CCO : TSX : C$23.67
CCJ : NYSE
SELL
Target: C$20.50
COMPANY DESCRIPTION:
Headquartered in Saskatchewan, Cameco is the world’s largest supplier of uranium and a significant fuel conversion services supplier. Cameco operates uranium mines in Canada and the US and uranium conversion facilities in Canada. The company also owns a 100% interest in NUKEM, a trader and broker of nuclear fuel products and services.
All amounts in C$ unless otherwise noted.
Readers of this blog and my book The Apprentice Millionaire Portfolio ( available from Amazon.com)will well know my take on the sector and this stock. Yet I still receive emails calling or the rise of the Nuclear Phoenix . Not gonna happen this year .
Metals and Mining — Base Metals and Minerals
DOWNGRADING TO SELL, MOSTLY ON RECENT SHARE PRICE PERFORMANCE
Event
Cameco has agreed to sell its 31.6% stake in Bruce Power LP for C$450 million. While we welcome the cash injection, we note that BPLP contributed 30-20% of our previous 2014-2017E operating cash flow forecasts for Cameco, and we believe the transaction is NPV-dilutive.
Impact
Our revised 2013-15E adjusted (for Bruce Power) EBITDA forecasts are C$837 million, C$483 million, and C$593 million and compare to C$837 million, C$754 million, and C$870 million prior. Our revised 2013-15E adj. dil. EPS forecasts are C$1.20, C$0.63, and C$0.89 and compare to C$1.20, C$0.95, and C$1.22 prior. Our revised NPV8 estimate of C$16.84 is down from our previous NPV8 estimate of C$17.50.
Action and valuation
We are downgrading our recommendation from Hold to SELL, and maintaining our 12-month target price of C$20.50, which is based on the average of: i) 15x (up from previous 12x) our 2015E EV/EBITDA, which would imply a share price of C$20.30, and ii) 1.25x (up from previous 1.0x) our NPV8 estimate of C$16.84. While the downgrade is mostly due to recent share price outperformance, it also reflects our view of earnings and NPV dilution from the Bruce Power sale. The higher multiples reflect market anticipation of positive uranium market news flow.
Next potential catalyst and investment risks
We believe that the equity market has already moved to reflect the asymmetric news flow risks of 2014, with initial Japanese reactor restarts highly likely, and spot uranium prices likely already at bottom-of-cycle. However, we believe that the market remains in fundamental surplus, and with continued excess Japanese inventory build.
