Cameco: Good News; Bad News:

Good news: Share Buyback Announced;
Bad News: Port Hope Restart Uncertain

By Brian Mok
Research Capital

       Despite the potential benefit to shareholders resulting from Cameco Corp.'s (TSX: CCO; $43.68) share repurchase program, we remain concerned with the uncertainty surrounding the duration of the shutdown at the company's UF6 conversion plant in Port Hope, Ontario, Canada.
        Consequently, we are leaving our 2008 estimates unchanged and we maintain our "accumulate" recommendation and our 12-month target price of $51 per share.
        Management recently announced that the company will be purchasing up to five per cent, or 17.7 million of its issued and outstanding common shares for cancellation. As of Sept. 6 closing price, this represents an investment of about $770 million.
        Cameco elected to proceed with its repurchase program rather than pursue acquisitions because management believed that "attractive assets have not been available at reasonable valuations.
        The company expects to begin repurchasing shares off the open market beginning on Sept. 11, 2007, and will continue the program until no later than Sept. 10, 2008. We believe Cameco will be able to fund its buyback program using cash on hand and cash from operations.
        As of June 30, the company had $480 million in cash on hand; we estimate that Cameco could generate over $1.2 billion in cash from operations during the next 12 months.
        At Cigar Lake, Cameco is close to completing the concrete plug in a drift near the water inflow, and it has begun pouring concrete and injecting grout at the location of the rock fall and up to the source of the water inflow.
        Management expects that it will take six to 10 weeks to complete pouring concrete and grouting.
        The company is also drilling into two other areas of the mine to assess pore water pressure and rock quality in order to determine if reinforcement or other precautionary measures will be required before de-watering the mine.
        Cameco continues to evaluate the prioritizing of Shaft #2 development; a decision on the need for additional reinforcement, the timing of Shaft #2 completion and a revised production schedule are expected to be completed at year-end.
        At this time, we have maintained our estimates for a 2012 start-up with capital costs of $600 million (Cameco's share). The company expects to provide its next update on the progress at Cigar Lake (barring any major developments) with its third quarter 2007 results, which are expected to be released on Oct. 30.
        On July 20, Cameco announced that chemicals, including uranium were found in the soil in the vicinity of its UF6 conversion plant in Port Hope. Subsequent testing completed on the monitoring wells surrounding the plant indicates that the contamination has not spread, and it is largely confined to the soil and groundwater immediately below the UF6.
        Sampling from the existing monitoring wells and new test wells installed inside and outside the plant is expected to continue over the next few weeks.
        Cameco initially indicated that the UF6 plant would be closed until at least September, while it determines the source of the contamination and develops an appropriate environmental-management plan. However, it now appears that the plant will remained closed beyond September while Cameco continues its investigation.
        The company expects that it will be in a better position to provide an estimate regarding the restart of the UF6 plant in November; until further clarity is provided, we have maintained our estimates going forward. At this time, Cameco believes that it has sufficient UF6 inventory to meet delivery requirements until the end of first-quarter 2008.
       The Port Hope facility holds roughly 20 per cent of the world's UF6 production capacity should the shutdown continue into early 2008, we believe that it could have a significant impact on the uranium market and thus uranium prices, as about one-fifth of the global supply could potentially be unavailable, and Cameco and the utilities would need to re-enter the market to secure supply to meet their respective requirements.
       Editor's Note: Reprinted from Investor's Digest of Canada, 133 Richmond St., W, Toronto, ON M5H 3M8, 1 year, 24 issues, $137. Digest from a September 7th report by Brian Mok, analyst, Research Capital.