DBRS Confirms Cameco at BBB (high), Changes Trends to Negative

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Debt rating of Cameco Corporation (Cameco or the Company) at BBB (high) as well as its Commercial Paper rating at R-2 (high). At the same time, all trends have been changed to Negative from Stable because persistently weak spot prices caused by the oversupplied uranium market and a dearth of long-term contracting have deteriorated credit metrics. During 2016 and the last 12 months ending March 31, 2017, Cameco’s key credit metrics deteriorated compared with 2015 and moved to a level consistent with a BBB (low) rating. Additionally, on February 1, 2017, the Company announced that a major customer, Tokyo Electric Power Company Holdings, Inc., had cancelled a contract, resulting in reduced annual revenues of $126 million until 2020 before adjusting for any resale of the cancelled deliveries. Consequently, DBRS expects a modest deterioration in Cameco’s key metrics in 2017 before possibly recovering moderately in 2018. The recovery in the metrics is expected to be driven by higher uranium prices and, to a lesser extent, lower operating costs following the closure of Cameco’s high-cost operations in 2016. The Bloomberg 2018 consensus spot price forecast was USD 41.76 per pound (lb.) of triuranium octoxide (uranium; as of May 23, 2017) compared with USD 24.66 in Q1 2017. A spot price at this level should result in Cameco’s realized prices under its portfolio of long-term contracts averaging approximately USD 46.00 per lb. of uranium.

DBRS had previously expected uranium prices to improve in 2016 based on improved sentiment from additional restarts of Japanese reactors; however, at the end of 2016, the market remained oversupplied and, of the 26 reactors that are going through the regulatory approval process, only three reactors had restarted. That situation was unchanged until May 19, 2017, when Kansai Electric Power Co. announced that its Takahama Unit #4 had restarted and that Takahama Unit #3 was preparing to restart in July 2017. There are four more reactors that have received the necessary regulatory approvals, but must first complete maintenance before restarting. As a result, there could be as many as nine reactors operating by the end of 2017. What remains to be seen is the impact on sentiment and activity in the long-term contracting market, which was tepid in 2016 with only about 50 million lbs. of uranium contracted. As it stands, uranium spot prices remain well below USD 30 per lb. of uranium and the uranium market remains oversupplied. If all nine were in operation, then approximately 33% of the eligible Japanese reactors would be back online, which may be sufficient to improve sentiment enough to bring utility customers back into the long-term contracting market. Otherwise, the current weak market conditions are likely to persist into 2018 and could result in a rating downgrade.

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 principal methodologies are Rating Companies in the Mining Industry (September 2016) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017), which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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