Now I’m no fan of MotleyFool, but there are exceptions to every rule so I’ve also come to the conclusion that Toby Shute is well worth following (and I have a Google alert with his name as keywords because of that). So today he’s written a short but incisive note on Cameco (CCJ) and uranium in general. Here’s the link and imho it’s well worth your time. Here’s a short extract, and while you’re reading the full text it’s worth considering the wider implications of Cameco’s recent buying spree on the whole sector.
A big reason for the cost jump is that Cameco was very busy purchasing uranium at near-spot prices during the quarter. These costs are dramatically higher than Cameco’s cost of production, so margins took a real hit. What could justify such behavior?
Well, think about what happens in the oil industry when near-term prices are far below those attainable via futures contracts. In such a situation, called “contango,” oil majors like ConocoPhillips (NYSE: COP) and Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B) make easy money by selling oil at higher forward prices and sitting on tankerloads of it in the meantime.