DBRS Comments on Cameco Corporation’s Temporary Suspension of McArthur River/Key Lake Operations

DBRS Limited (DBRS) notes that Cameco Corporation (Cameco or the Company; rated BBB (high) with a Negative trend by DBRS) announced that its McArthur River and Key Lake operations were being temporarily suspended because of the current low uranium price environment. At the same time, the Company reduced its annual dividend for 2018 by 80% to $0.08 per share from $0.40 per share. The McArthur River mine is Cameco’s flagship operation and is a low-cost producer in the first-quartile of the uranium cash cost curve, while the Key Lake operations process run-of-mine uranium ore from McArthur River into triuranium octoxide (uranium). The temporary shutdown is expected to begin in January 2018 and should remove approximately 15 million pounds (lbs) of uranium from global supply, or according to the World Nuclear Association, approximately 9% of 2016 global uranium production. DBRS notes that the removal of this production from near-term supply could be the most positive catalyst for higher spot prices since the Fukushima disaster in 2011.

Cameco will supply its 2018 contractual commitments by delivering from its existing inventories, which, as at September 30, 2017, were 27.6 million lbs at an average cost of $31.50 per lb, or by potentially purchasing material in the spot market. Management noted that current spot prices in the USD 20 per lb range are below its all-in sustaining cost per lb and that it would be prudent to purchase material under attractive terms and keep its mineable reserves at McArthur River for better market conditions. Management’s estimates for the cost of keeping the McArthur River and Key Lake operations on care and maintenance are between $6.5 million to $7.5 million per month, or about $70 million over the ten-month suspension. There could also be one-time charges incurred as part of the suspensions, but management was unable to quantify this potential cost at this time.

It is worth noting that the reduction in the dividend for 2018 is expected to save approximately $130 million next year, which on a net basis should increase free cash flow. Cameco had cash balances of approximately $350 million at the end of Q3 2017, which DBRS expects to increase sufficiently between now and the September 2019 maturity of approximately $500 million in debt to provide the Company with the flexibility to either repay or re-finance. Management is expected to provide its full 2018 guidance in conjunction with the release of its Q4 2017 results in February 2018. While DBRS currently views the above actions as neutral to moderately credit-positive, as more information becomes available, DBRS may be able to provide a more definitive view.

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

The principal methodology is Rating Companies in the Mining Industry (August 2017), which can be found on dbrs.com under Methodologies.

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