DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Debt rating of Cameco Corporation (Cameco or the Company) at BBB and the Commercial Paper rating at R-2 (middle), and changed all of the trends to Stable from Negative. The confirmations were based on Cameco’s (1) repayment of $500 million of debt in September 2019 with no maturities now until 2022; (2) favourable liquidity of approximately $2.2 billion; and (3) strong business risk profile due to long-life reserves, low operating cost structure, full integration across the nuclear fuel cycle, and portfolio of long-term contractual commitments. The trend changes were based on the improving outlook for the uranium industry, including the robust recovery in spot and long-term uranium prices that have increased in 2020 by 36% and 20%, respectively, as at April 30, 2020.
The rise in uranium prices has been largely driven by the impact of the Coronavirus Disease (COVID-19) since March 2020, which is estimated to have temporarily idled at least 10% of global uranium production, including Cameco suspending production at its 50%-owned Cigar Lake mine for what is now an indeterminate period. Similarly, on April 7, 2020, Kazatomprom, the world’s largest uranium producer, announced coronavirus-related curtailments across its operations that are estimated to reduce 2020 production by approximately 10 million pounds (lb) triuranium octoxide (U3O8). As a result of the lower primary supply, Cameco and other producers will be drawing down inventories and making purchases in the spot market to meet contractual deliveries, which should put upward pressure on prices. Based on the Bloomberg forward curve (as of May 18, 2020) for spot uranium prices, DBRS Morningstar estimates that Cameco’s realized 2020 contract uranium price realizations should be in the $47 to $48 per lb U3O8 range, or about 5% higher than in 2019. That said, the impact of the eventual restart of the idled capacity could represent a headwind for the industry with the price response less clear. However, DBRS Morningstar believes that the uranium market is transitioning from a consumer-driven market to a producer-driven market, which should encourage utilities to increase their long-term contracting volumes at prices supportive of the restarts.
Even though uranium market fundamentals have improved, DBRS Morningstar expects the Company’s key metrics to deteriorate moderately in 2020 to the BB category (with the exception of debt-to-capital, which is expected to remain robust), mainly driven by lower volumes of produced uranium and higher operating costs before recovering in 2021 as the Company’s idled capacity is restarted. If the reduced primary supply results in a material increase in long-term contracting or results in a recovery in prices to higher levels than expected, then a positive rating action could be taken. However, if the restarts result in materially lower prices and limited contracting by utilities, a negative rating action could result.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Mining Industry (August 23, 2019), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at firstname.lastname@example.org.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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