Cameco gets access to Russian warheads

It took longer than expected but Cameco has cleared all the regulatory hurdles and has closed its acquisition of nuclear fuels trader NUKEM Energy GmbH (NUKEM).




It took longer than expected but Cameco has cleared all the regulatory hurdles and has closed its acquisition of nuclear fuels trader NUKEM Energy GmbH (NUKEM).

The deal was expected to close in the fourth quarter of 2012, but required approvals from German, American and Chinese authorities, which slightly dragged out the process.

NUKEM has offices in the United States and Germany, and the need for Chinese approval is connected to both NUKEM and Cameco having large clients there. The Chinese approval was said to be the last one received.

Despite the lag, Cameco’s move may ultimately prove well timed, as many things are falling in 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 deal signed between Russian and the United States some 20 years ago that saw Russian nuclear warheads turned into American electricity, are all key factors that analysts suggest support a bullish outlook on the commodity.

The NUKEM deal is directly related to the Megaton to Megawatts deal, which is set to end this year.

The deal also fits with Cameco’s long term positioning on both the production and retail side.

In five years time, the company plans to double output to 40 million lb. But while it waits for that production to come on stream, NUKEM will provide access to uranium stockpiles it otherwise wouldn’t have access to.

In 2011 NUKEM sold 12 million lb of uranium and it expects to sell 10 million to 15 million lb for all of 2012.

For its part, Cameco sold 33 million lb of U3O8 in 2011, meaning that, combined, the two companies were in on roughly a quarter of all uranium sales that year.

Cameco’s corporate rationale for the deal is that acquiring NUKEM compliments its business, strengthens its position in markets, and improves its access to unconventional and secondary supply.

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

But Cameco spokesperson Robert Gereghty says the company is confident that NUKEM will have additional secondary supplies after that deal expires at the end of the year.

And that is the key point. Acquiring NUKEM gets Cameco into the world of secondary sources at a time when the shortfall of supply relative to demand is already wide and will likely only grow.

The Megaton’s to Megawatts program had been filling much of that 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,” Tim Gitzle Cameco’s CEO told the Regina 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.”

Such expertise means Cameco will leave NUKEM alone and let it do its thing rather than merge it with its own marketing department.

“We appreciate the value they bring and the different business model they have,” Gereghty says, “And also there is the issue of comfort from the customer’s side. NUKEM has a 50-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 a private equity firm, Advent International, US$140 million and called for Cameco to assume NUKEM's net debt of US$111 million.

While that is a lofty sum, it is considerably less than the amount of debt on its balance sheet when the deal was first announced in May of last year. At that point the debt stood at US$164 million. The reduction came thanks to cash generated from NUKEM’s ongoing business activities.

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

BMO Capital Markets analyst Edward Sterck said the closing of the deal was “potentially positive” news.

BMO has Cameco rated as "outperform" with a target price of $25.00. Cameco stock was trading for $19.70 in Toronto on January 9 — up roughly 1% or 15¢ on roughly 400,000 shares traded.

“Based on BMO Research’s estimates and NUKEM's historical accounts, the division is forecast to contribute [roughly] 10% of Cameco’s 2013 EBITDA,” Sterck wrote in his research note.

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

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