The following report on Cameco Corp. was digested from a July 31 report by analyst Brian MacArthur of UBS Research and published in the Investor's Digest of Canada advisory service.
Cameco Corp. (TSX: CCO; $42.85) recently reported diluted earnings of $0.55 per share for the second quarter, compared to our estimate of $0.35 and the consensus estimate of $0.37 a share.
The strong second-quarter results were largely driven by higher-than-expected sales volumes in the uranium segment. We reiterate that quarterly earnings tend to vary widely and are not indicative of full-year results.
Cameco expects third-quarter revenue to be about 10 per cent higher, but management has lowered its full-year consolidated revenue growth forecast from 50 to 40 per cent due to lower projected uranium sales volumes than previously anticipated.
This, in turn, reflects the deferral by customers of some deliveries, lower Rabbit Lake production and fewer trading opportunities.
Finally, management stated that the company continues to make progress on its phased remediation plans at Cigar Lake, and expects to provide the next update on Sept. 19, 2007.
The company expects third-quarter revenue to be roughly 10 per cent higher than in the second quarter based on higher anticipation sales prices for uranium and electricity. Uranium sales volumes are projected to decline in the third quarter due to normal variability.
In terms of full-year guidance, Cameco lowered its 2007 year-over-year consolidated revenue growth forecast from 50 per cent (at the time of its first-quarter release) to 40 per cent, driven by lower projected sales volumes than previously expected.
We also note that first-half 2007 tonnage and mill head grade at the Rabbit Lake mine were lower than expected and the company now forecasts 2007 production at this mine to be 5.1 million pounds versus the previously planned 5.5 million pounds.
Additionally, the benefit of higher uranium revenue is offset slightly as the company anticipates its share of Cigar Lake remediation expenses will be $36 million in 2007.
Cameco provided an updated uranium price sensitivity table that showed an indicative range of average prices that the company would expect to realize based on its current sales portfolio.
In particular, we note this quarter management lowered its assumed target level of future annual sales deliveries, for the sake of this sensitivity, from 35 million to 30 million pounds - although CCO could ultimately sell more.
On the conference call, management explained that it had lowered the assumed quantity of material sold on a spot-trading basis in future years.
This change was made to lower the effective realized price in many of the higher spot-price scenarios, and to raise the realized price in many of the lower spot-price scenarios, as existing contracts are now weighted more heavily.
We note, however, that while the average realized price is lower in many cases, the impact to future earnings would likely be less given material bought and sold on a trading basis tends to earn a relatively low margin.
We continue to believe the uranium market is tight given falling utility inventories, increased reactor operating rates, improved supply/demand fundamentals and continuing supply disruptions.
We also note that while Cameco will not reap all the benefits in the near term given the mix of its contracts in the uranium business, the company has indicated that it is now entering into contracts with more favorable terms.
We have modestly lowered our 2007 and 2008 earnings estimates from $2.20 and $4.35 a share to $1.97 and $4.20 per share, respectively, to reflect updated sales, realized prices, updated earnings at Bruce Power and tax rates.
We have revised our net asset value (NAV) estimate from $34.62 to $31.85 to reflect updated investments, capital costs, sales and realized prices.
Applying a price-to-NAV multiple of two times to our projected NAV (excluding Cameco's gold assets) of $29.58 a share, and adding $2.27 a share of value for Centerra, we derive our 12-month target price of $61 a share (down from $66 previously).
Given the implied return, we continue to recommend the shares as a "buy" but acknowledge uncertainty may persist with respect to the Cigar Lake mine.
We continue to believe the long-term outlook for uranium is positive, given falling utility inventories, increase reactor operating rates, improving fundamentals and market interest.
On the electricity front, pricing should remain strong in Ontario, which should help boost earnings at Bruce Power."
Source: Investor's Digest of Canada, 133 Richmond St. W., Toronto, ON M5H 3M8, 1 year, 24 issues, $137.
