Today's article is taking a different tack. I am discussing my best investment idea right now-the potential gains and risks. Because today is a light news exception to the glut of information (maybe because there are no more long holidays except in the Islamic world this month), I have the time and space to hold forth.

So I will. Here is my current investment favorite, a stock which dominates its industry whose good results are being discounted because of worries about potential risks which are being overstated.

*A nuclear energy supporter for most of my investing career I now want to help others reach the same conclusion, and also buy into Cameco, CCJ, (CCO in Toronto) a Canadian leader in mining, processing, and managing waste from uranium. The easiest path to carbon cutbacks is nuclear-fueled power production. Offsetting this is fear of radioactivity which insidiously undermines the health of those exposed to it.

But the risk of nuclear disaster has been greatly exaggerated.

On Tuesday, the stock gained 4% and is near a new 12-month and year-to-date high.

Cameco is a stock with more appeal to institutions than retail investors, but turns out to be one of the few ways that you can buy uranium, a market which is run by governments concerned with proliferation, and therefore operating, unlike other commodity markets, being highly regulated. Uranium deposits are mostly found in Australia, Kazakhstan, and Canada, but the only known high-grade deposits are all in Canada. As with other minerals, current production is focused on the highest grade cheapest-extractable ore.

Cameco accounts also for about 16% of all the uranium produced on earth. It has 458 mn lbs of proven and probable uranium reserves. CCJ also has 425 mn libs of measured and indicated resources and 190 mn lib of inferred resources. It is a key intermediary in a controlled market. It also dominates the North American market for components as well as the fuel needed for nuclear power plants. Nukem, a sub of CCJ, is a market intermediary between mines (not just its own) and nuclear electric power plants.

Management

It manages its mines with a discipline to protect its interests while keeping its investment grade rating and value of its reserves and resources. With long-term contracts and using its best margin mines, it can get a realized price of about $50C$A per lib when the spot price is under C$40. Its per lb cost of production is now under $20 since Fukushima.

After the Fukushima disaster in Japan, CCJ cut back on production in Canada and Australia to prevent the market glut. In Nov 2017 it also slashed its dividend and this took down its stock price after a dispute with Tepco (Tokyo Electric Power Co.) discussed below. But of course, if demand picks up the project pipeline will be restarted. Many of the closed mining projects were jv's with other firms like Kintyre with Western Mining and Mitsubishi in Australia. But during the drought in new uranium demand, CCJ bought out its partners and now owns 100% or a controlling share in former jvs like Millennium in Canada and Yeelirrie in Australia.

CCJ current year production will be about 25 mn lbs of uranium from Canada mines Cigar Lake, McArthur River, and Inka although it is licensed to mine 53.4 mn lbs in Canada. Full steam ahead will be slow but sure as 55 nuclear reactors are under construction worldwide over the next decade. Last year only 4 new reactors were connected to the grid.

Its next report will be before the market opens July 26. I suggest buying before then.

Report and Rating

Cameco did not change its 2018 financial outlook, for flat cash flow in 2017. It also switched some purchases from mines it doesn't control to lower its taxes. This is also discussed below, as it is a risk from the corporate strategy. It reports in C$s under International Financial Reporting Standards.

Its most recent quarter produced an upward earnings surprise and what is odd is that analysts covering CCJ failed to raise their valuation or rating. This is because nuclear is a no-no in many countries. One result of this ban is that Charles Schwab brokers now rate Cameco an outperform on pure valuation grounds, leaving aside the politics. It yields over 4% despite the dividend cut last year.

It reported net Q1 earnings of C$55 mn; adjusted net earnings of $23 mn. Earnings were higher this quarter as compared to 2017, largely due to the gain realized on the restructuring of JV Inkai and higher realized prices and deliveries in uranium. Under its efforts to optimize the contract portfolio and realize uncertain future value today, CCJ restructured a contract with one of its utility customers that advanced future deliveries into the quarter, resulting in higher sales volume in both the uranium and fuel services segments. As expected, its unit cost of production was higher in Q1 this year because of suspension of production at McArthur River, and Key Lake, and a new way to report for its Inkai minority shareholding at Inkai—all in Canada.

CCJ uses its jvs in Canada to boost output while cutting the risk. Cigar Lake has uranium grades which are the highest in the world, at 14.9%. There it holds 99 mn lbs and produces about 9 mn per yr. CCJ owns 50% of the mine. Inkai has low costs but also low ore grades. It is 40% owned by CCJ which produced 3.2 mn lbs last year and will this year produce 6.9 mn by buying its partner's output. McArthur river where CJ owns just under 70% is shut in. it has 250.7 mn libs of reserves and a still high-grade level of 9.63%, but nothing like Cigar Lake. This mine produced 11.2 mn lbs in 2017 before the shutdown. Cameco also shut in about 100,000 libs of US production in 2018.

Where Demand Will Come From

Uranium demand and prices are dependent on price. But also on controlling global warming. 

In Japan, a key market under a shadow, the government wants to restart 5 shut-in reactors and approve more restarts in future years. The market glut shut-ins will start leaving uncovered demand this year, about half from the US and a half from other countries. But in the next decade the U3O8 demand will flatten out in the US because of alternative fuels (mostly shale and natural gas) but other countries will lack that bounty.

By region, non-OECD (non-western industrialized nations) is growing fastest, accounting for roughly half of demand last year, but growing by 47% projected to 2035 to account for 60% of demand (at 31.5 Terra watts of electricity) whereas OECD (developed country demand) will barely budge.

By 2027 2/3 of uranium demand will be from non-US utes. The big switchers to nuclear power are building many plants: 19 in China which currently has only 38 reactors in use; 7 in India; and 4 in the UAE (which wants to stop running its power plants with oil and gas it can export.) Saudi Arabia is also planning nuclear power plants for the same reason.

The US, in contrast, is building only 3 reactors. (This data is from the International Energy Authority.)

A warning. If growth in emerging markets is zapped by a strong dollar and higher US interest rates, the nuclear dawn will be delayed. If Saudi and the UAE cannot afford to build nuclear power plants (because their oil receipts fall too far) they will cancel. their plans. I think these are not big risks. But there are some others which are big.

Risks: The Tepco Dispute

Japan is the most politicized nuclear market. It had 54 reactors in use before Fukushima and has now restarted 7 of them with another 19 in process of restarting. The other 26 including Fukushima itself (2) will not come back on stream. However, the election victory of pro-nuclear PM Shinzo Abe in 2012 meant that more plants would have been recommissioned.

However, now that Abe is rumored to plan to resign over scandals this month means that uncertainty has increased for Japan.

This may delay the settlement of the Cameco dispute with Tepco. CCJ is seeking C$682 mn in damages for the contract canceled early in 2017 which had been in force since 2014. Tepco had already paid for and taken in 2.2. mn lbs of uranium but 16 months ago it canceled deliveries scheduled to 2028 were canceled and totaling 9.3 mn lbs worth C$1.3 bn. ($959 mn) . About 11% of CCJ contracts are with Japanese power firms. and CCJ noted in its legal brief that other Japanese utes have restarted their plants, so Tepco's objections are to the price rather than the contract's other terms according to CCJ lawyers. The case is being examined in arbitration and a ruling is not expected until 2019 at earliest. If Abe stays on it is less likely that Tepco will be able to wiggle out of the contract because he wants to speed up recommissioning of more Japanese power plants. Arbitration is to begin in Q1 2019. The timing of a final decision will be dependent on how long the arbitrators deliberate following the conclusion of the hearing. CCJ claims $682 million (US) plus interest and legal costs.

Risks: The CRA Dispute

Another overhang is the tax dispute with Canada Revenue Agency (CRA is their IRS) which has been running for nine years. It results from CCJ using a Swiss sub to sell uranium at $10/lb (US) and then reselling it at the market rate. The sub was set up in 1999 and has a 17-year contract. Ottawa says it is a tax evasion vehicle. Another Barbados sub collects the offshore profits to perhaps repatriate. The potential bill is $2.2 bn Canadian ($1.62 bn US). The trial for 2003, 2005 and 2006 was concluded in 2017 but the judge's ruling is not yet known. CCJ expects it to come sometime before April 2019. It also got this year a notice of assessment for the tax year 2012 which it is also going to court about.

CCJ CEO Tim Gitzel On Other Risks

“We continue to focus on what we can control,” said CEO Tim Gitzel in the first quarter conference call. “We generated significant cash flow, which is due to our portfolio optimization activities, the benefits of our

cost-saving measures, and by pulling back on our production lever and drawing down inventory. While our average unit cost of sales was higher than a year ago, this was expected due to the care and maintenance costs incurred while production is suspended at the McArthur River and Key Lake operation.

“On Tuesday, the market remained quiet. There are a lot of moving pieces, and utilities continue to evaluate the implications of what is perhaps best described as unprecedented noise in the political economy. Things like the possible trade action under section 232 of the Trade Expansion Act, the suspension of US Department of Energy’s excess uranium sales for the remainder of 2018, review of the Russian Suspension Agreement, and a potential Russian ban on all trade with US nuclear power companies.

“On the demand front, the news remains mixed with additional Japanese reactor restarts, new construction announcements in China, India and the Middle East, further potential retirements in the US, and an announced phase-out of nuclear power in Belgium. “

Pharmaceuticals

ZYME's “Swiss Army Knife”

*Analysts at Raymond James write that Zymeworks' ZW25 is safer and more versatile than Daiichi Sankyo's DS-8201: We view ZYME’s near-term second clinical asset, the anti-HER2 bispecific antibody-drug conjugate ZW49 (ZW25 conjugated to N-acyl sulfonamide auristatin) as a key competitor to Daiichi Sankyo’s monospecific antibody-drug conjugate DS-8201. In our view, we believe it is reasonable to suggest that based on the backbone antibody alone ZW49 should better evade resistance mechanisms, have increased tumor cell receptor binding and superior HER2 receptor clustering and internalization vs. DS-8201 (trastuzumab antibody backbone). Furthermore, we believe preclinical data suggests that ZW49’s proprietary payload may be more tolerable than DS-8201’s derivative payload and believe ZW49’s linker may prove less “leaky”. While we prefer to await the opportunity to compare DS-8201 to ZW49, we are aware that many investors regularly attempt to compare and contrast ZW25 with DS-8201.

“In our opinion, anti-tumor activity is simply not comparable between a naked bispecific antibody with an antibody-drug conjugate and thus we would urge investors to avoid making such comparisons. Unlike Daiichi, ZYME has the potential to capture a large segment of the HER2 therapeutic paradigm by providing a type of treatment flexibility that DS-8201 or other targeted assets cannot. For example, if a clinician has a preference to treat their patient with a chemo free option, instead of treating with trastuzumab, pertuzumab or tras+pert, they can simply use ZW25. If the patient requires an extra boost, instead of utilizing tras+pert+chemo [the clinician] opt to utilize ZW25+chemo. Finally, if the clinical is looking for precise delivery of a cytotoxic payload they can opt for ZW49 as opposed to Kadcyla or DS-8201. Simply put, ZW25 in our view is the Swiss army knife of HER2 targeted therapy, and ZW25’s superior safety profile supports our continued conviction in the asset.”

*GlaxoSmithKline was raised to buy from overweight on Tuesday, by EVA Dimensions analysts.

*The US FDA accepted Roche's Hemlibra for priority review as a supplemental biologic for treating children with hemophilia with a decision targeted for Oct. 4.

RHHBY also is working with Tesaro on a triple-drug treatment for ovarian cancer combining its tecentriq and cotellic with niraparib which Tesaro calls Zejula. The two already work on combining Zejula with Tecentriq in treating bladder cancer. Readers should note how hard it is to try out triple-drug therapies, as reported on Monday from the Bronx Science talk on drug risks by MIT Finance Prof. Andrew Lo.

Moreover, Roche applied to change Herceptin's existing production site for China where Prof Lo's ancestors lived to a higher-capacity plant soon after it received shortage reports after Beijing allowed the drug to be made there on May 30.

*Teva lost 1.2% on Tuesday, in Israeli trading.

Bank-Insurance

*Bank of Nova Scotia was downgraded to equal rate from buy earlier this week, (2 notches), by BofA-Merrill Lynch.

*Allianz SE of Germany and Generali of Italy will be handling the central European business formerly done by Unicredit as the Italian bank prepares to merge with France's Société Générale. The deal covers insurance in all former Yugoslavian states, Bulgaria, Czech Republic, Slovakia, Romania, and Hungary.

Technology

*FAANGS (Facebook, Apple, Amazon, Netflix, and Google) were tracking higher on Tuesday in a downish market. The same with less-well-known Chinese BATTs—Baidu, Alibaba, Toutiao, and Tencent. Some tout BAT without Toutiao. Stock picks with nicknames have proven particularly dangerous in the past. If it is that easy the market tends to turn against the shares. My main concern about TCEHY is Beijing's plans to co-opt the Internet giants with operational pressures and investment demands.

*Nokia of Finland won a recommendation by Bruton Ryle of The Wealth Advisory because he expects it will double its YTD rise of 34% to 68% this year.

*Guggenheim brokers upped their target price for Autoliv to $150 from $138 because of the spin-off of its electronic arm in Veoneer this month. ALV is Swedish but incorporated in the US. It will keep its passive safety business (seat belts) but move its IT and active lines to the new firm.