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

Uranium Canada Research | Page 29 of 87Active Explorers. We believe Cameco has one of the best exploration teams in thespace, with a track record of successful reserve replacement and new discoveries,including Millennium and Centennial. Success is not limited to Cameco’s traditionalstomping grounds. For example, 20.2 m grading 5.2% – a truly world-class interval – wasreported earlier this year at Wellington Range, Australia. The company states it willspend C$115 mln in exploration in 2012 at over 50 active projects globally.Stable Dividend Policy. The company has an unbroken record of paying a quarterlydividend since 1991. In 2011, Cameco paid out C$146 mln in dividends (orC$0.40/share), implying a distribution of 35% and a yield of 1.5%. We expect this policyto continue indefinitely.Attractive Valuation. Cameco shares command a premium relative to its peers given thecompany’s size, liquidity, safety and tier-1 status; however, relative to its own historictrading levels, valuation appears attractive: current P/NAV is 1.15x, vs. its one-year pre-Fukushima average 1.47x (and peers Uranium One (UUU) and Paladin (PDN) currently at0.72x and 0.63x, respectively); current P/CF (2013E) is 9.9x, vs. UUU and PDN at 7.0x and15.4x; current EV/lb resources is US$8.24/lb, vs. UUU and PDN at US$8.25/lb andUS$2.19/lb.Biggest and Most Liquid. For investors with specific mandates/constraints, Cameco isthe most accessible of all Canadian-listed uranium equities, with the largest market cap(C$8.8 bln) and highest 100-day average dollar volume (C$25 mln).Exhibit 47: Market Capitalization and Recent Trading Volumes for Covered EquitiesCompany Market Cap. 100-day avg. daily 100-day avg. dollar(C$m) volume (Msh) volume (C$m)Cameco 8,831 1.17 25.4Uranium One 2,355 2.23 6.3Paladin 911 0.67 1.1UPC 615 0.36 2.0Denison 512 1.37 1.9Ur-Energy 81 0.07 0.1Source: Capital IQ, Thomson One, Raymond James Ltd.Potential ConcernsMuted Medium-term Earnings Growth. Since 1998, Cameco has benefitted from theRussian HEU agreement, in recent years taking delivery of ~7 Mlbs/year. Though annualpurchase prices are not directly disclosed, Cameco’s price on the majority of pounds wasnegotiated when levels were much lower than recent spot prices, making for a highlyprofitable business today. The company is scheduled to receive 7 Mlbs in 2012 and 10Mlbs in 2013 (plus an additional 4.5 Mlbs via Nukem, pro-forma). However, Russiandeliveries are due to expire at the end of 2013E and with Cigar Lake now starting up in4Q13E at the earliest, Cameco is at risk of lower sales from 2014E. We assume thecompany will take measures to mitigate this risk by spreading out sales of HEU-derivedmaterial (7 Mlbs in 2012E, 9 Mlbs in 2013E, and 5.5 Mlbs in 2014E). Other contractedpurchases (guidance is 6 Mlbs during 2012 – 2014) and opportunistic buying on the spotmarket could also support overall sales and revenues, however, these sources arecostlier than the HEU program and consequently, absent M&A, we see muted earningsgrowth until Cigar ramps to 15.7 Mlbs (7.8 Mlbs attributable to Cameco) in 2017E. Our2012E – 2016E EPS estimates are $1.24, $1.73, $1.69, $1.62 and $1.71.Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2