DBRS Confirms Cameco at A (low)

DBRS has today confirmed the rating of Cameco Corporation’s (Cameco or the Company) Senior Debt at A (low) and its Commercial Paper at R-1 (low), both with Stable trends. The ratings reflect Cameco’s strong business and financial profile, as well as its higher-than-normal operational risk. The Company is one of the world’s largest uranium producers. It has high-grade uranium deposits, a low-cost structure and enjoys diversification as a significant supplier of uranium fuel conversion services, as a generator of nuclear-powered electricity and as a gold producer. Nuclear power generation is enjoying a renaissance as a low-carbon-emitting option for electricity generation, providing a positive outlook for players in the nuclear fuel cycle despite a recent retrenchment in uranium prices from the record levels achieved in 2007. Cameco witnessed a slight deterioration in coverage metrics to the end of Q1 2009 (due to lower profitability), but its financial profile remains commensurate with the ratings.

Cameco’s operating income in 2008 was higher than in 2007, largely due to higher earnings in its gold business and, to a lesser extent, in its electricity business. Earnings from the uranium business in 2008 rose only marginally over 2007 levels, due to high operating costs and royalty charges, which offset the increases in the realized selling price and volumes of uranium. The higher 2008 earnings resulted in solid gross free cash flow, allowing Cameco to internally fund its record-high capex program and dividends for the year.

Cameco’s financial profile remains favourable due to its consistently conservative financial policies, despite weakening of earnings in Q1 2009. Cameco was acquisitive in 2008, with $466 million in net acquisition expenditures causing leverage to increase to 27% at the end of 2008 (from 21% at the end of 2007). Cameco has been judicious by reducing leverage to 23% by the end of Q1 2009, primarily through an equity issue in March 2009 that yielded gross proceeds of $460 million. Cameco’s near-term liquidity remains sound, with modest debt maturities in 2009 and significant cash and unutilized credit lines in hand.

DBRS expects Cameco’s leverage to remain moderate over the medium term (the Company is below its own targeted net debt ratio of 25%), and the balance sheet to stay strong. Even though capex requirements are expected to be high in 2009 (still lower than 2008), internal cash generation is expected to remain sufficient to fund the high capex.

DBRS expects that uranium prices will rebound to an average 2009 price of up to $50 per pound on the back of strong supply and demand fundamentals. This is substantially lower than the record high reached in June 2007 of $138 per pound, but still higher than historic norms. In the near term, DBRS expects consolidated revenue to decrease modestly, in light of expected decreases in revenues from the uranium (due to lower expected volumes) and electricity business (due to lower realized electricity prices), offset by increases in the fuel services business (due to higher average realized prices). Gold revenue is excluded from this forecast as Cameco plans to eventually completely divest itself of this line of business. Even though profitability in Q1 2009 was significantly lower than in Q1 2008, overall earnings in 2009 are expected to decline only marginally over 2008 levels, due to higher input costs for uranium. Despite this, coverage metrics for 2009 are expected to stay in line with the current rating.

Cameco has one of the lowest-cost structures for uranium producers due to its extremely high-grade uranium deposits, primarily its McArthur River and the Cigar Lake operations (still under development). This low-cost structure has enabled earnings and cash flow from operations to remain favourable (although weakened in Q1 2009), even as uranium prices have dropped from record peaks of US$138 per pound in June 2007 to a low of US$42 per pound at the end of March 2009 (which is still above historic norms). Although Cameco’s high-grade deposits present significant mining challenges, DBRS believes they underpin the long-term profitability of the Company.

DBRS notes, however, that Cameco continues to face operating challenges in implementing its growth objectives, including: (i) the planned capacity expansion at the McArthur River operation has been delayed due to regulatory approvals and other issues; (ii) significant setbacks continue to affect its Cigar Lake underground mine project, which flooded in October 2006; the subsequent remediation process was interrupted by another water incursion in August 2008, pushing start-up to after 2011; and (iii) the Port Hope uranium hexafluoride (UF6) conversion facility was shut down in July 2007, due to the discovery of soil contamination beneath the plant (restarted in September 2008). The conversion facility was forced to shut down again in November 2008 because Cameco was unable to resolve a contract dispute with its sole supplier of hydrofluoric acid. Due to the recent resolution, the plan is expected to resume production in mid-2009. DBRS views Cameco’s production issues as indicative of the complexities and intense regulatory scrutiny faced by the nuclear industry and Cameco’s specific operations, which tend to lead to greater operational problems than other mining-based companies. These and other unforeseen operational issues can lead to increased costs and potential loss of production, which could, in turn, lead to deteriorating credit metrics. DBRS’s ratings for Cameco reflect the higher-than-normal operational risks faced by the Company.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.

This is a Corporate rating.