DBRS Confirms Cameco Corporation

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Debt rating of Cameco Corporation (Cameco or the Company) at BBB (high) and the Commercial Paper rating at R-2 (high). All trends are Negative. The primary reason for the Negative trends is the ongoing weakness in uranium prices, as spot uranium prices are currently tracking approximately 3% lower through the end of April 2018, compared with 2017. Given that only eight Japanese reactors are currently operating, of which three are temporarily idled (two of which should restart after completing maintenance), and only one more is expected to restart in the near term, DBRS no longer expects the timely and orderly restart of the Japanese nuclear fleet to provide the catalyst necessary to cause spot uranium prices to strengthen in the near term. As a result, the continued weakness in spot prices means that utility customers currently have little incentive to enter into long-term contracts with Cameco (DBRS notes that Ux Consulting Company, LLC estimates that only about ten million pounds of long-term contract volumes were signed in the first quarter of 2018, compared with estimates as at December 31, 2017, of approximately 730 million pounds of uncovered demand over the next ten years) at meaningfully higher prices and thus, as described below, Cameco’s earnings are currently expected to increase only modestly.

In November 2017, Cameco announced a ten-month suspension of production at its McArthur River/Key Lake operations that began last February that is expected to last until the end of November 2018 (please refer to our DBRS comment dated November 20, 2017 for additional details). As part of this suspension, Cameco agreed to loan its partner Orano, uranium from its inventory to replace Orano’s share of McArthur River’s production in 2018, which is expected to total 5.4 million pounds. As a result, Cameco now expects to deliver approximately 32 million to 33 million pounds of uranium this year not including the Orano-loaned material and has given strong signals that it will use spot market purchases to make a portion of these deliveries to ensure that its inventory levels remain manageable and geographically balanced. Depending upon the depth of the spot market, spot uranium prices could react positively to any significant purchases by Cameco and DBRS will continue to monitor the situation and its impact on the term-contracting market.

For 2018, DBRS expects the Company’s key metrics to modestly improve, mainly driven by 10% higher Canadian dollar uranium price realizations partially offset by 4% lower uranium sales volumes, but remain similar to 2017. For 2018, the Bloomberg consensus spot price forecast is USD 39.36 per pound of uranium (as of May 10, 2018) which DBRS expects to translate into average price realizations of approximately USD 43.00 or $54.38 per pound of uranium under Cameco’s portfolio of long-term contracts. At these price levels, DBRS expects that Cameco’s key metrics should remain in the BBB range in 2018.

Assuming the $499 million in debt maturing in September 2019 is repaid and not refinanced, the Company’s 2019 metrics are expected to materially improve to the “A” range and could be supportive of a positive rating action if uranium prices also improve in response to increased spot market activity. Conversely, partial or no debt repayment or a lack of price response that results in ongoing downward pressure on EBITDA and operating cash flow could result in a negative rating action.

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

The principal methodologies are Rating Companies in the Mining Industry (August 2017) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2018), which can be found on dbrs.com under Methodologies.

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.

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