In an April 27, 2018, research report, analyst Alexander Pearce with BMO Capital Markets reported that Cameco Corp. (CCO:TSX; CCJ:NYSE) agreed to deliver up to 5.4 million pounds (5.4 Mlb) of uranium to Orano "with 'repayment in kind' no later than the end of 2021." Already, Cameco supplied 1.35 Mlb in January.
The arrangement could affect Cameco negatively but impact the uranium market positively, Pearce noted. Delivery of the uranium to Orano, "essentially an interest-free uranium loan," could "be detrimental to cash flow" for Cameco despite having started 2018 in a solid free cash flow position, at CA$270 million (CA$270M).
In light of the agreement, BMO expects Cameco's free cash flow in 2018 to be down about 10% but still reasonable, at CA$330M. "Free cash flow in 2019 remains attractive at CA$315M (yield of 6%), and Cameco remains well placed to repay the CA$500M debt due in 2019," Pearce added.
Cash flow will be lower because Cameco will have to spend money on buying at least 6 Mlb of uranium this year "to maintain its target of ~13 Mlb of inventory by year-end," explained Pearce.
Additionally, if Cameco extends the restart date of McArthur River to 2020 from early 2019, the time it has guided to, it would need to purchase an additional roughly 11 Mlb of spot market material. "Positively, we estimate Cameco's balance sheet remains strong enough to handle this development if it occurs," wrote Pearce.
Cameco's 2018 spot market purchases could "add positive support to the uranium price if utilities are forced to compete for the material," Pearce indicated. The minimum of 6 Mlb that the company would need this year represents "about 12–15% of annual spot market volumes."
Given the above, the company's Q1/18 earnings per share beat will likely "rebalance over the remaining three quarters of the year," Peace purported. Guidance remains unchanged.
BMO has an Outperform rating and a CA$15 per share target price on Cameco, whose shares are currently trading at CA$14.59.
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Disclosures from BMO Capital Markets, Cameco, Apr. 30, 2018
Analyst's Certification: I, Alexander Pearce, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.
Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Company Specific Disclosures Disclosure 5: BMO Capital Markets or an affiliate received compensation for products or services other than investment banking services within the past 12 months from Cameco.
Disclosure 6C: Cameco is a client (or was a client) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limited or an affiliate within the past 12 months: C) Non-Securities Related Services.
Disclosure 8C: BMO Capital Markets or an affiliate has a financial interest in 0.5% or more in the issued share capital of Cameco.
Disclosure 9: BMO Capital Markets makes a market in Cameco.
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