CAMECO: Initiation of coverage

12M TP CAD 15.95/share, "BUY" recommendation

Altynay IbraimovaDecember 06, 2016

We initiate coverage of Cameco with a target price (TP) of CAD15.95/share and a BUY recommendation.

Since November last year, the number of the world's operating nuclear reactors has increased by 10, planned reactors – by 2 and reactors under consideration – by 21. This reflects the growth of demand for nuclear energy, and can be expected to resume growing demand for uranium. As a consequence, we expect a rebound in the price of uranium, which is the main catalyst for the share price Cameco. Company ready to respond to market needs due share in the biggest fields, which makes it a key player in the uranium industry and an attractive asset for investment.

Leading supplier of uranium and nuclear fuel processing services. The Canadian company provides 18% of world production, carrying out prospecting in the fields of Canada, the US and Kazakhstan. In Kazakhstan Cameco develops the "Inkay" together with Kazatomprom. Cameco's revenue consists of revenue from uranium production (73%), uranium processing and the provision of fuel services (14%) and from the sale of uranium on the spot market (13%).

Cigar Lake - the growth project. Cameco has a stake in the largest oil fields in Canada, the US and Kazakhstan, with the highest uranium content in the ore, the most promising of which is Cigar lake. Impressive uranium content in the ore with the stated full capacity of about 8.16 mn tonnes allows Cameco to increase the volume of production: for 9M2016 at the Cigar Lake was produced at 88% (yoy), which increased the total production of 6%. The Company plans to increase production at Cigar Lake until reaching full capacity (9 mn. tons of uranium per year, 13% more than in 2015).

Uranium market. In our opinion, the price of uranium reached the bottom and in the future due to the increased demand for uranium from China, India and Russia the price of uranium will rise up. 25% of the expected increase in demand comes from China, which is pursuing an aggressive strategy in the nuclear industry. Today, uranium demand is 63 404 tons per year. This value is the sum of the requirements of 448 commercial nuclear reactors with a total capacity of 2 441 billion. kWt, which cover 11.5% of the world's needs for energy. Today in the world are contructing 58 reactors, 345 reactors are in the development stage and 167 reactors in the planning stage. The "contract" type of market gives support for uranium companies. Uranium supplies are carried out mainly under long-term contracts. Cameco have contracts with a term of 10 years or more, which able to keep the company "afloat" and now serve as a so-called "hedging", providing a constant demand for uranium - the ratio of contracts in the market 40:60.

12M TP CAD15.95/share, BUY recommendation. Based on the analysis of demand, testifying to the need to increase uranium production in the near future, as well as on the analysis of supply, where the uranium market is represented by a small number of companies, including Cameco holds a leading position, we recommend "BUY» Cameco shares with the expected growth potential of 28%.

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