DBRS Downgrades Cameco to BBB (high), Changes Trends to Stable

DBRS Limited (DBRS) has today downgraded the Issuer Rating and Senior Debt rating of Cameco Corporation (Cameco or the Company) to BBB (high) from A (low) and its Commercial Paper rating to R-2 (high) from R-1 (low). DBRS has also changed the trends from Negative to Stable. When DBRS changed the trends on the Company’s ratings to Negative on May 7, 2015, DBRS noted that “unless there is a significant improvement in the Company’s outlook, a downgrade in its ratings is likely.” While Cameco’s key credit metrics have largely improved compared to last year’s expectations, they are weaker than necessary to be fully compatible with the previous ratings and DBRS believes that there won‘t likely be significant improvement this year and expects an improvement in 2017 consistent with the current ratings.

In April 2016, Cameco announced the shutdown of its high-cost operations and reduced production guidance at its McArthur River complex in response to market conditions. DBRS believes that these actions should have a material positive impact on the Company’s financial performance at some point next year based on full production resuming at McArthur River and the successful ramp up of Cigar Lake to full production. However, the timing of the improvement remains uncertain as the spot market appears oversupplied with prices languishing under USD 30 per pound (lb) U3O8. DBRS believes that the most visible catalyst for improving both spot and long-term contract market (term market) sentiment would be the restart of additional Japanese reactors, of which three are ready to start but are prevented from doing so by local injunctions. In any event, once spot prices begin to recover, expectations should begin to shift to a pick-up in term market volumes as utilities accept that the period of low spot prices has likely passed. As such, DBRS believes that it would take the combination of higher spot prices and the new focus on low-cost operations for a significant, sustainable improvement in the Company’s credit metrics. As well, if additional Japanese reactors haven’t begun to restart by later next year, then DBRS believes that there would be increased risks from some Japanese utilities destocking inventories built up since 2011, which could further suppress a market recovery and a significantly improved credit outlook for the Company.

Cameco continues to pursue its dispute with the Canadian Revenue Agency for tax re-assessments that could have a material negative impact on the Company’s liquidity if they were to lose all of the re-assessments. However, DBRS believes that a mediated outcome is more likely once the initial court outcome is known, currently expected by late 2017 or in 2018, making this a medium-term event.

The long-term market has remained quiet with the Company estimating that only about 11 million lbs U3O8 were contracted in Q1 2016 following the contracting of approximately 180 million lbs U3O8 from 2013 to 2015. Management estimates that during the 2013 to 2015 period over 450 million lbs U3O8 were consumed, resulting in pent-up demand of at least 270 million lbs U3O8. As a result, the utilities will have to return to the long-term market at some point, leaving the overriding question of “When?” DBRS believes that until the Japanese restarts resume that the non-Japanese utilities are content to remain on the sidelines monitoring how low prices could go. As such, while Cameco’s shutdown of its high-cost operations should improve the Company’s financial performance modestly this year and more so next year, DBRS will await evidence of a sustained positive shift in market momentum over the next year before revisiting our 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 (October 2015) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Financial Issuers (April 2015), which can be found on our website under Methodologies.