Thread by @kashyap286

I've followed Cameco $CCJ $CCO.TO since 2015 and I consider it the poster child for a value trap.

The company had a terrible time enforcing long-term agreements signed pre-Fukushima, with Japan's Tepco walking out of a $1.3 billion long-term
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#uranium purchase agreement for 9.3 million pounds at a contracted price of $140/lb. Cameco sued for $700 million, won the two-year long legal battle, and was awarded $40.3 million in damages, or a mere 3.1% of TCV.
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As a direct result of this loss of a home for their produced uranium, the company had to shutter Rabbit Lake and McArthur River at significant expense. Worse, the pounds that Tepco had already purchased at $140/lb found their way into the spot market. Along with selling by other

Japanese utilities, the inventory glut sank uranium prices for nearly a decade. Long suffering Cameco bulls put up with the slide in uranium prices and stood by the company as it got into a transfer pricing dispute with the Canada Revenue Agency (CRA).

Then, just as the creation of the Sprott Physical Uranium Trust #SPUT $SRUUF $U.UN kick started a uranium rally and shareholders thought their payday was near, Cameco did another rug pull. The company revealed that it had sold 30 million pounds under long-term agreements

in 2021 and a further 77 million pounds in 2022. The company managed to put itself in the position of giving away nearly all the upside from rising uranium prices, while capturing most of the downside.

You can see this skew from the company's 2022 sensitivity to uranium prices. The loss in revenue from falling prices is bigger than the gain from rising prices. With spot uranium currently at just under $50/lb (per @numerco) the company expects to realise $56.9/lb for 2022.

With cost of sales expected to be $53.5-$54.5/lb, that's a gross profit margin of $2.9/lb, barely enough to cover 50% of G&A.

In other words, the company will be losing money at $50/lb uranium. The bullish case is for McArthur River ramping up and reducing the cost of sales.

Let's say cost of sales goes down to $36.7/lb (mid-point of 2014 and 2015 CoS) by 2026. Highly unlikely given inflation, new collective bargaining agreements signed, etc. but roll with it. If uranium rises to $140/lb, the company makes a gross margin of $35/lb instead of

$103/lb. Unlike Tepco, I doubt Cameco will be able to walk away from below market deals. And if costs hold steady or rise, 4 years out Cameco will still be underwater on these deals, even if uranium rips higher. The only consolation is that these deals are not marked to market

so Cameco will not be squeezed by having to put up margin. In that sense, they are better off than the gold producers in the late '90s, who got squeezed hard as gold rallied (side note: '90s Anglogold Ashanti is an interesting case study in how not to run a corporate treasury).

If #SPUT makes #uranium rip higher, every deal Cameco signs now will bleed shareholders more.

And the story of Cameco's mismanagement hasn't ended. They just diluted shareholders further by raising $747.6 million at $21.95/share.
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And took on additional debt of $1.6 billion. To what end? To buy a company with a TTM pre-tax margin of 3.8%, which is an improvement from 0.6% pre-tax margin in 2019. On flat revenue. The acquisition candidate has $3.4 billion in debt, no growth, but was valued by Cameco at

$4.475 billion, when it has generated pre-tax net income of $109 million, $57 million and $20 million respectively in the previous 3 years. Using TTM earnings, the PE ratio on this deal is 35.5x. If the company utilizes its entire net income to pay
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down debt, it'll take 26 years of earnings just to go debt-free.

Uranium miner Cameco has committed its balance sheet and its rosy future from rising uranium prices into rescuing a debt ridden fleabag with no prayer of adding any equity value, all while signing under-market

deals giving away its #uranium production at a discount. The company responsible for 1/6th of world uranium production, owning the world's highest grade uranium mines, is going to lose out on the coming uranium bull market due to poor executive decisions.

It's as if the proprietor of a luxury hotel decides to use his property to host homeless people alongside his millionaire clientele.
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To me, the kicker was the company's response to John Tumazos in the latest earnings call regarding the Westinghouse deal. Worth reprinting in full:

JOHN TUMAZOS (Analyst): If one of your uranium geologists was a little nervous and got a good salary offer from $RIO, and Rio

pitched them that if he discovers uranium at Rio, they can write the cheque for a billion dollar mine, how would you reply to the geo that might not understand this private capital, that debt doesn’t count arguments?

Do you just offer him better stock options or NSR on his discovery to keep him?

GRANT ISAAC (Cameco CFO): John, the folks that work in our—are amazing folks that work in our exploration and our mining unit, understand that the model for creating full-cycle value in uranium is

one where you build the homes for the production before you build the production. Actually, it’s the contracting performance that we’re enjoying, which is the glue that keeps those people attached to Cameco as being the absolutely best way to invest in the uranium market recovery

Like adding insult to injury, the CFO touts their contracting performance as the reason they will retain geologists. A complete non-sequitur reply to a very pertinent question. That reply shows the level of incompetence at the top levels.

I've analyzed 1000+ resource companies over my career. I've found scams, frauds, poor management, governance issues, the whole gamut.

But Cameco is a unique case of shareholder value destruction, in that it takes extraordinary talent to be this creative about losing money.