November 25, 2015 Company Update Rob Chang, MBA Associate: Michael Wichterle, MBA, CAIA [email protected][email protected](416) 849-5008 (416) 849-5005 Sales/Trading — Toronto: (416) 363-5757, (866) 442-4485 See disclosure and a description of our recommendation structure at the end of this report. Company profile: Cameco Corporation is a world leader in uranium mining and processing, with additional exposure to fuel trading. Cameco’s uranium mines and projects are situated predominantly in Canada, the U.S., Kazakhstan, and Australia. Equity Research CAMECO CORPORATION Notes from Investor Day: Uncovered Requirements Still the Story; US+$70/lb Needed EVENT Cameco held its annual investor day earlier this week in Toronto. BOTTOM LINE Positive – The tension in the spring continues to increase. We reiterate our Buy recommendation and target price of $26.05 per share. FOCUS POINTS ▪ Term contracting increasing but big uncovered requirements loom – Though still well below the volumes seen in 2005-2010, the amount of contracting has been increasing since 2013. With five weeks remaining in 2015, contracting this year has already surpassed that of 2014, which already surpassed that of 2013. With growing uncovered requirements, Cameco continues to feel optimistic on the future of long term contracting activity. ▪ +$70/lb needed – Cameco noted that some of the >100M lbs U3O8 deposits need +$70/lb to be viable. These deposits are needed for future supply and demand balance. ▪ Restart process slow & steady – Highlighted by the August 2015 restart of the Japanese Sendai 1 reactor, followed by an October restart of Sendai 2, the next reactors to come on line include Takahama 3 & 4 along with Ikata 3. All have already received the necessary NRA approval. ▪ Focus on efficiencies – Going forward, increased production from Cigar Lake (5.0M lbs expected in 2015) and McArthur River/Key Lake (13.9M lbs in 2015) will be achieved due to a nearly complete revitalization at Key Lake (new calciner, scrubbers and electrical upgrades) along with freeze drilling and freeze wall design optimizations at McArthur River. Recommendation: BUY Symbol/Exchange: CCO/TSX; CCJ/NYSE Sector: Metals and Mining All dollar values in C$ unless otherwise noted. Current price One year target: $16.17; US$12.15 C$26.05 Return target 61% Market Capitalization $6.4B Cash on hand $62.5M Yield 2.47% Company Summary Shares O/S (M) 396.6 52-week range $15.64- 23.51 Market cap ($M) $6,421.6 Avg. weekly vol. (000) 4.992 Market float ($M) $6,415.2 Fiscal year-end 31-Dec 2013A 2014A 2015E 2016E Uranium Production (M lbs) 23.6 23.3 27.3 30.5 Revenue ($M) 2,438.7 2,397.5 2,660.8 3,414.5 Operating Cost ($M) 1,832.0 1,759.8 2,024.0 2,271.4 Cash Cost (US$/lb) $21.81 $30.34 $36.77 $28.81 EBITDA ($M) 611.1 748.8 699.9 1,216.2 EPS $1.12 $1.04 $0.71 $1.70 CFPS $1.55 $1.44 $1.30 $3.11 Source: Company Reports and Cantor Fitzgerald Estimates 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 $15.00 $17.00 $19.00 $21.00 $23.00 $25.00 Nov/14 Jan/15 Mar/15 May/15 Jul/15 Sep/15 Volume (M) Price (C$)
See disclosure and a description of our recommendation structure at the end of this report.
Company profile: Cameco Corporation is a world leader in
uranium mining and processing, with additional exposure to fuel trading. Cameco’s uranium mines and projects are situated predominantly in Canada, the U.S., Kazakhstan, and Australia.
Eq
uit
y R
ese
arc
h
CAMECO CORPORATION Notes from Investor Day: Uncovered Requirements Still the Story; US+$70/lb Needed
EVENT
Cameco held its annual investor day earlier this week in Toronto.
BOTTOM LINE
Positive – The tension in the spring continues to increase. We reiterate our Buy recommendation and target price of $26.05 per share.
FOCUS POINTS
▪ Term contracting increasing but big uncovered requirements loom – Though still well below the volumes seen in 2005-2010, the amount of contracting has been increasing since 2013. With five weeks remaining in 2015, contracting this year has already surpassed that of 2014, which already surpassed that of 2013. With growing uncovered requirements, Cameco continues to feel optimistic on the future of long term contracting activity.
▪ +$70/lb needed – Cameco noted that some of the >100M lbs U3O8 deposits need +$70/lb to be viable. These deposits are needed for future supply and demand balance.
▪ Restart process slow & steady – Highlighted by the August 2015 restart of the Japanese Sendai 1 reactor, followed by an October restart of Sendai 2, the next reactors to come on line include Takahama 3 & 4 along with Ikata 3. All have already received the necessary NRA approval.
▪ Focus on efficiencies – Going forward, increased production from Cigar Lake (5.0M lbs expected in 2015) and McArthur River/Key Lake (13.9M lbs in 2015) will be achieved due to a nearly complete revitalization at Key Lake (new calciner, scrubbers and electrical upgrades) along with freeze drilling and freeze wall design optimizations at McArthur River.
Recommendation: BUY
Symbol/Exchange: CCO/TSX; CCJ/NYSE
Sector: Metals and Mining
All dollar values in C$ unless otherwise noted.
Current price
One year target:
$16.17; US$12.15
C$26.05
Return target 61%
Market Capitalization $6.4B
Cash on hand $62.5M
Yield 2.47%
Company Summary
Shares O/S (M) 396.6 52-week range $15.64- 23.51
Market cap ($M) $6,421.6 Avg. weekly vol. (000) 4.992
Source: Company Reports and Cantor Fitzgerald Estimates
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
$15.00
$17.00
$19.00
$21.00
$23.00
$25.00
Nov/14 Jan/15 Mar/15 May/15 Jul/15 Sep/15
Vol
ume
(M)
Pric
e (C
$)
Cameco Corporation November 25, 2015
Rob Chang MBA, (416) 849-5008 2 of 12
TERM CONTRACTING IS INCREASING
Though still well below the volumes seen in 2005-2010 (averaging 150M-250M lbs U3O8), the amount of contracting has been consistently increasing since 2013. With five weeks remaining in 2015, contracting this year has already surpassed that of 2014, which already surpassed that of 2013. As can be seen below in exhibit 1, buyers from Asia are increasingly predominant in the mix.
Exhibit 1. Uranium Term Contracting by Region
Source: Cameco Corporation
Cameco sees the changing composition of demand with Asian buyers forecast to grow to 15% by 2024 from 8% in 2014. As such, demand from the Americas and Europe is expected to decline by to 25% and 22% respectively, from 35% and 34% in 2014. Overall demand is expected to total 230M lbs, a noticeable increase from the 150M lbs in 2014.
As a result of the heavy contracting that was seen between 2005 and 2010, utilities were mostly covered for many years. This resulted in a delay in the demand spike that many (including ourselves) have forecasted. However, this will change as global uncovered requirements are set to grow at a sharp rate as seen in exhibit 2.
Cameco Corporation November 25, 2015
Rob Chang MBA, (416) 849-5008 3 of 12
Exhibit 2. Global Uncovered Uranium Requirements
Source: UxC
In fact, the condensed nature of the heavy contracting activity in 2005-2010 has effectively globally synchronized the demand cycles of utilities. As a group, their uranium requirements were well covered for years. But the graph above clearly shows that as a group their uranium requirements are becoming increasingly uncovered. Cameco forecasts demand of 230M lbs U3O8 by 2025.
For 2016 Cantor Fitzgerald Canada Research estimates global uranium demand for 2017 and 2018 at 198M lbs and 201M lbs U3O8, respectively. Based on the graph above, it appears about 25M lbs U3O8 is uncovered as of 2017 and about 40M lbs U3O8 as of 2018. This translates into uncovered amounts of 13% and 20% for the respective years – with the uncovered portion growing at a rapid rate in the following years. For 2020 we forecast demand of 228M lbs versus a shortfall of 75M lbs, or 33%. From our recent conversations with Cameco management, they believe utilities become “uncomfortable” when the uncovered figure reaches 20%.
This uncovered requirement situation is the primary basis for our belief that there will be a violent increase in the price of uranium when utilities step in as a group (again) to cover their needs. Since the uncovered amount grows from 13% to 20% from 2017-18 and proceeds to widen as the years progress.
Items to keep in mind with respect are the following:
It typically takes three years for U3O8 to be converted into reactor-ready fuel assemblies.
While there is an indeterminate amount of excess inventory in the market, it is a finite amount and we estimate primary supply as of 2015 to be 156M lbs versus 2015 demand of 179M lbs.
A substantial amount of current producers are producing only into long term contracts at prices north of US$50/lb. These are the same contracts that are rolling off that are creating the uncovered
Cameco Corporation November 25, 2015
Rob Chang MBA, (416) 849-5008 4 of 12
requirements for the utilities. We believe many operations are uneconomic at the current US$44/lb term contract price and additional shutdowns will occur until the price of uranium moves higher.
+$70/LB URANIUM PRICE NEEDED
During the panel discussion, Cameco management noted that a uranium price of higher than US$70/lb is needed for many of the 100M lbs U3O8 deposits to be put into production. They noted that Cameco’s Kintyre project’s break even number was US$67/lb in 2012.
Cantor Fitzgerald Canada Research (“CFCC”) believes that these +100M lbs U3O8 uranium deposits are necessary for global supply and demand to be in balance when we factor in the growth of nuclear power (in particular from countries such as China, India, and Russia). There simply is not enough pipeline production to satisfy the upcoming demand that does not involve production from the large mines of this size.
Cameco management noted that in a world where utilities are okay with satisfying near term requirements by purchasing pounds in the cheaper spot market, these utilities are effectively deferring the long-term security of supply transaction at higher prices. However, someone needs to step up and ensure that the +100M lbs deposits are developed or there will be a large shortfall – CFCC believes that the shortfall is now inevitable based on the typical development timelines of +10 years for a uranium mine.
JAPANESE RE-START PROCESS SLOW BUT STEADY
Highlighted by the August 2015 restart of the Japanese Sendai 1 reactor, followed by an October restart of Sendai 2, the next reactors to come on line include Takahama 3 & 4 along with Ikata 3. All have already received the necessary NRA approval.
Duncan Hawthorne, President and CEO of Bruce Power, noted that about 40% of the reactors in Japan can easily pass the safety checks. The key issue for all reactors is prefecture relations since prefecture approval is required for abnormal operations.
Cantor Fitzgerald Canada Research continues to forecast a total of seven restarted reactors by the end of 2016.
Cameco Corporation November 25, 2015
Rob Chang MBA, (416) 849-5008 5 of 12
Exhibit 3. Japanese Restart Timeline Since Fukushima
Source: Cameco Corporation
FOCUS ON EFFICIENCIES
Recall that updated FY 2015 guidance was provided during the Q3/15 earnings call. FY 2015 guidance increased and now stands at 27.3M lbs. Higher production from Cigar Lake (5.0M lbs expected in 2015) and McArthur River/Key Lake (13.9M lbs in 2015) will be achieved due to a nearly complete revitalization at Key Lake (new calciner, scrubbers and electrical upgrades) along with freeze drilling and freeze wall design optimizations at McArthur River. A modified mine layout plan has been put forward for Cigar Lake. In addition to increased water management, (present capacity to handle 150% maximum estimated outflow with 2,500m3/hr pumping capacity) ground freezing, and a new mining plan to reach the 480m level, Cameco remains confident at being able to achieve the stated goal of 18.0M lbs annually by 2018.
Exhibit 4. Modified Cigar Lake Mine Layout
Source: Cameco Corporation
Cameco Corporation November 25, 2015
Rob Chang MBA, (416) 849-5008 6 of 12
Recall that at McArthur River and Key Lake, the CNSC (“Canadian Nuclear Safety Commission”) has already approved an increase in Cameco’s licensed production limit to 25M lbs per year (100% basis). The planned mine production for FY 2015 is 19.6M lbs. At Key Lake, commissioning of the new calciner is underway and expected to be complete by year end.
Exhibit 5. Quarterly Uranium Production & Guidance (Cameco’s share)
Source: Cameco Corporation
SIGNS OF THE TURN
Cameco has been noticeably neutral to bearish on the uranium sector for years to the point where we look at Cameco’s statements in the same way many look at the U.S. Federal Reserve’s comments – scanning for incremental changes in tone to glean a sense of underlying direction. This conflicts with its clear long term bullish outlook and often leaves investors confused as to what Cameco is really thinking.
Perhaps to address this, management offered up a list of four items it looks for to determine the strength of the market.
Exhibit 6. Evaluation of Market Strength
Source: Cameco Corporation
(M lbs) Q1/15 Q2/15 Q3/15 FY2013 FY2014 FY2015e
McArthur River/Key Lake 2.7 2.9 3.9 14.1 13.3 13.7
Rabbit Lake 0.9 0.2 1.1 4.1 4.2 3.9
Smith Ranch-Highland 0.5 0.4 0.3 1.7 2.1 1.4
Crow Butte 0.1 0.1 0.1 0.7 0.6 0.3
Inkai 0.6 0.6 1.0 3.0 2.9 3.0
Cigar Lake 0.3 1.2 1.8 0.2 5.0
Total 5.1 5.4 8.2 23.6 23.3 27.3
Cameco Corporation November 25, 2015
Rob Chang MBA, (416) 849-5008 7 of 12
NOTABLE TIDBITS
Grant Isaac has assumed the responsibilities of Marketing & Sales as well as NUKEM, which were previously under the management of the now departed Ken Seitz. It appears evident that Grant is the heir apparent for the CEO role at Cameco whenever Tim Gitzel decides to step down.
On China, management noted that the country’s appetite for nuclear power remains strong as electricity needs remain and pollution control still an issue.
o It was noted that China is still looking to get into Canada.
o China produces about 2.0-3.0M lbs U3O8 domestically on an annual basis.
o China’s decision to develop Husab in Namibia despite the high cost of production (CFCC estimates that costs at Husab are north of US$70/lb) is indicative of the country’s long-term strategy to secure uranium supplies.
With respect to underfeeding, management noted that on a steady state basis it expects 2M lbs of U3O8 annually from underfeeding sources. Due to SWU overcapacity that figure is now 4.0-6.0M lbs annually with an additional 8.0M lbs from Russia (total 12.0-14.0M lbs U3O8).
o For 2016 Cantor Fitzgerald Canada Research conservatively estimates underfeeding to contribute 15.5M lbs of U3O8 into the market.
SWU market is currently in overcapacity with enough to process 200M lbs annually.
Not all western nuclear utilities are the same
o Merchant Market utilities are struggling to survive
o Regulated Market utilities are building four new reactors
CRA dispute: A court date has been set for September 2016
RECOMMENDATION
We are maintaining our Buy recommendation and target price of $26.05 per share. Our target price is based on an 8.7x multiple to our forward cash flow estimate of ($2.98/share).
Note that historically, Cameco has traded at an average multiple of 12.6x-13.2x with 12.6x being the average in its post-Fukushima life. Currently, Cameco is trading at a 5.4x multiple to our forward cash flow estimate.
Cameco Corporation November 25, 2015
Rob Chang MBA, (416) 849-5008 8 of 12
Exhibit 7. Historical Price to Forward Cash Flow
Source: Cantor Fitzgerald Canada Research
Exhibit 8. Cameco NAV
Source: Cantor Fitzgerald Canada Research
Exhibit 9. Uranium Price History and Forecast
Source: Cantor Fitzgerald Canada Research and Ux Consulting
Kintyre open pit 4,315.40 0.58 38.70 950.20 0.46 6.70 45.40
Total 63,805.40 465.10 33,308.10 244.00 246,556.30 286.98 996.08
Proven & Probable Measured & Indicated Inferred
Cameco Corporation November 25, 2015
Rob Chang MBA, (416) 849-5008 12 of 12
DISCLAIMERS AND DISCLOSURES
Disclaimers
The opinions, estimates and projections contained in this report are those of Cantor Fitzgerald Canada Corporation. (“CFCC”) as of the date hereof and are subject to change without notice. CFCC makes every effort to ensure that the contents have been compiled or derived from sources believed to be reliable and that contain information and opinions that are accurate and complete; however, CFCC makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to Cantor that is not herein.
This report is provided, for informational purposes only, to institutional investor clients of CFCC, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. This report is issued and approved for distribution in Canada, CFCC, a member of the Investment Industry Regulatory Organization of Canada ("IIROC"), the Toronto Stock Exchange, the TSX Venture Exchange and the CIPF. This report is has not been reviewed or approved by Cantor Fitzgerald USA., a member of FINRA. This report is intended for distribution in the United States only to Major Institutional Investors (as such term is defined in SEC 15a-6 and Section 15 of the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a major institutional investor. Major Institutional Investors receiving this report should effect transactions in securities discussed in the report through Cantor Fitzgerald USA.
Non US Broker Dealer 15a-6 disclosure: This report is being distributed by (CF Canada/CF Europe/CF Hong Kong) in the United States and is intended for distribution in the United States solely to “major U.S. institutional investors” (as such term is defined in Rule15a-6 of the U.S. Securities Exchange Act of 1934 and applicable interpretations relating thereto) and is not intended for the use of any person or entity that is not a major institutional investor. This material is intended solely for institutional investors and investors who CFCC reasonably believes are institutional investors. It is prohibited for distribution to non-institutional clients including retail clients, private clients and individual investors. Major Institutional Investors receiving this report should effect transactions in securities discussed in this report through Cantor Fitzgerald & Co. This report has been prepared in whole or in part by research analysts employed by non-US affiliates of Cantor Fitzgerald & Co that are not registered as broker-dealers in the United States. These non-US research analysts are not registered as associated persons of Cantor Fitzgerald & Co. and are not licensed or qualified as research analysts with FINRA or any other US regulatory authority and, accordingly, may not be subject (among other things) to FINRA’s restrictions regarding communications by a research analyst with a subject company, public appearances by research analysts, and trading securities held by a research analyst account.
Potential conflicts of interest
The author of this report is compensated based in part on the overall revenues of CFCC, a portion of which are generated by investment banking activities. CFCC may have had, or seek to have, an investment banking relationship with companies mentioned in this report. CFCC and/or its officers, directors and employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. Although CFCC makes every effort possible to avoid conflicts of interest, readers should assume that a conflict might exist, and therefore not rely solely on this report when evaluating whether or not to buy or sell the securities of subject companies.
Disclosures as of November 25, 2015
CFCC has not provided investment banking services or received investment banking related compensation from Cameco within the past 12 months.
The analysts responsible for this research report have, either directly or indirectly, a long or short position in the shares or options of Cameco.
The analyst responsible for this report has visited the material operations of Cameco. No payment or reimbursement was received for the related travel costs.
Analyst certification
The research analyst whose name appears on this report hereby certifies that the opinions and recommendations expressed herein accurately reflect his personal views about the securities, issuers or industries discussed herein.
Definitions of recommendations
BUY: The stock is attractively priced relative to the company’s fundamentals and we expect it to appreciate significantly from the current price over the next 6 to 12 months.
BUY (Speculative): The stock is attractively priced relative to the company’s fundamentals, however investment in the security carries a higher degree of risk.
HOLD: The stock is fairly valued, lacks a near term catalyst, or its execution risk is such that we expect it to trade within a narrow range of the current price in the next 6 to 12 months. The longer term fundamental value of the company may be materially higher, but certain milestones/catalysts have yet to be fully realized.
SELL: The stock is overpriced relative to the company’s fundamentals, and we expect it to decline from the current price over the next 6 to 12 months.
TENDER: We believe the offer price by the acquirer is fair and thus recommend investors tender their shares to the offer.
UNDER REVIEW: We are temporarily placing our recommendation under review until further information is disclosed.
Member-Canadian Investor Protection Fund.
Customers' accounts are protected by the Canadian Investor Protection Fund within specified
limits. A brochure describing the nature and limits of coverage is available upon request.
