Under the Spotlight Wall St: Cameco (CCJ)

If you want to understand why Cameco’s ($CCJ) shares are up 495% over the past five years, look no further than Meta ($META), Amazon ($AMZN) and Microsoft ($MSFT).

The world’s largest listed uranium stock is at the forefront of the global nuclear renaissance, led in part by the massive energy demands from data centres that power AI. Meta is the latest tech titan to show its support for nuclear energy with a request for proposal in early December seeking up to 4 gigawatts of low-emission electrons.

The interest from big tech marks a reversal of fortune for Canada-based Cameco. Japan’s Fukushima disaster in 2011 cast a shadow which hurt demand for uranium and nuclear fuel. But Russia’s invasion of Ukraine and the faltering renewables rollout has delivered a reality check on plans to reach Net Zero by 2050. Nuclear is now central to energy policy debates. In Australia, the Coalition’s plans to build seven nuclear power stations will make it a key issue in the 2025 election. Meanwhile, U.S. president-elect Donald Trump’s Energy Secretary nominee is a director of Oklo ($OKLO), which develops fast reactor technology. 

Atomic habits

Cameco CEO Tim Gitzel told analysts on its Q3 earnings call the company was ‘exceptionally well positioned’ for a world where nuclear energy provides more baseload power and lowers CO2 emissions. The US$22b company provides everything nuclear power stations need. It mines uranium, it converts that uranium into nuclear fuel, which then powers reactors built by its Westinghouse joint venture. 

An emerging source of demand has grabbed headlines: tech companies. Amazon, Microsoft and Meta have either signed nuclear energy supply deals this year or are in the market. We recently highlighted Oracle’s ($ORCL) plans to use nuclear energy to power its data centres. The International Energy Agency estimates data centres, AI and cryptocurrencies accounted for 2% of electricity demand in 2002 and that may double by 2026. Cameco’s chief financial officer Grant Isaac described big tech’s interest as ‘a very clear signal that very large pockets of demand are coming to buy electrons, and they happen to want the quality of electron that comes out of a nuclear power plant.’

Cameco’s bullishness seems well founded. Six more countries – including Turkey – joined the global pact to triple nuclear energy production by 2050 at this year’s COP29. There are now 31 countries signed up. This came only two months after the International Atomic Energy Agency raised its annual projections for nuclear power production for a fourth consecutive year. Capacity is projected to increase 2.5 times in its high case scenario, with nuclear’s share of electricity rising from 9.2% in 2023 to 12.8% in 2050. The World Nuclear Association says there are 65 reactors under construction and another 90 planned. 

Tit-for-tat sanctions between the U.S. and Russia are also a tailwind for Cameco. A U.S. ban on uranium imports from Russia came into effect in August, and Russia responded in November by banning exports to the U.S. of enriched uranium. Russia accounted for 27% of enriched uranium supplied to U.S. reactors in 2023. Cameco is working on technology to increase the West’s enrichment capacity. The Global Laser Enrichment joint venture is the exclusive licensee of Silex’s ($SLX) laser enrichment technology. Cameo has a 49% stake in GLE and an option to gain a 75% interest. We analysed Silex’s laser enrichment technology earlier this year. 

Chain reaction

Cameco’s operations across the nuclear fuel chain must translate to knockout financial results, right? Not at first blush. Last year’s acquisition of a 49% stake in reactor maker Westinghouse impacted the bottom line. However, a deeper dive shows strong growth. That was underlined by upgraded revenue guidance for 2024: from C$2.85b-C$3b to C$3.01b-C$3.16b. 

The uranium business is performing well. As the world’s second largest uranium producer, Cameco posted total revenue of $C721m in Q3, with uranium accounting for $C600m; up 23% year-on-year (YoY). Adjusted EBITDA rose 7% to $C240m. Production guidance for 2024 was raised from 22.4m pounds to 23.1m pounds. That’s well timed given the long-term contract price rose to a 12-year high of US$81.50 a pound in Q3. Gitzel said contracting by utilities has started to pick up, though contract volumes remain well short of the replacement rate. Cameco has average committed sales of 29m pounds a year between 2024 and 2028. 

The nuclear fuels unit is seeing increased demand for conversion services. Cameco operates the world’s largest commercial uranium refinery, Canada’s only conversion facility, and makes fuel bundles and components for CANDU reactors. Gitzel says the company is seeing ‘significant interest’ in an ‘extremely tight’ conversion segment of the fuel cycle. Those comments are supported by record spot prices for UF6, or uranium hexafluoride. Hex, as it’s known, was trading at US$72 a pound in Q3, up from US$48 in Q3 2023. Cameco’s focus is ensuring its contract book offers exposure to rising prices, to drive long-term revenue. Q4 fuel services revenue was C$120m, up 40% YoY. 

Cameco’s 49% stake in Westinghouse offers exposure to the leader in reactor technology. The flagship product is the AP1000 reactor, which was recently deployed at Southern Company’s ($SO) Vogtle power plant. Units 3 and 4 were the first newly constructed nuclear units built in the U.S. in three decades. The technology has even impressed the Chinese. China’s State Council approved two new power plants in September using the AP1000 reactors. 

Cameco is targeting annual growth of 6%-10% in Westinghouse’s adjusted EBITDA over the next five years, an outlook Isaac calls ‘very conservative.’ He said there are projects globally where a final investment decision hasn’t been made, but when that happens ‘there will be an upward adjustment to that number.’

Fission accomplished

Past hopes for nuclear energy were dashed by disasters like Fukushima, but the need for low-emission baseload power has recharged interest. With Silicon Valley having liked and subscribed to a nuclear future, Cameco is primed for a new wave of investment. 

This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.