Cameco Corporation Stock Continues to Climb. But Is the Growth Path Sustainable? | The Motley Fool

Cameco’s (CCJ 0.95%) share price has roughly doubled in value over the past year. Much of that gain has taken place since a rally started in April. Can Cameco’s shares continue to rocket higher, or should investors be worried about the potential for a deep pullback? Here’s a look at each side of the investment coin.

The good news about Cameco

Cameco serves the needs of the nuclear power industry, providing it with the fuel needed to power reactors and services to support those reactors. Right now, this is a very attractive place to be. There’s a step change taking place in the demand for electricity, and always-on nuclear power is a perfect complement to intermittent power sources like solar and wind power.

To put some numbers on this, in the U.S. market, electricity is expected to increase from 21% of end power use in 2020 to 32% by 2050. That’s a massive change, with much of the increase in demand expected to come from new industries like artificial intelligence, data centers, and electric vehicles. Demand has been growing; in 2021, the demand for electricity was expected to rise by 22% between 2020 and 2040. By 2024, that projection had risen to 38%. And by 2025, it was up to a huge 55%! That’s a sea change in the U.S. electricity market, noting that between 2000 and 2020 demand grew by just 9%.

The fact that nuclear power doesn’t emit greenhouse gases and that, once built, it is a fairly low-cost and reliable energy source, makes nuclear an attractive option. Therefore, demand for the nuclear fuel Cameco produces is expected to be strong. But here’s the interesting fact: Demand is expected to outstrip supply in the 2030s. So, not only does Cameco serve an industry with an attractive business backdrop, but it also sells a product that will be in very high demand despite there being limited supplies of the vital nuclear fuel.

If the long term plays out as expected with nuclear power and uranium, Cameco’s shares could easily continue their ascent over the long term.

Cameco is a miner, and that likely means short-term gyrations

All this big-picture stuff sounds great for Cameco and its shareholders, and it is. But there’s a problem “on the ground.” Cameco is still a miner that produces a commodity product serving an industry that is known for being volatile. Each one of those facts needs attention.

Mining is capital-intensive, time-consuming, and complicated. It just isn’t easy finding a place to mine, getting the approvals needed to build and operate a mine, and then returning that mine site back to its natural state once the mine is depleted. So, there are material limits to Cameco’s ability to grow along with industry demand. And execution is going to be vital. Any misstep and Cameco’s stock could plunge.

Then there’s the commodity nature of the uranium market. Yes, demand is expected to outstrip supply. However, commodity cycles are fairly predictable. Low supply and high demand lead to higher commodity prices. High commodity prices lead to investment in the sector. New supply resolves the supply/demand imbalance, and commodity prices fall. That’s a highly likely outcome in uranium, too. So, you’ll need to watch the supply/demand projections closely here if you invest.

CCJ data by YCharts

The last big issue is the nature of nuclear power. Although it’s safe the vast majority of the time, accidents do happen. And when they do, they tend to be huge events that grab the world’s attention. Often, a nuclear meltdown leads to a pullback in spending on nuclear power and a drop in the price of uranium. While it is impossible to predict such a negative event, buying Cameco opens you up to the downside risk of such an event.

Be careful with Cameco

Right now, Cameco has a lot of positive news to back up its investment thesis. But it seems as though the recent advance has priced in a lot of that good news. Could the stock keep rising? Sure, that’s totally possible. But investors need to understand that there are risks here, as well. Some of the most important, including the business of mining, the commodity nature of uranium, and the unknowable future of nuclear meltdowns, could easily and quickly upend Cameco’s story. Cameco is probably best left to more aggressive investors.