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Stock Analyst Update

Potential Uptick in Uranium Demand a Plus for Cameco

This undervalued miner stands to profit as more Japanese nuclear reactors restart and use more uranium.


Shikoku Electric Power Company has restarted operations of its Ikata nuclear plant, the fifth Japanese reactor to resume operations. While the pace of restarts is a bit slower than we had anticipated, we still expect most of the remaining 20 reactors in the approval process will restart in the next two years. Two of four previously restarted reactors are currently off line because of a court injunction, but we expect that to be lifted since Japan’s electricity prices would be up to 40% lower if it restarted its nuclear fleet. We believe the fifth restart is a positive indicator for uranium prices. Since other reactors in the approval process are following the same process of implementing new safety measures, we believe the Ikata restart is a sign that further restarts are likely.

We reiterate our positive long-term outlook for miner  Cameco (CCJ) and believe shares are meaningfully undervalued, trading at a 45% discount to our $18 per share value estimate.

Uranium prices currently languish around $26 per pound, down about 24% from the start of the year. We believe this is a function of current oversupply, where production exceeds demand by approximately 25 million to 30 million pounds in a 170-million-pound market. We expect market balance to turn into a deficit by 2021, as Japanese restarts and new reactor builds in China, South Korea, India, and Russia outpace a weak supply growth pipeline. Our thesis continues to play out, with 16 new reactors coming on line since the beginning of 2015, of which six began operating this year. We expect the pipeline of 61 reactors under construction and 170 reactors planned to accelerate growth in the coming years. This should drive prices to $65 per pound in the long run. We expect pricing to begin to recover in 2017 as the tighter market outlook leads to higher pricing in contract markets.

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David Wang, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.