DBRS Morningstar Confirms Cameco Corporation at BBB and R-2 (middle) With Stable Trends, Removes Ratings From Under Review With Developing Implications

DBRS Limited (DBRS Morningstar) confirmed Cameco Corporation’s (Cameco or the Company) Issuer Rating and Senior Debt rating at BBB and the Commercial Paper rating at R-2 (middle). All trends are Stable. With this confirmation, DBRS Morningstar has removed the credit ratings from Under Review with Developing Implications, where they were placed on October 12, 2022. The Under Review status was based on the announcement of Cameco’s acquisition of a 49% stake in Westinghouse Electric Company LLC (Westinghouse) for USD 2.2 billion along with Brookfield Renewable Partners L.P. (rated BBB (high) with Stable trend by DBRS Morningstar), who will own a 51% stake in Westinghouse (the Acquisition).

DBRS Morningstar considers the Acquisition to be credit friendly. The Acquisition is being funded by a combination of equity issuance of USD 748 million in October 2022, cash flow from operations, existing liquidity on the balance sheet, and the expected addition of USD 600 million in term debt. Since the Acquisition announcement, the Company has generated sufficient free cash flow (cash flow after capital spending and dividends) to minimize the amount of additional debt required at closing, where a financing mix involving a higher debt component could have impaired the key credit metrics to a point of possibly triggering a negative credit rating action. As a consequence, DBRS Morningstar believes the Under Review status can be resolved at this time and the credit ratings confirmed. The Acquisition is expected to close later this year and is subject to customary closing conditions and certain regulatory approvals.

The credit rating confirmations are also supported by Cameco’s (1) restart of its McArthur River/Key Lake complex, which will further reduce higher-cost open market purchases with incremental low-cost production and (2) strong business risk profile that takes into account the Company’s long-life reserves, low operating cost structure, investments across the nuclear fuel cycle, and a portfolio of long-term contractual commitments. The Stable trends reflect the positive pricing momentum for long-term uranium pricing, which has increased by 78% since the beginning of 2021.

A renewed recognition that nuclear energy will be a significant contributor to the world’s shift to a low-carbon, climate-resilient economy has resulted in the reversal of previously announced reactor closures and life extensions for a number of existing reactors. In addition, government approvals granted for new reactors have increased upward pressure on spot and long-term contract uranium prices. Also, the impact of Russia’s invasion of Ukraine and the subsequent, unprecedented sanctions on Russia have begun to be reflected in global uranium markets. Russia accounts for approximately 39% of global uranium enrichment capacity, 27% of uranium conversion supply, 14% of triuranium octoxide (U3O8) production capacity, and approximately half of global secondary supplies. As a result, the demand for uranium conversion and enrichment services has increased and trickled down to the primary uranium markets. However, DBRS Morningstar notes that Kazatomprom (the world’s largest uranium producer), and its partners, is planning to increase uranium production by approximately 20% in 2024 relative to its production levels in 2023 of approximately 46 million pounds U3O8. The combination of increased production from Cameco and Kazatomprom, along with other uranium producers, could potentially provide headwinds to higher volumes of long-term contracting and prices.

DBRS Morningstar expects the Company’s key metrics to moderately decline in 2023 compared with 2022 because of the addition of the term debt associated with the Acquisition. However, DBRS Morningstar expects the Company’s credit metrics to improve in 2024 as the McArthur River operations ramp up production, which along with continued positive momentum in the uranium price may lead to a positive credit rating action. That said, if McArthur River and other possible mine restarts cause material pressure on uranium prices and utilities limit contracting volumes, DBRS Morningstar may take a negative credit rating action.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Mining Industry (August 16, 2023; https://www.dbrsmorningstar.com/research/419230)

The following methodology has also been applied:
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196)

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 [email protected].

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and credit ratings are under regular surveillance.

DBRS Morningstar 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 [email protected].

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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