Morningstar DBRS Confirms Credit Ratings on Cameco Corporation at BBB and R-2 (middle) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Cameco Corporation's (Cameco or the Company) Issuer Rating and Senior Debt credit rating at BBB and the Commercial Paper credit rating at R-2 (middle). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations are supported by Cameco's (1) ramp up 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 environment for long-term uranium pricing, which has increased by 132% since the beginning of 2021.

CREDIT RATING DRIVERS
Morningstar DBRS expects the Company's key metrics to moderately improve in 2024 compared with 2023 as it pays off the term debt associated with the acquisition of its 49% stake in Westinghouse Electric Company LLC (Westinghouse). We also expect the Company's credit metrics to improve further in 2025 as the Company continues to pay down the remainder of its term debt, which along with the current positive pricing environment in the uranium sector, may lead to a positive credit rating action. In particular, Morningstar DBRS could upgrade the credit ratings if key credit metrics improved to and were maintained as forecast at a level commensurate with an "A" credit rating (i.e., EBITDA-to-interest of around 10.0x). That said, if other possible mine restarts similar to McArthur River cause material pressure on uranium prices and utilities limit contracting volumes, Morningstar DBRS may take a negative credit rating action.

EARNINGS OUTLOOK
For 2024, Morningstar DBRS expects uranium production of approximately 22 million pounds (lbs) triuranium octoxide (U3O8) comprising 10 million lbs U3O8 from Cigar Lake and 12 million lbs U3O8 from McArthur River/Key Lake, mostly in line with management guidance based upon Cameco's ownership of the Cigar Lake JV and McArthur River/Key Lake (54.5% and 69.8% ownership, respectively). The Company has the right to purchase its share of 2024 production, which we estimate to be about 4.2 million lbs U3O8, from JV Inkai at a discount from prevailing spot prices to deliver against its contractual commitments. We expect Cameco to generate EBITDA of between $425 million and $475 million in 2024. Our lower EBITDA forecast relative to the prior year is mainly due to higher costs, which have negatively impacted companies in the mining sector.

FINANCIAL OUTLOOK
In 2024, Morningstar DBRS expects Cameco to generate a net free cash flow surplus (i.e., after plant, property, and equipment spending, dividends, and noncash changes to working capital) of between $425 million and $475 million, including cash dividends from JV Inkai.

CREDIT RATING RATIONALE
Cameco's business risk profile is assessed in the middle of the BBB category based on the Company's robust reserves, low operating cost structure, and position as one of the largest uranium producers in the world.

Cameco's key credit metrics, with the exception of debt-to-EBITDA, deteriorated in the last 12 months June 2024 with the EBITDA-to-interest metric declining to the BB category due to the increase in debt related to the Westinghouse acquisition. The adjusted cash flow-to-debt and debt-to-capital metrics deteriorated within the "A" and AA categories, respectively. 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 36% of global uranium enrichment capacity, 22% of uranium conversion supply, 12% of 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. As a result, the Company's key credit metrics are expected to continue to improve in 2024 as the McArthur River/Key Lake operations provides lower-cost uranium to replace purchased material from the spot market.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors 
In the analysis of Cameco, the relative weighting of the BRA factors was approximately equal. 

(B) Weighting of FRA Factors 
In the analysis of Cameco, the relative weighting of the FRA factors was approximately equal. 

(C) Weighting of the BRA and the FRA 
In the analysis of Cameco, the BRA carries greater weight than the FRA. 
 
Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology: Global Methodology for Rating Companies in the Mining and Forest Products Industries (June 27, 2024), https://dbrs.morningstar.com/research/435122.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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