СAMECO: Revision of the target price

Altynay IbraimovaJanuary 18, 2017

Since our recommendation to buy in December 2016, shares of Cameco increased by 34.59%, and reached our target level of CAD15.95/share. The price of Cameco shares increased after rise of uranium price due to Kazakhstan's plans to cut uranium production by 10%. Due to the high volatility of the uranium market since the beginning of the year, we have revised the forecast income of the NUKEM segment, which is engaged in purchase and sale of uranium on the spot market and whose profits depends on uranium prices fluctuations. In connection with the revenue forecast growth from NUKEM, we raise our target price on shares of CCO CN to CAD20.11/share and maintain our "Buy" recommendation.

Uranium production planned reduction. In connection with the glut of the uranium market, the national operator of the Republic of Kazakhstan Kazatomprom announced a planned reduction of volumes of uranium mining in the country by about 10% in 2017. Kazatomprom plans to cut more than 2 ths tons of uranium from the planned production of 2017, representing 3% of the total world uranium production. Recall that Kazakhstan is a leading uranium producer in the world with a share of 39% of the total world production. Uranium production in Kazakhstan is carried out by subsidiaries and joint ventures of Kazatomprom together with foreign partners, including Cameco. In connection with the announced reduction of production, the price of uranium on the spot market increased by 10% to 24.25 / lb that day. We believe that the price recovery will be gradual, since uranium is traded mainly through long-term contracts. The main driver of growth in the long term remains an increase in uranium demand from China, India and Russia.

Higher volumes on the market due to the spread. Cameco's revenue is composed mainly from the sale of uranium (73%), fuel services (14%) and trade of uranium on the spot market (13%), perfomed by the NUKEM segment. Reduced production in Kazakhstan by 10%, in our opinion, will not have a meaningful impact on Cameco, as long-term contracts involve pre-specified volumes. At the same time, we expect that the volume of transactions on the spot market due to the expected reduction in uranium production will be higher, which will lead to an increase in revenues in the segment of NUKEM.

We increase our 12M TP to CAD20.11/share, preserving recommendation to BUY. Based on the possibility of increasing revenue due to the anticipated increase in the volume of purchase and sale of uranium on the spot market, triggered by the plans of Kazatomprom, and also considering that uranium market is represented by a small number of companies, including Cameco, which holds a leading position, we reiterate our "BUY" recommendation for the shares of Cameco.

Revision of the target price. In our model, we have revised the forecast in terms of the trade of the uranium on the spot market and assumed the growth of an average of 1% against a decline expected earlier. According to our new estimates, the share of revenues from NUKEM in total revenue in 2017-22 will vary between 9-10% against 4-5% previously, which allows us to raise our target price. Thus, based on the weighted average cost of capital of 10.66%, and long-term cash flow growth rate of 1%, we have increased the estimated value of one share to 20.11 CAD. Our target price implies an upside potential of 17% from the current price.

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