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

Canada Research | Page 30 of 87UraniumTechnical Ramp-up Risk. Uranium mining in the Athabasca Basin is a unique andchallenging exercise. Many deposits are hosted within friable, incompetent sandstones,located below the water table, at high hydrostatic pressure. Although substantivelyprogressed after two separate flooding events in October 2006 and August 2008, wehighlight risk of further delays to Cigar Lake’s start-up (we model 4Q13E, in-line withguidance), including further water in-flow and difficulties in adapting the innovative jetboring system (Cigar will be the first time Cameco has used JBS commercially).At McArthur River, the company is looking to increase output significantly and we modelthe start of ramp-up to 22 Mlbs/year in 2017E. However, we see significant uncertaintyin the mine’s ability to support these rates, given significant resources (e.g., McA N andS, and Zones A and B) remain classified as inferred or indicated with no certainty offuture conversion to economic reserves – a particularly tall order with McArthur’s>C$2,000/t LOM average mining costs.Permitting Risk. Cameco is still waiting for final government permits and a binding MOUto allow Inkai to ramp to 5.2 Mlbs/year production rates (from 3.9 Mlbs/year now).Further approvals would be needed for postulated eventual ~10 Mlbs/year rates, andgiven recent statements about restrained growth by Kazakh officials (see Market sectionfor details), receipt of permits are not a foregone conclusion, in our view.In the US, Cameco continues to experience protracted timelines for the permitting ofnew wellfields at Smith Ranch-Highland, which has hindered output (1Q12 -33% y/y).Slow regulatory approval of expansions may also result in missed guidance (thecompany sees 2.4 Mlbs in 2012 and 3.0 Mlbs in 2013 from US ISR). At McArthur inCanada, Cameco awaits approvals to expand the Deilmann TSF (“Key Lake Extension”)and licensed McArthur capacity to 22 Mlbs/year (from 18.7 Mlbs/year now; “McArthurRiver Extension”).In Australia, Angela/Pamela, a JV with Paladin, is on the back-burner after Australia’sNorthern Territory government withdrew support in September 2010 (though electionsare scheduled for August 25, 2012). Toro Energy’s receipt of environmental approvalsfor its Wiluna project bodes well for Cameco’s Kintyre, also in Western Australia.Minimal Takeout Potential. As a strategic Canadian entity formed via the merger of twoCanadian crown corporations, certain share movements are restricted by the EldoradoNuclear Limited Reorganization and Divestiture Act (Canada). Per the Act, a Canadianresident, individually or with associates, cannot own >25% of voting shares and a non-Canadian resident cannot own >15%, limiting takeout potential, in our view.Contract Risk. In its upcoming 2Q12 financial statements, Cameco expects to record aUS$30 mln charge relating to termination of a uranium sales agreement with a customer(we suspect a German utility). The company states this material, which totaled 3.4 Mlbsover five years, is likely to be placed at a higher price and will not affect full year results. Wehighlight that further cancellations could have an adverse effect on Cameco’s profitability.Less Sensitive to Spot Price Rebound. Cameco targets a 40:60 ratio between fixed andmarket-related pricing (references spot or long-term prices at time of delivery) in itscontracts and many of the company’s sales agreements were signed in 2003 – 2005,when uranium prices were in the US$11/lb – US$31/lb range. While CCO is heavilycontracted through 2016, these hedges provide some downside protection in a fallingprice environment and may have allowed the company to gain market share when otherproducers eschewed fixed prices. Conversely, Cameco will have reduced exposure toany spot price rebound. For example, in 2013E, 2014E and 2015E, we forecast prices toaverage US$63.00/lb, US$72.50/lb, and US$75.00/lb; our modeled realized prices forCameco in those years are US$57.00/lb, US$62.00/lb, and US$65.00/lb, vs. for exampleUranium One at US$61.00/lb, US$71.00/lb, and US$75.00/lb.Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2