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Shares of Cameco (CCJ) ended yesterday's session (January 12, 2023) at $25.62, thus equating to YTD performance of +12%. Though the close itself is not overly meaningful, it is significant that shares have increased to a point in which they remain just a shade away from the October 11, 2022 close of $25.82, that level being immediately before the transformational Westinghouse deal was announced. Recall that as part of the $7.88B enterprise value deal for Westinghouse (Cameco at 49% and Brookfield Renewable (BEP) at 51%), Cameco concurrently announced after the close on October 11th, a $650M bought deal offering for common shares. This offering was subsequently upsized to $747.6M encompassing 34.057M shares priced at $21.95 which was a 15% discount to the pre-announcement close of $25.82. Given yesterday's close and today's volatile price action, it may just be a matter of time before the shares once again surpass the pre-deal levels.
Since the deal announcement, progress has been consistent as management announced a uranium supply agreement with China Nuclear international Corp. (CNNC), one of China’s largest nuclear fleet operators. This supply agreement was part of the 50.0M lbs of LT contracts announced in 2022 alone. More contracting updates will be expected in conjunction to the Q4/2022 earnings release, to be announced before the market open on February 9, 2023. That said, recall that during the Q3/2022 results release, management stated that they were in “advanced” discussions for another 27.0M lbs which would be (hopefully) finalized by year end.
Note that earlier in November 2022, an operational milestone was achieved as the first lbs of uranium ore from the McArthur River mine were milled and packaged at the Key Lake mill. This essentially marked a successful transition back to normal operations, approximately four years after production was suspended at McArthur River and Key Lake in January 2018. This suspension was attributed to persistent price weakness. If re-starting what is arguably the most prolific uranium asset on the planet isn’t seen as bullish endorsement of the LT fundamentals, then we don’t know what is. Looking forward to 2024, Cameco plans to produce ~15.0M lbs U3O8 per year (100% basis) from these operations. If warranted, note that McArthur River is licensed for up to 25.0M lbs per year with Cameco’s share amounting to 17.5M lbs. Additional assets can contribute 9.0M-10.0M lbs from Cigar Lake and ~5.0M lbs from Inkai.
Subject to regulatory approval, recall that the Westinghouse transaction is expected to close sometime in 2H/2023. Cameco’ proposed purchase for 49% of Westinghouse has to be viewed as much more than the 11.2x TTM EV/EBITDA multiple or the 10.0x FY/2024 EV/EBITDA multiple as date of announcement. The increased value chain proposition and sales opportunities from the combined entity are extremely timely given the current themes of energy security, ESG and Russian sanctions. In the short term, Cameco sees approximately $50M in new revenue opportunities however the longer term play is much more compelling. Particularly in energy deprived Eastern Europe (where Rosatom has a stranglehold on nuclear builds and services), Westinghouse does have a foothold in the Czech Republic, Ukraine and Finland. Numerous agreements and MOUs have since been signed in central & east Europe.
Yes, post-close, Cameco becomes less of a pure-play miner however we see the Westinghouse transaction as solidifying Cameco’s entire nuclear value chain. There is considerable margin to make in all steps of the nuclear fuel conversion cycle, even more so if one owns the entire value chain in this high barrier to entry business. Though an exit from Bruce Power and electricity generation was more than welcomed in 2014 (as was Cameco's re-established pure play status), this expansion into Westinghouse makes much more strategic and long term sense given the added downstream refining capacity with capabilities in conversion and enrichment.