much pure grade uranium is worth a lot of money, even if they have to dry out a lake to get it!

Charles

March 9, 2007 | Unregistered CommenterCharlesL

Charles, a terrific comment. I think that we will have to have a word with our IT man and put a forum on the site otherwise some of this good data and commentary will get lost.

March 9, 2007 | Unregistered CommenterUranium Stocks

Sir,
I was reading your article with great interest.I have made some money with Cameco but have sold it and own now SXR, First Uranium and Denison.
I feel there is another reason for the bad performance of Cameco. I suspect Cameco has hedged Uranium for lousy prices and is still sitting on such contracts. So it will take some time, until Cameco gets higher prices. What is your thinking concerning my suspicion.
Very truly yours.
George

March 10, 2007 | Unregistered CommenterGeorge

I think that Cameco have said that somewhere in the order of 70% of their production was not locked into fixed price contracts, but we are not sure what the actual figure is.

March 10, 2007 | Unregistered CommenterUranium Stocks

I think you're way off base and your remarks sound more like a self-
serving ploy than an honest analysis. Cameco is trading at just 15 x
2008 earnings estimates. What is fronteer's PE? Infinity?

What about Cameco's reserves of Uranium compared to Fronteer and the
other juniors? Despite your dry pump, Cameco has reported good
progress on Cigar Lake, and when --not if--they have resolved the
problem, CCJ will really soar. And what happens to the juniors then?

I am happy to own a quality company like Cameco, and while I wait for
Cigar Lake, I earn consistent income selling covered calls.

We'll see who comes out ahead by 2008 and who gets burned. But
you're not fooling anyone or winning any fans amongst knowledgeable
investors by writing such garbage. No wonder your "service" is free--
That's about what it is worth on the street.

March 16, 2007 | Unregistered CommenterPhilip

If we look at the chart above we can see that FRG's stock price has increased 150% and Cameco has decreased by 10%.

We relish your challenge to see who comes out ahead in 2008 and wish you luck with your covered calls.

March 16, 2007 | Unregistered CommenterUranium Stocks

The writer in Comment 5 states that those who speak negatively about Cameco do so as a self-serving ploy. Possibly his belief in CCJ may turn out to be correct, but since no one has a crystal ball, it would be a dangerous investment to go against the market. The market is the determining factor, not any one single person's opinion, including mine. All I can see is that CCJ has underperformed the market for the past 14 months. That's a long time for a blue chip company to lag behind others in the same business when the very basis for it's existence, uranium, has been in a momumental bull uptrend.
My second comment concerns the writers comparison to FRG. As far as I know, FRG is mainly focused on gold, silver, and other precious metals. It purposely spun off it's uranium assets into Aurora Energy (AXU). It is not a pure uranium play and so to compare it to CCJ would be technically incorrect.
To sum up, the market has decided that CCJ is not where they expect to make capital gains. There are many other uranium companies whose share price has doubled, tripled, or more over the same time span. It appears the market favours these companies. As the price of uranium rises, all uranium mining companies will benefit, so I think it would be unwise to suggest that when CCJ improves, the others will not also improve. They are growing, merging, production is ramping up, new mines are coming on line, and mergers are occurring. Technical analysis is good; visual analysis also tells a story, so when I look at a chart, I can see who the market favours.

March 16, 2007 | Unregistered Commenterstoneygulch

We take the point, we should have used a uranium stock that is a pure uranium play, thanks for catching that one.

March 16, 2007 | Unregistered CommenterUranium Stocks

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