Cameco: Both prices and cash costs rise, hold rating confirmed (NYSE:CCJ)

Investment thesis

Cameco (NYSE: CCJ) (TSX:CCO:CA), the uranium market remains under pressure due to limited supply in the short to medium term. Additional market pressure is being exerted by the increase in mineral production in Kazakhstan. tax in 2025 and the law banning the import of Russian uranium.

The increased price forecast for the Company's products (uranium sales and fuel services) resulted in an increase in Cameco's revenue forecast, which was partially or even fully offset by an increase in the cost forecast.

We have previously covered the stock and, given the new requirements, are lowering our price target from USD 55 to USD 53. We reiterate our HOLD rating.

The uranium market

Uranium prices in the long-term contract market continued to rise in Q2 2024. The price averaged $78.5 per pound (+5% q/q and +40% y/y) compared to the $78 per pound we had Most orders continue to come from utilities, with Cameco management notes that they are beginning to develop new storage strategies to buy larger volumes and build up stocks. Nuclear energy continues to enjoy bipartisan political support in the United States and many other countries around the world, which is increasing confidence in the reliability of investment in the industry and allowing companies like Cameco to increase the number and size of contracts.

In the spot market, price performance was mixed during the quarter, averaging $87.9 per pound (-7% q/q and +57% y/y) versus our expectations of $101 per pound. The spot market is extremely small and even the smallest fluctuations in orders have a strong impact on price.

Typically, long-term prices are set above spot prices, but during bull phases when uranium prices are rising (from 2004 to 2007 or from late 2023 to present), this pattern is reversed.

Given the ongoing supply constraint in the industry and the announced July 2024 long-term uranium contract price ($80.5 per pound), we are increasing our long-term contract price forecast from $78.2 per pound to $79.3 per pound for 2024 and from $84.5 to $85 for 2025.

We are lowering the Q3 2024 spot price forecast from $101 per pound to $95 per pound based on the availability of data on the July 2024 uranium spot price ($84.25 per pound). We are leaving the forecast for spot prices going forward unchanged.

On July 10, 2024, it was reported that Kazakhstan plans to increase the tax rate on uranium mining in two stages. Here are the planned changes: From January 1, 2025, the tax rate on uranium mining will [MET] on uranium will be increased from 6% to 9% and, from 1 January 2026, differentiated rates for uranium will be introduced, depending on the annual production volume and the weighted average price of uranium.

Cameco has a joint venture called Inkai with Kazatomprom (based in Kazakhstan) that supplies Cameco with low-cost uranium. It is currently unclear what agreement the two companies will reach regarding the increased costs, but we expect that from 2025 onwards the price of uranium purchases from the Inkai joint venture will be 3% higher for Cameco, meaning the company's cash costs will increase by the same amount.

The increase in MET fees, which will drive up costs for Kazatomprom and further increase the price of uranium in the long term, comes at a time when the industry is still in the early recovery phase. In addition, Kazakhstan, the world's leading uranium producer (> 40% of global production), is the reason for the possible global shift in the cost curve of supplies. This will not only affect Cameco, but the entire industry.

On August 12, 2024, the Prohibiting Russian Uranium Imports Act came into force, signed by the US President on May 13, 2024. This law prohibits the import of unirradiated, low-enriched uranium (LEU) produced in Russia or by a Russian company. To ensure a seamless transition from Russian uranium to other uranium, the law provides an option for some Russian imports until January 2028: The US Department of Energy can lift the ban on imports from Russia if there is no alternative viable source of LEU or if importing Russian LEU is in the US national interest.

Russia has about 44% of the world's uranium enrichment capacity and is a major exporter of LEU to the US. The US ban on Russian nuclear fuel raw materials, albeit gradual, brings additional uncertainty to the future of the industry and is likely to shift the global cost curve of nuclear fuel production to the right.

Although the Company signed fewer long-term contracts than expected in Q2 2024, we continue to expect that these contracts will account for approximately 60% of the revenue structure of the segment engaged in the mining and sale of uranium going forward. The Company's management emphasized that the long-term contract market is a much higher priority than the spot market.

Due to the increased forecast for long-term contract pricing, which represents a dominant share of the Company's forecast revenue structure, we are increasing our forecast for the average selling price over the forecast period to 2025 from CAD 85 to CAD 87.5.

In terms of production volumes and revenues, we continue to expect the Company to produce 22.4 million pounds of uranium (+27% year-on-year) in 2024 (including Cameco's project interests) and 23.8 million pounds (+6% year-on-year) in 2025. Revenues will reach 33.6 million pounds (+5% year-on-year) in 2024 and 34.4 million pounds (+4.4% year-on-year) in 2025.

Financial results

We are increasing Cameco's revenue forecast from CAD$3,187 million (+23% year-on-year) to CAD$3,249 million (+26% year-on-year) for 2024 and from CAD$3,537 million (+11% year-on-year) to CAD$3,647 million (+12% year-on-year) for 2025 due to:

• the increased forecast for the average selling price of the Company's products in the segment that sells uranium;
• the forecast increase in the average selling price for the Company's products in the Fuel Services segment in light of increasing supply uncertainty in the industry as demand remains fundamentally strong.

We are increasing Cameco's EBITDA guidance from CAD$1,051 million (+108% year-on-year) to CAD$1,185 million (+135% year-on-year) for 2024 and decreasing it from CAD$1,136 million (+8% year-on-year) to CAD$1,086 million (-8% year-on-year) for 2025 for the following reason:

• the increased guidance for the Company's revenue in 2024 and 2025, which will be partially offset by increasing costs in the Company's fuel services segment in 2024 and offset by expectations of increasing costs in the Company's uranium and fuel services segments in 2025.

The increased cost estimate in the Fuel Services segment in 2024 and 2025 is due to the high costs incurred in the second quarter of 2024, which are expected to remain high due to the increased uncertainty regarding the supply of enriched uranium following the law banning U.S. imports of Russian uranium.

The increase in estimated uranium purchasing costs in 2025 is due to the impact we expect increased metallurgy in Kazakhstan to have on the market.

Evaluation

We are reducing the price of the shares from $55 to $53 due to:

• the reduced EBITDA forecast for 2025;
• the postponement of the FTM assessment period.

Based on the new assumptions, we maintain our HOLD rating for the stock.

The price target is 53 USD/share was achieved by projecting the financial results for 2025 and discounting them at a rate of 13% per annum.

The discount rate of 13% corresponds to the average growth of the S&P 500 index over the last 20 years. In other words, when we evaluate a company based on its long-term results, it is important to us that the company's growth exceeds the average growth of the index.

Diploma

Cameco is a unique uranium mining and nuclear fuel manufacturing company. The company successfully navigates the phases of the uranium demand cycle by either retiring or developing its assets. Cameco also has a number of dormant and young projects such as Millennium, Kintyre and Yeelirrie.

To manage your positions, we recommend that you follow Cameco's earnings releases and uranium market updates.