Buying beaten-up commodity stocks hasn’t been a very rewarding play recently, but some of the best names in their respective sectors are getting to the point where contrarian types are starting to kick the tires.
Cameco Corporation (TSX:CCO)(NYSE:CCJ) and Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW) are two names that get a lot of attention and are trading near their 52-week lows. Let’s take a look at both companies to see if one deserves to be in your portfolio.
Cameco
The uranium industry has been in the doldrums ever since the nuclear disaster in Japan.
In fact, long-term shareholders of Cameco Corp. can be forgiven for wanting to throw in the towel. The stock is down more than 50% from its 2011 highs and the long-awaited rebound in the uranium market still hasn’t materialized.
These are frustrating times, for sure, but the outlook for the industry suggests patience will be rewarded.
More than 80 net new reactors are expected to go into service over the next 10 years as countries like China and India expand their nuclear power fleets to meet rapidly growing demand for electricity.
Low prices have forced miners to delay or cancel expansion projects that will need to come online at some point to meet the expected demand growth. A new mine takes several years to get up and running, so there is a real risk the market will face a supply shortage in the coming years.
Anyone who follows the uranium market knows that prices can spike quickly, and the shares of producers like Cameco tend to follow the move.
Cameco recently signed an important five-year deal to supply India with 7.1 million tonnes of uranium concentrate. India currently has 21 reactors in operation and is constructing another six that should be up and running by 2017.
These 27 reactors will have a combined capacity of 10,300 megawatts, but India expects to have as much as 45,000 megawatts of nuclear power capacity by 2032. That’s a lot of potential sales for Cameco in the coming years.
Cameco has done an excellent job of controlling cost through the downturn and is well positioned to reap the rewards when the market finally turns.
Silver Wheaton
Silver Wheaton is a great way to play a rebound in silver and gold prices without taking on the direct risks associated with owning the miners.
As a streaming company, it simply purchases the rights to gold and silver by-product from miners that operate facilities set up to produce other metals such as copper. In exchange for a substantial upfront payment the miners give Silver Wheaton long-term or life-of-mine rights to the gold and silver production for very attractive prices.
How attractive?
Silver Wheaton generally pays about US$4 per ounce of silver and US$400 per ounce of gold.
The miners are willing to do this because it costs a lot of money to get a mine up and running, and the current environment isn’t a favourable one for raising funds.
Silver Wheaton’s stock is volatile and has traded in a very predictable range over the past two years. In fact, the stock has moved between $20 and $30 per share a total of four times in the past 24 months.
The company continues to add production through new deals and this is the reason many long-term investors are holding the stock. Silver equivalent production for 2015 is expected to be 43.5 million ounce and that number should grow to 52 million ounces by 2019.
The stock currently trades for less than $22 per share, which is near the bottom of its recent trading pattern.
Should you buy Cameco or Silver Wheaton?
Both stocks are getting pretty cheap. Cameco has a bit more risk attached because a battle with the CRA could put a lid on the stock’s upside potential for the next couple of years. At this point, Silver Wheaton probably offers more opportunity for significant gains in the short term.
