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Better Buy: Cameco Stock or NexGen Energy Stock?

Super sized rock trucks take a load of platinum rich rock into the crusher.
Source: Getty Images

Written by Brian Paradza, CFA at The Motley Fool Canada

Nuclear is another clean source of reliable energy that enjoys growing international government support as green renewable energy becomes a more topical issue this decade. Investments in nuclear energy stocks, including uranium mining houses, generated triple-digit returns over the past five years as the uranium market finally turns a corner – a decade after the rare Japan nuclear disaster.

Long-term uranium contract prices hit US$53 per pound in April 2023, 70% growth from lows of around US$31 a pound seen in May 2019. Spot prices north of US$53.40 in May are near record highs for this decade. Nuclear is finally back from the brink, and the uranium market is going strong.

Cameco Corp. (TSX:CCO) is a top destination for new uranium contracts in a toxic geopolitical environment. A junior uranium play NexGen Energy (TSX:NXE) stock could be the underdog that generates market-beating returns. However, investors may wish to overweight Cameco stock. The giant has outperformed the junior miner stock so far this year.

Let’s dig deeper to find out which uranium stock between Cameco stock and NexGen Energy stock is a better buy as the nuclear energy market recovers.

Buy Cameco stock

Cameco is one of the largest uranium miners in the world. The $15.9 billion integrated uranium business also operates uranium conversion and fabrication facilities, a business more U.S. allies, including those in Eastern Europe, came to appreciate in a geopolitically toxic environment post the Russian aggression over Ukraine.

Cameco stock is most likely a better investment. NexGen Energy stock falls short on supply contract portfolios, industry experience, revenue, earnings, and cash flow generation, and lastly, on financial strength and flexibility.

Future revenue and some earnings are secured. The company won new contracts from Eastern Europe for uranium deliveries and conversion services as utilities diversify from politically unstable supply chains. Cameco’s long-term supply contracts can last for a full decade.

The mature business has a growing revenue base and a bigger cash flow-generating machine. Following strong contracting in 2022, Cameco had 215 million pounds of uranium and 70 million kilograms of uranium conversion services under long-term contracts at the end of March 2023. First quarter revenue was up 73% year over year. Net income of $119 million showed 197% year-over-year growth. Higher deliveries and higher average realized prices in both uranium and fuel services segments helped the uranium producer engineer good performance.

Most noteworthy, Cameco is cycling back to its low-cost producer status in North America. It’s ramping up production at McArthur River and Key Lake assets – critical low-cost assets.

Most important is Cameco’s financial strength and balance sheet quality. The company had $2.5 billion in cash, cash equivalents, short-term investments, and $1 billion in debt in March. The company has the liquidity to fall back on should another uranium winter ravage the nuclear industry.

Investment prospects for NexGen Energy stock

NexGen Energy is a Canadian prospecting and development-stage uranium mining company with a $2.6 billion market cap. Its key asset in Saskatchewan, Rock I, located in a good, stable, and supportive mining jurisdiction, could be a low-cost operation. It benefits the same as Cameco from a supportive Tier 1 mining jurisdiction and a stable political environment – yet offering better nuclear upside potential than the mature market leader.

The biggest advantage for NextGen Energy is in being a small player entering a growing market. Naturally, small companies or startups may have more room to grow into large corporations, and their stock prices may generally provide more upside than stocks of mature companies whose growth may have plateaued.

Being small, NexGen stock may offer better nuclear upside than a mature Cameco stock as the new nuclear player graduates into an operating entity. One or two new contract wins would be more significant for NexGen stock over the next few years than Cameco.

That said, NexGen Energy stock has more financial, liquidity, exploration, and execution risks than a well-rounded Cameco. The company was happy to announce a potential US$1 billion (CS$1.4 billion) in new debt financing for the Rock I project on May 1, 2023. Debt is a high-risk financing option for any start-up project without any recurring cash flow. NexGen could soon balloon its debt load, blow out its leverage metrics, and assume significant financial and solvency risks.

No wonder why NexGen stock has underperformed Cameco stock recently!

The post Better Buy: Cameco Stock or NexGen Energy Stock? appeared first on The Motley Fool Canada.

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Fool contributor Brian Paradza has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.