Cameco: 3Q2017 results overview

Reduction of 12М TP to CAD14.39/share, keeping the BUY recommendation.

Altynay IbraimovaNovember 10, 2017

Considering the current situation on the uranium market, we are observing more moderate recovery of prices, compared to our expectations, which is observed in the results of Cameco 9М2017. However, despite the uranium market stagnation, we stick to optimistic expectations towards the uranium prices for the coming 5 years. Our expectations are backed up by quite impulsive growth of demand for uranium from China (+55% yoy) for the last year and high probability of repeated reduction of uranium mining by Kazakhstan. The decline of our target price to CAD14.39/share considers the correction of production volumes forecast, whereas potential growth of 22% reflects our optimism towards higher uranium prices in the future. Due to this, we maintain our “Buy” recommendation for the shares of Cameco.

Long-term demand for uranium stimulated by China. Today, China accounts for 36% of all reactors under construction and more than 40% of all reactors under consideration globally. The country provides 13% out of world demand in uranium, enhancing it by 55% for the last year.  We note an increase in the nuclear potential of China as a sign of shortage of uranium on the global market, which serves as a key driver for increase in prices of both uranium and shares of Cameco.

Short-term support due to reduced production. In October this year, the Ministry of Energy of the Republic of Kazakhstan announced the possibility of further reduction of uranium production. We believe that the adoption of an appropriate decision, as a minimum, will support prices at current levels. Based on the market reaction at the beginning of the year, when the announcement of a 10% reduction in production by Kazakhstan strengthened the quotes of uranium and Cameco shares by 18%, we point to the possibility of short-term growth of Cameco shares. In addition, Cameco announced a temporary suspension of production at McArthur River / Key Lake, which is scheduled for late January 2018 and will last for 10 months. Given that the uranium market is represented by a small number of companies, among which Cameco is the largest producer, the partial freezing of production by the Company also gives signals to the market about the reduction of uranium reserves. In turn, noting that Cameco has contracts for the sale of 28-30 million pounds of uranium in 2018, we see no threat to the Company's revenues, and on the contrary, we consider measures to reduce costs as positive.

9М2017 results made changes to future forecasts. The company reduced the operating indicators on one of its main fields McArthur River/Key Lake (-11%), which together with the decrease of average sales price affected the reduction revenues from sales of uranium (-16% yoy). Despite the low volume, earnings in the segment of fuel services showed a decrease by less than 6% yoy due to higher realization price (+19% yoy). No changes occurred in NUKEM, low average realization price (-32% yoy) was fully compensated by higher sales volume (+50%). The company managed to reduce the net cost by 7% by optimization of unit expenses for uranium production. Based on the results of 9M2017, we lowered our forecasts for mining at Mc Arthur River, Smith Ranch-Highland in average by 20% and corrected our expectations in income for 2017 down to $1 707mn (-8%). We refreshed the forecasted uranium prices for 2018-2022 by lowering CAGR from 14% to 10%, considering the prices expected by S&P Global Market Intelligence, whose prerequisites for uranium market strengthening are fair, in our opinion. We consider the decision of Cameco to reduce the size of annual dividend in 2018 to $0.32/share by $0.08/share as neutral, noting the enhancement of cash flows to be higher priority for the Company experiencing tough times.

Reduction of 12М TP to CAD14.39/share, keeping the Buy recommendation. We tempered our expectations towards operational parameters and corrected our forecasted prices for uranium, which led to decrease in target price by 22% to CAD14.39/share. Considering the potential growth of 22%, we keep our recommendation “to Buy” Cameco shares.  We believe that steps undertaken by Kazakhstan towards cutting back uranium production will continue and overlapping stimulation of demand for uranium from China will serve as a main driver for growth of Cameco share prices.

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