Wednesday, September 22, 2010
Before I continue with my discussion of uranium, I just want to make a few points supporting the further development of nuclear power across the world, especially here in the US of A. For starters, nuclear power plants are far more efficient than in recent years. The development of advanced technology has made these reactors for more durable and safer. This is evident by the continued building of reactors across the globe (which is described in the next paragraph). There are no fossil fuels burned through the use of nuclear power and no carbon dioxide is emitted into the air, significantly reducing the damage to the ozone layer. Safety is also a major concern nowadays, in terms of energy exploration and extraction. Take for example the 2 oil rig explosions in the Gulf, or the WV mine explosions.
Uranium goes a long way in terms of producing energy, meaning only a small amount is needed to produce a significant amount of energy. "In fact, if the cost of uranium doubled, costs would only be increased by 7%. 1 truck of uranium produces as much energy as 1000 trucks of coal!" If nuclear power is developed and utilized here in the US, it will reduce our dependence on foreign nations to export their oil and other precious metals here. As we all know the price of oil is subject to supply and demand, amongst other factors, and can be very volatile, i.e. summer of 2008. If we were to be energy independent, as our President so elegantly puts it, this would reduce our need for oil, and other energy inputs.
I would also like to point out that other forms of renewable energy, like solar and wind, are going to fade out pretty quickly. For starters they are expensive to maintain. These forms of energy also require purchasing land to build these turbines and combines, a resource that is running low. Also, when was the last time the sun consistently shined? The sun can stay hidden behind clouds for days, and last time I checked, the sun usually shined for about 8 hours a day. Nuclear power can run for 24 hours a day. As for using wind as a renewable resource, I will simply say this. When was the last time it was windy? I guarantee one cannot string together multiple days of gusts strong enough power an entire city.
It is estimated that the largest supply of uranium is found in Australia, followed by Kazakhstan, and then Canada. "The World Nuclear Association says demand is projected to grow by 33 percent in the next decade to correspond with a 27 percent projected growth in nuclear reactor capacity. However, more efficient nuclear reactors, such as "fast-reactor" technology, could extend those supplies by more than two thousand years. Experts say spent fuel can be reprocessed for use in reactors but currently is less economical than new fuel. Currently, there are nearly one thousand commercial, research, and ship reactors worldwide; more than fifty are under construction, and 130 are in planning stages." There is also an accord for old Russian weapons to be dismantled and turned into fuel for the power plants. The continued desire for nuclear power will fuel (pun intended) demand for uranium in the years to come, and there is no better company to experience this surge in growth with than Cameco.
Cameco is "major supplier of uranium processing services required to produce uranium fuel" and is the world's second largest producer of Uranium, trailing only AREVA in terms of market share by a slim margin. Cameco currently has 13 utility customers in 4 countries. They are expecting to sell over 300 million pounds, due to long term contracts, through 2030.
Cameco's strategy is to double uranium production by 2018, an ambitious goal to say the least. They anticipate doing this through increased production and upgrades at current facilities, and by continued thorough exploration of future prospects. Thus far in 2010, Cameco has spent about $90 billion on exploration, including expanding mines at Inkai and in Kazakhstan. But, lets start with their exploration in Canada, the home country of both hockey and Cameco. There is extensive work being done in the Athabasca Basin, located in Northern Saskatchewan and Alberta Canada, which is best know for its high grade uranium. It is important to note that they higher the grade of uranium, the cheaper it is to utilize and term into energy. There are currently 23 active exploration projects in Australia, the country containing the world's largest uranium reserves, and Cameco owns the operating rights to 22 of them. In order for Cameco to be able to benefit from exploration, they must own or have significant interest in junior exploration companies. Well Cameco does, and these include UE Corp, Minergia SAC, Western Uranium Corp, and Govi High Power Exploration. Exploration is key to finding deposits, and if said deposits are found through the exploration efforts of the companies above, Cameco will own operating rights to them.
Cameco currently owns and/or operates 7 active mills/mines today, of which 4 are in Canada, 2 are located in the US, and 1 is in Kazakhstan. 2 of the 4 in Canada are the world's largest and cheapest producers of uranium in the world, the McArthur River Mine and the Key Lake Mill. Cameco owns at least 70% in both units. Cigar Lake and Rabbit Lake are the mines for the future, also located in Canada. Cigar Lake is completing renovations this month and is expected to be producing in 2013. The Cigar Lake mine is expected to produce about 15% of the world's supply of uranium. Rabbit Lake currently process all ore from Eagle Point deposits and is expected to be used until 2015. Rabbit Lake is also being updated to be able to handle the increased workload. Cameco is the largest producer in the US, thanks to the Smith Ranch-Highland and Crow Butte mines.
The big daddy of them all is Inkai, located in Kazakhstan, where the world's largest deposit of uranium can be found. This mine is expected to last into 2030. To fuel demand, as well as expected increases in deposits, Cameco is doubling production at blocks 1 and 2 and advancing block 3. The table below describes production and production potential at Cameco's current mines/mills.
Cameco will report earnings on November 8. Back in August, Cameco reduced its full-year forecast for the sale of uranium. This was expected as some customers deferred delivery to next year. They also expect revenue to slip a hit. However, lower costs and more deliveries are expected in the future, which will certainly help to absorb the forecasts of declining revenue. A few positive notes include Cameco beating 4 of the last 5 earnings estimates from analysts, including price targets above $40 a share. Cameco's production of uranium was also 30% higher than the same quarter in 2009.
However, even with the possibility of lower earnings in the future, Cameco has never decreased its dividend and has raised it 4 of the last 5 years. Cameco also split its shares twice, in 2004 and 2006, on a 3 for 1 and 2 for 1 share basis, respectively.
Their cash flow from operating has continually grown over the past few years as the graph below shows.
More importantly, their revenue continues to grow each quarter. Their net income was lower due to higher costs this quarter, which can be related to a stronger Canadian dollar and declining price of uranium
On a closing note, Ill leave you guys with a table of uranium futures contracts. Note the expected increase in prices in the coming years.
Monday, August 30, 2010
As you all know, bonds have been supported nicely by the recent fear that the US may slip into another recession, and in particular the long end of the curve. This has led to a noticeable flattening, just as it did prior to the financial crisis in 2008 (albeit for different reasons.) Nonetheless, yields at the long end have plummeted and one is getting about 2.54% (at the time of this writing) for lending money to the government for 10-years. The graph below shows how the curve has flattened since the beginning of the year.
As we peek into the spread between the yields on the active 10-year and 2-year issues, it is clear that there has been an alarming tightening. This sharp and consistent decline reared its ugly head back in Q1 of 2004. What followed was a 3-year tightening of the spread and an inverted yield curve (as shown by the negative spread between the two.) But one also must also look at the previous 2 occurrences of extreme tightening over the past 2-years and see that yields did, in fact, bounce back. Now granted, I understand the circumstances were different back then than they are now. What's important to note is that the curve still remains steep and the red flags don’t need to be put up just yet, however I think a yellow caution flag is in order. The charts below show the recent movement of the 2/10-year spread. Here we have spreads creeping lower, as the 2-year note touches all time lows.
The 2/30-year and 2-year/Fed Funds spreads are also experiencing the same type of tightening. What's particularly interesting is that the 2-year/Fed Funds spread is the tightest since December 2008(when the Fed moved its target for the Funds rate to 0.0%-0.25%) and has shown no signs of slowing down here in 2010. If the Fed leaves rates untouched till the end of 2011, we may see this spread tighten to single digits and possibly even touch negative territory. Which would raise a whole new set of questions because well, what happens with bill rates? Do they approach 0.00%? These scenarios may seem unlikely, but its something to keep in the back of ones head. Personally, I don’t think yields will drop too much further.
As opposed to the tightening of the Treasury spreads, we have the Baa/10-year spread widening to levels not seen since August 2009. This is led by the desire to hold Treasuries amid economic uncertainty and the avoidance of corporate debt. Contributing to the widening of this particular spread could be the amount of corporate issuance. Throughout July and August, there has been a stronger amount of corporate supply, compared to 2009, which could have been driving down the price of this particular debt. We are talking issues with Baa rating in this case, and drop in price will increase the yields, which would widen the spread even further. A lot of companies are attempting to finance expansion with these extremely low rates, clearly evident by the recent increased issuance. However, through August 20 corporate issuance is down about 10-12% compared to 2009.
Moving away from fixed income spreads, we will show how inter-bank lending credit spreads can serve as barometers for the economy. Our first spread is the dollar Libor/OIS. I cite the dollar spread because it has tightened significantly over the past month to levels considered more "normal." The same cannot be said for the European spread, which is the difference between the 3-month Euribor and the 3-month Eonia. This spread continues to widen, allowing us to conclude that EU banks are having problems. More evidence that concludes EU banks are in a scramble for liquidity stems from the fact that banks have gone to the ECB each of the past 3 Wednesday's and bid on dollar deposits. But, that is neither here nor there. Lets move on to the US TED spread, the difference between the 3-month Libor and 3-month T-Bill. As you can see, the spread has tightened considerably and now rests at levels not seen April. Using the TED and Libor/OIS spreads as barometers for the health of the US economy, it can be concluded that things may not be as bad as we think they.
So what does all this mean? Well in conclusion I would like to make a few points that should be taken to heart. It appears that these spreads are leading us in 2 different directions. For starters the yield curve spreads appear to show a flattening of the curve (although it is still steep and healthy) and maybe inverted down the line, which could signal a recession on the horizon. However, I do not think this is the case. Spreads may tighten further down the road, with the Fed's easy money and projected slow growth, but I do not think we will have an inverted curve. Flatter curve? Yes. This does not mean a recession will follow suit. Now, while the flattening of the curve may be troublesome, other credit spreads such as the TED and Libor/OIS spreads don’t seem to be telling that story. In fact, both are back to "normal" levels, after skyrocketing during the European Debt Crisis. This has indicated a healthy inter-banking lending market, which is an important factor in growth.
Now, back to my reference about punching a shark in the nose. By this, I mean shorting Treasuries and/or moving into diverse dividend yielding stocks, as evidenced here by my pal Jefferson Starship. Once the economic data turns positive, I would jump into TBT, which shorts the 30-year, long earl, (OIH or SCO), and maybe even a double long S&P (SSO). I realize these are risky but if they can all be timed right in tandem, once can make a handsome return.
Wednesday, August 25, 2010
It seems like every day more and more economic indicators come out in disappointing fashion and the market acts accordingly. The Dow has dropped almost 650 points since August 9th and the S&P has been equally affected. This is indeed significant but now one must asked themselves what to do with their money with such a lack of predictability in the equities market.
You could find yourself asking: is it too late to short particular stocks, because we’ve seen how well the CRM short has worked; is it too soon to call the market oversold, maybe from a resistance level perspective; is it too late to catch the gold train, I personally think so but there is no creditability to that notion; is it too soon to call a top on wheat/agricultural ETFs, who knows, there’s the Russian issue, along with the chance that two hurricanes are going to ravage the eastern seaboard in the near future. We’ve even seen the SIRI perma-bull selling his stake, or at least a large part of it, causing a ruckus in the small community that is SIRI followers.
So what is one to do? You could look at boring fixed-incomes, especially strong corporate bonds or take some risk on international debt offerings. But one could also look at the industry leaders that have been trading strongly within range over the last few weeks of mayhem. And yes, I know that this is going to read just like a dividend aristocrat article (though not all 5 of these meet the criteria), but that’s okay with me because right now they may be the best way to go. With that said we’ll look at the graphs of 5 very strong companies. Not too much analysis will be presented as these companies are very well known and stand on their merits.
McDonald’s MCD – McDonald’s is currently trading around their 52 week high at $73.19, well above their moving averages, and really shows no signs of stopping. Their dividend is at a respectable 3%.
Johnson & Johnson JNJ – J&J has been showing some strong resistance recently. It is mainly held by dividend appreciators who buy up more as the price drops keeping it from falling too far (this is evidenced by the immovable 200 day moving average). Currently priced just below $58 means its yielding 3.7%.
Altria Group MO – People smoke through recessions and Altria is the play to be made in the industry. It trades within a fairly tight range and pays a very nice dividend of 6.2%.
Walmart Stores WMT – Walmart is similar to JNJ in the fact that their 200 day moving average is relatively stable. There has of course been much talk about how one would not have made anything holding Walmart over the last decade, but of course this does not account for their steady dividend, and the fact that their earnings have been increasing over that time is no secret. Walmart is the only stock on this list yielding under 3% and they are currently at 2.4%.
Verizon Communications VZ – Verizon may rub some people the wrong way in that their long term future is nowhere near as certain as the other stocks on this list, but for right now they have been relatively stable, especially after their spinoff of Frontier FTR and latest earnings release. At $29.66 they are yielding 6.5% with room for some growth.