PORTERS
Threat of new entrants
The threat of new entrants is very low. On the cost side, entering the market of uranium mining is extremely expensive due to exploration cost and initial capital. Also, the government has very strict regulations on nuclear mining and usage. Since Federal government enforces the environment law on energy sector, companies, which want to entry into nuclear energy industry, need to ensure the environment safety before the business launched. According to Cameco, “We study the environment around the project area to gain an understanding of potential effects on air and water quality, wildlife, plants, noise, human health, aboriginal activities, and the use of land and natural resources.”(Cameco, 2010)
This is not an easy industry to penetrate, especially since the industry has been fulfilled by numerous major players such as Cameco, Nuchem, and Areva. The majority of uranium resource has been controlled by the existing operators. In 2011, eight companies marketed 85% of the world’s uranium mine production. (World Uranium Ming, 2012) Thus, the barriers to entry the current nuclear industry are intense.
Threat of substitutes
Respect to the main product that Cameco, Uranium currently are principle to produce nuclear weapon and nuclear energy. The nuclear weapon industry merely has substitution from other bomb industries. However, on the energy side, there are a huge amount of energy sources can substitute uranium to generate electricity and heat. In 2008, Coal (48.7%) and Natural gas (21.4%) are used for main resources to generate electricity in US. (Morgan, 2010) Meanwhile, other high-tech energy sources, such as solar, wind and hydro, are capturing their own market shares for generating electricity. Thus, the threat from substitutions is quite high for the nuclear energy industry.
Degree of rivalry
The competition in the Uranium mining industry is not that intense as that in other industry such as retail, food, or other commodity. Only four major players have about the same Uranium
Areva is a leading nuclear supplier in the United States. Areva also has a major presence in Canada, employing 5,000 people. http://us.areva.com/EN/home-143/key-fact-and-financial-figures-areva-north-america.html. They have a commercial presence in 100 countries. http://us.areva.com/EN/home-143/key-fact-and-financial-figures-areva-north-america.html.
“Nuchem Limited is an environmentally friendly, diversified company having its registered head office at Faridabad, Haryana … Nuchem nearly employs 1000, has over 45,000 shareholders and 800 trade associates.” http://www.nuchem.com/?q=node/23 http://www.world-nuclear.org/info/inf23.html Supplier Power
Cameco is just one of many uranium producing companies in the world, but it is by far the largest, supplying an estimated 16% of world uranium production. Due to Cameco’s sheer size, they play a central role in not only the mining of uranium, but the supply of the final product. Cameco’s vertical integration strategy ensures the company plays a role in multiple areas of the nuclear energy industry, allowing them to capitalize on all opportunities related to uranium production. Cameco has invested in uranium conversion technology, fuel manufacturing, and nuclear energy generation through their partnership with Bruce Power (Cameco, 2009). If Cameco maintains their current vertical integration strategy and continues to play a part in the entire uranium production cycle, without stretching themselves too thin, they will guarantee strong supplier power for years to come.
Buyer Power
Cameco’s buyer power is equally as strong as its supplier power. Nuclear power plants and facilities cost millions of dollars to build, maintain and operate. Once these facilities are up and running, they can last decades, and will rarely be shut down within their operational lifespan. This is beneficial to Cameco’s position because uranium is the only fuel these long-standing plants will ever be able to use. As Demand for uranium continues to outstrip the amount produced from primary sources, with secondary sources on their way to depletion, the bargaining power of those with reserves is only growing, while those who demand it will experience the opposite effect (Finch, 2010).
PESTEL
Political
Cameco has a number of political factors that could potentially affect their operations. With Cameco’s headquarters, corporate offices, and the majority of their mining operations located in Canada, our government’s policies and regulations are crucial to the way in which Cameco does business. Although mining in Canada is typically regulated by provincial governments, all uranium production is under federal jurisdiction. The Canadian Nuclear Safety Commission regulates uranium mines and mills and all subsequent stages of the nuclear-fuel cycle, such as refining, conversion and fuel fabrication, to protect health, safety, security and the environment (Natural Resources Canada, 2009). This regulatory body is tasked with ensuring companies operating within the uranium industry in Canada are compliant with all laws passed by parliament, as well as offering guidance and licenses to operate in the industry. Some political factors; however, exist outside of Canada. Cameco has operations in various developing nations including the Republic of Kazakhstan, the Kyrgyz Republic, and Mongolia (Cameco, 2009). All three of these countries have the potential to experience a significant degree of political and economic difficulties, including internal unrest or political instability, which could have an adverse effect on Cameco’s financial position.
Economic
In the last decade, uranium consumption has far exceeded Cameco’s mine production. This margin is typically made up of recyclable uranium material, and products and secondary sources. Cameco’s current mines and supply are estimated to meet approximately 80% of world demand. The remaining 20% must come from new supplies, which may include expansions of existing mines, or new mines (Cameco, 2009). Given the availability, demand, and lower cost of producing uranium, Cameco’s economic, as well as that of the entire uranium industry is promising and shows no signs of slowing down.
Social
There are some social trends surrounding the uranium industry that may help to create opportunities or pose threats in the further expansion of the company. Population health and safety is a two-sided blade because it is an opportunity for high-pollution countries, such as China, to reduce carbon emissions (1). The uranium industry in recent years has alternated from being a social ill towards being a necessary form of energy that will involve a high amount of investment from foreign countries (1). From another perspective, population health and safety can also be viewed as a negative preceding the events of Fukishima, Japan (1). The social perception of what can go wrong and the diverse spillover effects of nuclear energy can put a negative connotation around uranium producers (1). Conversely, there is an inherent opportunity for increased nuclear safety programs, continued education, and transparency of the uranium industry in order to gain public acceptance (1). Through government nuclear safety programs, becoming a credible energy source will establish Cameco a worldwide leader. This will also create thousands of new jobs for communities and local residents.
Technological
With fossil fuels remaining at such a high cost for production and use, the technology of nuclear power is one of the most viable options for sustaining energy consumption. This form of technology transfer will have a large impact on the profitability of Cameco and its ability to meet demand levels. From a technological standpoint with emerging countries fighting for cheap energy sources, nuclear power will see a greater demand even though it might not be the most popular choice (1). Along with this, new AP1000 reactor designs in the United States and China are said to be only the beginning of a bright future for the nuclear industry, creating thousands of jobs in the years ahead and providing households and businesses with low carbon energy (1). Continuous new improvements in reactor designs will ultimately make them easier and safer to use, as well as, allow more countries to feel safe building and maintaining these facilities.
Environmental
First off, there is opportunity for further corporate social responsibility initiatives done by Cameco to educate and help improve local environments surrounding production facilities. Nuclear power plants are able to avoid 2 billion tones of carbon dioxide emissions, so by educating communities and being transparent about all potential damages they can promote a responsible form of energy (2). Environmental concerns can be compared in carbon emissions with nuclear power coming in 7th out of other forms of energy behind that of lignite, coal, oil, natural gas, solar, and biomass (2). Being one of the cleaner sources of energy, and promoting that, Cameco and other uranium producers should continue to see bullish support and investment in the near future.
Legal
A major factor in the future success of the nuclear power sector is the introduction of market liberalization (2). Typically, the nuclear power market is regulated by a governing body and allowed to satisfy a specific piece of the market resulting in a prescribed rate of return (2). Trends in the US, Far East, and Europe have began moving towards a more deregulated type of market allowing for increased opportunity (2). The need for producers to have lower production costs, optimization of resources, and more efficient processes will create a further need for nuclear power and uranium production (2). Although the uranium industry is one of the most regulated in the world if countries begin to move towards a liberalized market then this could be potential for increased demand.
SWOT Analysis
Strengths
Cameco Corporation is one of world's largest uranium producers, and holds 16 percent of the world's uranium production. Also, Cameco owns abundant mineral reserve and resource. Cameco has a sustainable resource of approximately 435 million pounds of proven and parable reserves which is world's largest high grade reserve. In addition, it operates diversified business to provide different services, including Uranium, Fuel services and Electricity. Cameco also makes rector components and consulting service to Canada around the world. Cameco provides has a strong culture that reflects a safe and healthy workplace for employees. It also focuses on the protecting environment. They try their best to reduce pollution from production and adopt several solutions to keep the already existing pollutants away which supports their position on being corporately socially responsible. * Uranium efficiency. http://www.triplepundit.com/2009/02/nuclear-energy-pros-and-cons/ http://dsc.discovery.com/tv-shows/curiosity/topics/10-pros-cons-nuclear-power.htm
Weakness * Commodity risks * Uranium vs other energy source * Safety * Functions * Ability to differentiate products * Restrictions on demand
Opportunity
Since countries try to reduce heavy-polluting industries and expensive renewable resources, the growth of nuclear energy is a big opportunity for Cameco. Also, nuclear energy can be applied in more fields, such as medical, agriculture and aviation. With the growth of the population and fast development of economy, the demand of electricity is becoming increasing. In addition, Cameco has the opportunity to expand investments in further project. For example, developing new mining zones to increase production.2 Cameco seeks respectful relationships with more associations, and joints ventures with other companies that hold high-quality development project, such as UEX Corporation and Minergia.3
Threat:
First threat is the public's negative outlook in safety of nuclear energy, such as nuclear leak, and nuclear radioactive contamination. Owing to the serious radiation leaks in Japan, public fears about radiation sickness have been reawakened. Secondly, based on international economic instability, the price of Uranium varies all the time. For long-term, it's difficult to forecast and invest the further projects.( weakness?) Within the nuclear mining industry, Cameco needs to be very mindful that it follows the government regulation and related laws. Uncertain regulations will have a negative impact on nuclear energy operations. Due to the wide use of renewable sources, such as wind, hydro energy, and solar energy, all of these compete with nuclear power for a share of alternative energy market.
Threats: energy industry, competitor within the industry. Most major competitor is coal, oil &gas.
1 http://www.cameco.com/about/vision/
2 http://www.cameco.com/investors/our_growth_strategy/
3 http://www.cameco.com/exploration/investments/
4 http://www.wikinvest.com/stock/Cameco_(CCJ)
Financial analysis:
A number of ratios were calculated to determine Cameco’s financing, liquidity, profitability, and efficiency. It was found that all four areas were suffering and the financial health of Cameco is continuing to decrease. Poor liquidity affects Cameco’s ability to pay its liabilities. The aging of accounts receivable and the slowing of inventory turnover will reduce a company’s liquidity which in turn may cause the company to fault on its loans. Faulting on loans may cause a company to immediately demand repayment which would cause Cameco to go into a financial frenzy.
With respect to financing, the current ratio decreased from 2010 to 2011 by 15%. This decrease was caused partly by the massive increase in accounts receivable which was 37.4%. This enormous increase exposes Cameco to counterparty credit risk. Cameco should be extremely concerned with the possibility of customers defaulting on their accounts, which in turn, may cause Cameco to default on their own liabilities. The quick ratio decreased by 10% which is 5% better than the current ratio. This suggests that there is a significant amount of inventory on hand since the difference between the current ratio and quick ratio is the quick ratio takes inventory out of the numerator current assets. The implications of these ratios determine that although cash and cash equivalents are fairly stable, the company’s ability to cover short term debt is reducing as the company is becoming less liquid.
As mentioned above, Cameco’s ability to cover short term debt is decreasing. This is problematic in itself. Worse still, accounts payable and accrued liabilities are increasing by 17.2%. This is noteworthy because as Cameco’s position to pay its debt is decreasing, the liabilities needed to be paid are increasing. A strategy must be implemented. It is suggested that customers are monitored on a more strict basis to determine the worthiness of the customer to be granted credit. This would reduce the amount of aged accounts in the accounts receivable ledger by weeding out the customers that would likely not pay on time. Another suggestion related to customers is to seek prepayment. If prepayment was made by a customer, Cameco would be in a better position to pay off its debt rather than waiting for payments from receivables that made be uncollectible. Another possibility for Cameco is to mitigate the risks with financial assets.
While examining the ratios concerning profitability and efficiency, potential areas of concern were exposed. It was found that return on sales reduced significantly from 2010 to 2011. The drop was by 22.8% which signifies that profitability is in serious doubt. The gross margin ratio reduced by 10.5%. This is partly due to poor cost management. The cost of goods sold raised by 20% which outweighs the increase in revenues of 12.3%. The cost of goods sold rise possibly occurred because of commodity price risks and the inability of management to manage costs. There is also a heavy concern surrounding the losses on derivatives which amounted to a baffling $79,600,000 in net change. This is a material loss that will have a major impact on net earnings.
Cameco’s efficiency is another area of interest. While examining the inventory turnover ratio it was found that it had increased from 2010 to 2011 by 15%. This is a favourable position for Cameco to be in since it displays the growth in revenue through uranium sales. However, inventory sales give rise to accounts receivable balances which have been found to not turnover quickly.
The strategies suggested to correct the above concerns involve cash flow hedges and entering into forward contracts. The former would include maintaining a portfolio of uranium product sales contracts with a variety of delivery dates and pricing mechanisms. This would provide a degree of protection from pricing volatility. The latter would reduce the foreign exchange risk by hedging.
Bibliography
Cameco. Risks & Risk Management. February 16, 2009. http://www.cameco.com/annual_report/2008/annual_financial_review/mda/risks_management_accounting/risk_and_risk_management/ (accessed October 16, 2012).
Canada, Natural Resources. About Uranium. July 6, 2009. http://www.nrcan.gc.ca/energy/sources/uranium-nuclear/1169 (accessed October 16, 2012).
Canadian Nuclear Safety Commission. Regulatory Framework. 2012. http://nuclearsafety.gc.ca/eng/lawsregs/regulatoryframework/index.cfm (accessed October 16, 2012).
Finch, Spencer. Educational Investment Fund, Cameco Inc. June 8, 2010. http://www.neeley.tcu.edu/WorkArea/DownloadAsset.aspx?id=9767 (accessed October 16, 2012).
