The Energy Report - Mon, May 7, 2018

Energy Firm's Uranium Delivery Agreement Could Bump Up Market Prices

BMO Capital Markets analyst Alexander Pearce reviewed the implications of this arrangement.

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In an April 27, 2018, research report, analyst Alexander Pearce with BMO Capital Markets reported that Cameco Corp. (CCO:TSX; CCJ:NYSE) agreed to deliver up to 5.4 million pounds (5.4 Mlb) of uranium to Orano "with 'repayment in kind' no later than the end of 2021." Already, Cameco supplied 1.35 Mlb in January.

The arrangement could affect Cameco negatively but impact the uranium market positively, Pearce noted. Delivery of the uranium to Orano, "essentially an interest-free uranium loan," could "be detrimental to cash flow" for Cameco despite having started 2018 in a solid free cash flow position, at CA$270 million (CA$270M).

In light of the agreement, BMO expects Cameco's free cash flow in 2018 to be down about 10% but still reasonable, at CA$330M. "Free cash flow in 2019 remains attractive at CA$315M (yield of 6%), and Cameco remains well placed to repay the CA$500M debt due in 2019," Pearce added.

Cash flow will be lower because Cameco will have to spend money on buying at least 6 Mlb of uranium this year "to maintain its target of ~13 Mlb of inventory by year-end," explained Pearce.

Additionally, if Cameco extends the restart date of McArthur River to 2020 from early 2019, the time it has guided to, it would need to purchase an additional roughly 11 Mlb of spot market material. "Positively, we estimate Cameco's balance sheet remains strong enough to handle this development if it occurs," wrote Pearce.

Cameco's 2018 spot market purchases could "add positive support to the uranium price if utilities are forced to compete for the material," Pearce indicated. The minimum of 6 Mlb that the company would need this year represents "about 12-15% of annual spot market volumes."

Given the above, the company's Q1/18 earnings per share beat will likely "rebalance over the remaining three quarters of the year," Peace purported. Guidance remains unchanged.

BMO has an Outperform rating and a CA$15 per share target price on Cameco, whose shares are currently trading at CA$14.59.

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