Morning Note: Market news and updates from Cameco and Next.

Market News

US equity markets moved higher last night – S&P 500 (+0.7%); Nasdaq (+0.5%) – with all sectors ending in the green, led by REITs and Financials. This evening, the Federal Reserve is poised to hold interest rates for a second straight meeting while keeping its tightening bias. Ahead of the decision, investors will focus on the Treasury’s quarterly funding announcement. With deficit projections soaring, the plan may see most auction sizes increased. The 10-year Treasury yield moved back up to 4.9%, while gold fell back to $1,979 an ounce.

This morning in Asia, shares traded broadly higher: Nikkei 225 (+2.4%); Hang Seng (flat); Shanghai Composite (+0.2%). Toyota jumped after raising guidance and announcing a share buyback. The yen strengthened from near its weakest level this year after Japan’s foreign exchange chief said he was on standby for intervention. Separately, the Bank of Japan conducted an unscheduled bond buying operation as the benchmark yield inched toward 1% after it tweaked the framework yesterday.

The FTSE 100 is currently little changed at 7,323. According to Nationwide, UK House prices unexpectedly rose in October, by 0.9% month on month, versus the forecast for a 0.4% decline. Sterling trades at $1.2147 and €1.1505.

Joe Biden and Xi Jinping are expected to meet in San Francisco in November, the White House said. Officials from both sides had worked for months to arrange the sit-down, the first between the two since the G-20 summit in Bali last year. Meanwhile, the Caixin manufacturing PMI unexpectedly contracted in October, signalling that the recovery in China is losing momentum.

Source: Bloomberg

Company News

Yesterday lunchtime, Cameco released its Q3 results and upgraded its full-year guidance. The group also reiterated its positive view on the uranium market – it believes we are experiencing the industry’s best ever fundamentals. In response, the shares, which are up over 65% over the last year, were marked up by another 8%.

Cameco is one of the largest global providers of the uranium fuel, with shares trading on the Toronto and New York stock exchanges. The company has interests in tier-one mining and milling operations that have the licensed capacity to produce more than 30m pounds of uranium concentrates annually, backed by more than 469m pounds of proven and probable mineral reserves. The group is also a leading supplier of uranium refining, conversion, and fuel manufacturing services across most phases of the nuclear power sector.

The group’s competitive position is based on ownership of the world’s largest high-grade reserves and low-cost operations. The strategy is to focus on its tier-one assets and profitably produce at a pace aligned with market signals to preserve the value of those assets and increase long-term value. In 2022, with the group choosing to hold many of its operations in care and maintenance, Cameco only accounted for 12% of the world’s production. In September, the group downgraded its 2023 production forecast at its two largest assets: Cigar Lake (from 18m pounds to 16.3m pounds) and McArthur River/Key Lake (from 15m pounds to 14m pounds).

In yesterday’s statement, the group reiterated its positive view of the industry – the world’s desire for clean, secure and low-cost energy is creating a foundation of support for nuclear energy from across the public and political spectrum. In its latest report, the World Nuclear Association increased its demand forecast to an average annual growth rate of 3.6%, vs. 2.6% previously. This increase in support, coupled with the geopolitical uncertainty brought on by Russia’s invasion of Ukraine and a coup in Niger, has intensified supply concerns as future uranium supply and downstream processing is needed to balance the market. In the short term, supply chain issues and inflation risks are causing production challenges for current operators. Compared to previous price cycles, the market does not have the inventory or secondary supplies to absorb market shocks.

It is against this backdrop that the uranium spot price increased by 31% during the quarter from US$56.00/pound to US$73.50/pound, while the average reported long-term contract price rose from US$56/pound to US$61.50 per pound.

During the quarter, Cameco’s uranium production grew by 50% to 3.0m pounds, with sales volume up 32% to 7.0m pounds at an average realised price 14% higher than last year. Group revenue grew by 48% to C$575m. Gross profit improved by 6x to $152m due to lower unit costs and a higher average realised price. Adjusted EPS rose from 3c to 32c, well above the 12c market forecast, and reflects normal quarterly variations in contract deliveries. The company is financially resilient, with net cash of C$1.7bn and an undrawn credit facility of C$1.0bn. The group declared a dividend of 12c.

With improving market fundamentals, the group has once again increased its consolidated revenue outlook for 2023 to $2.43bn-$2.58bn (vs. $2.38bn-$2.53bn previously), primarily driven by higher expected average realised prices.

Looking forward, the group has continued to enter long-term contracts while maintaining exposure to higher prices – as of 30 September, Cameco had commitments requiring delivery of an average of 29m pounds per year from 2023 to 2027, an increase from 28m pounds per year at the end of June. Many of the contracts benefit from market-related pricing mechanisms. In addition, the group has a large and growing pipeline of business under discussion. Total industry long-term contracting volumes to date in 2023 have already exceeded the volume of each of the last 10 years, a strong indication that a new long-term contracting cycle is underway.

Exposure to uranium in a diversified portfolio provides a low correlation to other asset classes and the potential for a high level of capital growth if the cycle continues to turn up. For investors who want exposure to the uranium price and are happy to take on the operational risk inherent with a production company, we would consider Cameco or, for more diversified exposure, the Global X Uranium ETF. For investors looking for a ‘cleaner’ exposure to the commodity price, without the operational risk, we would consider Yellow Cake, the UK AIM-listed company focused on buying and holding physical uranium.

Source: Bloomberg

Retailer Next has this morning released a trading update for the three months to 28 October and once again raised its guidance for the financial year to end January 2024. In response, the shares are up by 3% in early trading.

In a brief statement the group highlights that full price sales in the quarter were up 4.0% versus last year. This is £23m ahead of management guidance which was for 2.0% growth. Note that Full price sales are VAT exclusive sales of items sold at ‘full price’ in Retail and Online plus NEXT Finance interest income. They exclude items sold in Sale events, Clearance operations and through Total Platform. By channel, Online grew by 6.5%, while Retail fell by 0.6%.

Sales growth has been variable. Management believes the volatility in sales performance is a result of changing weather conditions rather than any underlying changes in the consumer economy. In an Autumn season cooler weather is good for sales, warmer than average weather depresses sales. Over time, the average performance is a better indicator of underlying consumer demand than any one week.

The group has moderately raised its guidance for the rest of the year. Full-year full price sales growth is now +3.1% (vs. +2.6% previously). This assumes that full price sales for the rest of the year are up 2.0%.  Profit generated from the additional sales achieved in the third quarter has added £10m to the group’s full-year forecast for profit before tax, which is now £885m.

Although there is much uncertainty surrounding the impact higher mortgage rates and increased prices might have on consumer spending, today’s update once again highlights the group’s strong franchise and management team.

Source: Bloomberg