Cameco Earnings Report (Update 1)

Cameco vs Urasia + Paladin: Hedged Versus Unhedged

Cameco's earnings report just came out and I will be commenting more about it in the days to come

Cameco's Uranium Production
Let's look at some of Cameco's 2005 highlights:
-$690 million in revenues
-$15.45/lb averaged realized price for uranium oxide
-$159 million gross profits
-production volume of 21.2 million lbs

Because Cameco uses a 60 / 40 mix of market-related and fixed pricing mechanisms, their average realized uranium price will be lower than say Urasia and Paladin's, who are fully unhedged. That explains why their averaged realized price for uranium oxide is $15.45/lb when the current market price is $37.5/lb

In its earnings report, Cameco gives a series of projections stating its expected average realized uranium price if the price was $25, $35, and $45 dollars, and how that would be different in 2006, 2007, and 2008. Of course their expected average realized uranium price will be higher in 2008 than 2006 as existing contracts agreed to at a lower fixed price will expire.

So let's use one of Cameco's projections. They expect to have an expected average realized price of $20.50/lb of uranium oxide if the price of uranium oxide rose to $45 this year (as predicted by most analysts) Thus, Cameco will receive only 46% of the market price due to its hedging. Their planned production volume for 2006 will be 21.4, a slight uptick from 2005.

What this illustrates is that Paladin, with its proposed annual production of 2.6 million lbs of uranium oxide and Urasia, with its annual production of 1.4 million lbs, are earning twice as much as Cameco at present. It's like almost like mining twice as much uranium! These two companies have the flexibility that Cameco lacks.

Cameco, on the other hand, has rock-solid stability; their prospective 2006 and 2007 uranium output is sold out and 2008 is almost all gone as well. Add to that their continued development of the four producing uranium properties they own (MacArthur Lake, Cigar Lake, Smith Ranch/Highland, Crow Butte) and establishment of a Kazakhstan mine means that Cameco's future is bright, even with a restrictive uranium selling price.

Cameco's share price today plummeted 7.5% and reduced their market cap to a mere $14.5 billion. Both Urasia and Paladin's market caps currently stand at around $1.2 billion. Are these two companies worth 1/12th of Cameco? I personally think so, but do your own due diligence and you decide!