Should You Own Cameco?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Strong industry fundamentals make nuclear power a wise investment. Economically, it is more viable than any method of electricity generation besides hydroelectric which itself is severely limited geographically in where it can be produced. Environmentally, the generation of nuclear power does not result in the release of any toxic air pollutants or greenhouse gasses. Global consumption of uranium has exceeded production in every year since 1985, with the gap being bridged by secondary sources. One of the largest of those secondary sources is the Russian highly enriched uranium (HEU) agreement whose expiration this year will  considerably reduce supply (24 million pounds per year, about 15% of 2011 consumption). Unfortunately the Fukushima disaster has resulted in a negative short term outlook for the industry. But the best in the industry will weather the storm and patient investors will be able to reap rewards from a form of energy that will certainly be there 20 years from now.

Enter Cameco

The CAnadian Mining and Energy Corporation, or Cameco (NYSE: CCJ), is the world’s second largest producer of uranium behind only Kazatomprom, which is owned by the government of Kazakhstan. Despite adverse market conditions Cameco's uranium segment has remained profitable, generating gross profits of 504 and 632 million dollars in 2012 and 2011, respectively. The same cannot be said for Rio Tinto (NYSE: RIO). In 2011 Rio Tinto lost just over 100 million dollars producing 7 million pounds of uranium. A 38% increase in production didn't stop the bleeding as losses climbed to 178 million. This year Rio Tinto is decreasing production slightly from 2012 levels and praying they don't lose too much money. Which makes sense for a company who has several other segments actually making a profit. This presents an opportunity for Cameco, a pure play nuclear investment, to take some market share from a competitor who has clearly shown that the uranium business is not their top priority. 

An 8.5 Billion Dollar Price Tag

Most of us probably don't have 8.5 billion dollars lying around to purchase Cameco, but as investors considering buying even a single share we would be wise to think as if we were purchasing the entire company. So is Cameco worth 8.5 billion dollars? If you had bought Cameco 10 years ago by now the Canadians would have put 2.5 billion dollars of retained earnings in your pocket. On top of that you would have received nearly 860 million dollars in dividends, with no year yielding less in distributions than the last. Cameco has generated 3.36 billion dollars in cash for its owners over the past 10 years. The facts lead me to believe the next 10 years will yield even greater results for the owners of Cameco. The total amount of cash used to pay dividends has climbed 566% for Cameco over the past 10 years, since 2009 distributions have been increased by 67%. Retained earnings will rise with the price of uranium, widely considered to be near a bottom, and increased production. Cameco intends produce 36 million pounds of uranium in 2018, they produced 21.9 million pounds last year. What would you say is a fair price for a company that produced 3.36 billion dollars for its owners over the past 10 years and is planning to nearly double its production? 8.5 billion dollars certainly seems fair to me.

Final Foolish Thought

In the short term Cameco may not necessarily thrash the market. Concerns over the viability of nuclear power aroused partially by the Fukushima disaster have led to low uranium prices with many miners struggling to remain profitable. However economic and environmental realities are dawning on the leaders of the world. Many are realizing that nuclear power will play an important part in satisfying the growing energy needs of their people. Cameco has remained profitable during adverse market conditions, something that certainly cannot be said for all uranium miners. Over the past 10 years they have provided satisfactory returns for their shareholders. Ambitious growth plans from management whose sole focus is nuclear power should provide the same over the next 10 years.

Fool contributor Ryan Palmer owns shares of Cameco and is Canadian. The Motley Fool does not own shares of any companies mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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