DBRS Confirms Cameco A (low) Senior Debt Rating with Stable Trend

DBRS has today confirmed the rating of Cameco Corporation’s (Cameco or the Company) Senior Debt at A (low) and its Commercial Paper rating at R-1 (low), both with Stable trends. The confirmation of the ratings reflects the Company’s strong business and financial profile, as well as its higher-than-normal operational risk.

Cameco is one of the world’s largest uranium producers. The core of its business remains low-cost uranium production, providing about 65% of the Company’s gross profit before depreciation and reclamation (after exploration and other cash expenses). Cameco’s uranium business is supported by the Company’s 480 million pounds of proven and probable uranium reserves (before metallurgical recoveries), approximately 70% of which are in two very high-grade deposits with grades up to 100 times the world average.

Cameco’s vertical integration along the fuel cycle for nuclear-generated electricity provides it with a deep knowledge of the complex and often political uranium marketplace; a reputation as a known and reliable supplier of uranium-related products and services and diversification from the often volatile world of commodity prices.

Risk-reduction factors built into the Company’s business profile are important in reducing the volatility of the Company’s earnings and cash flow. Although Cameco relinquished some degree of diversification when it disposed of its gold assets in late 2009, it also reduced the political risk and earnings volatility related to the gold operations.

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. The number of new reactor builds is growing, particularly in China and India. Current long-term contracting prices for uranium (about US$60 per pound) are well above Cameco’s current realized prices (US$44 per pound), providing an upward bias in the Company’s revenues largely independent of spot-market pricing. With uranium consumption expected to grow over an extended period, and current market demand being partially met by secondary supplies (which may or may not continue), Cameco’s focus on doubling annual uranium production by 2018 appears to be well timed. Expanding nuclear power generation should also benefit the Company’s fuel service business, while electricity generation is expected to provide stable income. DBRS expects the Company’s credit metrics to remain solid.

Nonetheless, DBRS intends to maintain a close watch on the Company’s efforts to develop its rich Cigar Lake (Saskatchewan) deposit, which is key to expanding output but has suffered serious setbacks to date. The Cigar Lake project has had difficulties, leading to large cost overruns and still-significant questions regarding the timing and cost to complete the project. If developed as currently conceived, Cigar Lake will be a very competitive producer, but further technical issues could put a strain on the Company’s financial resources. Additionally, several of Cameco’s other expansion plans could face delays in terms of regulatory approvals.

Although DBRS’s ratings for Cameco generally already reflect the higher-than-normal operational risks faced by the Company, these and other unforeseen operational issues could lead to increased costs and potential loss of production, which could, in turn, imperil the Company’s current ratings.

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.