Clock - Uranium Supply Crunch and Critical ... - Andrew Johns

Uranium Canada Research | Page 25 of 87Cameco Corp. July 26, 2012CCO-TSX | CCJ-NYSEDavid Sadowski | 604.659.8255 | david.sadowski@raymondjames.caMining | UraniumTop Dog Should Go ShoppingEventWe are resuming research coverage of Cameco Corp. with a $28.00 target andan Outperform rating.RecommendationWe recommend Cameco on its top producer status, low cost organic growth insafe jurisdictions, healthy balance sheet, vertical integration, and dividend.AnalysisTop Dog. In 2011A, Cameco had the highest production of publicly-listeduranium miners, with 22.4 Mlbs U3O8 coming from a suite of five high-qualitymines in largely low-risk jurisdictions. The company’s purchase program, whichincludes the low cost HEU agreement, elevated sales to 32.9 Mlbs. We estimatecash costs of US$25/lb were in the lowest quartile globally.Low Cost Production Growth. Guidance is to reach 40 Mlbs/year by 2018 viaexpansion at producing mines and development of new ones, including 50%-owned Cigar Lake, Saskatchewan, the biggest undeveloped mine in the world at18 Mlbs/year nameplate. We see timely start-up in 4Q13E as critical for Cameco.Inkai (Kazakhstan), Millennium (Canada), and US ISR should also bolster growth.At ramped rates, we see overall cash costs remaining low at US$31/lb.Lower Risk Exposure. We view Cameco as one of the lowest-risk ways to gainexposure to uranium. Fuel services and electricity business arms contributed 20%of gross profit in 2011A and the company targets a 40:60 fixed to market-relatedcontract pricing mix, a higher ratio than its peers. These aspects reduce thecompany’s exposure to any decrease in uranium prices, albeit, by the samemeasure, dampen the impact of price increases. Since Jan-2008, Cameco shareshave traded at a 0.56 correlation with U3O8 spot prices (vs. Uranium One at 0.78).M&A Could Solve Muted Earnings Growth. Expiry of the lucrative Russian HEUdeal in 2013 and likely protracted Cigar ramp-up put the company at risk oflimited growth in medium-term earnings, in our view; our 2013E – 2015E EPSare C$1.73, C$1.69, C$1.62. However, with C$4.1 bln in available capital,including a C$1.0 bln shelf filing in May 2012, we think Cameco may be gearingupfor an acquisition that could solve this problem.ValuationOur $28.00 target is based on a 50/50 weighting of (i) a 1.3x P/NAV applied tothe project component of our C$19.50 NAVPS (8%) and (ii) a 14x P/CF appliedto our C$2.26 2013E CFPS. Please see our Valuation & Recommendationsection for further details.EPS 1Q 2Q 3Q 4Q Full Revenue NAVPSMar Jun Sep Dec Year (mln)2011A C$0.23 C$0.17 C$0.26 C$0.62 C$1.28 C$2,384Old 2012E 0.31A NA NA NA NA NA NANew 2012E 0.31A 0.27 0.29 0.38 1.24 2,372 19.50Old 2013E NA NA NA NA NA NA NANew 2013E 0.36 0.45 0.41 0.51 1.73 2,653 NASource: Raymond James Ltd., Thomson OneCompany ReportRating & TargetOutperform 2Target Price (6-12 mos): Old: UR New: C$28.00Current Price ( Jul-18-12 )C$22.34Total Return to Target 25%52-Week RangeC$27.05 - C$17.25Market DataMarket Capitalization (mln)C$8,830Current Net Debt (mln) C$214Enterprise Value (mln)C$9,044Shares Outstanding (mln, basic) 395.310 Day Avg Daily Volume (000s) 901Dividend/YieldC$0.40/1.8%Key Financial Metrics2011A 2012E 2013EP/E17.4x 18.0x 12.9xP/NAV1.2x NACFPSOld C$1.94 NA NANew C$1.94 C$1.67 C$2.26Working Capital (mln)Old C$1,877.3 NA NANew C$1,877.3 C$1,445.8 C$1,645.7Capex (mln)Old C$(647.2) NA NANew C$(647.2) C$(635.3) C$(485.9)Long Term Debt (mln)Old C$932.3 NA NANew C$932.3 C$907.9 C$857.9Production (Mlbs)Old 22.4 NA NANew 22.4 21.8 22.6Cash Costs (US$/lb)Old US$25.0 NA NANew US$25.0 US$28.8 US$30.1Company DescriptionOne of the largest, highest-grade & lowest-costuranium producers globally. Cameco is verticallyintegrated via fuel services and electricity generation,adding exposure to the recovering nuclear industry.Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2