VANCOUVER — It’s a tough time to be in the uranium business, but Canadian producer Cameco (TSX: CCO; NYSE: CCJ) believes it is well positioned for a market recovery due to strong operating leverage and a rock-solid contract portfolio. According to president and CEO Tim Gitzel, the company’s cornerstone Cigar Lake asset in northern Saskatchewan is a “key to the strategy,” and a promising quarterly performance indicates the mine is on track to deliver.
Cameco had expected to crank out between 25.3 million and 26.3 million lb. U3O8 in 2015, but boosted its production guidance to 27.3 million lb. after the third quarter. The company attributed the increase to a stronger-than-expected performance at Cigar Lake, which hit commercial production in May.
The mine lies 660 km north of Saskatoon and is a joint venture between operator Cameco and France’s Areva. Cigar Lake was supposed to cost $450 million to develop and be in production by 2007, but delays saw costs balloon to over $2.5 billion.
The main problems at the large-scale mine involved ground conditions and dewatering, and it wasn’t until early 2014 that the joint-venture partners solved an issue related to underground storage tanks.
Over the past nine months, however, Cigar Lake has produced over 8 million lb. packaged uranium oxide, and has become a major contributor to Areva’s McClean Lake mill. Gitzel said during a conference call that the partners are “firmly on track” to hit an 18 million lb. target at McClean Lake by 2018.
“The most important news for Cameco this quarter is just how well Cigar Lake is performing. As you all know, this is a project that was a long time in the making, and the challenges to bring it on have been significant,” Gitzel said. “We are on track to deliver on our sales guidance for the year, and thanks to the better-than-expected ramp up, our overall production guidance is higher as well. We’re obviously delighted with the way [the mine and mill] have performed this year.”
Cigar Lake hosts underground proven and probable reserves of 597 million tonnes grading 17.84% U3O8, for 235 million contained lb.
Despite signs that Cameco will hit its growth targets, the struggling uranium market is a major challenge. The company reported year-to-date net earnings of $75 million — or 19¢ per share at the end of October, which compares to earnings of $113 million, or 28¢ per share over the same period in 2014. Financials were bolstered by lower-than-expected quarterly cash costs of US$17.56 per lb. U3O8.
Cameco noted the third quarter brought no “significant change” to uranium markets in terms of contract volumes or price. The company estimates that quantities in the spot market were at “normal levels,” while prices remain stuck under the US$40 per lb. U3O8 ceiling. Longer-term conditions could help uranium prices out of the doldrums, however, with an estimated 65 reactors under construction globally.
“The one piece we have been watching that has returned some good news is reactor restarts in Japan. [Kyushu Electric]’s Sendai reactor started up in the second half of the year, and another reactor is expected to come online in early 2016,” Gitzel pointed out. “Of course, there need to be more restarts to move sentiment in the markets, so we haven’t seen the needle move much in reaction to those events. When the market does turn, we expect to be more than just a price play.”
Bank of America Merrill Lynch analyst Oscar Cabrera called Cameco’s third-quarter earnings “weak,” but said that full-year guidance implies a strong financial year-end.
Cabrera has a “buy” recommendation on the company and a $27-per-share price objective. He wrote in a research note that Cameco “should continue to benefit from a strong long-term contract portfolio through 2018, after which point long-term uranium fundamentals should improve.”
Cameco shares have traded within a 52-week range of $15.50 to $22.46, and closed at $17.34 per share at press time. The company has 396 million shares outstanding for a $6.9-billion market capitalization.
The reserve numbers quoted in the article for Cigar Lake are obviously wrong. A quick look at Cameco’s website confirmed underground proven- and probable reserves at Cigar Lake total about 597 thousand tonnes, not 597 million tonnes.