Clock - Uranium Supply Crunch and Critical ... - Andrew Johns

Canada Research | Page 26 of 87UraniumInvestment OverviewA Top Producer, with Low Costs. In 2011A, Cameco produced 22.4 Mlbs (a close secondglobally) from mines in Canada (2), the US (2), and Kazakhstan (1). Production cash costswere amongst the lowest in the industry at C$24.95/lb, on the back of the world’shighest-grade mine – McArthur River (69.8% interest) in Saskatchewan. Cameco is alsooperator and 50% owner of the highest grading and (planned) highest outputdevelopment project globally, Cigar Lake, as well as the two largest conventional millingoperations: Key Lake and Rabbit Lake.Organic Production Growth. Cameco has a stated goal to reach 40 Mlbs/yearproduction by 2018 on ramp-up within jurisdictions where the company is alreadypresent, including Inkai Block 3, US ISR expansions, Millennium, and the McArthurExtension. The most critical piece is Cigar Lake, where successful remediation anddevelopment progress has paved the way for start-up in late-2013E, 10 Mlbs/year in2015E and 16.7 Mlbs/year in 2018E at sub-US$20/lb cash costs. The company remainscoy on specific guidance at its other projects; however, we view these assets as highquality and likely to contribute meaningfully to growth by decade’s end. We model 21.8Mlbs in 2012E (in-line with guidance), and 22.6 Mlbs, 24.1 Mlbs and 28.1 Mlbs for thesubsequent three years (just below guidance in each case). For 2018E, we project 36.7Mlbs, vs. guidance of 40 Mlbs, albeit, we exclude Kintyre (Australia) on limited data. Webelieve potential M&A could also boost this profile (see M&A Potential below).Sales Exceed Production. Cameco typically sells significantly more uranium each yearthan it produces (see Exhibit 44). This reflects the company’s third party purchaseprogram which consists of the Russian HEU agreement, as well as spot and term marketbuying. In 2011, the company sold 32.9 Mlbs (47% more than production). Making upthe gap after the HEU agreement expires (end of 2013) is a large risk to sales andearnings growth – this risk is quantified below.Exhibit 44: Production and Sales Profile45404035353030252520201515101055002010A 2011A 2012E 2013E 2014E 2015E 2016E 2017E 2018EMillennium Crow Butte Smith Ranch-HighlandJV Inkai Rabbit Lake Cigar LakeMcArthur River Sales Cash CostsSource: Cameco Corp., Raymond James Ltd.Uranium Production (Mlbs)Solid Balance Sheet. At March 31, 2012, Cameco had C$1.36 bln in cash andequivalents, C$1.84 bln in working capital (including C$495 mln in inventories) and longtermdebt of C$922 mln (including debentures: C$300 mln maturing September 2016and C$500 mln September 2019), representing only 12% of total capital.We estimate the company has ~C$4.1 bln in capital potentially available fordevelopment, expenditure surprises and/or M&A – a very comfortable buffer. This totalincludes:(i) C$1.0 bln May 2012 shelf prospectus (debt or equity, valid for 25 months);Cash Costs (C$/lb)Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2