The uranium market is showing convincing signs of recovery, and early investors in integrated producers like nuclear giant Cameco (CCJ) have enjoyed great stock returns so far this year.
At one point, Cameco stock was up nearly 19% for the month of October before shedding some gains during the final trading week of the month after a third-quarter revenue and earnings miss.
However, CCJ stock has still given a nice 195.9% return over the past 12 months.
As to why Cameco stock has gained this much in a year, words from the company’s CEO Tim Gitzel during the third-quarter earnings call on October 29 help summarize everything:
“It isn’t very often in the last 10 years, you’ve heard us use the word exciting and nuclear and uranium market in the same breath,” said Gitzel.
Fundamentals for the nuclear industry are changing. They are improving fast, and nuclear stocks are soaring as a result.
There’s still a significant risk brewing from Kazakhstan which makes me neural on CCJ, however. (See Analysts’ Top Stocks on TipRanks)
Rising Nuclear Sentiment
After a decade-long uranium supply glut since the Fukushima nuclear disaster in Japan, demand and supply dynamics are leveling off and the uranium market is getting back into a balance again.
Uranium prices have been on a steady increase over the past year, before a sudden jump in August.
CCJ stock rallied by almost 50% between August 16 and September 16 this year.
What’s Driving CCJ Stock?
One might say that news of the launch of the Sprott Physical Uranium Trust, (the world’s largest physical uranium closed-end fund) in July amplified a strong rally on uranium mining stocks.
The Sprott Physical Uranium fund has raised over $730 million and is mopping up cheap uranium in a thinly traded spot market. Uranium spot and contract prices rose through the roof to touch a high above $50 per pound in September.
The Sprott fund continues to raise new funds from an eager investor base that is confidently betting on higher uranium prices in the future.
Moving Announcement from Kazakhstan
Investor sentiment was stirred again in October when the world’s largest uranium miner, Kazatomprom (KAP) announced the creation of a physical uranium fund, ANU Energy, on October 18.
ANU Energy has similar intentions to Sprott’s fund. It targets holding physical uranium inventory. It will list in Kazakhstan, and promises to give more access to emerging markets investors who could not access similar investment vehicles on the Toronto or London stock markets.
Investor sentiment on Cameco stock has been strong and rising lately.
Out of over 500,000 investor portfolios tracked by TipRanks, the number of portfolios holding Cameco stock increased by 12.2% over the past 30 days.
Clearly, it’s not just Cameco’s CEO who is excited about uranium’s future and CCJ’s improving prospects, especially as a new investor fund rises from Kazakhstan.
That said, there are two sides to the latest news from Kazakhstan.
CCJ Stock and the Risk From Kazakhstan
Kazatomprom is a big player in the uranium industry. It exerts significant influence on the long-term pricing trajectory for nuclear prices.
KAP controls more than 23% of global uranium production (as of 2020). Just like Cameco, the company announced plans to cut annual production in 2017. The plan was to curtail a persistent uranium oversupply that had wrecked the commodity’s price.
However, in 2018, the company found a new customer, a new uranium holding company Yellow Cake (YCA), which planned to buy and hold physical uranium as a long-term investment.
Yellow Cake raised about $200 million and bought uranium from Kazatomprom under a long-term contract at a price reportedly around US$21 per pound.
Kazatomprom made the first delivery of uranium to Yellow Cake in 2018. The sale represented more than a quarter of KAP’s planned annual production for the year.
Interestingly, the material received from Kazatomprom was reportedly stored at Cameco Corporation’s Port Hope-Blind River facility in Canada.
Investors may argue that the Yellow Cake deal did not materially help reduce the global amount of mined uranium inventory lying above the ground. It did not necessarily help reduce market oversupply. Yellow Cake became a new non-user customer.
The thing is, uranium supply contract-negotiating teams from nuclear reactors (the ultimate users) look at abundant above-ground inventories. They use the data as justification for pinning down miners when long-term contract prices are set.
CCJ may have to wait longer before contract rates are above the $60 mark (if that’s the company’s target).
Is History Repeating Itself?
This time around, Kazatomprom is sponsoring a new fund. The ANU Energy fund could raise more than $550 million to invest in buying uranium.
Market players are waiting with bated breath to see where uranium prices could be headed over the next few months.
Here lies some potential problem areas: where will the new fund buy its material from? Will ANU buy uranium from the spot market like the Sprott fund does? Does the fund intend to lock up its pounds under non-redeemable clauses for some time? Will the fund desist from opportunistic disposals at “right” prices?
Cameco’s largest competitor could sell mine production at prices around $20 per pound and still profit. Won’t contract prices around $40 per pound look too good for them to take?
In other words: What if the new fund becomes a vehicle upon which an industry giant justifies increasing its annual production rates to sell newly mined production?
It is possible that global uranium supply could soon increase before Cameco clinches new deals at desirable rates in long-term contracts.
Answers to the above questions concerning the Kazakhstan fund could unravel a potential investment risk to uranium mining stocks like Cameco in 2022.
Miners, including KAP, have sacrificed a lot to curtail production. They are mopping up excess uranium inventories on the spot market, and the previous oversupply is gone.
However, the current bull run in uranium prices could lose its legs quickly. More so if low-cost producers like the Kazakhs can create a new non-user market so they can produce more uranium that ends up being stored somewhere (thereby creating new inventory builds),
Bottom Line
Perhaps it’s too soon to speculate on the Kazakhs’ pure intentions, but uranium investors need to watch developments from Kazakhstan closely.
The yellow metal production powerhouse might just prick a growing uranium bubble, and Cameco stock may blow up with it.
That said, Wall Street analysts are bullish on CCJ stock right now. Consensus analyst rating on Cameco stock is a Strong Buy based on nine Buys and two Hold ratings. The average Cameco price target of $28.24 represents 3.9% upside over the next 12 months.
Disclosure: At the time of publication, Brian Paradza did not have a position in any of the securities mentioned in this article.
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