Cameco Might Need More Equity for an Acquisition
by: FP Trading Desk March 16, 2009
Thanks to the credit crisis, Cameco Corp. (
CCJ) sees an opportunity to take advantage of undervalued and underfunded miners. However, some consider these plans too lofty, unless it decides to tap the market for more capital.
Jerry Grandey, the CEO of the world’s largest uranium supplier, recently disclosed his intention to pursue a potential uranium acquisition ranging from C$1-billion to upwards of C$2-billion. So while a deal would strenghten Cameco’s market position, analysts are raising concerns about what it would do to its balance sheet.
With its recent C$460-million equity raise, Cameco will end the first quarter with an estimated cash balance of C$870-million. However, Orest Wowkodaw at Canaccord Adams noted that its net debt position will be C$443-million. Therefore, he does not think the company’s balance sheet would support a transaction in the indicated range unless additional equity is raised.
As a result of this acquisition overhang, the analyst lowered his rating on Cameco shares from Buy to Hold. His target price remains C$24 per share.
Mr. Wowkodaw said in a research note:
“As the world’s largest and lowest-cost uranium producer, Cameco should continue to benefit from improving uranium market sentiment over the medium to long term.” “However, in the near term, the shares are likely to underperform the uranium peer group given the overhang of a potentially large acquisition. We are also concerned with the company’s balance sheet in the event of a large transaction.”
The analyst points out that there are very few publicly listed uranium miners with a market capitalization greater than $1-billion. These include Uranium One Inc. (SXRZF.PK), Paladin Energy Ltd. (PALAF.PK) and Energy Resources of Australia Ltd. He thinks Paladin and Rio Tinto plc’s (RTP) 68% stake in Energy Resources would serve to further diversify Cameco’s producing asset base in relatively attractive regions.
On the other hand, Cameco could be looking to invest further in Kazakhstan, where Uranium One operates. However, Mr. Wowkodaw said this is unlikely given the Cameco’s mixed experiences to date at its Inkai project there.
Meanwhile, reports have suggested that the French government may be looking to sell a minority stake in AREVA, which the analyst said would also probably interest Cameco. AREVA has a 30% stake in McArthur River, the world’s largest high-grade uranium deposit, while Cameco owns the rest. The two companies are also joint-venture partners at Cigar Lake.
Instead of Cameco, Mr. Wowkodaw suggests investors move their uranium production exposure to Paladin, which has a “good balance sheet, significant near-term production growth and attractive valuation.”
