Canada Research Published by Raymond James Ltd Cameco Corp. October 6, 2011 CCO-TSX | CCJ-NYSE Company Comment Bart Jaworski P.Geo. | 604.659.8282 | [email protected] Rating & Target David Sadowski (Associate) | 604.659.8255 | [email protected] Outperform 2 Tracy Reynolds (Associate) | 416.777.7042 | [email protected] Target Price (6-12 mos): C$32.20 Current Price ( Oct-05-11 ) C$20.34 Uranium & Junior Exploration | Uranium Total Return to Target 63% 52-Week Range C$44.28 - C$17.61 Drops Opex at Cigar, Sets Table for Roughrider Market Data Market Capitalization (mln) C$7,811 Event Current Net Debt (mln) C$226 Enterprise Value (mln) C$8,037 Last night, CCO announced a non-binding MOU with its Cigar Lake JV (including Shares Outstanding (mln, basic) 394.7 50% CCO and 37% Areva) to mill 100% of Cigar ore at McClean Lake mill (vs. the Average Daily Volume (000s) 1,353 previous roughly 50/50 McClean/Rabbit split). Binding agreement with the Dividend/Yield C$0.40/2.0% McClean Lake JV (70% Areva, 22.5% Denison, etc) is expected by Nov-30-11. Key Financial Metrics 2010A 2011E 2012E Action P/E We continue to recommend buying the shares of CCO on a strategic industry 32.2x 19.3x 13.8x position, solid balance sheet, positive cash flow and strong growth profile. P/NAV Analysis 0.9x NA CFPS • Opex and Capex implications. A new technical report is expected early Old C$1.29 C$1.73 C$2.01 next year (with or prior to Feb-2012 AIF). Key revisions from the Mar-2010 New C$1.29 C$1.73 C$2.01 Cigar report include: (i) lower cash costs by 20% (to $18.60/lb from Working Capital (mln) $23.14/lb) and (b) higher capex by 21% (a C$189 mln increase in CCO's Old C$1,968.6 C$1,927.4 C$2,089.5 New C$1,968.6 C$1,927.4 C$1,966.5 attributable capex to C$1.1 bln from C$912 mln). High capex reflects Capex (mln) surface freezing, general cost escalation, mill modification at McClean and Old C$(470.3) C$(517.2) C$(423.6) mine plan improvements. Start-up remains mid-2013 (vs. our 2014E). New C$(470.3) C$(517.2) C$(546.6) • Impact on Our Model - Minor. The above capex guidance implies Long Term Debt (mln) remaining capex as at Mar-2010 (date of last study) of C$952 mln has Old C$940.3 C$908.4 C$858.4 increased by 40% to roughly C$1,330 mln. Given our capex was already at New C$940.3 C$908.4 C$858.4 Production (Mlbs) C$1,103 mln, we only need to adjust our estimate by 26% to a conservative Old 22.9 21.6 22.6 C$1,390 mln. Incorporating for lower cash costs, our NPV (8%) at Cigar New 22.9 21.6 22.6 increases by 5% to C$1,021 mln (from C$969 mln). Cash Costs (US$/lb) • The Real Implications. It appears to us the more strategic reason for this Old US$23.3 US$27.6 US$29.4 move is to make room for Roughrider ore (which is destined for Rabbit New US$23.3 US$27.6 US$29.4 Total Resource (Mlbs) 1,018.10 assuming CCO’s bid for HAT succeeds). Rabbit’s capacity is currently Shares Outstanding (mln, f.d.) 403.4 16Mlbs/yr and its only customer, CCO’s Eagle Point mine, is expected to Company Description run out of ore in 2017E. With CCO’s Millenium project starting up in 2018E One of the largest, highest-grade & lowest-cost at 6Mlbs/yr (RJ est), this appears to open up 10Mlbs/yr production for producers of uranium globally. Cameco is vertically integrated via fuel services and electricity generation, HAT’s Roughrider (vs. our current LOM average of 4.8Mlbs/yr). This adding exposure to the burgeoning nuclear suggests CCO may be more willing to pay up for HAT, in our view. renaissance. Valuation We are maintaining our Outperform rating and $32.20 target. Our target implies a 1.4x P/NAV multiple to our NAVPS (8%) of $22.31 (from $22.18). See details on Page 3. EPS 1Q 2Q 3Q 4Q Full Revenue NAVPS Mar Jun Sep Dec Year (mln) 2010A C$0.28 C$0.29 C$0.20 C$0.52 C$1.31 C$2,124 Old 2011E 0.23A 0.18A 0.35 0.35 1.06 2,329 22.18 New 2011E 0.23A 0.18A 0.35 0.35 1.06 2,329 22.31 Old 2012E nm nm nm nm 1.47 2,525 NA New 2012E nm nm nm nm 1.47 2,525 NA Source: Raymond James Ltd., Thomson One Please read domestic and foreign disclosure/risk information beginning on page 7 and Analyst Certification on page 8. Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Canada Research | Page 2 of 12 Cameco Corp. Background on Athabasca On Aug-05-10, we published a note on the dynamics of uranium milling capacity in the Athabasca Basin (see INsight titled “Scarce Milling and Tailings Capacity in the Athabasca Basin…Implications for Future Mine Development”). The following are a few excerpts which we believe provide good background for CCO’s announcement yesterday. Exhibit 1: Regional Map of Uranium Infrastructure, Athabasca Basin, Saskatchewan Source: Cameco Corp., Raymond James Ltd. Exhibit 2: Summary of Uranium Mills in Saskatchewan, Canada Source: Raymond James Ltd., Company Disclosures Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Cameco Corp. Canada Research | Page 3 of 12 Exhibit 3: RJ Notional Schedule of Active mines and projects, Athabasca Basin (as of Aug-2010) Source: Raymond James Ltd., Company Disclosures Exhibit 4: Summary of Key Operations and Mine Development (as of Aug-2010) Source: Raymond James Ltd., Company Disclosures Valuation Our target is predicated on a blended (50%, 40%, 10%) average of: (i) our NAVPS (8%) of $22.31 (from $22.18) and a P/NAV multiple of 1.4x (unch); (ii) our CFPS ’12 of C$2.01 and our 15x P/CF multiple; and (iii) our US$14.75/lb takeout valuation applied to CCO’s global attributable resource of 1.0 bln lbs. Our increased NAVPS reflects lower cash costs at Cigar Lake (as per above). Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Canada Research | Page 4 of 12 Cameco Corp. Appendix 1: Financial and Operational Snapshot of Cameco Corp. Cameco Corporation RAYMOND JAMES RESEARCH Rating: OUTPERFORM 2 CCO-T Analyst: Bart Jaworski 604 659 8282 6-12 Mth Target C$ 32.20 NAV $22.31 Projected Return: 59.2% YR-END: Dec 31 Reporting currency: CDN 6-Oct-11 Investment Thesis Market Statistics - Vertically integrated / diverse revenue streams (production, conversion, power generation) Share Price C$ 20.23 Shares Basic (mln) 394.7 - Exceptional exploration potential in the Athabasca Basin of Northern Saskatchewan 52 Week High 44.28 Shares Fully Diluted (mln) 403.4 - Strong North American asset base with low sovereign risk 52 Week Low 17.61 Adj. Shares used in NAV calc (mln) 403.4 Market Cap. (mln) 7,985 Avg Daily Volume: 1,258,540 Key Attributes: Enterprise Value (mln) 8,211 - One of World's largest uranium producers Total model'd lb. in DCF (mln) 1018.1 Annualized Dividend $0.40 - Controlling interest in the mammoth Cigar Lake and McArthur River uranium assets Div Yield % 1.98% - Owns the Port Hope UF6 Conversion facility - 1 of 4 in the western world - 31.6% share in North America's largest power plant, Bruce Power, Ontario Financial Metrics 2008A 2009A 2010A 2011E 2012E Cash ($ mln) 269.2 1304.1 1259.7 1258.3 1297.4 Key Concerns Working capital ($ mln) 771.0 1764.7 1968.6 1927.4 1966.5 - Cost control and operational risk at Cigar Lake and McArthur Current ratio (x) 1.9 3.3 4.3 4.6 4.7 LT Debt ($ mln) 1213.0 952.9 940.3 908.4 858.4 Reserve & Resource Interest Tonnes Grade U3O8 CCO Shre Common Equity (mln) 3514.9 4843.8 5216.3 4941.6 5363.8 Proven & Probable Reserves (%) ('000) (% U3O8) (Mlbs) (Mlbs) Price/book (x) 1.01 1.07 1.04 1.09 1.04 McArthur River 70% 999 15.24% 335.5 234.2 LTD/(LTD + Equity) 25.7% 16.4% 15.3% 15.5% 13.8% Cigar Lake 50% 557 17.04% 209.3 104.7 ROE 17% 11% 10% 8% 11% Crow Butte 100% 1,204 0.12% 3.1 3.1 ROIC 8% 7% 7% 6% 8% Gas Hills - Peach 100% 6,404 0.13% 19.0 19.0 Inkai 60% 80,627 0.07% 121.6 73.0 North Butte/Brown Ranch 100% 3,803 0.10% 8.2 8.2 Earnings/Cash Flow 2008A 2009A 2010A 2011E 2012E Rabbit Lake 100% 1,518 0.76% 25.5 25.5 Smith Ranch-Highland 100% 3,951 0.09% 8.0 8.0 RJ Uranium Forecast US$/lb 63.65 46.76 46.37 58.48 72.50 Key Lake 83% 62 0.51% 0.7 0.6 Revenue ($mln) 2859.2 2315.0 2123.7 2329.1 2525.4 99,125 0.33% 730.9 476.2 EBITDA ($mln) 778.2 1041.6 783.2 661.5 842.7 Measured & Indicated Resource EBITDA margin 27% 45% 37% 28% 33% McArthur River 70% 108 7.09% 16.9 11.8 EV/EBITDA (x) 10.6 7.9 10.5 12.4 9.7 Cigar Lake 50% 24 2.27% 1.2 0.6 EBIT ($mln) 484.9 801.0 531.6 430.1 609.2 Crow Butte 100% 2,466 0.21% 11.2 11.2 Adj.