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TABLE OF CONTENTS Jan 21 - 27, 2013 Volume 98 Number 49 - 0 comments

Cameco closes Nukem acquisition

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By: Anthony Vaccaro

It took longer than expected, but Cameco (CCO-T, CCJ-N) has cleared all its regulatory hurdles and acquired nuclear fuel trader Nukem Energy GmbH.

The deal had been expected to close in the fourth quarter of 2012, but it required approvals from German, American and Chinese authorities, which prolonged the process.

Nukem has offices in the U.S. and Germany, and both Nukem and Cameco having large clients in China. The Chinese approval was said to be the last one received.

Despite the lag, Cameco’s move could prove well-timed, with many things falling into place for the uranium market.

A more pro-nuclear government in Japan, renewed Chinese support for reactor development and the winding-down of the Megatons to Megawatts agreement forged between Russia and the U.S. two decades ago — which saw Russian nuclear warheads turned into American electricity — are all factors that analysts suggest support a bullish outlook for uranium.

The Nukem deal is related to Megaton to Megawatts, which is set to end this year, and fits with Cameco’s long-term positioning on the production and retail side.

The company plans to double output to 40 million lb. in five years. But while it waits for this production to come on stream, Nukem will provide access to uranium stockpiles.

Nukem sold 12 million lb. uranium oxide in 2011, and it estimates 10 million to 15 million lb. in 2012.

For its part, Cameco sold 33 million lb. uranium oxide in 2011, meaning that the two companies accounted for roughly a quarter of all uranium sales that year.

Cameco says acquiring Nukem will complement its business, strengthen its market position and improve access to unconventional and secondary supply.

The last point is connected to Nukem being one of the main sellers of Russian nuclear warheads. Nukem has sales contracts that include 4.5 million lb. uranium under the deal.

But Cameco spokesperson Robert Gereghty says the company is confident that Nukem would have more secondary supplies after the deal expires at year-end.

And this is the key point. Acquiring Nukem gets Cameco into the world of secondary sources when the shortfall of supply relative to demand is already wide, and will likely grow.

The Megatons to Megawatts program had been filling much of this gap for many years, but when it expires, Nukem should have the contacts and expertise to source out more material, especially in places like Uzbekistan and Kazakhstan.

“These guys are experts at finding this material, acting as a broker and putting it on the market,” Cameco CEO Tim Gitzel told Regina’s Leader-Post. “It’s not something we’ve done, but we know the [secondary] market is there, [and] we’d rather be in it than watch it happen.”

This expertise could mean that Cameco would leave Nukem alone, rather than merging it with its own marketing department.

“We appreciate the value they bring and the different business model they have,” Gereghty says, “and there is also the issue of comfort from the customer’s side. Nukem has a fifty-year relationship with some its customers.”

Cameco says Nukem’s key personnel have committed to remain on-board.

The deal for Nukem was done by paying private equity firm Advent International US$140 million, and called for Cameco to assume Nukem’s net debt of US$111 million.

While this is a lofty sum, it is considerably less than the amount on its balance sheet when the deal was first announced in May 2012, when the debt was US$164 million. The reduction came thanks to cash from Nukem’s business activities.

The deal also requires Cameco to pay Advent a share of Nukem’s 2012 earnings. It might also have to make additional payments in 2015, depending on financial results from 2013 and 2014.

BMO Capital Markets analyst Edward Sterck says the deal’s closing was “potentially positive” news.

BMO has given Cameco an “outperform” rating with a $25 price target. Cameco’s stock traded for $19.70 in Toronto on Jan. 9 — up 1%, or 15¢, on 400,000 shares traded.

“Based on BMO’s estimates and Nukem’s historical accounts, the division is forecast to contribute 10% of Cameco’s 2013 earnings before interest, taxes, depreciation and amortization,” Sterck writes in his research note.

He cautions that Cameco has not issued any guidance related to the acquisition, but expects to see these forecasts as part of the company’s full-year results released on Feb. 8.

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