DBRS Comments on Cameco $520 Million Offer for Hathor Exploration

DBRS notes today that Cameco Corporation (Cameco or the Company, rated A (low) and R-1 (low) with a Stable trend) has announced that it intends to make an unsolicited offer to acquire all of the outstanding shares of uranium explorer Hathor Exploration Limited (Hathor) for cash consideration of approximately $520 million. Hathor has a promising uranium exploration property approximately 25 kilometres from Cameco’s Rabbit Lake mill. Cameco has a strong balance sheet and solid liquidity, with $1.2 billion in cash and short-term investments on hand at June 30, 2011. DBRS believes that the acquisition of Hathor would align well with Cameco’s existing uranium business, would be affordable for the Company and, accordingly, would not be expected to result in a change to the Company’s ratings if completed as currently proposed.

Hathor is a uranium exploration company focused on projects in the Athabasca Basin of northern Saskatchewan, Canada. The company’s most significant asset is the Roughrider uranium deposit, which is estimated by Hathor to contain indicated resources of approximately 17.2 million pounds of uranium (U3O8) at a grade of 1.9% U3O8 per tonne and inferred resources of 40.7 million pounds of U3O8 at an average grade of about 11.4 % U3O8 per tonne. The deposit is located approximately 25 kilometres northwest of Cameco’s Rabbit Lake mill. Hathor and Cameco failed to reach agreement on potential board support of Cameco’s offer.

Cameco’s H1 2011 operating results were poorer than expected, but performance is expect to improve in the second half of the year, with uranium sales skewed to the fourth quarter. The Company is engaged in a program to double its uranium output by 2018, including the development of the Cigar Lake deposit. The Cigar Lake project has had difficulties, leading to large cost overruns and faces uncertainties regarding the timing and cost to complete the project. Nonetheless, H1 2011 net free cash flow as calculated by DBRS was only mildly negative at $66 million and DBRS expects that Cameco will be able to largely fund its dividend, working capital and capital expenditure needs (including growth capital) from internally generated funds for calendar 2011. With $1.2 billion in cash and short-term investments on Cameco’s balance sheet, DBRS expects any transaction to likely be financed from existing cash resources.

Cameco has indicated that the offer for Hathor will be made by way of a formal offer and take-over bid circular and will be subject to usual and customary conditions, including receipt of all required regulatory approvals, termination or waiver of Hathor’s shareholder rights plan and not less than 66 2/3% of Hathor shares being deposited under the offer and not withdrawn. The Company also indicates the offer will be open for acceptance for at least 60 days following its commencement. Given that Cameco’s offer for Hathor is being made on an unsolicited basis, the final terms of the offer will remain uncertain for some time and there does exist the potential that it may ultimately be unsuccessful.

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

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