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Cameco (CCJ) and U: A smart call from Toby Shute

Toby Shute is an energy sector analyst (who crosses over into the world of mining from time to time) working over at the financial supermarket website Motley Fool.

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.

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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.

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