VANCOUVER — Canada’s Cameco (TSX: CCO; NYSE: CCJ) is in damage control mode amidst the worst uranium market in over a decade. The company’s underwhelming third-quarter results were plagued by a 20% year-on-year drop in spot U3O8 prices, and production delays at its Key Lake uranium mine in Saskatchewan.
Cameco reported an adjusted quarterly loss of US$50 million, or 13¢ per share, after selling 9.2 million lb. uranium. The company indicated its US$32 per lb. U3O8 price realization represents the “lowest quarterly level reported in over 10 years.”
Cameco generated 3.1 million lb. uranium in the quarter, which marked a 56% quarter-on-quarter decline after “planned summer shutdowns” at its flagship Cigar Lake and McArthur River operations in Saskatchewan, as well as a required four-week maintenance program at Key Lake.
Cameco’s Cigar Lake uranium mine in northern Saskatchewan. Credit: Cameco.
The company had previously announced layoffs at these three mines totalling 120 employees, or 10% of its overall workforce. In mid-2016, Cameco cut 500 jobs in the province when it suspended its Rabbit Lake operation due to “depressed market conditions.”
“Our strategy remains to curtail higher-cost production and focus on our best margin assets,” president and CEO Tim Gitzel said during a conference call. “We’ve consistently acknowledged the near- to medium-term challenges on both the demand and supply side. We are cautiously optimistic, however, because today’s uranium price is too low to incentivize the investment required to ensure that adequate uranium production is in the market.”
Cameco subsequently reduced its annual production outlook to 24 million lb. from 25.2 million lb. U3O8. The company faces growing long-term demand risks from France, South Korea and the U.S., which jointly account for 18% of the global market.
Cameco’s quarterly results were also impacted by an ongoing dispute with Tokyo Electric Power Co. (Tepco) over a 2009 uranium supply contract worth $1.3 billion in revenue through 2028.
The Japanese utility has claimed force majeure pursuant to government regulations enacted after the earthquake and tsunami-related accident at Tepco’s Fukushima nuclear power station in March 2011.
“Three arbitrators have now been appointed for the Tepco trial, and based on the current schedule set by them, we expect the case will be heard in the first quarter of 2019,” Gitzel said.
A worker readies U3O8 drums to ship from Cameco’s Key Lake uranium mill in Saskatchewan. Credit: Cameco.
“Timing for a final decision, however, will obviously depend on how long the arbitrators deliberate following the conclusion of the hearing,” he said.
In addition, the company recently wrapped up legal proceedings against the Canada Revenue Agency (CRA) over its corporate structure and related transfer-pricing methodology for uranium.
The tax court trial began in October 2016 with closing arguments in September. The company estimates its total potential liability to the CRA between $1.75 billion and $1.95 billion. The decision is expected by mid-2019.
Scotia Capital noted in October that it now forecasts “the uranium market to remain in a structural surplus until early next decade.” Scotia analyst Orest Wowkodaw has a “sector underperform” rating on Cameco, alongside a $9.50-per-share, one-year price target.
“Cameco released relatively disappointing [third-quarter] results and issued sharply lower 2018 to 2021 realized price guidance, in our view, reflecting deteriorating fundamentals. Overall, we view the update as negative for the shares,” Wowkodaw said.
Cameco shares have traded in a 52-week range of $9.90 to $17.65 per share, and closed at $10.82 at press time.
The company has 396 million shares outstanding for a $4.3-billion market capitalization. It exited the third quarter with $352 million in cash and a $1.1-billion net debt position. It approved a 10¢-per-share dividend.
“We are restructuring our organization to be as efficient as possible,” Gitzel said. “Our goal is to remain competitive and position the company so we have the ability to be among the first to respond when the market calls for more uranium.”
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