DBRS Downgrades Cameco Corporation to BBB, Maintains Negative Trend

DBRS Limited (DBRS) downgraded the Issuer Rating and Senior Debt rating of Cameco Corporation (Cameco or the Company) to BBB from BBB (high) as well as the Commercial Paper rating to R-2 (middle) from R-2 (high). DBRS maintained all trends at Negative. The downgrades were the result of ongoing weakness in uranium prices coupled with production curtailments and higher costs due to product purchases and the care-and-maintenance requirements at the Company’s suspended/closed operations, which resulted in further deterioration of its key credit metrics. Cameco has $499 million of senior debt maturing in September 2019 (the 2019 Debt). DBRS expects this debt to be repaid; however, as a result of current conditions, this repayment would only partly mitigate the expected weakening in credit metrics in the near term. That said, the Company’s business risk profile remains strong despite the near-term increase in operating costs. The Negative trends are based on the stalled recovery of uranium prices and the potential for further price weakness.

In 2018, Cameco and partner, Orano Canada Inc. (Orano), announced that the suspension of production at their McArthur River/Key Lake complex (McArthur) would continue for an indeterminate duration. Cameco stated that it will not produce from McArthur until long-term sales contracts can be arranged at acceptable prices. As a result, Cameco now expects to deliver at least 28 million pounds of uranium this year, not including the Orano-loaned material, and expects to source at least 19 million pounds from purchase commitments (including from JV Inkai LLP) and spot-market purchases to make up the majority of the difference between its sales volumes and the projected Cigar Lake production of nine million pounds to ensure that its inventory levels remain manageable. Depending on the depth of the spot market, spot uranium prices could react positively to these purchases and DBRS will continue to monitor the situation and its impact on the term-contracting market.

For 2019, DBRS expects the Company’s key metrics to deteriorate, mainly driven by higher operating costs that include the McArthur care-and-maintenance costs as well as lower Canadian-dollar uranium price realizations and uranium sales volumes. For 2019, DBRS expects price realizations in line with management guidance of approximately CAD 44 per pound of uranium under Cameco’s portfolio of long-term contracts. DBRS expects that these price levels, in conjunction with the repayment of the 2019 Debt, could cause Cameco’s key credit metrics to decline to the BB category in 2019 (with the exception of debt-to-capital, which is expected to remain robust). If, however, there is limited upside price response to the industry curtailments (including McArthur), the 2019 Debt is refinanced as opposed to repaid and/or extended labour disruptions occur at the McClean Lake Mill that processes the Cigar Lake uranium ore such that adjusted cash flow to debt declines to the 15% range on a sustained basis, among others, then a further negative rating action could result. Conversely, the Negative trends could be changed to Stable if the price response is sufficiently robust to trigger the re-start of McArthur.

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

The principal methodologies are Rating Companies in the Mining Industry (September 2018) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2019), which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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