Cameco: An AI Winner Hidden in Plain Sight

Yahoo

31-01-2025

Cameco Corporation (NYSE:CCJ) is a leading provider of nuclear fuel solutions and a major supplier of uraniuma critical element in nuclear fission power generation. As tech giants increasingly turn to nuclear power to meet the growing energy demands of AI-driven data centers, nuclear-related stocks are gaining attention. With its strong position in the uranium supply chain amid the growing demand for energy, Cameco is well-positioned to thrive, making it an attractive long-term investment.
AI is driving new revenue opportunities for major tech giants. Meta Platforms Inc (NASDAQ:META), Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc (NASDAQ:GOOG), and Amazon.com Inc (NASDAQ:AMZN) are investing billions into AI infrastructure and are optimistic about its growth potential. These companies, in the recent past, have highlighted AI's ability to boost growth, enhance advertisers' return on investment, expand infrastructure revenue, and foster innovation across various business verticals.
For example, Microsoft, after reporting strong growth for AI products like Azure Arc and GitHub Copilot in the previous quarter, emphasized that the company's GPU supply is currently insufficient to meet customer demand. Meta's Llama 3 AI assistant is also gaining traction, with increasing user adoption rates. The system now recommends 30% of Facebook posts and 50% of Instagram content.
Google's generative AI features have served billions of queries as well, leading to increased search usage and user satisfaction, with over one million developers using Google's AI tools. Amazon Web Services, on the other hand, is demonstrating significant momentum in AI adoption and revenue, with Amazon's SageMaker aiding in LLM training, AI inference, and productivity improvements.
These recent developments highlight that AI innovation and capital investments toward AI infrastructure are likely to remain at elevated levels. However, there is one key challenge facing the increasing adoption of AI; the massive power requirements to support AI data centers.
Globally, there are over 11,000 data centers, each requiring significant energy to stay operational. According to Barclays Research, data centers currently account for about 3.5% of U.S. electricity consumption. This figure is expected to exceed 5.5% by 2027 and surpass 9% by 2030. Similar estimates from the Electric Power Research Institute align with these projections. On a global scale, the International Energy Agency forecasts electricity demand from AI, data centers, and cryptocurrencies to rise to 800 TWh by 2026 in its base case scenarioa 75% increase from the 460 TWh consumed in 2022.
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The International Energy Agency estimates that data centers, AI, and cryptocurrencies consumed approximately 460 TWh of electricity in 2022, accounting for less than 2% of global electricity demand. In its 2030 projections, the IEA presented various scenarios for AI's energy demand under slow-growth and fast-growth conditions. Even in the high-growth scenario, AI's power demand is not expected to rival that of electric vehicles, air conditioning, or heating systems. However, data center energy demand will still experience a boom from historical standards as increasing AI adoption exerts pressure on global power grids.
However, this growing demand for energy is not the only reason why major tech companies are pouring significant resources into establishing their own power plants to support their data centers.
There are two main reasons behind this interesting development.
AI power demand puts extreme pressure on the local grids.
The data centers are becoming significant carbon emitters.
The U.S. power grid was not built for modern energy requirements. It was a series of patchwork done by many independent companies. The current power grid is not efficient enough to conduct power over long distances. And the aging infrastructure is causing many problems.
The energy demands for AI are very localized. The IEA highlights that the spatial concentration of energy demand is extremely high for data centers. This means there can be severe strain on the grid at a highly localized level, even if the impact on total energy demand is small. Therefore, AI energy demand can be considered a constant peak that leads to higher overall peak power demand across the grid. This high concentration can take a toll on the old grid infrastructure which can affect the constant power need for data centers.
Demand for AI is growing rapidly. Data centers can be built relatively quickly to address this demand, but the energy infrastructure cannot be built that quickly, especially in the U.S. where the grid is controlled by many companies. That means energy supply becomes a congestion issue, even if it's not fully reflected at the national or global level.
Data center operators face the challenge of finding localized, efficient energy solutions to meet their growing demand. While nuclear energy provides a highly efficient option, concerns about environmental sustainability remain at the forefront.
The increasing energy demand to power data centers for training and operating AI models is significantly contributing to global greenhouse gas emissions. Microsoft, the largest investor in OpenAIthe developer of ChatGPTreported a nearly 30% rise in CO2 emissions since 2020 due to data center expansion. Similarly, Alphabet's GHG emissions in 2023 were almost 50% higher than in 2019, largely driven by energy consumption tied to data centers.
To align with their sustainability goals, tech companies are exploring ways to reduce emissions. Renewable energy sources like solar, wind, and hydropower are promising but face challenges due to their intermittent nature, which conflicts with the constant high-power requirements of AI operations. As a result, companies are increasingly considering nuclear energy.
Nuclear energy offers unmatched reliability and minimal carbon emissions, making it an ideal candidate. However, existing nuclear plants in the U.S. are already operating at approximately 96% capacity, and constructing new reactors is a time-intensive process that cannot immediately address the anticipated power supply shortfall.
This situation has prompted tech giants to invest heavily in alternative energy options. These include exploring advanced nuclear technologies for powering data centers and innovative energy storage solutions such as hydrogen. Despite the mismatch between local-level energy concerns and global-scale sustainability challenges, the search for efficient and reliable power sources remains critical for the growth of the AI sector.
Leading tech giants have already embraced nuclear power. For example, Amazon recently signed agreements to support the construction of a four-unit 320 MW plant in Washington with Energy Northwest. AWS also participated in a $500 million Series C-1 financing for X-energy to construct five gigawatts of new nuclear projects by 2039.
Alphabet, on the other hand, signed a partnership with Kairos Power for 500 MW of advanced nuclear power, targeting the deployment of new capacity by 2035. In addition to this, Google announced an agreement with Duke Energy Corporation (DUK) to invest in advanced nuclear energy in North Carolina through Accelerating Clean Energy tariffs, along with Microsoft and Nucor Corporation (NUE).
Microsoft Corporation has entered into a 20-year Power Purchase Agreement with Constellation Energy Corporation (CEG) to restart Three Mile Island Unit 1, which in its prime produced around 7.2 TWh each year. The unit will provide over 800 MW to the PJM grid by 2028 for an estimated $110$115 per MWh.
Meanwhile, Meta is trying to identify nuclear energy developers to help meet its AI innovation and sustainability objectives by targeting 1-4 GW of new nuclear generation capacity in the U.S.
Nuclear energy production primarily relies on uranium, which is the most widely used fuel source for nuclear fission as it can easily undergo fission when struck by a neutron, releasing a substantial amount of energy. This efficiency is evident in the fact that one kilogram of uranium can generate approximately 24,000 MWh of electricity, significantly outperforming fossil fuels.
In a nuclear reactor, when a neutron collides with a uranium atom, it causes the atom to split, releasing energy in the form of heat and additional neutrons. These neutrons then trigger further fission reactions, creating a self-sustaining chain reaction.
Although uranium is mined in various locations worldwide, the western United States holds an important position as it is home to significant uranium deposits. Currently, approximately 60,000 tons of uranium are required annually to fuel the world's 410 operating nuclear power reactors. However, as countries work to mitigate climate change, enhance energy security, and promote sustainable development, uranium demand is projected to rise. According to the International Atomic Energy Agency, global uranium requirements could reach up to 100,000 tons per year by 2040.
However, the uranium market is experiencing a massive supply deficit, which has been the case for almost the last two decades. Geopolitical factors, such as the coup in Niger and the growing influence of Russia and China, push the uncertainty even further. Even though a uranium crisis is unlikely to occur soon, the slow supply growth will continue to put upward pressure on prices.
Cameco Corporation is one of the world's largest uranium producers, with facilities in Wyoming and Nebraska. Cameco accounts for approximately 18% of global uranium production. The company operates key mines such as McArthur River (Key Lake) and Cigar Lake in Canada, which rank among the largest and highest-grade uranium mines in the world.
Cameco maintains long-term commitments with multiple customers across various regions, including utilities and other entities involved in nuclear power generation. In October 2023, Cameco signed a uranium supply agreement with CNNC, a subsidiary of China National Nuclear Corporation. The company also supplies uranium to Ukraine's Energoatom for its nuclear power plants under a contract extending through 2035.
As of April last year, Cameco had 215 million pounds of uranium under long-term agreements. By June 30, 2023, the company reported average yearly deliveries of 28 million pounds from 2023 to 2027. This figure increased to 29 million pounds annually from 2024 to 2028 as of Sep. 30, 2024.
In its Q3 2024 earnings report, Cameco announced an increase in its 2024 uranium production outlook, rising from 22.4 million pounds to up to 23.1 million pounds, driven by strong production from McArthur River/Key Lake.
Earlier in 2024, Cameco converted 73.4 million pounds of resources into reserves at the Cigar Lake mine, extending its estimated lifespan until 2036. At the McArthur River/Key Lake site, assessments were made to increase production to its licensed annual capacity of 25 million pounds.
The company is also well-positioned to benefit from U.S. government support. Geopolitical tensions between the U.S. and Russia have prompted swift actions to bolster the domestic nuclear power industry. The Nuclear Energy Deployment Framework published by the White House outlines a detailed action plan to revitalize the nuclear power sector, helping achieve net-zero emission goals. This favorable policy outlook can be expected to progress under the Trump administration given that President-elect Donald Trump has voiced strong opinions about strengthening the economic power of the U.S. by reducing its reliance on global supply hubs.
There are many reasons to believe that Cameco will benefit from the surging demand for nuclear energy.
Cameco owns and operates some of the most sought-after uranium mines in the world, not only in the U.S. but also in Kazakhstan.
In 2023, 22 countries and 120 global companies pledged to more than triple the available nuclear energy production capacity by 2030, signaling the strong growth expected in this sector in the coming years.
Cameco is investing in advanced technologies such as AP1000 and AP300 reactors to position itself as the frontrunner in serving the growing demand for energy stemming from the deployment of AI technology.
Cameco, despite a lackluster market performance in the past 12 months, is valued at a forward price-to-earnings multiple of 129 as the company has not been able to convert stellar revenue growth into earnings in the last couple of years. However, the company, aided by technological advancements and the growing demand for uranium, is likely to see a meaningful operating margin expansion in the next few years, leading to strong earnings growth.
As tech giants invest millions in establishing nuclear reactors to power their data centers, the nuclear power sector is poised for significant growth. Investor confidence in nuclear energy stocks has been steadily rising, as reflected in their increasing prices. Since uranium is the most efficient element currently available for fueling large-scale nuclear reactors, the spillover effects of the AI boom are likely to benefit Cameco Corporation. With both internal strengths and favorable external conditions, Cameco appears well-positioned for growth.
This article first appeared on GuruFocus.