During Cameco’s May 1 earnings release conference call, management offered a number of interesting tidbits. First, during the big run-up in uranium prices back in 2007 the company purchased little if any uranium on the spot market. But in the first quarter of 2009 the company was a significant acquirer, as the following quote indicates:
…[W]hile we are reporting lower net earnings than [the] comparable quarter of 2008, a major component of that changes relates to opportunities Cameco finds in the uranium market. Our reason for purchasing [spot uranium] in the first quarter was for one purpose only, to seize trading opportunities which our marketing staff identified. When we enter the market to take advantage of trading opportunities, we often acquire uranium at prices significantly higher than our production cost. This action results in our reported unit cost of sales being driven higher. And of course that flows through to margins and earnings.
Cameco is simply saying that current uranium spot prices–even at recent lows–are significantly higher than its production costs. When it actively buys uranium, the cost of its inventory goes up; its cost of sales rises and depresses profit margins.
Cameco wouldn’t be making these purchases if it felt uranium prices had more downside. The company is essentially speculating that the price of uranium is likely to rise from current levels.
Because Cameco knows a lot more about the uranium market and has more perfect information than I or any other analyst does, I prefer to bet with the company. In other words, if Cameco is buying uranium, you should consider following its lead.
Another interesting comment from the company’s call relates to the source of uranium demand. Consider the following:
…I believe that about half of the purchases [of uranium in the spot market] that have taken place have been made by utilities…a good portion of that would have to be attributed to the Chinese. And in their case, they’re certainly looking to stockpile significant quantities of inventory for the Chinese program.
It seems that the Chinese utilities are also convinced uranium prices have bottomed and are likely to head higher. The Chinese have been extremely smart and strategic when it comes to locking up natural resource supplies they know they’ll need in coming years. It’s not a bad idea to follow China’s lead into uranium.
Excerpt from http://www.petroleumworld.com/sf09051601.htm