5 Reasons Cameco Will Rebound

5 Reasons Cameco Will Rebound

In the last few weeks, nuclear experts have noted that the Fukushima leak is much worse than people were led to believe. This has caused concern among investors about uranium companies like Cameco (NYSE: CCJ). Moreover, the price of uranium has continued to fall since the Fukushima disaster took place in 2011. In spite of the dismal outlook, Cameco was recently upgraded to a neutral rating from underperform by Zacks.

What is the current outlook at Fukushima?
Around 300 metric tons of radioactive water used to cool the reactors has leaked out, increasing the risk of contamination with each passing day. In order to stop this water from leaking, Japan's nuclear watchdog plans to build an underground wall made from frozen soil that runs across a length of 1.4 km. The construction cost is expected to be between $300 million and $410 million. Interestingly, Cameco has already used this technology at its Cigar Lake facility in Canada to protect the environment from possible contamination.

5 reasons Cameco will rebound in the coming years

1. Nuclear energy is clean
Nuclear energy may seem dangerous and controversial, but it is still the cleanest source of energy we know, as long as safety precautions are met. 11% of the globe's electricity is generated with the help of nuclear technology, with almost zero greenhouse gas emissions.

There have only been three major nuclear accidents in history: Three Mile Island, Chernobyl and the Fukushima disaster. In order to ensure that the reactors are safe, western countries use an approach called 'defense-in-depth.' The approach involves using multiple safety systems including exceptional design and construction.

2. Asian countries will drive the demand for nuclear fuel
Demand for clean alternative sources of energy in high-demand countries like China, India,and South Korea will increase in the coming years. These fuel-hungry nations' nuclear power generating capacity is increasing significantly. Environmental safety measures enforced in India, China and South Korea will push those countries toward opting nuclear fuel. By 2020, the nuclear share in these three countries will be considerable, according to the World Nuclear Association.

3. Bad economy in emerging countries will increase consumption of nuclear fuel
Conventional fuel is expensive, and it is becoming increasingly difficult for countries like India to import fuel because of a weakening economy. India imports approximately 80% of its fuel needs, and having to pay all that in USD is hurting its declining economy further. The rupee has been in the news lately for tumbling against the dollar.

Consequently, the Indian government is exploring measures that will reduce its fuel consumption. In the long term, this can only mean that there will be an increased demand for nuclear fuel.

4. Increased global electricity consumption
The world's clean energy supply will greatly increase in the next 20 years. By 2035, electricity demand is expected to increase by 73%. Because of the limitations of coal, natural gas and oil, energy derived from nuclear fuel will be used not just in emerging Asia, but across the world, including OECD nations. This amounts to a number of countries that will want to do business with a nuclear heavyweight like Cameco.

5. Uranium use is not limited to energy
Uranium is not used only to generate energy and electricity. Its use in the fields of military, medicine, and scientific research is undisputed. Considering volatile political conditions across the world, there is bound to be an increase in the number of nuclear warheads among countries that currently have the technology. Nuclear medicine, which often uses uranium in various forms, is expected to become more prevalent. Nuclear medicine uses radioactive substances like uranium to diagnose and treat diseases.

Smaller uranium players
Cameco doesn't face huge competition with respect to uranium. I previously discussed how Cameco compares favorably with bigger mining and energy companies like Rio Tinto and BHP Billiton, which have diversified. BHP Billiton divested its uranium properties and Rio Tinto's Rossing Mine in Namibia is running under losses.

Denison Mines (NYSEMKT: DNN) has a successful uranium operation in Saskatchewan, Canada. The company bought several projects from Fission Energy. International Enexco and Denison Mines have begun to drill at the Bachman lake, which is only four kilometers away from Cameco's Millenium Deposit. The 1,900 meter diamond drill program may help Denison Mines to add more uranium projects to its small portfolio.

The company has a market cap of $530 million and an enterprise value of $522 million. With a profit margin of -212% and an operating margin of -233%, it is not one of the most profitable companies in the space.

Exelon (NYSE: EXC) is another big name in nuclear. With 17 nuclear reactors under its belt, the company is a gigantic power generator. Through Exelon Nuclear Partners, Exelon has sustained a profitable uranium business that revolves around power generation. The company has operations in the U.S. and Canada.

With a market cap of $26 billion and an enterprise value of $46 billion, Exelon is a large company. However, with a PEG ratio of -2.50, the company may have its own share of troubles.

Foolish bottom line
The leaks at Fukushima will not decrease the demand for nuclear fuel in the future. Thanks to an increasing demand for clean fuel in countries like China, India and South Korea, Cameco will find more buyers for its products, increasing its revenue in the long term and making it an attractive buy.

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The article 5 Reasons Cameco Will Rebound originally appeared on Fool.com.

Jaiyant Cavale has no position in any stocks mentioned. The Motley Fool recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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