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Stock-price rebound elusive for Cameco, Potash

Potash Corp underground production supervisor Dave Esslinger displays a sample of potash 1,000 metres below surface at the potash mine in Rocanville, Saskatchewan in a Sept.30, 2010 file photo

DAVID STOBBE/REUTERS

Oh, woe is Cameco, what with uranium prices what they are. Yet the crash in potash makes it a bit of a tossup which of the former Canadian commodity superstars will keep investors waiting longer for reward.

That's a reasonable conclusion from peering at the outlooks for Cameco Corp. and Potash Corp. of Saskatchewan Inc., the latter set to combine with fertilizer/ag retailer Agrium Inc. to form a new concern, "Nutrien." Certainly, there are bulls who see an end to the current malaise, and the stocks overwhelmed by the negative sentiment. At the same time, however, there are sufficient warnings to suggest that value investors might get trapped waiting for a near-term comeback.

Let's start with Cameco, which hit its depths late last year, then gained 70 per cent, and has since given back 25 per cent of that advance. At current levels – it closed Friday on the TSX at $12.30 – it's a screaming bargain for the long-term investor, its advocates say.

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"Uranium offers a rare growth opportunity in metals and mining," writes Kristoffer Inton of Morningstar, who pegs the stock's fair value at $17 (U.S.) (versus its $9.71 close on the NYSE Friday). He says while uranium prices have fallen each year from 2011 to 2016, owing to a supply glut caused by delays in restarting Japanese reactors, "this situation won't last much longer."

Au contraire, writes Robert Reynolds of Credit Suisse, who authored a deeply pessimistic report on Cameco and uranium last month. Mr. Reynolds said he catalogued demand at hundreds of individual nuclear plants and figures that the uranium market oversupply will last until the late 2020s, versus bulls who figure it ends in the early 2020s. (That's what passes for a bull case in uranium these days, one supposes.) Mr. Reynolds says his estimates are in line with the "low case" outlook released by the International Atomic Energy Agency.

He then knocked his long-term price forecast down to $40 per pound, from $60 per pound. And, since he figures uranium must fetch $48 a pound for Cameco stock to trade at net asset value, he's whacked his price target on the shares all the way down to $10 (Canadian).

There are other factors buffeting Cameco stock. For some years, it's suffered from an overhang from a multi-billion-dollar dispute with the Canada Revenue Agency over its allegations that Cameco has dodged domestic taxes via a complex international corporate structure. The U.S. Internal Revenue Service made similar claims – then settled a $122-million (U.S.) claim for $122,000 in July, prompting enthusiasm that Cameco might escape its home-country dispute owing little to no taxes. Final arguments are in September, with a decision expected many months later.

Cameco now has another long-term squabble with Tepco, a Japanese utility customer that terminated its long-term contract on the grounds that government regulations have kept its nuclear plants offline. Mr. Reynolds notes a similar dispute in 2014 took 30 months to resolve, but Cameco won. It sounds like a long time – but not nearly as long as it may take to see a rebound in uranium prices.

There's far bigger, more imminent news in fertilizer, as Potash Corp. of Saskatchewan Inc. comes closer to merging with Calgary's Agrium and creating "Nutrien." The deal, cynics say, couldn't come soon enough for Potash Corp., but should give Agrium shareholders more pause.

As has long been noted here and elsewhere, Potash Corp. was a shining, pure-play fertilizer star that rode the multiyear boom in global demand for potash, its main product offering of the three biggest commercial fertilizers (with nitrogen and phosphate being the others). Agrium had its wholesale fertilizer business as well, but also has an extensive retail network that sold ag products directly to farmers.

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Agrium's business model could be seen as a wonderful hedge against shifts in the commodities markets, or, critics have said, a waste of an opportunity by yoking what could be a high-earnings-multiple retail business to a low-multiple commodity seller. Agrium's view, the former, won out against activist investors and critics, and now they're doubling down by adding Potash Corp.'s wholesale operations. Agrium currently gets 10 per cent to 15 per cent of revenue from wholesale; the Potash Corp. merger will take that up to about one-third. The profit mix will swing even more dramatically to wholesale.

Analyst coverage of Potash Corp. is slacking off as the merger grows near, so we turn to S&P Global Ratings, the debt evaluators, for this recent analysis: The firm cut Potash Corp.'s outlook to negative because it has extended its outlook for weakness in fertilizer prices throughout its entire 2017-2019 cash-flow forecast period.

S&P expects prices for nitrogen and phosphate to "remain anchored near current levels due to significant capacity additions," while prices for potash will "modestly strengthen" due to stronger demand following lower customer inventories.

The agency is keeping Potash Corp.'s credit rating – for now – but says its new forecasts for the company's cash generation and debt levels don't support it.

One of the reasons S&P won't cut the debt rating now is the Agrium merger, and "the diversification benefits of Agrium's retail operations." Indeed. There's little to complain about there, as Agrium's second quarter, reported Wednesday, was widely seen as a success, although, as Morningstar's Seth Goldstein notes, "growth in the retail segment was offset by continued headwinds in the wholesale nitrogen business." The next task is merger integration.

Mr. Goldstein suggests a fair value of $114 (U.S.) for Agrium's shares, which closed Friday at $98.36 on the NYSE, suggesting double-digit upside. But analysts as a whole see the stock as fairly priced, with a nearly even split between buys and holds, and an average target price that suggests 8 per cent upside, according to Bloomberg.

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In short, for Nutrien and Cameco as well: likely a long path before investors see robust returns.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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