Cameco (CCJ): The uranium blue chip

by Chris Mayer, contributing editor Daily Reckoning

Cameco (CCJ) is the "Superman" of the uranium world. The stock fits with our preference for owning tangible assets - the classic, durable means of wealth creation and preservation.

Uranium ought to prove a wonderful inflation hedge if our thesis plays out. This is one to buy and sock away for a few years.

Cameco Corp., based in Saskatchewan, Canada., is the only uranium blue chip. It is the second largest uranium miner in the world, after Kazatomprom. Cameco produced about 20 million pounds last year, or 16% of the world's supply.

It aims to double production by 2018 from its existing assets - nearly a billion pounds of resource - excluding potential acquisitions. Cameco's world-class assets have among the lowest costs in the industry.

It's also involved in all facets of nuclear power, not just mining. It owns uranium-processing plants and power generators and invests in new enrichment technologies. Non-mining interests produce about half of Cameco's sales.

There are lingering clouds over Cameco that make its stock cheap. Among one of the biggest such clouds is its largest new project, Cigar Lake. It flooded in 2006 and again in 2008, halting development.

Recently, Cameco finally pumped all the water out and sees production in 2013. This is potentially a big catalyst for Cameco's stock as more good news unfolds about Cigar Lake through the year. All the bad news is baked in the price already.

Secondly, Cameco recently released lowered guidance for 2010. Wall Street was disappointed in its near-term growth outlook. This is classic short-term thinking, as nothing has changed longer term for Cameco.

Cameco recently sold its stake in Centerra Gold, which netted Cameco $871 million. The company now has a war chest of $1.3 billion against debt of only $1 billion. It has great financial strength and the flexibility to make acquisitions and do other potentially good things.

Cameco is also well insulated should uranium prices remain soft. That's because Cameco sells a lot of uranium through long-term contracts.

Many of these contracts are old and at prices lower than today's. So as these contracts roll off, Cameco's earnings will rise even if uranium goes nowhere.

The trade-off is that Cameco doesn't enjoy as much an immediate windfall if uranium prices spike as a smaller more speculative miner that sells everything on the spot market. But I'll take the safety.

The net asset value (NAV) of Cameco is around $25 per share. The stock price is less than $25 currently.

Furthermore, that NAV is depressed because current uranium prices are so low. I'm comfortable having $25 of depressed NAV to cover my downside. When uranium prices go up, so will Cameco's NAV. Every $1 increase in uranium prices adds nearly a $1 to Cameco's NAV.

Plus, Cameco often trades at multiples of 1.5 times NAV and higher. This will provide good upside when uranium prices start running again. Keep in mind that in 2007, investors shelled out nearly $60 per share to own Cameco - more than double today's price.

Still, the bottom line: Cameco is a speculation on a higher uranium price. If uranium goes nowhere, Cameco will not be an exciting investment, though we shouldn't lose money at these prices.

Cameco has no net debt and a boatload of cash. In 2010, it should generate around $900 million in cash flows. It is the Superman of the uranium world.

The stock is trading for only 9 times next year's cash flow per share guess of $2.59, which is likely too low.

It also trades just under my $25 estimate of net asset value per share. Plus, we own a super strong balance sheet with no net debt and over $1 billion in cash. Cameco is a buy.

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