Cameco’s Grandey Says Investors Confuse Uranium, Oil

Cameco Corp. Chief Executive Officer Jerry Grandey says some investors in the world’s largest uranium producer mistakenly expect its shares to perform like other energy companies.

“They just treat all energy equally — uranium, oil and gas,” Grandey, 60, said yesterday in an interview in New York. “It’s silly because the markets are completely disconnected.”

Shares of Saskatoon, Saskatchewan-based Cameco have plunged as much as 26 percent from this year’s high on April 19, as oil dropped 23 percent over the same period. The stock also slumped after the company announced Oct. 23 it would delay its Cigar Lake mine by as much as a year after an underground flood.

The price of uranium, the radioactive metal used to make fuel for nuclear-power plants, has jumped 78 percent this year to a record because of global shortages and rising demand, outpacing the 20 percent increase in Cameco shares. Last year, the stock matched the metal’s 76 percent gain.

Demand for uranium is relatively insensitive to price, unlike oil or natural gas, Grandey said. A rise or fall in oil or gas has no effect on uranium because utilities that use it to generate electricity have no substitute fuels, he said.

No Correlation With Oil

Some hedge funds and money managers are buying Cameco shares in anticipation the company will somehow benefit as oil advanced.

“There’s next to no ability for power-plant operators to switch between oil and nuclear,” so valuing a uranium producer like other energy companies is flawed, said Bob Mitchell, an investor in physical supplies of uranium at Adit Capital Management LP in Portland, Oregon. “There should not be a correlation between oil and Cameco, but there is.”

Since 1992, the correlation coefficient, a measure of the similarity in swings in returns for a pair of investments, shows a high correlation of 0.75 for Cameco’s shares and the price of uranium. The scale is from 1, meaning they move in lockstep, to – 1, meaning the returns offset. For the same period, the relationship between the shares and oil is a weak -0.14.

From 2001 and 2005, the readings show a strong 0.75 relationship between Cameco and uranium, and 0.36 between the company’s shares and oil. When the data is extended from 2001 to the end of November, Cameco’s link to uranium slipped to 0.33 while strengthening to 0.38 when the shares are compared to oil.

Some “hedge funds had come into Cameco for the momentum play,” Grandey said. “When fossil fuel prices came off, some ran for the sidelines as the momentum dissipated.”

Limited Benefit

Cameco also has been slow to get the full benefit of the uranium rally, Grandey said.

The company had signed long-term contracts in previous years that are well below the current market price. On average, Cameco sold uranium at $20.12 a pound in the third quarter compared with spot prices of $50.83, Cameco said in a statement. Uranium fetched a record $63 as of Dec. 4.

“People just say you’re not as highly leveraged to the spot price and that it’s not going to immediately come into Cameco’s bottom line,” Grandey said. “A new producer that is just starting up is going to step his production right into a $60 market.”

The company is signing new contracts for longer periods that will boost its average sales prices by about $10 a year, Grandey said.

Mine Project Delayed

Cameco’s stock had its biggest decline in five years on Oct. 23 when the company’s unfinished Cigar Lake uranium mine in northern Saskatchewan flooded after a rock fall. Before the accident, the project was slated to open in 2008 and the company predicted it would supply as much as 10 percent of the world’s uranium when it reached full production in 2010.

“As we restore confidence because of Cigar Lake, and that’s going to take a while, you’ll find our shares coming back into better alignment with uranium,” Grandey said.

Shares of Cameco, which fell as low as C$35.35 on Nov. 17, are trading higher than before the flood was disclosed. They fell 53 cents, or 1.1 percent, to C$44.26 today on the Toronto Stock Exchange, compared with C$42.95 on Oct. 20.

Cameco said Nov. 20 it would announce revised cost estimates and timelines in February for reviving the Cigar Lake project, which was forecast to eventually produce 18 million pounds of uranium a year.

Estimated Value

Proven and probable reserves of 232 million pounds of uranium at Cigar Lake are worth $14.6 billion, based on the current spot uranium price. Rock at Cigar Lake on average is 19 percent uranium, a concentration exceeded only by the 25 percent grade at Cameco’s deposit at McArthur River, Saskatchewan.

The flood was Cameco’s third in a northern Saskatchewan mine since 2003 and the second this year at Cigar Lake, the world’s largest undeveloped deposit of high-grade uranium. A ventilation shaft flooded in April, delaying construction by six months and helped to boost the mine’s construction cost by 26 percent to C$660 million ($577.2 million).

Cigar Lake is 50 percent owned by Cameco, with the remainder held by AREVA Resources Canada Inc., Idemitsu Uranium Exploration Canada Ltd. and TEPCO Resources Inc.