Cameco: 2017 results overview

Decrease of 12M TP to CAD13.82/share, Buy recommendation

Altynay IbraimovaMarch 05, 2018

Despite a restrained approach in forecasting future cash flows of Cameco, our new 12M target price of CAD13.82/share exceeds the current price by 20%. We note the reduction of carbon dioxide emissions as a rather serious factor favoring nuclear power and capable of tempering the outbreak of anti-nuclear sentiments in the society. We estimate the achievable goal of the major producers in the face of Kazatomprom and Cameco to balance the uranium market and bring prices to the profitable levels for uranium mining companies. We maintain our Buy recommendation on Cameco.

Cameco's results for 2017 are better than expected, but mixed forecasts restrain optimism.The Company's revenue decreased by 11% to $2157mn in 2017, due to a decrease in revenues from the sale of uranium (-8% yoy), fuel services (-2% yoy) and revenues in the NUKEM segment (-18 % yoy). Low uranium prices continue to exert major pressure on the revenue decline. The cost of production decreased by 13% to $1,721mn due to lower costs for uranium production (-7% yoy) and fuel costs (-3% yoy). The company's operating loss narrowed to $128mn, however, the net loss increased more than threefold and amounted to $205mn due to the negative exchange rate difference and a low recovery in the profit tax. 2017 results exceeded our expectations, while the Company confirmed its weak production forecasts at McArthur / Key Lake, due to which the 2018FY production will show a decline. On the other hand, the Company has reserves to meet obligations under long-term contracts.

The focus on nuclear power is increasing. The uranium demand from the US, France and China continues to dominate. The largest number of reactors under construction is still in China, where more than a third of all nuclear reactors under construction in the world are concentrated. The problem of air pollution, which is becoming more and more widespread in the world, is most relevant for a multi-populated China, whose long-term goal is to increase the power of nuclear electricity to 58 GW by 2020 at the current 35 GW. The calculations by the International Energy Agency (IEA) also confirm the need to reduce air pollution, and therefore it is expected that the generation of electricity from nuclear fuel by 2040. will double. The more ambitious scenario of the World Nuclear Association (WNA) involves providing a quarter of the world's electricity through nuclear fuel, which currently stands at only 11%.

Conservative forecasts for 2018-2023. Our forecasts for sales are less optimistic compared to the Company expectations and are limited to revenue in CAD1344mn in 2018, followed by uniform growth during 2019-2023. We pledge an increase in unit cost by 5% annually during 2019-2023 and lower expectations for average uranium prices, based on Bloomberg's consensus forecast and the historical sensitivity of Cameco's contract prices to spot prices (40:60).

Decrease of 12M TP to CAD13.82/share, Buy recommendation. The new discount rate declined from the previous 12.3% to 11.2%, partially offsetting the decline in forecasts for the calculation of the new target price - CAD13.82 / share - assume a 20% upside potential and confirm our Buy recommendation for Cameco shares.

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