Cameco reported earnings this week, and their earnings calls are always an important vantage point from which to understand the uranium industry. This quarter we got a look into just how absurd the supply imbalance is becoming, along with details on production restarts. Additionally, Cameco’s comments, and their financial condition illustrate the survival advantages it has compared to smaller junior miners. The quarterly financial performance was worse than expected, but thats not the big story.

“Zero Tonnes”

Perhaps the most shocking part of the earnings report pertained to uranium production volume. Notice the empty cell. One of the largest producers of uranium in the world completely cut off production in 2020Q2. Of course sales volume was still up year over year. That means they are running down inventory, and buying on the secondary market in order to meet demand from nuclear utilities. They are actually purchasing ahead of time on the spot market. They might start making 2021 purchases early. This is an indicator of how low the spot price in Cameco’s view. Clearly this is an unsustainable situation.

Cameco also noted that the longer the Covid shutdowns continue, the more likely that supply disruptions in Kazakhstan will last far beyond the end of 2020. Covid-19 will exacerbate the supply disruption that is inevitable after a decade of underinvestment.

Cigar Lake Restart

Cigar Lake will be reopening sooner than expected. In the grand scheme of things that’s not a big deal, but the market was clearly shocked. Management commentary discussed the tradeoff between health/safety concerns, and commercial concerns. The proactive shutdown drastically increased Cameco’s cost structure. It’s expensive for them to keep it closed. They also see demand increasing, and want to be prepared to meet it. The ability to maneuver carefully around the restart plan is a key strength of Cameco- not all uranium companies can afford to be flexible.

Resiliency

Cameco’s management commentary emphasized resilience. Cameco does have an important advantage over junior minors- a strongish balance sheet. Cameco can afford to lose money for a few years, and deal with the costs of temporary shutdowns, and additional safety measures. Other junior miners with good assets that are suddenly shutdown might not be in such a comfortable position. They might have to conduct highly dilutive secondary offerings en route to producing in a high price environment post Covid-19. That being said, junior miners hta survive long enough to reach the bull market (and be able to produce), will deliver far superior returns to their shareholders. Greater risk, greater reward, at least when it comes to balance sheets. Nonetheless, the current risk/rward tradeoff is clearly favorable for Cameco. From a portfolio standpoint, a position in Cameco, along with a handful of the junior miners with the least bad corporate governance makes sense. Another simpler option is to just buy an ETF.

Its true that the market can remain irrational longer than you can remain solvent. That means in pursuit of the next great bull market, never forget the importance of staying power.

Notably TD Ameritrade still has a buy rating, and a much higher price target on Cameco. It looks like the market may have overreacted.