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Message: Cameco: An Alternative Metal Play That Is Beginning To Look Attractive

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Cameco: An Alternative Metal Play That Is Beginning To Look Attractive

posted on Jan 18, 13 07:41AM
January 18, 2013 by: Vineet Dutta | about: CCJ, includes: MCP, URA, USGT.OB

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Uranium stocks have struggled ever since the Japanese nuclear accident about two years ago. However, Cameco (CCJ), the uranium heavyweight, has started seeing a bottom in its stock over the past 18 months as it has traded in the $16-25 range after falling all the way from over $40 a share. The fundamental picture has begun to improve as well, offering more support for the stock.

Cameco is one of the world's largest uranium producers, accounting for almost 16% of world production from its mines in Canada, the US and Kazakhstan. Cameco's leading position is backed by approximately 435 million pounds of proven and probable reserves and extensive resources. Cameco holds premier land positions in the world's most promising areas for new uranium discoveries in Canada and Australia as part of an intensive global exploration program. Cameco is also a leading provider of processing services required to produce fuel for nuclear power plants, and generates 1,000 MW of clean electricity through a partnership in North America's largest nuclear generating station located in Ontario, Canada.

The past 30 days or so has seen a number of news items that are seen as a positive for uranium and Cameco. First, in late December, the pro-nuclear Liberal Democratic Party in Japan won a landslide election victory. The win by the Liberal Democratic Party, said Dundee Securities analyst David Talbot, "may be a turning point for the nuclear sector and the catalyst many investors have waited for. We expect that this news could accelerate the likelihood that at least part of the Japanese nuclear fleet gets back online, perhaps even earlier than mid-2013."

Following that, there was Cameco-specific news. The company's CEO and one of the company's directors purchased shares in the open market, signifying their confidence in the company. Typically, insider purchases are following by periods of outperformance by the shares.

Just on Monday, Uranium One (SZRZF) announced that it entered into a definitive agreement with ARMZ, a Russian state-owned uranium firm, under which the company would be taken private pursuant to a plan of arrangement. Under the agreement, ARMZ would acquire all of the Common Shares that ARMZ and its affiliates do not already own for cash consideration of CDN$2.86 per share. The transaction provides total consideration to minority shareholders of approximately CDN$1.3 billion and implies an equity value for Uranium One of approximately CDN$2.8 billion. This announcement provided further confidence for the battered sector as companies are ready to put fresh capital to work in the space.

All of these news items provided a boost to uranium prices as well as Cameco. The Uranium ETF (URA) is now up over 10% year to date while Cameco is now up 7% on the year.

In addition to the positive fundamental developments for Cameco, the stock is attractive on a valuation basis. The stock currently sits at a price to book ratio of 1.7 versus a 3.2 figure in early 2011. It is also trading near its 5 year lows for the price to book ratio. As a bonus, the stock yields 1.9%. Cameco is also well capitalized with very little debt so if uranium prices do continue to fall, some of the risk should be mitigated.

Cameco isn't the only attractive alternative metal play out there, here are a couple of other ones that look appealing:

Molycorp (MCP) is a globally integrated, advanced materials manufacturer that produces a wide variety of specialized products from 13 different rare earths, five rare metals, and the transition metals yttrium and zirconium. It is the only advanced material manufacturer in the world that both controls a world-class rare earth resource and can produce high-purity, custom engineered rare earth products to meet increasingly demanding customer specifications.

The stock has struggled significantly over the past 18 months due to a myriad of issues. The most recent of which being a revenue warning late last week due to a weak rare earth pricing environment as well as a ramp-up schedule of a new manufacturing facility. The stock traded reached nearly $80 a share in May of 2011 and is now trading at about $9 a share, a fall of nearly 90% due to a myriad of issues.

The stock has lost so much value that now some are some calling it a "prime takeover target" due to the stock's fall below its net asset value. On a price to book value, the stock is attractive as well as one of its largest competitors in Australia, Lynas, is trading at a price to book ratio of 2.1 MCP is trading at a price to book ratio of 0.76 right now.

USA Graphite (USGT.OB) is focused on the acquisition, exploration and development of world class graphite properties in North America. USA Graphite is poised to be the only domestic graphite supplier as the USA has been importing 100% of its supply for the past 5 years (USGS 2010). The company has significant holdings in Nevada, offering considerable potential for the discovery and development of large flake, high-grade graphite whereby mineralization is exposed at surface.

The company recently signed a letter of intent to acquire the Ruby Mountains Graphite Property. The Ruby Mountains Graphite Property has been identified by the company as a high priority area for flake graphite. The claim block covers a large graphitic marble unit with flake graphite visible at surface. The quality of rock visible on-site exceeded the company's expectations and the proximity to its other core projects is complementary and economic. The financial terms of the transaction consist of approximately $3,200,000 in cash and stock and a $500,000 work program commitment.

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