Morningstar Equity Research $29 targetCameco Corp CCO (XTSE) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Dividend Yield % Market Cap (Bil) Industry Stewardship 14 Apr 2015 14 Apr 2015 14 Apr 2015 14 Apr 2015 QQQQ 18.99 CAD 29.00 CAD 0.65 2.11 7.52 Industrial Metals & Minerals Standard
Daniel Rohr, CFA, Analyst, 15 April 2015 Investment Thesis Uranium miner Cameco is a rare growth story in a mining industry that is likely to see profit expansion harder to come by amid China's structural slowdown. We expect Cameco's annual uranium production, 23.3 million pounds in 2014, to rise more than 50% by 2019. The new volume will be low cost, with the majority coming from one of the highest-grade deposits in the world. Fulfillment of Cameco's growth plans will hinge foremost on the successful delivery of Cigar Lake (50% ownership stake), a greenfield project situated close to Cameco's McArthur River mine in Saskatchewan. Cigar Lake shares McArthur's attributes: a stellar ore grade, large scale, long life, and an attractive operating cost profile. Production began in 2014, with annual output ramping up to target capacity by 2018. Uranium prices remained weak in 2014 and into 2015 due to the current supply glut caused by delayed Japanese reactor restarts. This situation won't last much longer. We expect new reactor capacity to drive the strongest uranium demand growth in decades. A quadrupling of China's reactor fleet headlines this growth. New reactors in India, South Korea, and Russia as well as restarts in Japan lend additional support. We expect global uranium demand to rise 40% by 2025. Annual growth of 2.8% might not sound like a lot, but it is massive for a commodity that has seen precious little demand growth since the 1980s. The mined supply of uranium will struggle to keep pace amid rising demand and falling secondary supplies. Low uranium prices since Fukushima have left the project cupboard bare. We expect a cumulative supply deficit to emerge by 2021. These shortfalls should begin to affect price negotiations in 2017, since utilities tend to secure supplies three to four years before actual use. We estimate prices must rise from $50 a pound to $75 to encourage enough new supply. Daniel Rohr, CFA, Analyst, 09 February 2015 Analyst Note The long wait for better uranium prices cast a shadow on an otherwise decent 2014 for Cameco. With the catalysts for both a price recovery and strong production growth Cameco offers investors a second chance at the China growth story. Bulls Say OThe continued depletion of secondary uranium stockpiles will put increased onus on mined supplies to meet rising global demand, lifting prices. OCameco plans to increase uranium production substantially over the next several years. The bulk of increase will come from mines with low expected cash operating costs. OCameco owns several of the world's highestgrade uranium deposits. The company's McArthur River mine in Saskatchewan boasts ore grade concentrations 100 times higher than the industry average. Bears Say OPublic sentiment toward nuclear power worsened in the wake of Fukushima. Germany plans to shutter its entire nuclear fleet by 2022, and the timing and quantity of reactor restarts in Japan (home to the world's third-largest reactor fleet) is highly uncertain. OPost-Fukushima reactor shutdowns have mired the uranium market in oversupply. OA good deal of the nuclear renaissance hinges on China's new build activity. Uranium prices would suffer if China were to fall seriously short of its ambitious plans. Morningstar Pillars Analyst Quantitative Economic Moat Narrow Narrow Valuation QQQQ Undervalued Uncertainty High Very High Financial Health — Moderate Current 5-Yr Avg Sector Country Price/Quant Fair Value 0.84 0.94 0.69 0.59 Price/Earnings 126.6 28.2 17.1 15.7 Forward P/E 12.8 — 11.5 11.3 Price/Cash Flow 15.7 17.7 8.1 6.9 Price/Free Cash Flow101,636.3 478.4 16.1 15.8 Dividend Yield % 2.11 1.76 2.11 3.90 from Cameco still intact, we remain bullish on free cash flow growth. We've raised our fair value estimate to CAD 29/$23 on a weaker Canadian dollar. A more conservative valuation treatment of Cameco's long-running tax dispute with the Canadian Revenue Agency partly offsets that lift. We now assume a 50% probability Cameco loses its case and pays CAD 1.5 billion in cash taxes and penalties. Cameco's price realizations dipped 1.7% to $48 per pound in 2014 amid limited contracting activity. Mine output was slightly lower than 2013 (23.3 million pounds versus 23.6 million) due to the third quarter's labor disruption at McArthur River, the world's largest uranium mine. However, 2014 volumes exceeded management's guidance thanks to a strong fourth quarter at the Key Lake mill. Cost performance was solid, with unit cash costs up 1.6% to CAD 18.66 per pound. Initial production from Cigar Lake was the operational highlight of 2014. Cigar's ramp-up to full capacity of 18 million pounds per year (Cameco owns a 50% share) by 2018 will push Cameco's volumes higher in 2015. Cameco expects volumes of 25.3 million-26.3 million pounds in 2015, with Cigar contributing 3 million-4 million to Cameco, offsetting lower output at less economical assets where capital spending is being cut amid low prices. While Cigar will be a very low-cost asset when fully operational, costs will be higher in the ramp-up phase, pushing consolidated unit cash costs higher in 2015. We expect Cameco's production growth to arrive amid better prices than prevail today. Japanese reactor restarts and new reactors in China remain the key catalysts. Limited contracting activity by utilities in 2014 further stretched the rubber band of a price recovery. Cameco estimates contracting activity was about half of current annual reactor consumption. Economic Moat Daniel Rohr, Analyst, 15 April 2015 Production costs are the primary litmus test for a measuring competitive advantage in the highly cyclical mining industry. All producers can generate fat returns on capital when commodity prices are high, but only the lowest-cost producers can be expected to generate excess returns on capital through the cycle. Measured by cash cost of production, Cameco ranks among the lower-cost Source: Morningstar Equity Research Source: Morningstar Undervalued Fairly Valued Overvalued Quantitative Valuation rCAN CCO M
Valuation Daniel Rohr, Analyst, 15 April 2015 Our fair value estimate is CAD 29 per share. We forecast uranium prices rising to $75 per pound by 2019, on the basis that far higher prices will be necessary to encourage the new mines needed to meet rising demand and fill the gap left by the continued drawdown of stockpiles. We expect to see significant earnings growth in the medium term because of higher market uranium prices driven by the expiration of the Megatons to Megawatts program, eventual restart of Japan's idle reactor fleet, and expansion of China's reactor fleet; the rolloff of long-term sales contracts that had been struck amid lower prevailing market prices; and growth in uranium sales volume driven by higher mine output. We employ a 10-year explicit forecast horizon in our Cameco model. This allows us to capture the significant volume growth that the company is likely to realize in the coming decade and the convergence of realized prices