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

DBRS has today confirmed the Issuer Rating 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, its cost-competitive operations as well as the higher-than-normal operational risks related to the nuclear industry. Cameco has embedded a range of risk-aversion features in its operations which have reduced, and are expected to continue to reduce, earnings volatility.

Cameco is a low-cost uranium producer, thanks to its exceptionally high-grade uranium deposits in Canada and low-cost operations in Kazakhstan. Cameco’s participation from miner to fuel fabricator along the fuel cycle for nuclear-generated electricity provides the Company with deep knowledge of the complex, and often political, uranium marketplace, along with diversification from the often volatile world of commodity prices, furthering its reputation as a reliable supplier of uranium-related products and services.

The Company’s business profile narrowed materially in early 2014 with its sale of its interests in nuclear electricity generator Bruce Power Limited Partnership (BPLP), which is expected to be partially offset by ongoing increases in primary uranium output. The acquisition of NUKEM Energy GmbH (NUKEM) in early 2013 is expected to only add modestly to Company earnings potential but will increase its market presence.

Cameco’s net income before non-recurring items remained steady in 2013 despite an ongoing decline in spot uranium prices post the Fukushima nuclear disaster in 2011. Upward trending uranium mine production volumes, price stabilizers built into Cameco’s sales contract portfolio, an effective floor-price mechanism for electricity sales at BPLP (equity accounted and recently sold) and other earnings stabilizers have contributed to relatively low earnings volatility. As well, Cameco has maintained its gross debt at $1.4 billion in 2013 although its net debt doubled to $1.2 billion as ongoing high capital expenditures and $163 million of working capital needs contributed to a $340 million net free cash flow deficit despite an increase in operating cash flow. Net acquisitions ($91 million) also served to reduce cash balances.

Cameco’s credit metrics have weakened somewhat since the serious nuclear accident at the Fukushima Daiichi power plant in Japan in 2011 weakened near-term markets for uranium. Despite the weakness, Cameco’s operating cash flow improved in 2013 mainly due to higher realized uranium prices and NUKEM’s contribution. Nonetheless, with the need to fund the development of its important Cigar Lake mine (start-up in 2014) and working capital requirements, average debt levels have risen. Coverage metrics are considered cyclically depressed although they largely remain adequate for its ratings. The sale of the BPLP interests will help restore cash levels.

DBRS expects Cameco earnings before non-recurring items in 2014 to be lower than in 2013 due to the loss of earnings from BPLP, ongoing weak uranium markets and only partial benefit from the start-up of Cigar Lake. The end of the Highly Enriched Uranium program at the end of 2013 will help reduce the supply overhang in uranium markets although other secondary sources may partially fill the gap between primary production and consumption. Nonetheless, DBRS expects that Cameco’s coverage metrics will soften moderately further in 2014, as lower earnings and higher financing costs are not offset by higher output from Cigar Lake. As well, tax payments due to income tax reassessments may serve as a drain on available funds.

Over the longer term, DBRS expects the demand for primary uranium production will grow as secondary market supplies are reduced; the number of operating reactors increases (mainly in China) and progress is made restarting idled Japanese reactors post-Fukushima, providing a positive outlook for players in the nuclear fuel cycle as a low-carbon alternative for electricity generation. Combined with the ramp-up of production from Cigar Lake and full-scale operations of NUKEM, DBRS expects Cameco should be able to restore its financial metrics to be more fully within the “A” range.

Nonetheless, Cameco continues to face high operational risks related to Cigar Lake and other operations as well as major income tax reassessments. Further significant operational or tax-related setbacks 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 2013), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.