VANCOUVER — Canada and India heralded a new era of economic cooperation on April 15 when the countries announced a uranium trade agreement wherein Canadian producer Cameco (TSX: CCO; NYSE: CCJ) will fuel growing Indian power needs over the next five years. The company will supply 7.1 million lb. uranium concentrate to India, with the value of the contract estimated at US$285 million, based on spot uranium oxide (U3O8) prices.
The landmark agreement follows consistent efforts by Prime Minister Stephen Harper to strengthen Canada’s ties to one of the world’s fastest growing economies. The Canadian government a banned exports of uranium and nuclear hardware to India after the Indian government used imported technology to build a nuclear bomb in 1974.
The ice thawed in 2013 when the two countries signed a cooperation deal, which set the stage for Canadian exports of controlled nuclear materials and equipment subject to safeguards of the International Atomic Energy Agency. The announcement of the newest supply agreement coincided with a visit to Canada by India’s Prime Minister Narendra Modi.
“Canada and India have, for the past decade, been cooperating more and more on international issues. The untapped trade potential between our countries is enormous,” Harper said during a press conference. “Canada has what India needs, and vice versa. I want to congratulate Saskatchewan Premier Brad Wall and Cameco’s Tim Gitzel on this great announcement.”
The two Prime Ministers are hoping to boost economic activity between their nations, with bilateral trade valued at $6.3 billion per year. Modi has made nuclear power a key tenet of his clean-energy strategy. Nuclear power provides 3% of India’s energy needs, but the country’s goal is to increase that to 25% by 2050.
“I place the highest importance on India’s relationship with Canada,” Modi added. “Prime Minister Harper and I are committed to establish a new framework for economic partnership. The uranium agreement for our civilian nuclear power plants launches a new era of bilateral cooperation. It also reflects a new level of mutual trust and confidence, and will contribute to India’s efforts to power its growth through clean energy.”
According to the International Monetary Fund, India is set to become the fastest growing economy in the world, with its gross domestic product growth expected to exceed China’s by 2016.
For Cameco the deal is relatively minor, but it opens the door for more long-term supply contracts. The Saskatchewan-based miner sells 33 million lb. uranium per year, and expects the agreement will boost its contract volumes by 4.4% annually over the contract’s term.
India operates 21 nuclear reactors providing 6,000 megawatts of nuclear capacity. Another six reactors — totalling 4,300 megawatts — are under construction and scheduled to come online by 2017. By 2032, India expects to have 45,000 megawatts of nuclear capacity. Based on information on in-country development proposals, the number of reactors could grow to 53 by 2023.
“As one of the world’s largest uranium suppliers, we’ve certainly been watching the Indian market,” Cameco president and CEO Gitzel commented in a phone interview from Ottawa. “It’s really a starting point and a first contract. With our production we can easily manage the contract, and it’s a foot in the door, or the beginning of a relationship with a country that is aggressive in its nuclear build.
“What I’ve found most fascinating in my meetings with Prime Minister Modi is his commitment to nuclear power. He understands the need for safe, reliable power that doesn’t have carbon emissions associated with it. It was clear he wanted some of that supply to come from Canada,” he added.
Having another potential long-term customer in its back pocket is a big win for Cameco. Utilities’ uranium requirements remain well covered in the near-term, which has created a preference for fixed-rate contracts over market-based contracts, due to low spot prices. Cameco is committed to sell 200 million lb. uranium to 43 customers globally, but the five largest consumers account for half of that total.
“The deal gives us confidence in the long-term. The market is still soft for uranium, and we don’t want to downplay that. This won’t change the market overall, but it will certainly help,” Gitzel continued.
Cantor Fitzerald analyst Rob Chang noted that there have been fewer long-term transactions over the past few years, as utilities have opted for shorter contracts to take advantage of low spot prices for U3O8. Chang has a “buy” recommendation on Cameco, and a US$26.15-per-share price target.
“The long-term supply agreement will provide revenue security at profitable prices for the company that could underpin its financial position, possible acquisitions or even a dividend increase,” Change wrote on April 15, and cited Fission Uranium’s (TSX: FCU; US-OTC: FCUUF) Patterson Lake South project and Denison Mines’ (TSX: DML; NYSE-MKT: DNN) Wheeler river assets as potential targets.
“We’re actually comfortable with where we are today,” Gitzel said. “We have a great portfolio of projects in operation, including McArthur River and Cigar Lake. We also have a nice bullpen of projects in Saskatchewan, Western Australia and Kazakhstan. We’re not going to be aggressive on acquisitions because we think we have great assets, and that’s where we’d like to spend our money.”
Cameco registered net earnings of $185 million — or 47¢ per share — in 2014 on the back of 23.3 million lb. uranium production, and reported cash and short-term investments of $567 million to end the year. The company expects to crank out between 25.3 million and 26.3 million lb. uranium in 2015.
Cameco has traded within a 52-week range of $19.62 to $20.05, and closed at $19.75 per share at press time. The company has 396 million shares outstanding for a $7.9-billion market capitalization.
“We’ve been consistent in saying that the short- to mid-term will be tough in the uranium market. We’re waiting to see the Japanese fleet restart, and we’re watching the Chinese and Indians build. There are around 70 nuclear reactions under construction today, and we haven’t seen those kinds of numbers since the 1970s. The future looks bright,” Gitzel said.
I think if fcu was sitting on a pot of gold if camaco not buy china or india would make a offer