S Uranium Stocks Could Offer High Returns In The Long Run

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Uranium is a key component in the production of nuclear energy. In the past, nuclear energy was considered risky due to the devastating effect of accidents that occurred in nuclear factories. However, now that most countries are trying to shift from fossil fuels to clean energy sources, nuclear energy has gained steam again. As a result, investors with a long-term perspective may be interested in gaining exposure to uranium stocks, which may greatly benefit from the expected boom in the production of nuclear power. In this article, we will discuss the prospects of three uranium stocks.

BHP Group (BHP)

BHP Group is an exploration and production giant in the metals and mining industry, based in Australia. BHP explores, produces, and processes iron ore, metallurgical coal, copper, nickel and uranium. The company has a diversified production portfolio but it currently generates approximately two-thirds of its EBITDA from iron ore production and about 20% of its EBITDA from copper. It thus has very limited exposure to uranium but this element may become more important if its price rises significantly in the future amid favorable fundamentals.

As a commodity producer, BHP is very sensitive to the cycles of commodity prices and hence it has exhibited a volatile performance record. It has also proved vulnerable in the last two downturns of commodities, namely the Great Recession in 2009 and the plunge of commodity prices in 2015-2017.

On the bright side, BHP has proved extremely resilient to the coronavirus crisis. Thanks to the impact of this crisis on the production of iron ore in Brazil, which is a key producer, the price of iron ore rallied to new all-time highs in 2021. As a result, BHP posted record earnings per share in 2021 and the stock more than doubled off its bottom in 2020.

Moreover, while the price of iron ore has somewhat deflated off its all-time high, it remains much higher than its historical average thanks to strong demand and relatively low inventories. Therefore, BHP is on track for another strong year in 2022. This helps explain why the company declared a record semiannual dividend of $3.00 per share for this year. At the current stock price, the semiannual dividend corresponds to a 4.3% dividend yield (or an 8.6% annualized yield).

Cameco Corporation (CCJ)

Cameco is one of the largest producers of uranium in the world. The company has a production capacity of 53 million pounds per year and has proven and probable reserves of 464 million pounds. It also has a dominant position in the largest uranium mine in the world, McArthur River.

Cameco has been hurt by the coronavirus crisis. It drastically reduced its output in 2020 due to the pandemic and incurred a loss of -$0.11 per share in that year. In 2021, it partially increased its production but it still produced 75% below its nominal capacity and incurred a loss of -$0.21 per share.

On the bright side, the company expects significant improvement in its business in the next few years. It expects to boost its production from 25% of its nominal capacity in 2021 to 42% of its capacity this year and 59% by 2024. In addition, thanks to low global uranium inventories and limited investment in growth projects from other producers in the last two years, Cameco expects higher uranium prices and material profits in the upcoming years.

NexGen Energy (NXE)

NexGen Energy engages in the acquisition, exploration and development of uranium properties in Canada. The company became public in 2011 and has a market capitalization of $2.2 billion.

As an exploration and development-stage company, NexGen Energy does not have revenues while it has posted operating losses every single year in the last decade. As a result, the fate of the stock depends on the developments related to the quality of its uranium assets. This means that the stock is highly speculative and hence it is suitable only for the investors who are willing to bet that the assets of the company will prove highly valuable.

On the bright side, NexGen has some promising assets, such as the Rock I Project, which is the largest development-stage uranium project in Canada right now. The company estimates that it may generate annual after-tax cash flows of CAD$763 million from this project and thus it has estimated the present value of this project to be around CAD$3.5 billion ($2.6 billion). As this amount exceeds the current market capitalization of Cameco, it is evident that the stock will have significant upside potential if the project meets or exceeds management’s expectations.

It is also worth noting that NexGen has a strong balance sheet. It has total liabilities of only $74 million and a cash pile of $188 million. As a result, it can easily service its debt obligations for the foreseeable future.

Final Thoughts

Thanks to the promising long-term prospects of uranium, investors may want to initiate some exposure in this industry. Uranium plays a minor role in the business of BHP and hence this stock offers limited upside potential but is much less risky than Cameco and NexGen. On the other hand, thanks to their high sensitivity to the price of uranium, Cameco and NexGen will offer much greater upside potential to their shareholders in the positive scenario. Nevertheless, investors should always keep the high risk of these two stocks in perspective.

Disclosure: The author does not own any of the stocks mentioned in the article.

Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling ...

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