Mr. Market may not be in the company's corner right now, but energy investors can't seem to shake their faith in Cameco (NYSE: CCJ) . It would easily make a list of energy stocks most likely to make a comeback if ranked by individual investor sentiment. The uranium supplier may be reeling from historically awful market conditions right now, but a calm and collected management team and healthy balance sheet promise to deliver it through the storm. Or so the thinking goes, anyway.
While I think investors shouldn't get greedy with the uranium stock right now -- and that it may be time to move on from nuclear investments altogether -- things are so bad right now that even the slightest improvement in the market could provide a short-term jolt to operations. With that in mind, here's a list of three potential catalysts for Cameco stock in 2018.
1. Japanese nuclear reactor restarts
All of the company's current woes are tied to what management calls the "low-price environment." That's a nice way of acknowledging that global demand for uranium fuels cratered after the Fukushima Daiichi accident in Japan. Luckily, there are some hints that the low-price environment could be poised for at least a brief recovery on the demand side of the equation.
Prior to the Fukushima accident, Japan had 54 nuclear reactors in operation -- the third-most on the planet. While it permanently shuttered some reactors, a total of five previously mothballed reactors have restarted operations, and another 19 reactors were waiting to be restarted as of mid-February. That's more nuclear capacity than is being built in all of China right now, and it could be brought online in a much shorter time frame.
Long story short, the island nation's thawing of its once dominant nuclear industry could boost near-term uranium demand. That may not hold in the long-run, as reactor restarts in Japan will be offset by closures in the United States and Germany, and as Japan itself turns to liquefied natural gas for electricity generation -- but it's a potential catalyst for 2018.
Uranium yellow cake.
2. Kazakhstan reining in oversupply
That "low-price environment" Cameco is always talking about is also a subtle way of noting that, despite significant reductions in demand in recent years, Kazakhstan decided to increase production anyway. That's significant, because the Central Asian country is the world's largest supplier of uranium.
The good news is that Kazakhstan has found that getting blamed for driving global uranium prices into the ground isn't much fun, and has announced intentions to cut output (multiple times, in fact) in an effort to help remove the supply glut.
In more mixed news, the country has also announced several long-term uranium supply agreements with China, which is currently building 20 nuclear reactors. While that could increase global demand and lift selling prices, the closed-loop nature of the supply chain could also keep Chinese nuclear growth from having much of an impact on the global market. That will take longer for investors to determine, however. For now, investors may be able to look forward to rising prices if excess Kazakh uranium is indeed kept off the market in 2018.
3. Almost any increase in uranium prices
Cameco released a 137-page financial report chock full of interesting discussions and disclosures for full-year 2017 operations and future scenarios. One table described the projected impact of uranium selling prices and the exchange rate between the U.S. dollar and Canadian dollar on operations -- and the upside is substantial.
The company estimates that every $5 per pound increase in uranium prices would deliver an additional $54 million in revenue, $32 million in adjusted net earnings, and $42 million in cash flow. That would translate to a spot price of $27 per pound. While that was last achieved in May 2016, Japanese reactor restarts and Kazakhstan's follow-through on production cuts could provide positive trends for prices. At least prices don't seem to be headed much lower than their current $20 per pound floor, which has held pretty firm for over a year now.
Do these potential catalysts make the stock a buy?
Cameco has an amazing management team, a rock-solid balance sheet, and enough cash to survive for about five years if it needs to. But it also faces some noteworthy headwinds that shouldn't be overlooked, and could take longer to overcome than many investors expect. While it's still possible for the right sequence of events to occur and lift the company out of its rut, I think it's unlikely to change the long-term calculus for the company or its industry. Therefore, I'm not going anywhere near the uranium stock.
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