COVID policies have hurt many industries, and mining companies like Cameco Corp (NYSE: CCJ) felt the impact as well. For a uranium producer like CCJ, that meant closing a productive, remote mine at Cigar Lake, Saskatchewan. The closure and other measures taken took their toll on Cameco as it posted an annual loss of $53 million. While production concerns remain, the long-term fundamentals of the uranium market look bright and their earnings report on Wednesday showed it.

The Electrification Craze

Policymakers are infatuated with subsidizing and pushing the auto industry and virtually everything else toward the use of batteries. The idea certainly has appeal as it is expected to reduce emissions amidst increasingly more populated cities. The issue with increased utilization is supplying enough power for all of the devices. The power grid has been something that has been discussed extensively but has yielded little in terms of advances in supply. If you’ve experienced a blackout in California during 110-degree heat, you know what I’m talking about.

While wind and solar are great, the notion of being able to electrify everything seems almost unattainable and certainly not at a price point that many can afford it. Clearly the acceptance of coal and natural gas is becoming increasingly less desired by elected officials and there is a gap in what is required and what is being provided.

Uranium and Nuclear Power

This is where nuclear power and uranium production enter the picture. Tim Gitzel, Cameco’s president and CEO, discussed this trend during the company’s conference call.

“This is occurring precisely at the same time countries and companies around the world are making net-zero commitments, including in the US where the new administration has expressed support for maintaining the existing domestic nuclear power fleet and the construction of advanced reactors, it has recommitted the US to the global Paris Agreement and has ambitions to re-establish the country’s position as a global leader in the development of commercial nuclear technologies. From a policy point of view, there is recognition that nuclear will be needed in the toolbox to sustainably achieve both electrification and decarbonization.”

The trend toward nuclear power isn’t all about traditional uses. The use of advanced small modular reactors (SMR) are expected to have a big role. For example, the U.S. Office of Nuclear Energy discusses the role of SMRs in their plan:

“The Department has long recognized the transformational value that advanced SMRs can provide to the nation’s economic, energy security, and environmental outlook.”

CCJ Earnings Highlights

The positive earnings quarter was largely a product of the return of their low-cost tier-one production from Cigar Lake. The company has a 50% interest in the mine, which propelled them to net earnings of $80 million and adjusted net earnings of $48 million. The mine was again closed for a second time in December and remains closed today.

The closure Cigar Lake is big for the company. This is because Cameco continues to incur costs due to paying employees along with care and maintenance. The site produces uranium at $15 to $16 per pound compared to the market price of uranium $29.63. The closure required CCJ to purchase 11.5 million pounds of uranium at $40.41 per pound to meet its servicing agreements.

In 2020, CCJ expanded their fuel servicing contracts by adding another 17.1 million kilograms. As a result, the company expects that the long-term fuel servicing contracts will allow them to continue to operate profitably and service the needs of their customers.

The company was also able to refinance about $400 million in debt. This extended the maturity to 2027 from 2022 and lowerd the interest rate from 3.75% to 2.95%. Their balance sheet now stands at $943 million in cash, $1 billion in long-term debt and another $1 billion in available credit.

In the image below, you’ll see the impact of its mine closures in 2020. CCJ only produced 5 million lbs of uranium in 2020 compared to 9 million lbs in 2019. The company saw their sales volume decline by 3%. However, the higher cost of their purchases hit their gross profit substantially with a 92% decline.

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CCJ Technicals

Following the report yesterday, CCJ finished over 8.5% higher on the session. The breakout found the stock closing at the highest price since May of 2015. The price has also moved $3 off of its February 4 low of $13.10. The significant short-term movement in the price of CCJ places the share price in an extreme position in the near-term. However, the bigger picture of electrification and nuclear power production may have a much larger impact on the company longer-term.

In 2011, the company reached a peak near $45 before falling back near $17 in 2012. The price then fell to $7 in 2016. The share price briefly touched $5.30 in March 2020 before starting its most recent ascent. The share price of CCJ has very directly followed the price of uranium over that period.

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With this week’s advance, the share price has broken a long-term resistance level $13.50. The move may have just completed a long-term reversal pattern. Drawing Fib retracement levels over the long-term downtrend yields a 38.2% retracement level near $21.50. Taking a Fib projection from the rally in spring of 2020 yields a 223.6% to 261.8% target range of $20.79 to $23.26.

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Conclusion

The future of electrification seems bright and that means miners like CCJ may be part of that bright future. With the closure of their Cigar Lake mine, there is a risk to the company’s profitability. However, it’s unlikely the facility will be closed for much longer as the number of COVID cases and hospitalizations continue to decline. While the price is overbought in the near-term, the bigger picture of a larger retracement to the 38.2% to 61.8% retracement levels shows significant potential upside if uranium prices continue to rise on increased demand.