VANCOUVER — Despite a renaissance in some subsectors of the mining industry — predominantly precious metals — Canadian uranium leader Cameco (TSX: CCO; NYSE: CCJ) is feeling the pain. The nuclear market has yet to recover from the Fukushima disaster in Japan in 2011, while oversupply conditions have depressed uranium oxide (U3O8) spot prices to an 11-year low.
On July 28, Cameco reported what easily qualifies as its worst quarterly performance since 2005. The company registered an adjusted net loss of $57 million, or 14¢ per share, and saw its sales plummet 20% quarter-on-quarter and 40% year-on-year. Cameco sold just 4.6 million lb. U3O8 over the past three months, which equates to its lowest level in 10 years.
Cameco exploration efforts in northern Saskatchewan. Credit: Cameco Corp.
The Rabbit Lake uranium mine in Saskatchewan that Cameco has put on care and maintenance. Credit: Cameco.
“I can say that this [second quarter] has probably been the toughest quarter in the toughest market we’ve seen in the last decade, and our results reflect just how challenging the environment is … uranium demand remains low and prices are very depressed,” president and CEO Tim Gitzel said during a conference call.
“Primary supply has simply not responded to decreased demand, and, coupled with an abundance of secondary material available today, the market is simply oversupplied,” he added.
The company also attributed the weak results to “allowable customer discretion,” with respect to the timing of deliveries under contracts. Utilities may select a quarter for deliveries within a calendar year, and many opted to defer to the fourth quarter due to the falling price environment.
The Rabbit Lake uranium mine roughly 800 km north of Saskatoon, Saskatchewan, on the northeast edge of the Athabasca Basin. Credit: Cameco Corp.
The spot price for uranium has fallen 66% since the Fukushima disaster, including a 25% decline over the past year. The commodity traded for US$25 per lb. at press time, though Cameco expects contract commitments for the rest of 2016 will total between 19.5 million lb. and 21.5 million lb. U3O8.
In addition, the company was hit with a $124-million impairment charge after announcing its intention to suspend uranium production at its Rabbit Lake mine in northern Saskatchewan in late April. As a result, Cameco expects to incur $35 million in care and maintenance and $19 million in one-time severance costs this year.
The company also disclosed that it has agreed to end a long-term U3O8 supply agreement with a customer for cash proceeds of $47 million, because future deliveries were contracted at prices “well above current levels.” Cameco did not reveal the utility that cancelled its contract, and the situation raises the spectre of more contractual difficulties in major markets like Japan and the United States.
In-situ uranium recover at the Inkai operation in central Kazakhstan. Credit: Cameco Corp.
A worker readies U3O8 drums to ship from Cameco’s Key Lake uranium mill in Saskatchewan. Credit: Cameco.
“I assume this is a bit of a one-off,” Gitzel said. “This certainly isn’t a pattern we’re seeing right now. We’ve talked about it in the past on calls, and we’ve done some deferrals, but we haven’t seen anything else lately in that regard.”
Cameco modestly boosted its annual production guidance to 25.8m lb. U3O8 after “stronger than expected” production at Rabbit Lake. Despite weak results over the past six months, the company reaffirmed its full-year sales guidance of between 30 million and 32 million lb. U3O8.
The weak markets overshadowed Cameco’s strong operating quarter. The company produced 7 million lb. uranium, which represents a 30% year-on-year jump in quarterly production. In addition, cash costs were down 23% quarter-on-quarter to US$15.96 per lb. U3O8. The improvement is even starker when compared to second-quarter 2015 costs, which were pegged at US$26.53 per lb. U3O8.
“Our strategy is to keep our production flexible and focus on our lowest-cost assets.”
Tim Gitzel
president and CEO, Cameco
“Our strategy is to keep our production flexible and focus on our lowest-cost assets. That strategy led to the production curtailments we announced last quarter,” Gitzel said. “We expect these decisions will help us remain competitive in an uncertain market, where we simply don’t know how long weak conditions will persist. But over time, we believe it will change. China’s new build program is going strong, as are programs in South Korea and India. So far this year five new reactors have started up.”
The company is focused on three operations: Cigar Lake and McArthur River in Saskatchewan, and Inkai in Kazakhstan.
One overhang on Cameco’s valuation is its ongoing dispute with the Canada Revenue Agency over $3.4 billion earned by a European subsidiary from 2003 to 2010. The company has indicated another $3.6 billion in earnings may come under review. Initial court hearings are scheduled in October, and long-term proceedings could result in a $2-billion tax bill.
In early August, Cameco also hit a wall at its Yeelirrie deposit in Australia after environmental regulators recommended a rejection of its mine proposal over concerns about “underground fauna.”
Cameco’s Cigar Lake uranium mine in northern Saskatchewan. Credit: Cameco.
The company’s shares have traded in a 52-week range of $12.12 to $19.32 per share, and last closed at $12.38. Cameco has 396 million shares outstanding for a $4.9-billion market capitalization.
It reported cash of $132 million and $1.7 billion in debt at the end of the second quarter.
Scotibank cut its 12-month price target on Cameco by $2 to $13.50 per share after the quarterly results.
“The very weak volumes, combined with new disclosure of a [long-term] contract cancellation by a utility, provides more evidence that uranium fundamentals are extremely weak,” analyst Orest Wowkodaw noted. “We believe there is significant downside risk to street expectations, as a material near-term price recovery is unlikely to materialize.”
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