Cameco buying cheap uranium on spot marketMove increases...

Cameco buying cheap uranium on spot market

Move increases short-term costs, but may pay off

Peter Koven, Financial Post Published: Saturday, May 02, 2009

Cameco Corp. is aggressively buying uranium in the spot market as it looks to take advantage of "trading opportunities" in the radioactive metal.

In the company's first-quarter results, released yesterday, it revealed that the cost of sales in its uranium business jumped 30% from the same quarter a year ago to $220-million. That was largely due to purchases on the spot market.

In addition, the Saskatoonbased company said it expects its cost of sales to rise 15% to 20% for the full year as it continues to purchase uranium at prices "substantially higher than our costs of production."

"They've certainly bought uranium [on the spot market] before, but I don't think they've done it to this extent, at least in the last couple of years," said Orest Wowkodaw, an analyst at Canaccord Adams.

"The reason I say that is we would have seen a similar spike in their costs, which I've never seen before."

Cameco's decision to buy up uranium in the thinly traded spot market is evidence the company thinks it is undervalued and that it can sell the product in the future for a profit.

This follows a collapse in the uranium spot price, which peaked above US$130 a pound in 2007 before plummeting to just US$40 a pound this year. It recently rebounded to US$44 a pound, according to Ux Consulting.

When uranium was peaking and the whole sector was booming, Cameco was one of the only companies that maintained a cautionary tone and refused to get caught up in the mania and make overpriced acquisitions. But its recent move to buy uranium suggests that the company believes the price is undervalued and has room to move up.

Those thoughts also emerged on yesterday's conference call, as chief executive Jerry Grandey pointed out that 10 new nuclear reactors began construction around the world last year, the fastest nuclear build in nearly 25 years. He also predicted a net gain of 95 operating reactors over the next 10 years because of rising electricity demand, largely from Asia.

Cameco's adjusted earnings in the quarter came in at $89-million (24¢ a share), down from $148-million (43¢ a share) a year ago. The numbers were below consensus analyst estimates, but that was largely because of the company's recent spot uranium purchases. Cameco also raised its uranium sales forecast for 2009 to 32-34 million pounds, up from its last forecast of 31-33 million pounds.

"We continue to produce results that confirm our future is bright," Mr. Grandey said.

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