You're probably here because you're bullish on uranium. All this recent interest in nuclear stocks has increased your interest in uranium, hasn't it? So there you are sitting in your underwear on a Saturday afternoon doing "due diligence" and you came across this video.
It's too bad you weren't here a year ago because that's when we provided everyone with a list of hot uranium stocks to watch. You missed that, didn't you? Okay, we'll quickly review the bull thesis.
But first, let's get the FOMO stuff out of the way. Turns out we didn't miss much. So this Bloomberg article was featured in our last video on hot uranium stocks and it talked about how uranium prices have soared 125% since the end of 2020.
Talks about an increase in demand for nuclear capacity and how hedge fund managers are loading up on uranium stocks. So when we look at the spot price of uranium, of course, that's interesting to give you an idea of what the sector is doing. You see here that the price of uranium, I've circled it there, in 2024 last month, it's not much different to where it was in 2023 of October when that piece was written.
But when we zoom out and take a look at the bigger picture, on the right, you'll see from 2020 through 2024, that's the 125% increase that that Bloomberg piece talked about. And then when you zoom out and look on the left, you see that's from that spike in the center of that chart is 2007, that's the last time that uranium saw a sizable increase in price. So why was that?
Maybe we can learn something from that. Well, to find out we simply asked Perplexity and it came up with a pretty good answer here. It said, it was the spike, the dramatic spike, that you saw was largely related to supply constraints.
They talk about depleted stockpiles, some mining issues, declining secondary sources, things that can be rectified over time. And when you think about the bull thesis today, I think Sprott spells out exactly why one ought to be bullish on uranium. I think if you came across this video, there's plenty of people out there that can tell you why uranium might be a good investment what we're here to look at is simply this: if you're bullish on uranium you really have three options to invest.
We're going to talk about those. So you can invest in the largest Developed Market Mining Company. I say Developed Market because- for a reason, we're going to talk about.
You can invest in the largest ETF, a collection of companies related to uranium, or you can invest in the Sprott Physical Uranium Trust. Now if uranium is what you want exposure to, then just invest in physical uranium. It's the purest play.
When you move into mining, sure there's some leverage you can get on the price of uranium, but you're also now dealing with supply chain issues, potentially a company-specific risk. Lots of risks. So you could say, well, I'll diversify away company-specific risk while- by investing in multiple companies.
And then you're back at the ETF. Now in our last piece, we talked about how Cameco merit a closer look and that's what we're going to do today. But first, I wanted to touch on Sprott's physical uranium fund and what they call their Physical Uranium Trust.
Sprott is an asset manager with about $25 billion in AUM that's publicly traded and one of their investment products is the Sprott Physical Uranium Trust. It's the world's largest physical uranium fund. They describe it as a liquid and convenient way to own physical uranium.
Indeed, it is. Low fees. 60 basis points, I suppose.
That's about average for an active ETF. So that's not horribly bad considering what you getting. And one of the things we like to look at, when you have a fund that provides exposure to a commodity, how closely does that track the price of the commodity?
And here you can see it does a pretty good job of tracking the commodity. Now I know everyone always wants to look at performance. We talked about FOMO earlier.
So a quick look at some of the primary assets here and how they perform. So that uranium fund, itself, over the past year, hasn't really done anything and that he would expect that to be the case, the price of uranium hasn't, so it tracks it rather well. The S&P 500, that's your opportunity cost, that's up 30%.
So when we look at the performance of Cameco, as a uranium miner, we see they're only up 21%. It's underperformed. But that's a good thing.
If you want to be purchasing shares of a stock, you always want to buy them as cheaply as possible. And, of course, we can Benchmark all of that against the Uranium ETF, the more popular one anyways, URA, you see a return of 12%. So it turns out we haven't missed very much.
Now when we look at the assets for these two ETFs over time, you see a year ago the AUM there, what's described as total assets for the Global X Uranium ETF, Sprott's Uranium Miners ETF, have gone up. You see the table below that. And but what's also interesting to look at here would be the year-to-date performance of these ETFs.
In the top table, look how they were just booming quite well. And then look this year, not so much, right? So perhaps the interest is a little bit lower but that, as I said, is a good thing if you're a net buyer.
Now when we consider the top Uranium ETF, the Global X Uranium ETF, when we look at the constituents, the members of that ETF, you see here a year ago, Cameco and Sprott's Uranium Trust, along with the largest producer of uranium in Kazakhstan, they're under the ticker KAP, they made up, what, almost 40% of that ETF. And when you look today the situation's changed a bit. So they've actually added to that ETF several nuclear reactor companies that don't actually have revenues yet but they're they're aspiring to be something in the nuclear space, Oklo and NuScale.
They've also here, at the top, I've highlighted two exploration companies NexGen and Uranium Energy Corp. Now Cameco is the second largest producer of uranium that's publicly traded. That's why it's of such interest if you're interested in investing in uranium.
Investing in a Kazak firm isn't something we find appealing. I have a friend over there right now who's doing business with the Kazak government along with some large multinational firms and the amount of corruption and and things that would be, frankly, quite shocking. That's just the nature of doing business in Kazakhstan and or Russia.
It's also not very appealing to invest in, what they call, exploration firms. So these would typically be pre-revenue or quite sporadic revenue companies. There's just too much risk there.
We look to invest in leaders. And this article we came across is quite good. It talks about how Market leadership gives you the gift of wielding considerable influence.
It's not just about having the highest market share. There's a lot of benefits that come with that. Leaders are typically far ahead of runnerup players.
They have loyal consumer bases. They're able to set industry standards and dictate market trends. So we look at Cameco as a leader and we want to know what that leader does.
Here you can see revenue segmentations for the company. They have three: the Uranium segment, the Fuel Services segment, and the Westinghouse segment, and perhaps that's the most interesting one. We'll talk about that in a second.
But uranium is what it says on the tin, that's the production and sale of uranium. Fuel Services, that's more about refining and fabricating uranium concentrate. That's rather interesting given there's a heavy dependence in the industry on Russia for those activities.
And the table here you see breaks down. Predominantly around over 80% of Cameco's revenues come from that uranium segment. But they also have nice International diversification, as you can see, 53% of revenues coming from the Americas, the rest being internationally diversified.
But when looking at this Revenue table, you be may be wondering where the Westinghouse segment is? And this article here, in November of last year, talks about Westinghouse being acquired by Brookfield and Cameco. So for those of you that are Brookfield fans, I know there's many of you out there, you want to explore what sort of exposure you're getting with this investment that they've made.
For Cameco it seems to be somewhat significant. We'll look at that breakdown in this next table. And this is in the filings of the company, their 10-K equivalent.
It's a foreign firm, Canadian firm, so they have a 10-K equivalent. But the first thing to note here, of course, you have revenues and gross profit and we can see the gross margins for Westinghouse around 50%. A lot higher than the other two segments for Cameco.
But what what they essentially did is acquire half the shares of Westinghouse and they used the equity method in accounting and what that basically means is they provided you these numbers and then they just back those out. So the investment gets initially recorded at historical costs and then you adjust that value based on your ownership and net income, loss, dividend payouts, things like that. So I think that's just an important nuance for those who are navigating the financials to understand.
And when we look at profitability for Cameco over time, you see, in the top there, gross margins trending up. So were trending down for a while and certainly Westinghouse acquisition is going to help with that. And operating margins also trending up.
Of course, those tend to track gross margins over time. I wanted to touch on the end result which looks like this. So you have Revenue growth coming from Cameco, there you see they're expecting, at Mid-point, 13% growth in 2024.
The left-hand side, of course, annual. And the right-hand side, quarterly. A little bit more volatility there but we always look at annual numbers to cut out some of the noise.
Now what we like to see would be consistency over time. And here you can see future sales commitments for the companies, a meaningful chunk of revenues that are sort of already in the bank. This should provide some Revenue stability for Cameco over time.
And also, another thing to consider is their sensitivity to uranium prices which could be quite volatile, as we saw in previous charts. So they actually break that down in their financials. Here you can see the two types of contracts.
They use Market-related contracts, will have more exposure to the volatility of uranium prices and about 52% of those revenues fall under that classification. So that brings me to the miner's dilemma which is rather interesting. So they want pure-play exposure to a commodity but that creates volatility for revenues and profits.
They say, well, let's reduce exposure by vertically integrating or doing some horizontal expansion. So the optimal vertical integration strategy is something like an Exxon or a Nucor where their business model actually provides a natural hedge. It's really quite slick.
We've written about both. The horizontal expansion, that really reduces pure-play exposure to the commodity. And then it becomes just a battle between desired exposure and diversification.
You know, one hand, you want a lot of exposure; on the other hand, you want diversification. So the question is whether just investing in the commodity is a better idea that eventually it'll just offset whatever leverage you're going to gain in good times from miners. We take on a lot of added risks.
So for Cameco, I think horizontal integration would be an interesting strategy given dependency on the Russians for postprocessing activities for uranium. And then the Westinghouse expansion I think provides upside for Cameco and provided, of course, there's a nuclear energy boom. So just to conclude here.
The price of uranium is going to react to supply and demand. You're really speculating on the price of a commodity here. Cameco is a pick-and-shovel play on the nuclear energy boom, I think the Westinghouse venture is an interesting addition.
It provides some breadth in what they're offering. Now we prefer companies that enjoy benefits of a nuclear boom but also that would see upside even if that nuclear boom story doesn't pan out. And I'm thinking there about perhaps larger utility companies which is a great segue into this next video you ought to watch if you're thinking about investing in nuclear energy.
We've gone out there and found some very interesting nuclear stocks you might want to take a look at. Thanks so much for taking the time to watch this video today.
