JAMES PHIPPS
INVESTMENT CONSULTANT
EURO PACIFIC CAPITAL

COMPANY: Cameco Corporation
SYMBOL: CCJ (Nasdaq)
PRICE: $70.46 (as of 4 p.m. yesterday) 52-WEEK RANGE: $35.65-$82.15
MARKET CAPITALIZATION: $12.29 billion

James Phipps is an investment consultant with Connecticut-based Euro Pacific Capital Incorporated. Cameco is the world’s largest uranium producer and accounts for about 20% of global production. Mr. Phipps spoke to David Dalley of The New York Sun and explained why the price of uranium has risen by more than 500% in the past five years, and why Cameco is perfectly positioned to reap the rewards.

What does Cameco do?

Cameco is the largest uranium producer in the world. It has a market cap of only about $13 billion, but it supplies about 20% of the world market. Strategically, that’s of enormous consequence to the world economy. It’s been one of the best performing stocks over the last year in the energy sector. The stock was as low as $5 in 2002, and has surged since then. It’s currently trading at around $70.

Why is uranium so attractive right now?

Uranium has been the most maligned industry out there for decades, but it’s entering a new renaissance, mainly because of the prohibitively high cost of oil and natural gas. It was in a long-term bear market for much of the ’80s and ’90s. The price two years ago hit a low of $7, which was well below production costs. That rendered the vast majority of uranium mines out there unprofitable. There are a few reasons why the price dropped. The Three Mile Island incident back in the ’70s combined with the low price of oil and natural gas for much of the ’80s and ’90s meant that most of the utilities built over the time were not geared toward uranium. No one wanted nuclear power plants.

Now, alternative energies including nuclear power have come to the fore. It’s the least expensive form of power in the world. For a nuclear reactor, the actual uranium accounts for approximately 1.5% to 2% of the total running cost. For natural gas or oil, the raw inputs constitute a much higher proportion of costs. So when the price goes up it can really hurt those profit margins. In the case of uranium, the demand is inelastic. They’ll pay whatever they have to pay. The cost of shutting down a reactor is huge. If there’s a supply crunch, they don’t want to be left with the lights off.

What has the uranium price been doing lately?

In constant 2005 dollars, uranium exceeded $100 in the late ’70s. In 2000, it bottomed at about $7.10. Since 2000, the price skyrocketed from $7.10 to $37.50 as of this week. Most amazingly, in the past two years the price has not had one down week. For over 100 weeks the price has either gone up or stayed the same.

Why the sudden jump in 2000?

Well, a big reason for the decline from 1980 onwards was the so-called Swords Into Ploughshares program, in which the U.S. and the USSR agreed to reduce nuclear warheads and use the uranium to power utilities. This artificially suppressed the price for a long time. The uranium-producing industry went into a depression. That program has now been slowed down, and Russia has indicated an intention to end it in the near future.

Current mine output globally is around 90 million pounds, and demand is about 180 to 200 million pounds. So you have a huge supply deficit that had previously been met by the program. Right now there is essentially an all-out bidding war among the utilities for whatever uranium they can get. As the largest supplier, Cameco is perfectly poised to take advantage of that. Their forward P/E is at about 30. I expect their earnings to grow by at least 50% annually going forward. Their profit margins are already very high and should rise exponentially over the next few years.