Is Cameco worth CDN$57 a share?
A lot depends on the price of uranium
Cameco (CCO.TO) is the world’s largest uranium producer and reports a resource base (proven, probable and inferred) net to Cameco of 562 million pounds of U3O8 of which 409 million pounds is categorized as proven or probably. The current uranium price of US$94 is almost double what it was a year ago, so investors are piling into Cameco shares
The nuclear industry went into a funk when a tidal wave damaged the Japanese reactors at Fukushima and the world reeled in horror at the risk of a nuclear catastrophe. That risk came and went and demand for energy kept rising, so nuclear power is back in vogue again, even in Japan.
Nuclear fuel comprises about US$19 per megawatt hour of the approximately US$29 per megawatt hour cost of electricity from a nuclear power station, the balance made up of operating costs and retirement of the capital cost of the power station. The world’s largest nuclear power station, Japan's Kashiwazaki-Kariwa Nuclear Power Plant (NPP) produces a net capacity of 7,965MW.
Costs to build new nuclear power plants have escalated over the years with the most recent plants costing about US$14 million per megawatt.
Each megawatt is equivalent to 365 x 24 x 1,000 = 8,760,000 Kwh of electricity which at current power rates in North America of about US$0.15 per Kwh to residential users amounts to US$1.3 million of revenue for the utility and likely about half of that to the power station after transmission losses, delivery costs and utility administration. At a cost of capital for utilities of (say) 10 percent, a new nuclear power plant will have to charge about US$0.15 per KwH for return on capital in addition to the cost of the nuclear fuel.
In 2022, the approximate cost of nuclear generated electricity was about US$29.00 per megawatt hour, or US$0.03 per kilowatt hour. In 2022, U3O8 price was on the order of US$50 per pound. At current U3O8 prices, nuclear sourced electricity would cost somewhere around US$0.21 per KwH (15 + .03 +.03 )to provide from a new generating plant. New nuclear power plants are no longer “low cost” providers of power even without a the added costs of local and federal taxes. Here is a Manitoba Hydro bill excerpt showing how taxes double the costs of power from a supply cost of CDN$.07381 per Kwh to a user price of 15.77/86= CDN$0.1834 per Kwh.
Given the relative costs, it seems unlikely to me that U3O8 costs will keep rising.
Cameco has three Tier 1 operations which make up most of its income, in addition to numerous Tier 2 or exploratory deposits which have additional value. Using a modified Black Scholes valuation, I calculated the value of Cameco’s large McCarthur River operation to be about CDN$9.5 billion or just over CDN$27.00 per Cameco share.
A similar analyis of Cameco’s Cigar Lake and Inkai joint venture yielded values per Cameco share of CDN$8.76 and CDN$4.23 respectively, all of the foregoing values before adjustment for Cameco debt which amounts to about CDN$1.2 billion. Cameco fuel operations have value as do its undeveloped properties, and it has an estimated CDN$1.3 billion liability for reclamation. Since its Westinghouse joint venture was a recent CDN$2 billion acquisition, I assume its value is CDN$2 billion.
Adjusting for the foregoing (and without any attempt at precision) I value CCO shares at CDN$45 to $CDN$50 a share plus or minus, and think the current market price premium is a bet by investors that U3O8 prices will keep rising. There are about 60 nuclear power facilities under construction worldwide today, and demand for uranium is sure to rise as they come onstream. Cameco shares will likely benefit longer term, but in my opinion there are better uranium investments. In particular I like Fission Uranium and Denison Mines, both of which seem deeply undervalued to me (and subject of other articles).
Congress just made a dramatic move toward nuclear power with 90% in favour . That’s a major blow to the Marxists who want to de-industrialize America. One would think that new demand would impact the price of uranium