DBRS Confirms Cameco at A (low), with Stable Trend

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

Cameco is a low-cost uranium producer, thanks to its exceptionally high-grade uranium deposits in Canada and low-cost operations in Kazakhstan. The Company benefits from vertical integration as a significant supplier of uranium fuel conversion services, as a supplier of nuclear-generated electricity and as a leading uranium-oriented commodity trader. In addition, Cameco has imbedded a range of risk-aversion features in its operations, which have reduced, and are expected to continue to reduce, earnings volatility.

Cameco’s net income before non-recurring items over the last five years has declined recently, but remains generally less volatile than that of other mining companies, averaging $513 million, despite volatility of spot uranium prices, the sharp recession of 2008 and 2009 and the Fukushima nuclear disaster in 2011. Steady uranium sales volumes, price stabilizers built into Cameco’s sales contract portfolio, an effective floor-price mechanism for electricity sales at BPLP and other earnings stabilizers have contributed to relatively low earnings volatility. On average, the Company’s Uranium unit contributed two-thirds of its pre-tax profits over the last five years.

The serious nuclear accident at the Fukushima Daiichi power plant in Japan in 2011 weakened near-term markets for uranium and has delayed an expected renaissance for nuclear power generation as a low carbon-emitting option for electricity generation, particularly in Asia. Although Cameco’s credit metrics have weakened, they remain adequate for its ratings, despite the depth of the market weakness. In addition, the Company continues to make progress on bringing its important Cigar Lake deposit into production while augmenting its business profile with tack-on acquisitions of undeveloped properties and uranium industry service operations.

DBRS expects that Cameco’s coverage metrics will soften moderately in 2013, as flat earnings and higher financing needs may lead to higher debt and/or reduced cash levels. Over the longer term, DBRS expects the demand for primary uranium production will grow as secondary market supplies are depleted and as the number of operating reactors increases. We see progress is being made in the resumption of Japanese reactors idled post-Fukushima and the resumption of new reactor builds (mainly in China), providing a positive outlook for players in the nuclear fuel cycle.

Nonetheless, Cameco has depleted about a third of its cash hoard in 2012, yet still faces completion risks at Cigar Lake and other projects. Further significant setbacks at Cigar Lake, or a prolonged slump in the uranium market, could result in a downgrade of Cameco’s ratings.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Mining Industry (June 2011), and Rating Companies in the Industrial Products Industry (June 2011), which can be found on our website under Methodologies.