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

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

Cameco is a low-cost uranium producer thanks to its exceptionally high-grade uranium deposits. In the last five years, Cameco’s Uranium division has contributed almost 70% of combined gross profit (before depreciation and minority interest and after exploration and other expenses). The Company also benefits from vertical integration as a significant supplier of uranium fuel conversion services and as a supplier of nuclear-generated electricity. In addition, Cameco has imbedded a range of risk-aversion features in its operations, which are expected to reduce earnings volatility.

Cameco has demonstrated conservative financial management, with gross debt in the capital structure below 20% since 2008 (and with negative net debt), high cash balances and significant unused credit capacity. The Company has generated consistent operating cash flow for many years and has maintained a close balance of cash generation, capital expenditures and dividend requirements. Coverage metrics are adequate for the rating, although they deteriorated in 2011 following an erosion of EBITDA in each of the Company’s three operating segments.

Nuclear power currently provides approximately 14% of the world’s electricity production. Despite the setback of the serious nuclear accident at the Fukushima Daiichi power plant in Japan in 2011, nuclear power generation is expected to continue to enjoy a renaissance, particularly in Asia, as a low-carbon-emitting option for electricity generation, providing a positive outlook for players in the nuclear fuel cycle. Cameco stands to benefit from this resurgence, with a plan to double its annual uranium production to 40 million pounds by 2018.

Although DBRS believes that the weakening of Cameco’s coverage metrics in 2011 was a temporary situation brought on by the Fukushima events, DBRS intends to maintain a close watch on progress in 2012 as the Company strives to bring the development of its rich Cigar Lake (Saskatchewan) deposit back on track. DBRS views Cigar Lake as the key to expanding output and maintaining cost-competitiveness but notes that the project has suffered serious setbacks to date, including being well over its initial budget and completion expectations. Further significant setbacks at Cigar Lake could seriously impair Cameco’s rating outlook.

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