How to Take Advantage of Cameco's Shopping Spree

by: Andrew Mickey August 28, 2008 | about stocks: CCJ    

Andrew Mickey

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It’s called “burying.”

Governments have turned it into an art form.

At some time or another, every major organization is forced to release some bad news that it would like to hide.

But they can’t hide it.  So they bury it.

The best way to bury bad news is it to release it on a Friday evening. TV ratings are lowest on Friday evenings.  The weekend political talk show topics are set on Friday mornings. By burying a news story on Friday evening it won’t get much exposure.

In the last few months, the U.S. government has made a number of Friday afternoon announcements. For instance, the EPA buried the announcement that it will not be testing the amount of sewage sludge used in fertilizer. Or that the U.S. Department of the Interior has reversed a rule limiting the amount of mining waste that can be dumped on public land.  The government also declared that commercial fishing practices that encircle dolphins with nets would have no impact on the dolphin population. They were all buried.

It’s not just the government burying unsavory news. Businesses do it too.

That’s why I was very intrigued on Friday when I saw an announcement from embattled uranium giant Cameco (CCJ) come across the wires hours after the markets closed. It had to be something the company wanted to keep as quiet as possible and could make these Two Uranium Bulls to Jump on Now even more valuable.

Preparing for the Worst

Cameco wasn’t able to bury this one though. Cameco announced it will be cutting a $28 million check to acquire 11% of GoviEx’s uranium exploration property in Namibia. On the surface, I think it’s a wise move for Cameco to expand its exploration portfolio into Africa (and the uranium giant would be hard-pressed to find a better partner). After thinking about it for a while, I realized the timing of this news shows there could be some big problems brewing at Cameco.

Frankly, we’ve known Cameco has had some problems for a while. Cameco’s well-documented problems might be bad news for its shareholders, but it is good news for investors looking to catch onto the next leg of the uranium boom.

A little over a week ago Cameco announced its Cigar Lake uranium mine could face more delays…if it ever goes into production. News of the mine, which was expected to provide as much as 17% of the world’s uranium production, is facing more setbacks and it wasn't received well. Cameco’s share price continued its 30% plunge in the past two months.

Cameco added to the selling frenzy by stating it expects its 2008 production to total 19.6 million pounds of uranium. That’s one million pounds short of previous expectations.

Cameco is facing an uphill battle. It’s going to take a long time for these stories to play out and no one outside of Cameco really knows for sure. Regardless, we know one thing for sure: Cameco needs more uranium projects. And now, with spot uranium prices back above $60 a pound and the long-term delivery prices for uranium at $90 a pound, Cameco is going to have to pay top dollar for them. And that’s where the investment opportunity lies.

A Buyout Boom Begins

In this case, I’m not going to fault Cameco.

Is it a horribly run company that’s made some major blunders in the past few years? I don’t think so.

Did it miss out on picking up some exploration properties in Africa, Canada, and Australia? Possibly…but Cameco is a major mining company and exploration is not its primary objective.

Exploration is left to the junior miners. The juniors shoulder the risk of spending millions drilling holes in the ground hoping to find a new deposit. The majors buy the exploration companies. They have the cash, personnel, and expertise to buy a junior exploration company and turn it into a mine. That’s what majors do.

Cameco is doing the right thing and aggressively acquiring new uranium projects. In addition to the GoviEx deal, Cameco recently bought the Kintyre uranium deposit in Australia from Rio Tinto (RTP).

The way things are shaping up, Cameco is going to have to do a lot more acquisitions. Cameco has very few new sources of uranium to mine.

The key thing here is Cameco has the deep pockets to solve the problem. At the end of last year, Cameco had more than $1 billion of cash, receivables, and inventory ready to be liquidated. It also generated more than $800 million in cash flow from operations in 2007. All together, that’s plenty of cash to fund a shopping spree across uranium exploration companies.

The deal with GoviEx is likely just one of what I’m sure is many more to come. Cameco has to go shopping and it could spark some interest in the top tier uranium exploration companies. For instance, one takeover candidate is Hathor Exploration [TSXV:HAT] which will eventually be bought out by one of the major uranium mining companies.

The writing is on the wall for the resurgence of uranium mining and exploration. Cameco’s “buried” news story is just the start of what should be an exciting year ahead for uranium investors.

The days of overnight triple-digit gains from uranium stocks may be over, but there’s still plenty of opportunity out there for market-beating returns in uranium.

Disclosure: No position.

 

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This article has 8 comments:

  •  
    Aug 28 08:50 AM
    Why are we trading one pusher for another? If we want energy independence, why are we developing resources in politically
    unstable areas of the world?

    McSame and our republican senatorial candidate are both big nuke
    backers. But 90% of our current stockpile is from Russia and former USSR republics. Talk the talk, but walk the walk. With the price of yellowcake up 400%, why is there only one mine open in the US?

    Let's stick to Canada, Australia, and the US, or we will find ourselves in another hostage situation 15 -20 years down the road.
    Reply | Link to Comment
  •  
    Aug 28 12:10 PM
    pockywhatever is a perfect example of the typical misinformation on this site by posters...Denison Mines has FIVE active mines in the US..two additional in Canada. It is also ready to begin mining operations at several others in 2009. Check their website for some facts. By 2011 No. American production is expected to hit 5 million lbs...Sounds as if WE are hardly hogtied by hostile forces.
    As for the article...Cameco has run into serious issues..money may well help it find a way thru! Here's a slightly different take...I'm not convinced the holdup in mining Cigar Lake is such a bad thing long term.....Many of the 40+ nuclear plants being built or ready to break ground are still years away from supply demand. Eventually Cigar Lake will come on line...by the time it does recognition of future demand could well be at a very high pitch. I like URPTF..DNN..and will buy some CCJ at $28 or below....and keep them in my pocket.
    Reply | Link to Comment
  •  
    Aug 29 04:03 AM
    I would like to make a correction Cameco / GoviEx deal was not about properties in Namibia but Niger. The tenements in question are called Madaouela and Anou Melle. It is important to be factual. Regards. Getitright (See Cameco release at: www.cameco.com/media_g...)
    Reply | Link to Comment
  •  
    Aug 29 05:29 AM
    Title of the article: How to take advantage of...
    so - your suggestion of how to ? is exactly - what?

    I could write an article titled 'How to win a million in las vegas every day' and it surely would get a lot of attention.
    And if I were to follow the author's path in suggesting an actual 'how to' i would state: chose the right numbers and hit big.
    Reply | Link to Comment
  •  
    Aug 29 09:14 AM
    andrew
    what is going on with you and b.i.?
    Reply | Link to Comment
  •  
    Aug 30 12:18 AM
    fxtrader, do you really think that the author of this article is going to tell you where they're investing based on this thesis? C'mon, please. Follow the bread crumbs that Cameco has left in the junior sector or draw some conclusions of your own. I agree with the thesis of this essay, but surely Hathor is not the best the author can do! I believe that UEX is a potential acquistion, as could be URG or URE. In the exploration sector, who knows but if you figure out where Cameco itself is already invested, that would be a good place to start.
    Reply | Link to Comment
  •  
    Aug 31 06:21 AM
    Fireball, I'll fill you in, but I don't think this is really the appropriate place to discuss. If you drop me an e-mail at amickey@q1publishing.c... I can give you an update.



    On Aug 29 09:14 AM fireball wrote:

    > andrew
    > what is going on with you and b.i.?
    Reply | Link to Comment
  •  
    Sep 02 11:25 AM
    @cameco Jr.: I didn't and do not expect anything from the author. But if you post an article headline 'how to' you either follow up on that promise or you chose another headline. Rest assured I am not going to waste my time on another Mickey-Article now that I know that headline and content might be two different things entirely.
    Reply | Link to Comment
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