👉 The Upstream Green Machine

Hi Everyone 👋,

It’s time for our GRIT Monthly Stock Deep Dive! This time, we are breaking down another player in the nuclear energy space.

Let’s jump right in!

_{As a reminder, this specific stock deep-dive is written by the GRIT team and is not the work of Head Analyst Austin Hankwitz.}

Stock Deep Dive: Cameco Corp. (NYSE: CCJ, $22.9B USD market cap)

U.S. Electricity demand has been relatively flat for the prior two decades.

Increased productivity in end-consumption technology has been a stronger factor than growing demand, resulting in a net flat total consumption.

Not anymore.

We are just about to hit an inflection in energy consumption, and we are going back to a period of secular growth.

A portion of this is driven by the most CapEx-intensive technological revolution we have seen in a very long time: AI powered by data centers.

While semiconductors are reaping all the initial benefits from massive (and growing) order books — all of these data centers need to be powered by an already antiquated grid. We therefore need new, clean, and always-on power sources in order to increase grid resiliency while providing the power needed for these facilities.

Nuclear fills this need.

In investing, it’s much easier to pick a winner in an area where a rising tide lifts all ships. Then it’s up to you to find the fastest ship. This ship is looking turbo-charged.

In last month’s issue we discussed an Independent Power Producer (IPP), Talen Energy. This week, we’re going closer to the source with a pick in the mining space.

• Why Now? 👉 Sentiment Shift

• Overview 👉 What Does Cameco Do?

• Asset Portfolio 👉 McArthur River, Cigar Lake, Inkai

• How Do They Win? 👉 Value Proposition

• How Do They Make Money? 👉 Tiered SaaS Revenue & Self-Managed

• Key Relationships 👉 Closely Integrated with Google

• By The Numbers 👉 Key Metrics

• Risks 👉 Potential Pitfalls

Why Now? 👉 Sentiment Shift

You can start to feel the tides changing.

Nuclear energy has understandably had to battle a lot of negative associations when it comes to disasters around the world: Chernobyl (Ukraine), Fukushima (Japan), Three Mile Island (United States), and Windscale (UK).

However, nuclear facility safety has drastically improved and Fukushima was the last disaster, taking place in 2011. Since this time — there have been marked improvements through stricter regulations, global safety reviews, advanced reactor designs, risk-informed decision making, and much higher public transparency and engagement.

Unlike many industries where trade secrets are kept from each other for competitive concerns, many operators at nuclear facilities now share critical information that makes every reactor safer and more efficient.

With antiquated grids and a new step-function of demand about to come online, we need additional non-greenhouse-gas-emitting fuel sources. We should be building these up or upgrading existing facilities, not decommissioning this fuel source.

Finally… we are.

This week (on Tuesday) Onagawa No. 2 reactor restarted. This is the plant that is closest to the epicenter of the earthquake that caused the Fukushima disaster.

This, among many other recent plant re-openings, are a step in the right direction towards increasing global confidence in turning back on this incredible power source.

Energy is the output of these facilities, now let’s move to the input.

Overview 👉 What Does Cameco Do?

Cameco Corporation is one of the world's largest providers of uranium fuel, essential for nuclear energy production. Headquartered in Saskatoon, Canada — the company specializes in the exploration, mining, refining, and trading of uranium.

Its flagship operations include the McArthur River and Cigar Lake mines in Saskatchewan, which are among the highest-grade uranium mines globally. These assets position Cameco as a critical player in supplying the growing demand for nuclear fuel, especially as the world seeks low-carbon energy alternatives.

Beyond mining — Cameco offers a suite of services in uranium refining, conversion, and fuel manufacturing, catering to nuclear power plants worldwide. The company's vertically integrated business model allows it to control multiple stages of the uranium supply chain, enhancing operational efficiency and revenue stability. With long-term contracts and a diversified customer base, Cameco mitigates market volatility and secures steady cash flow.

Financially, Cameco stands to benefit from the increasing global emphasis on clean energy solutions. As countries aim to reduce carbon emissions, nuclear energy is regaining traction as a reliable and low-carbon power source. Cameco's substantial reserves, coupled with its operational expertise, position it well to capitalize on this trend. The company's prudent financial management, including a solid balance sheet and disciplined capital allocation, underscores its commitment to delivering shareholder value amid a transitioning energy landscape.

Asset Portfolio 👉 McArthur River, Cigar Lake, Inkai

Cameco’s vertically integrated approach ensures they capture value along the entire supply chain.

The three key flagship assets are:

• McArthur River Mine (Saskatchewan, Canada): One of the world's largest and highest-grade uranium mines. After a period of temporary suspension due to market conditions, operations resumed in 2022 to align with increasing demand. Cameco owns 69.8% of the McArthur River mine and 83.3% of the Key Lake mill, which processes the ore.

• Cigar Lake Mine (Saskatchewan, Canada): Another high-grade uranium mine, Cigar Lake is crucial to Cameco's production portfolio. Cameco holds a 54.5% interest and is the mine's operator.

• Inkai Joint Venture (Kazakhstan): A significant in-situ recovery uranium operation in Kazakhstan, one of the top uranium-producing countries. Cameco has a 40% stake in the joint venture with Kazatomprom, Kazakhstan's national atomic company.

In addition to these mining operations, Cameco also fully owns and operates refining and conversion facilities, fuel manufacturing, as well as services and trading.

Additionally, Cameco also bought a 49% ownership in Westinghouse alongside Brookfield Renewable. Westinghouse services approximately half of the world’s nuclear power plants, onboarding additional expertise.

Vertical integration is crucial for Cameco because it allows the company to control multiple stages of the uranium fuel cycle, from mining and refining to conversion and fuel manufacturing. This comprehensive control enhances operational efficiency by streamlining processes and reducing reliance on external suppliers. It enables Cameco to optimize production schedules, maintain consistent product quality, and quickly adapt to market changes, thereby reducing operational risks and costs.

How Do They Make Money? 👉 Business Segments

Cameco generates its revenue primarily through three main streams. The most significant is its Uranium Segment, which involves the mining and milling of uranium ore to produce uranium concentrate, commonly known as yellowcake. This product is sold to nuclear utilities worldwide under long-term contracts and spot market sales, supplying fuel for nuclear power plants. Historically, this segment accounts for the majority of Cameco's revenue, typically around 70-80%.

The second revenue stream is Cameco's Fuel Services Segment. In this segment, the company provides refining, conversion, and fuel manufacturing services. Cameco processes uranium concentrate into uranium trioxide and uranium hexafluoride, which are then used to produce nuclear fuel bundles for reactors. Revenue in this segment comes from service fees and the sale of processed uranium products. This segment contributes approximately 15-25% of the company's total revenue.

Lastly, Cameco engages in Other Activities, including uranium trading to optimize its portfolio and meet contract obligations, as well as income from investments and joint ventures. Collectively, these other activities account for about 5% or less of Cameco's total revenue.

By The Numbers 👉 Key Metrics

In fear of skipping the obvious, the price at which Cameco sells uranium directly affects its revenue. Higher market prices = higher revenue and profit margins. However, there are some nuances to market pricing.

Long-Term Contracts: These contracts are future-dated at a pre-agreed upon sale price. While these provide a degree of revenue stability, many include market-related pricing mechanisms or escalators tied to uranium price indices. Therefore, even long-term contracts are influenced by market price movements.

Spot Market Sales: Sales in the spot market are fully exposed to current market prices, making revenues from these sales highly sensitive to price fluctuations.

Average Realized Price: The overall average price Cameco realizes for its uranium sales is affected by the blend of contract types and current market prices.

If we look at their most recent quarter, we can pull out the breakdown of these key operating metrics:

Critically, the company also provides an outlook for the full year period:

Using this and asset-specific information, analysts then construct a forecasted production profile:

And finally, when companies like this have so many moving pieces, they are typically valued on either an EV/EBITDA basis, a Net Asset Value basis, or a combination of both.

This has led TD Cowen to a target price of $80 as of their most recent report:

Risks 👉 Potential Pitfalls

Contract Slowdown: Pace of new long-term contract wins slows which delays its plans for mine life extensions, production expansion, and project restarts. Without a steady stream of new contracts, Cameco may face uncertainties in justifying investments in existing and new projects. This could lead to delays or cancellations of planned expansions, affecting the company's ability to meet future demand when the market rebounds.

Market Pricing: New supply growth ramps up faster than expected, placing downward pressure on Uranium prices. Factors contributing to rapid supply growth may include new mines coming online ahead of schedule, existing producers increasing output, or the release of secondary supplies from government stockpiles and decommissioned nuclear weapons.

Sentiment: Global sentiment towards nuclear energy sours, resulting in slower than expected build-out of new nuclear power plants and/or SMRs. For Cameco, this means potential reductions in future sales and challenges in projecting long-term demand. Moreover, existing nuclear facilities might face early decommissioning, further decreasing uranium consumption.

Wrapping Up…

Cameco has become the default company for generalists to turn to when they hear nuclear energy — and for good reason. Their asset portfolio and operating history is amongst the best in the industry.

The movement towards nuclear already had solid footing when thinking about non-GHG emitting sources of energy. Incremental short-term energy demand increases further strengthen the thesis.

There’s a solid argument to be made for Cameco as a long-term hold.

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