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Stock to watch: Cameco shares could double on near-term catalysts

Cameco’s Cigar Lake mine in Saskatchewan. Uranium giants Cameco and Areva have reached a $600-million deal with a northern Saskatchewan First Nation that supports their mining operations and drops a lawsuit over land near the proposed Millennium project.

David Stobbe/Reuters

Cameco Corp.

Tuesday's close: $22, up 39 cents, or 1.8 per cent.

52-week trading range: $16.50 to $23.49 a share

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Annual dividend: 40 cents for a yield of 1.8 per cent

Analysts' ratings: There were 11 buys, 6 holds and 1 sell, according to Bloomberg data. Target prices ranged from $20 a share as estimated by CIBC World Markets analyst Gary Lampard to $39 a share by Salman Partners analyst Raymond Goldie.

Recent history: Shares of the Saskatoon-based Canadian uranium producer have gained 5 per cent (including dividends) after their wild roller-coaster ride over the past year. Cameco's stock has languished after being pummelled following the meltdown in 2011 at Japan's Fukushima nuclear plant. The country, once the world's third largest nuclear power producer after the United States and France, shut down all but two of some 50 power plants, and instead began importing energy like oil and liquefied natural gas. With plunging demand for uranium, which is the feedstock for nuclear reactors, the spot price for the commodity has tumbled to just under $40 (U.S.) a pound recently from a high of over $70 before the Fukushima disaster. Cameco shares have inched higher in recent months after Japan's pro-nuclear Liberal Democratic Party (LDP) led by Shinzo Abe won a landslide victory in December.

Manager insight: Cameco shares are poised to gain more momentum once Japan gives the green light to restart its nuclear reactors. "This year, we are talking about 6 to 12, and next year double that until they get most of them back online," suggested Jim Huang, president of T.I.P. Wealth Manager Inc. "That is the biggest short-term catalyst for the uranium price."

Japan's Nuclear Regulation Authority (NRA) is expected to introduce nuclear safety guidelines next month that will require power companies to improve safety measures to deal with severe accidents. They include dealing with the potential impact of earthquakes and tsunamis that triggered the Fukushima disaster. Utilities able to comply with the new standards can then apply for permits to restart their idled reactors.

Mr. Huang, who bought his latest Cameco shares about six months after the Fukushima crisis, is convinced that nuclear power is due for a comeback in Japan. There are estimates that the shutdown of Japan's nuclear reactors has come at a cost of 1 per cent to annual gross domestic product he said. "That is huge because Japan has been stuck in pretty much no growth for the last couple of decades."

The nuclear power option could can gain more headway if - as expected - the LDP and its coalition partner, the New Komeito, get enough seats for a majority in the upper house election later next month. With a majority in the lower house and expectations of taking over the upper house as well, "it will be much easier to push through political decisions like the restarting of nuclear reactors," Mr. Huang said. Countries like China, India and Russia will continue to build reactors after a pause following Fukushima, but "with the Japanese overhang, it has been pretty much a dead market [for uranium] for a while," he said.

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The U.S.-Russian Highly Enriched Uranium (HEU) Purchase Agreement, which will come to an end this year, will be another catalyst for Cameco shares, he added. With Russia no longer recycling uranium from its nuclear weapons to energy-grade fuel, that will cut supply to the Western world by "about 24 million pounds a year," or nearly 15 per cent of current demand, he said. "That is not insignificant...That will be positive in terms of reduced supply and higher [uranium] prices."

With the two catalysts, Cameco stock could reach the $40-range over the next year, but it depends on how quickly the uranium price recovers, he said. Risks include a slower-than-expected restart of Japan's nuclear reactors, and aging U.S. nuclear reactors not getting licence renewals, he acknowledged. "The biggest near-term driver continues to be China in pushing forward with its ambitious build-out plan...If something happened in China, it could be negative as well, but we don't expect that. China needs those reactors."

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