DBRS Comments on Further Delays at Cameco’s Cigar Lake Project

DBRS notes that Cameco Corporation (Cameco or the Company) has announced further delays and potential cost increases at its 50%-owned Cigar Lake mine development project in northern Saskatchewan. DBRS considers the Cigar Lake development a key component of Cameco’s future uranium production base, but the mine development represents a highly technically challenging project that has been characterized in the past by development delays and significant cost overruns. The current delays are a further disappointment and come on the heels of Cameco’s August 1, 2013, announcement that it expected its share of the total capital cost for the project to increase between 15% and 25% from the prior estimated cost of $1.1 billion. In addition, Cameco’s financial and operating results for the first half of 2013 were poor, as has been the recovery of the uranium market since the serious nuclear accident at the Fukushima Daiichi power plant in Japan in 2011.

DBRS remains concerned about the development issues at Cigar Lake and the slow uranium market recovery following Fukushima. As indicated in DBRS’s March 13, 2013, rating report on Cameco, “Further significant setbacks at Cigar Lake, or a prolonged slump in the uranium market, could result in a downgrade of Cameco’s ratings.” Accordingly, DBRS intends to closely monitor the progress on these issues generally and in the Company’s financial results in the second half of 2013.

Cameco’s financial and operating results for the first half of 2013 were disappointing, albeit somewhat expected due to the timing of uranium shipments and planned maintenance activities. Earnings from operations were down 24% in the first half of 2013 compared to the first half of 2012, in part due to low uranium deliveries and poor results from its interest in its Bruce Power L.P. (Bruce Power) unit following low operating rates due to planned maintenance. Decreased H1 2013 operating cash flow of $199 million (net of interest paid),, was 16% below that in H1 2012 and, combined with high additions to property, plant and equipment ($339 million) and the acquisition of NUKEM Energy GmbH (approximately $250 million, including debt net of cash acquired) and dividends ($79 million), resulted in an increase in net debt of $454 million for the first half of 2013. Although the Company’s gross debt leverage remains solid at 21%, its liquidity has decreased, with cash and short-term investments declining from $1.2 billion at the end of 2011 to $332 million at June 30, 2013, and net debt moving from a net cash position at the end of 2011 to net debt of $1.0 billion at the end of the second quarter 2013.

Cameco anticipates higher uranium shipments in the second half of 2013 compared to the first half of the year due to the timing of contract deliveries. In addition, improvements at Bruce Power are also expected, with major planned maintenance now complete. Both of these will be necessary to stabilize the growth in the Company’s net debt, barring other funding activities.

The serious nuclear accident at the Fukushima Daiichi power plant in Japan in 2011 weakened near-term markets for uranium and has delayed an expected renaissance for nuclear power generation as a low carbon-emitting option for electricity generation, particularly in Asia. The return to service of Japan’s nuclear fleet has been a slow process and, although progress is being made with the regulatory rules for return now better defined, the timing and extent of restarts remains uncertain, removing an important consumer from the uranium market. On a more positive note, the long-expected removal from the market at the end of 2013 of 24 million pounds per year of secondary uranium supplies under the Highly Enriched Uranium (HEU) Agreement to recycle weapons-grade uranium is expected to tighten the current weak market conditions.

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

The applicable methodologies are Rating Companies in the Mining Industry (June 2011) and Rating Companies in the Industrial Products Industry (June 2011), which can be found on our website under Methodologies.