RBC says " Uranium market in significant oversupply" RBC Dominion Securities analyst Fraser Phillips:
“The global uranium market is in a state of significant oversupply,” he said. “Our supply/demand analysis suggests that the uranium market will not be balanced until 2024, with large surpluses in the intervening years.
Citing its recent strong share price performance, RBC Dominion Securities analyst Fraser Phillips downgraded his rating for Cameco Corp. (CCO-T, CCJ-N).
In moving his rating to “sector perform” from “outperform,” Mr. Phillips also emphasized his belief that there is limited further upside to uranium prices in the near term as well Tokyo Electric Power’s decision to scrap its supply contract with the company.
“The 10 per cent or 5 million pounds per year production cut by Kazatomprom was a clear positive and helped to propel the spot price from a 12-year low of $18.25 (U.S.) per pound in November to the current level of $24.50 per pound,” he said. “Despite the cut, our analysis suggests that the market still faces a 21.5 million pound surplus in 2017 and [Ux Consulting Co.] believes the surplus could be as much as 19 million lbs. As a result, we believe that further upside for the uranium price will be limited in the absence of additional supply cuts or a significant increase in utility purchases.”
On Wednesday, Cameco said it considers Tepco’s decision to terminate its contract unfair and plans to seek legal action. Tepo cited force majeure for ending the agreement, saying it has been unable to operate its nuclear plants for 18 months due to regulations stemming from the 2011 Fukushima nuclear accident.
“The obvious question is whether other Japanese customers might follow suit,” said Mr. Phillips. “Japan makes up 11 per cent of Cameco’s contract portfolio. Cameco believes the cancellation is an isolated incident and unjustified and intends to defend itself and seek compensation. The company points to a previous post-Fukushima cancellation claiming force majeure due to regulatory issues, which was resolved in its favour in 2014, with compensation of the present value of the contract revenue less the spot price at the time.”
“The 2014 arbitration process took 30 months. It therefore seems likely that revenues and volumes will be reduced by $126-million and 855,000 pounds, respectively, in 2017 and 2018 and perhaps 2019. We estimate that this will reduce our EPS estimates by 23 cents in each year, assuming no resale of the material and excluding any offsetting compensation. We have not yet adjusted our estimates but await updated guidance on Feb. 9.”
At the same time, Mr. Phillips adjusted his financial model for the company to reflect the company’s earnings warning on Jan. 17, in which they said there was a ““significant discrepancy between analyst earnings estimates and our current expectations.”
Accordingly, his earnings per share projections for 2016 and 2017 and 2018 moved to 38 cents and 56 cents, respectively, from 77 cents and 55 cents. His 2018 estimate was introduced at $1.05.
Mr. Phillips maintained a price target of $15 for the stock. The analyst consensus price target is $16.50, according to Thomson Reuters.
“The global uranium market is in a state of significant oversupply,” he said. “Our supply/demand analysis suggests that the uranium market will not be balanced until 2024, with large surpluses in the intervening years. The current spot price has recovered from 12-year lows but is still putting tremendous pressure on producers. We expect that further production cuts, some further progress with the slow reactor restart process in Japan, and increased utility purchases will lead to an increase in the uranium price over the next 12 to 24 months. However, we expect the upside to be limited until the market begins to tighten. We expect upside for Cameco’s shares to be limited as a result. Longer term we see significant upside for the shares based on our view that uranium prices must eventually rise to encourage new supply.”
Meanwhile, Cantor Fitzgerald analyst Rob Chang downgraded the stock to “hold” from “buy.”