Cameco Thesis: Appendix

Methodology for the NPV Calculations

The NPV calculations were conducted in the following order:

1. Price forecasts for spot, with Cameco’s corresponding realized price from their 2016 annual report, were created under four separate scenarios:

Price Forecasts
Base Case @ Spot Cost of Production in Three Years Growth @ 15% Aggressive Growth @ 30%
Year Spot ($USD) Realized ($CAD) Increase % Spot ($USD) Realized ($CAD) Increase % Spot ($USD) Realized ($CAD) Increase % Spot ($USD) Realized ($CAD) Increase %
2016 $27.5 $50 $27.5 $50 $27.50 $50.00 $27.5 $50
2017 $27.5 $50 0.0% $27.5 $50.0 0% $32.20 $52.50 5.0% $36 $54 7.5%
2018 $27.5 $50 0.0% $38 $55 10.0% $37.03 $55.00 4.8% $47 $64 18.6%
2019 $27.5 $50 0.0% $49 $64 15.9% $42.58 $57.50 4.5% $62 $73 13.7%
2020 $27.5 $50 0.0% $60 $70 9.8% $48.97 $62.50 8.7% $80 $83 13.8%
2021 $27.5 $50 0.0% $60 $71 1.8% $56.32 $70.00 12.0% $104 $99 19.7%

2. A WACC was developed using three separate (7%, 10%, 15%) risk premiums to debt and equity:

WACC Assuming: 7% rpe, rpd 10% rpe, rpd 15% rpe, rpd
         
Market Value of Equity (yahoo finance)   5.96B 5.96B 5.96B
Market Value of Debt 2.99B 2.99B 2.99B
Risk free rate 2.20% 2.20% 2.20%
Equity beta 0.87 0.87 0.87
Market risk premium 7% 10% 15%
Cost of Equity Ce = rf + Beta * (Rm – Rf) 6.38% 8.99% 13.34%
Cost of Debt 6.73% 8.92% 12.57%
Cd = (rf + rp) * (1-t)
 
Cost of Equity 6.38% 8.99% 13.34%
Cost of Debt 6.73% 8.92% 12.57%
Marginal tax rate (from annual report) 26.9% 26.9% 26.9%
Equity Ratio 71.6% -28.4% -128.4%
Debt Ratio (from ycharts) 28.4% 128.4% 228.4%
WACC 6.49% 8.96% 13.08%
= (equity x Ce) + (debt x Cd) / (Equity + Debt)
Where equity, debt = market value of equity, market value of debt
Ce = cost of euqity, Cd = cost of debt

3. Free cash flow was calculated by adjusting earnings to cash-only effects, and incorporate growth in revenues and variable costs. This chart is an example at the spot price:

DCF: Base Case @ Today’s Spot
Items 2017 2018 2019 2020 2021 2022-2040 (per year)
Spot Price ($CAD @ 1.25$USD/$CAD) $34.4 $34.4 $34.4 $34.4 $34.4  $34.4
Growth (% based on change in realized price) 0.0% 0.0% 0.0% 0.0% 0.0%
Revenues (constant production @25m lbs.)  $2,431,404  $2,431,404  $2,431,404  $2,431,404  $2,431,404 $2,431,404
Production Costs (constant volume @25m lbs.) $1,577,764 $1,577,764 $1,577,764 $1,577,764 $1,577,764 $1,577,764
Operating Costs (excluding non-cash, 2% growth) $263,691 $271,601 $279,749 $288,142 $296,786 $279,994
Earnings (loss) from Operations $589,949 $582,039 $573,891 $565,498 $556,854 $573,646
Net: Other Cash Income, Costs (3% growth) -$48,396 -$49,848 -$51,343 -$52,883 -$54,470 -$51,388
EBIT $541,554 $532,191 $522,548 $512,615 $502,384 $522,258
Tax Rate (%) 26.9% 26.9% 26.9% 26.9% 26.9% 26.9%
Less: tax $145,678 $143,159 $140,565 $137,893 $135,141 $140,487
NOPAT $395,876 $389,032 $381,982 $374,721 $367,243 $381,771
Change (%) -1.7% -1.8% -1.9% -2.0%
Gross Cash Flow $395,876 $389,032 $381,982 $374,721 $367,243 $381,771
less: Capital Expenditures (3% growth) $287,693 $296,324 $305,213 $314,370 $323,801 $305,480
Free Cash Flow ($CAD) $108,183 $92,708 $76,769 $60,352 $43,442 $76,290.60
Total $457,744

Note that changes in working capital was not included because the company had extremely variable history in WC changes, giving the number no effective meaning. Additionally, revenues and variable costs were assumed to grow by the % change in realized price (a cool feature of this NPV calculation, in my opinion) to account for production volume increases in a stronger uranium price environment.

4. The DCF was then calculated by applying different WACC rates and free cash flows, adding cash assets, then subtracting debt. Here is an example at the 15% spot growth price forecast:

DCF per Share – 7% discount rate 2017 2018 2019 2020 2021 2022-2040
Free Cash Flow $501,367,570 $635,284,852 -$72,247,486 $267,643,756 $1,715,246,749 $949,459,088
WACC @ 7% 6.49% 6.49% 6.49% 6.49% 6.49% 6.49%
Discounted FCF $470,800,118 $560,181,999 -$59,822,384 $208,103,035 $1,252,357,230 $6,794,850,396
Sum of Discounted FCF $9,226,470,394
less: Debt $1,965,628,000
Add: Cash & Cash Equivalents $584,810,000
Total $7,845,652,394
Outstanding Shares  395,790,000
DCF per Share (in $CAD) $19.82
DCF per Share – 10% discount rate 2017 2018 2019 2020 2021 2022-2040
Free Cash Flow $501,367,570 $635,284,852 -$72,247,486 $267,643,756 $1,715,246,749 $949,459,088
WACC @ 10% 8.96% 8.96% 8.96% 8.96% 8.96% 8.96%
Discounted FCF $460,124,962 $535,066,314 -$55,844,629 $189,860,813 $1,116,668,797 $4,979,009,360
Sum of Discounted FCF $7,224,885,617
less: Debt $1,965,628,000
Add: Cash & Cash Equivalents $584,810,000
Total $5,844,067,617
Outstanding Shares  395,790,000
DCF per Share (in $CAD) $14.77
DCF per Share – 15% discount rate 2017 2018 2019 2020 2021 2022-2040
Free Cash Flow $501,367,570 $635,284,852 -$72,247,486 $267,643,756 $1,715,246,749 $949,459,088
WACC @ 10% 13.08% 13.08% 13.08% 13.08% 13.08% 13.08%
Discounted FCF $443,369,653 $496,807,280 -$49,963,392 $163,680,151 $927,630,953 $3,091,548,486
Sum of Discounted FCF $5,073,073,132
less: Debt $1,965,628,000
Add: Cash & Cash Equivalents $584,810,000
Total $3,692,255,132
Outstanding Shares  395,790,000
DCF per Share (in $CAD) $9.33

5. Lastly, a matrix was created by pulling each DCF at different WACC and price forecasts:

Cameco Corporation: NPV Matrix
Price Assumption for Five Years of Production
Sustained Spot 15% Annual Growth in Spot Three Yr. Industry Cost of Production 30% Annual Growth in Spot
WACC 6.49% -$4.73 $19.82 $34.92 $68.55
8.96% -$4.88 $14.77 $26.95 $53.65
13.08% -$4.95 $9.33 $18.33 $37.41

This is how I developed my NPV figures. I believe it offers a good approximation of value.

Maximum conservatism was applied in the estimates. Costs were suggested to grow, and production increase only marginally in the face of a much higher price environment.

 

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One thought on “Cameco Thesis: Appendix

  1. Pingback: Cameco Corporation: A Value Investing Thesis – Cameco Corporation (NYSE:CCJ) | BinaryFest.com

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