Cameco bullish on uranium demand
- 20 Jan 2017
- Saskatoon StarPhoenix
- SUNNY FREEMAN Financial Post
Cameco bullish on uranium demand
But market still oversupplied
Facing this consensus view that exceeded our maintained core guidance and our disclosed other costs … we faced some choices.
Cameco Corp. is more optimistic about long-term demand for uranium than it has been for five years, a top executive said Thursday after the company’s stock price tumbled following an unusual warning it was too bullish on its 2016 performance.
The Saskatoon-based uranium miner took an extraordinary step Tuesday by issuing an announcement that analysts’ estimates for the company’s full-year results were too high. It said it expected to report a 2016 loss Feb. 9. The company’s share price lost about 10 per cent of its value on Wednesday, but recovered on Thursday, closing at $15.85, up 10.15 per cent on the day, on the Toronto Stock Exchange.
Grant Isaac, Cameco’s chief financial officer, told the TD Securities Mining Conference in Toronto that the company felt compelled to “correct what we felt was a misalignment in earnings expectations,” noting that restructuring costs from shuttered operations and legal costs associated with a tax dispute will weigh on its 2016 balance sheet.
“So, facing this consensus view that exceeded our maintained core guidance and our disclosed other costs … we faced some choices,” Isaac told the analysts’ conference, adding the company wanted to be transparent with the investment community.
“We were not going to sit with the investment community and discuss our positive forward outlook on the uranium market, remain silent on the misaligned earnings expectations and then fly back to Saskatoon and put out an earnings announcement that didn’t meet the Street.”
Cameco’s shares have risen some 50 per cent in the past three months as analysts foresaw the supply-demand economics tip into better balance — and even undersupply in the medium-term — amid renewed interest in the sector driven by production cutbacks and the potential for global nuclear energy growth. But even after recent production cuts, the market is still oversupplied and utilities will be covered until about 2022 when demand increases to the point it cannot be satisfied by existing supply, Isaac said.
The market has been oversupplied since demand dropped following the Fukushima nuclear accident of 2011, while Kazakhstan continued to raise output to maintain market dominance, causing further weakness in uranium prices. He believes customers are taking a “wait-and-see” approach as to whether Kazakhstan, the world’s top uranium producer, follows through on last week’s announcement that it will cut output by 10 per cent due to weak market conditions, sending uranium spot prices 10 per cent higher to around US$25 a pound the day after.
Some of Cameco’s customers have suggested they want to terminate current contracts negotiated when uranium prices were higher — as they are paying more than the spot price.
Cameco has two approaches on that front: For customers it believes hold a future potential, it is open to discussions about blending or extending the contract, while for those considered to be of little future value, it is willing to fight to keep the contracts in place.
TD analyst Greg Barnes said he realizes that he and many analysts did not model correctly for the one-time cost impacts in 2016, but he was taken by surprise that the company said it didn’t see the utilities markets responding to the Kazakh announcement.
“That is a positive development, it recognizes that we are in a uranium price that is not supportive of uranium production,” he said. “But ultimately what we haven’t seen is a real buy-in from fuel buyers … they don’t yet believe the Kazakhs.”