Washington has agreed to arrange financing and facilitate planning for at least $80bn of nuclear reactors to be built in the United States.
Once definitive decisions have been made to complete the construction of these plants, the US Government will be entitled to 20% of any future cash payouts in excess of $17.5bn by Westinghouse. In addition, subject to certain conditions, the US Government will also earn the right to buy 20% of the company in the event of a spin off on the stock market.
The shares were up 20.4% in early trading.
Our view
The market has responded enthusiastically to news that the United States government is to partner with Cameco’s 49% owned joint venture, Westinghouse. The tie-up aims to exploit the company’s proven nuclear reactor designs to help quench America’s growing thirst for energy. The exact financial impact is still to be determined, but the deal incentivises Washington to rubber-stamp at least $80bn of reactors over the next three years.
It also puts the prospect of a separate IPO of Westinghouse firmly on the table. There are no guarantees, but the deal sets out a target valuation of at least $30bn, nearly seven times the price paid by Cameco and its JV partner Brookfield in 2023. That’s a tantalising prospect but a lot can happen in that time. For now, our focus is fixed on the impact on Cameco’s financial performance.
Westinghouse already accounts for about a third of Cameco’s profits. If the agreement goes to plan, we should see a significant uplift while providing a long-term boost in demand for Cameco and Westinghouse’s other divisions. However, such an ambitious expansion is not without execution risk.
Cameco provides uranium fuel to generate clean and reliable electricity around the globe. It also offers nuclear fuel processing services and refinery services. Through Westinghouse, it provides fuel assemblies and end-to-end power station development and operation. The breadth of its offer leans into improving attitudes towards nuclear, and growing demand for clean energy.
The supply dynamic also looks favourable with limited sources of new uranium coming on stream at a time when demand is increasing. Cameco has several approved and built mines in less volatile regions ready to fire up. Almost 90% of uranium consumption is in countries with little-to-no primary production and Cameco has controlling ownership of one of the world’s largest high-grade uranium reserves.
The balance sheet is currently strong and with operations ramping back up, cash flows have improved too. That’s paved the way for an improved dividend program, though no shareholder returns are assured.
Cameco is exposed to political risk. We think policymakers will remain on a more nuclear-friendly course, but sentiment could change. There’s also some risk from tariffs, but we think having the US government onside could see future policy align with Cameco’s interests.
Cameco is a well-placed name to capitalise on the ongoing nuclear renaissance. Meanwhile the Washington/Westinghouse partnership could herald a step-change in scale. The market’s recognised the opportunity too, pushing the valuation relative to earnings to over two times the long-term average, meaning there’s additional pressure to deliver an acceleration in growth.
Environmental, social and governance risk
Mining companies have high ESG risk. Emissions, effluents & waste and community relations are key risk drivers in this sector. Operational carbon emissions, resource use, health and safety, labour relations, and bribery and corruption are also contributors to ESG risk.
Cameco’s overall management of material ESG issues is strong.
There is board level responsibility for overseeing ESG issues, however, ESG reporting is not in accordance with leading reporting standards. Executive remuneration is explicitly linked to sustainability performance targets. Scope 1 and 2 emissions are disclosed and carbon intensity tracks below the industry average. There are also programmes in place to reduce own emissions, with targets and audits. Cameco has not been involved is any major community relations controversies.
Cameco key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.