CIBC Capital Markets has initiated protection of Cameco (TSX: CCO; NYSE: CCJ) with an outperformer ranking and a value goal within the subsequent 12-18 months of $37 for the Canadian uranium producer’s shares, whereas additionally taking a bullish view of uranium pricing.
“We anticipate nuclear power, a scalable, low-carbon power supply, to be key in lowering international dependency on fossil fuels as efforts to curb local weather change persist,” CIBC analyst Bryce Adams wrote in a analysis word in mid-January. “We imagine Cameco provides buyers Tier 1 property, with premium jurisdictional publicity, a big reserve base, a powerful stability sheet and an affordable valuation.”
Cameco’s Toronto-listed shares are presently buying and selling at $24.17 inside a 52-week buying and selling vary of $15.79 and $35.47, and Adams wrote that his $37 goal for Cameco’s shares relies on 2.0x value to internet asset worth (P/NAV) that captures “the prime quality of the corporate’s uranium property, lengthy mine life, low price of manufacturing, robust stability sheet, and its standing as a go-to title amongst uranium producer and developer friends.”
Two different elements which have influenced Adams’ share value goal are the doable decision of Cameco’s ongoing tax dispute with the Canada Income Company (CRA) and the potential restart of the corporate’s McArthur River mine, in addition to absolutely ramped up manufacturing at its Cigar Lake operation, each positioned in northern Saskatchewan.
The last decade-long troubles with the CRA relate to the corporate’s switch pricing methodology, and Adams says the dispute has at all times had the potential to have a fabric affect on Cameco’s liquidity and monetary place. Nonetheless, in February 2021 the Supreme Courtroom of Canada dismissed an utility for enchantment by the CRA for a number of of the years in query (2003 and 2005-2006). This set a powerful authorized backing that Cameco’s tax practices are absolutely compliant with Canadian tax legal guidelines. As such, CIBC assumes a two-thirds likelihood of decision between the CRA and the corporate, in favour of Cameco.
Adams additionally sees the potential restart of Cameco’s McArthur River operation, which the corporate shut down in 2018 on account of low uranium costs. Adams notes {that a} “restart can be a business determination based mostly on long-term contracts.” With robust provide and demand fundamentals, McArthur Lake might restart starting in 2025, Adams mentioned, although a nearer-term resumption of operations is feasible if the present market setting proves extra sustainable.
Cameco stays one the biggest producers of uranium on the earth, with about 12% of worldwide major manufacturing estimated for this yr. Adams expects Cameco’s market share to extend to 18% of worldwide manufacturing by 2025.
Cameco’s property are the Cigar Lake mine in northern Saskatchewan and the Inkai mine in Kazakhstan. 4 different property are presently suspended: the McArthur River/Key Lake operations and the Rabbit Lake mine, each positioned in Saskatchewan; the Crow Butte mine in Nevada; and the Smith Ranch-Highland operations in Wyoming. (The corporate additionally has processing services in Ontario.)
Trying forward, Adams additionally factors to the extensively held view that nuclear energy can be a essential a part of the bottom load power infrastructure required to attain international net-zero targets. Although renewable power technology has change into a a lot bigger a part of decarbonization targets, it has but to displace fossil fuels. This provides nuclear energy the potential to tackle an vital position as an power supply for electrical grids and create extra demand for Cameco’s uranium to gas these nuclear vegetation. “Our bullish thesis on uranium pricing is rooted in robust macro elements pushed by a path to net-zero with many hurdles enroute,” Adams mentioned.
Nonetheless, past restricted high-quality reserves, which might result in the event of lower-grade deposits that require greater prices, he cautions that the largest hurdle the uranium sector could face is the general public notion of the security of nuclear energy, or the social stigma left within the wake of nuclear disasters like Chernobyl and Fukushima.
The worldwide uranium sector was upended by the March 2011 Fukushima-Daiichi nuclear accident in Japan. Between 2011 and 2020, about 48 gigawatt-electric (GWe) of nuclear capability was misplaced around the globe as 65 reactors went offline or didn’t have their extensions renewed. The affect on the uranium sector was dramatic.
“The shock to demand, proper after a value spike pushed by the Chinese language coming into the uranium market in 2010 for their very own reactor necessities, created a interval of complacency that proved detrimental to uranium costs,” Adams wrote.
Nonetheless, the mining analyst factors out that market fundamentals have shifted, and new monetary gamers have entered the sector, serving to to reverse the surplus provide and stock that suppressed market fundamentals for the higher a part of the final decade.
CIBC now forecasts a “near-term market deficit” and a spot uranium value of about US$50 per lb. in 2022 rising to US$55 per lb. in 2024.
Primarily based on knowledge from nuclear trade analyst UxC, CIBC expects that China will add 14 reactors within the subsequent three years to its current 51 and have some 103 nuclear reactors by 2030. The US, South Korea and Pakistan, amongst others, are additionally anticipated to extend their electrical technology utilizing nuclear energy.
“Nuclear energy remains to be projected to be the low-carbon base-load expertise with the bottom anticipated ingoing fuels prices,” Adams commented, including that, “applied sciences reminiscent of small-modular reactors (SMRs) are displaying promise by way of lowering upfront capital prices, whereas regularly altering notion in regards to the security of those operations.”
