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Max Manturov

Max Manturov

Head of investment research regulated by CySec 07.03.2022

Uranium investments: returns of up to 37% amid looming energy crisis

Uranium is not as prominent a mineral as oil, gas or gold. With the transition to green energy, it may soon come to the fore. Already in 2021, the price of uranium has risen significantly and some states are making plans to increase nuclear generation capacity. Explosive price increases were expected by 2030, but the evolving energy crisis against the backdrop of the abandonment of Russian oil, coal and gas could significantly accelerate the process.

Our experts have identified two promising areas for investment in nuclear power development.

Cameco Corporation

Company: Cameco Corporation
Ticker: CCJ.US
Current price: $23.5
Target price: $30
Potential Growth: 27.66%
Time Horizon: 12 months
Risk: Moderate
Position size: 5%
Potential dividend yield: 0.5%

The Company

Cameco is one of the world's largest uranium producers. Amid years of declining uranium prices, the company has reduced production, instead buying uranium on the spot market to meet contractual obligations. In the long term, Cameco has the opportunity to increase its annual uranium production by reopening closed mines and investing in new ones. In addition to its large mining business, Cameco operates processing and production facilities, making it a vertically integrated company.

What is the idea?

Investing in Cameco Corp to make money amid the evolving energy crisis. Today's conflict could cause a growing energy crisis, pushing Europe to accelerate the implementation of clean and environmentally friendly energy sources in line with the plans of the Paris Agreement.

Why do we like the uranium industry and Cameco Corp.?

Reason 1: The escalating conflict between Russia and Ukraine could accelerate the transition to renewable energy.

The conflict has increased the risk of dependence on Russian gas, especially for countries that see it as a bridge to renewable energy.

Russia's invasion of Ukraine was expected to give added urgency to Europe's efforts to overcome its dependence on Russian oil and gas, and to force Europe to accelerate the transition to cleaner energy, experts and EU officials say. Indeed, on the 27th of February 2022, the Chancellor of Germany, Olaf Scholz, announced the construction of two liquefied natural gas (LNG) terminals in Germany in response to the Ukraine operation and dependence on Russian natural gas. These actions have increased tensions between Europe and Russia.

Discussions about a quicker transition to clean and eco-friendly energy sources began months ago when oil and gas prices began to rise. Discussions have intensified in recent weeks as Russia has moved closer to war, a threat that has raised the possibility that already low gas supplies could be further curtailed if Russia shuts off the taps. Germany currently gets about half of its gas supply through pipelines from Russia, and lacks the infrastructure to import liquefied natural gas from other countries. (As mentioned above, they will build two LNG terminals). As Russian gas flows have slowed down, Germany's sense of reliability has changed. This realisation could overturn the status quo.

The energy crisis experienced in some parts of the world has heightened concerns about energy security and highlighted the role of energy policy and balancing three main goals: ensuring a clean emissions profile, ensuring a reliable and secure base load profile and ensuring an affordable balanced cost profile. Too much focus on one goal has resulted in some jurisdictions facing electricity shortages and soaring energy prices. There is now a growing recognition that nuclear power, with its clean emission profile, reliable and safe base load characteristics and low level costs, plays a key role in achieving decarbonisation goals.

Reason 2. The competitive advantages of uranium over other energy sources on the world's path to "net zero".

Uranium has the following competitive characteristics:

Relatively more reliable, efficient, clean and safe.

  • Nuclear power is highly reliable and efficient compared to other forms of power generation. Nuclear energy is by far the most concentrated form of energy. The high energy density of uranium reduces the impact of mining and transport, making it easier to store waste.
  • Nuclear power is one of the cleanest sources of energy, based on CO2 emissions. Nuclear reactors use fission (the splitting of uranium atoms) to produce electricity without any combustion.
  • Nuclear power is one of the safest energy sources available. When calculated on a full-cycle basis, nuclear is the safest industry among all energy industries in terms of the number of deaths per unit of electricity generation (Source: World Nuclear Association).

Because of the long-term falling uranium price, many companies have gone bankrupt, while the strongest have consolidated, waiting for a better time to ramp up production. Today, the lagging supply over the last year has positively affected the rising price of uranium. The shift in demand is fundamental and linked to global plans to decarbonise the global economy. This plan is based on the Paris Agreement.

In particular, the following problems can be partially solved with uranium:

  1. First, to lift a third of the world's population out of energy poverty by increasing the availability of clean and reliable basic electricity.
  2. Secondly, to replace 85% of the world's current carbon dioxide-fuelled electricity grid with a clean and reliable alternative.
  3. Finally, the challenge is to expand global energy systems by converting industries to clean electricity.

Today uranium market fundamentals are changing in favour of producers. Stable long-term demand, enabled by the "Net Zero" trend, is developing positive strategic shifts for existing mining companies, in particular affecting Cameco Corporation's uranium mining decisions (discussed further below).

Reason 3. Cameco has competitive advantages that will contribute to long-term benefits throughout the fuel chain in the new clean economy.

Cameco is one of the industry leaders. From 2011 until 2020, uranium prices declined. In this long-term negative environment, the company's management made strategic choices aimed at maintaining the company's position in the industry. Today the company is vertically integrated. The realisation of this objective is reflected on the balance sheet in the form of accumulated cache in excess of the company's debt. Negative net debt indicates the company's strong balance sheet and provides an opportunity to participate in new projects. The increased demand for uranium has not yet affected the company's revenue, as the sales are generated by medium- and long-term contracts. The company's revenue declined on average by 5% over the last 5 years. EBITDA declined from $372MM in 2019 to $117MM in 2021. However, management managed to maintain a high FCF of $286MM in 2021. FCF is more informative about the company's financial health as it reflects the high level of liquidity needed to support a) operations and b) increase the company's flexibility and readiness for production roll-outs as well as new investments in uranium development and processing.

Source: Ycharts

The cash reserves over the last 5 years have grown at an average annual rate of 38% to $978MM by 2021, while debt declined to $781MM in the same year. Net debt was -$197MM - more cash than debt.

Source: Ycharts

We should expect positive changes in revenues as the spot price of uranium has risen 92.5% since March 2020 from $24.35 to $46.75 per U3O8. The same is confirmed by management's intentions as at the last quarterly conference the CEO shared the company's plans:

"If you remember last quarter, I said at the time that when the data came in, I would announce a return to operating status for our mine. I said it would be undeniably positive news for Cameco. Well, today is that day."

The CEO further clarified:

"To start with, we will begin the process of moving the MacArthur River mine and Key Lake shredder from maintenance to operational readiness, which will allow us to produce 15 million pounds (pounds) a year at 100% level by 2024."

At the moment, by multiples, Cameco Corp is trading cheaply relative to other companies in the industry:

  • Price/Sales (TTM) 7.77 | Industry Avg- 292
  • EV/Sales (FWD) 6.38 | Industry Avg - 99
  • EV/Sales (TTM) 7.57 | Industry Avg - 284
  • EV/EBITDA (FWD) 31.22 | Industry Avg - N/A
  • EV/EBITDA (TTM) 42.06 | Industry Avg - N/A
  • Price to Book (TTM) 2.37 | Industry Avg - 4
  • PE (FWD) 26.5x | Industry Avg — N/A

Source: Seeking Alpha

Because of the long-term decline in the uranium market, from 2011 to 2020, companies faced difficult conditions: many were forced into bankruptcy, some temporarily suspended production, while the strongest implemented strategic plans for integration and consolidation. Today, most companies in the industry are in poor financial condition, with many lacking revenue. For this reason, on the one hand, a comparison with the industry dominating the Cameco uranium market helps to give a quick overview but, on the other hand, is not informative.

Furthermore, management is optimistic that the company will increase its dividend payments in 2022: "our board of directors has approved a dividend payment of $0.12 per share in December compared to $0.08 per share in 2021. The current annual dividend yield is 0.4%. The potential dividend yield will be 0.5%

Recommendations of investment houses

  • 11.02.2022 // BMO Capital Markets // $С33 target price (Canadian USD)
  • 10.02.2022 // Canaccord Genuity Group // $37 target price
  • 10.02.2022 // Royal Bank of Canada // $С30 target price (Canadian USD)

Source: marketbeat.com

Conclusion

Cameco Corporation has long stagnated in terms of shareholder value due to the long-term downturn in the uranium market. Today, in a new market fueled by global long-term demand based on carbon reduction plans, Cameco stands out from its competitors in terms of financial health, market share and vertical integration. These factors will enable Cameco to deliver tremendous value to its shareholders in the new commodity cycle.

How to take advantage of the idea?

  1. Buy the stock at $23.5.
  2. Allocate no more than 5% of your portfolio for purchase. To compile a balanced portfolio, you can use the recommendations of our analysts.
  3. Sell when the price reaches $30.


Buy Cameco Corporation Shares >>

ETF fund: Global X Uranium ETF

Ticker: URA.US
Current price: $23.3
Target price: $32
Potential Growth: 37.34%
Time Horizon: 12 months
Risk: Moderate
The number of shares in the ETF is 51.
Dividend yield for 2021 - 5.3%
Position size: 1%
P/E Ratio - 21.88

About the ETF fund

The Global X Uranium ETF provides investors with access to a wide range of companies involved in uranium mining and the production of nuclear components, including companies involved in the processing, exploration or production of equipment for the uranium and nuclear industries.

The Global X Uranium ETF seeks to deliver investment results that are broadly in line with price and return performance, excluding fees, expenses and the Solactive Global Uranium & Nuclear Components Total Return Index.

  • Assets under management, AUM - $1.41bn.
  • Expense Ratio, Expense Ratio - 0.69%.
  • ETF yield over the last six months - 17.8%.

What's the idea?

Above, we recommended the industry leader, Cameco Corporation. This ETF reflects the same idea for more conservative investors who prefer diversification in the uranium industry.

Fund structure

The fund invests 23% of its funds in Cameco Corp. The fund contains a total of 51 assets that are designed to diversify an investor's investments.

Read more about this ETF at KID.

How to take advantage of the idea/ETF?

  1. Buy ETF at $23.3.
  2. Allocate no more than 1% of your portfolio for purchase. To compile a balanced portfolio, you can use the recommendations of our analysts.
  3. Sell when the price reaches $32.


Buy ETF fund: Global X Uranium ETF >>

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*Additional information is available upon request. Investment in securities and other financial instruments always involves risks of capital loss. The Client should make himself aware at his own accord, including to familiarize himself with Risk Disclosure Notice. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Commissions, fees or other charges can diminish financial returns. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and do not constitute an investment advice service. The recipient of this report must make their own independent decisions regarding any securities or financial instruments mentioned herein. Information has been obtained from sources believed to be reliable by Freedom Finance Europe Ltd. or its affiliates and/or subsidiaries (collectively Freedom Finance Europe). Freedom Finance Europe Ltd. do not warrant its completeness or accuracy except with respect to any disclosures relative to the Freedom Finance Europe Ltd. and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated.

  • Sources of information

    https://www.cameco.com/

    https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement

    https://www.cameco.com/invest/events-presentations/2021-q4-conference-call-and-webcast

    https://www.globalxetfs.com/funds/ura/

  • Recommendation evaluation methodology in accordance with Terms and Conditions of Market Research Use
    Freedom Finance analysts perform a three-stage analysis. They select a promising industry based on the latest news, statistics and industry-specific metrics. They assess the supply and demand situation and its future development dynamics. Industry’s investment attractiveness is mostly affected by the forecasted market growth rates; total addressable market, player concentration level and likeliness of a monopoly formation, as well as the level of regulation by various entities or associations.

    The assessment is followed by the comparative analysis based on the selected sample. The sample comprises companies with a market capitalization of over USD 1 billion, but there is space for exceptions (when the suitable level of liquidity for company’s securities is available on the stock exchange). The selected companies (peers) are being compared against each other based on multipliers (EV/S, EV/EBITDA, PE, P/FCF, P/B), revenue growth rates, marginality and profitability (operating income margin, net income margin, ROE, ROA), and business performance.

    Having completed the comparative analysis, the analysts carry out a more in-depth research of the news about the selected company. They review company’s development policy, information about its current and potential mergers and acquisitions (M&A activity), and assess the efficiency of company's inorganic growth and other news about it over the past year. The main objective at this stage is to identify the growth drivers and evaluate their stability, as well as the extent of impact they have on the business.

    Based on all the data collected, the analysts determine the weighted forecasted figures of company’s growth rates and proposed business marginality, which are used to calculate the company’s multiplier-based estimated value. The said value enables setting the stock price target and stock value growth potential.

    The expected timing of the idea implementation is set depending on the current market situation, volatility level and available forecasting horizon for industry and company development. The forecasting period is normally set between 3 and 12 months.