CCJ will partially fund the acquisition of its 49% share through a $650m bought deal offering.
The deal is being done via a strategic partnership with Brookfield Renewable Partners, who will own 51% of Westinghouse.
The total enterprise value of Westinghouse is $7.87bn. Westinghouse's existing debt structure will remain in place, leaving the buyers an estimated $4.5bn equity cost.
This equity cost will be shared proportionately between Brookfield and its institutional partners (approximately $2.3bn) and Cameco (roughly $2.2bn).
The CCJ share price fell -15% on the news, but the bulls see it as a good long-term move.
Timothy Gitzel, President, CEO and Director of Cameco Corp, said:
As nuclear energy is back in a durable growth mode, Cameco is also back in a durable growth mode, growth that will be pursued in the same manner as we approach all aspects of our business: in a strategic, deliberate, disciplined, and responsible fashion.
What Does Cameco Corp Do?
Cameco Corp (NYSE: CCJ) is the world's largest publicly traded uranium company, with a current market cap of $9.3bn. In 2015, it was the world's second-largest uranium producer, accounting for 18% of world production.
Cameco Corporation explores, develops, mines, refines, converts, and fabricates uranium. The company offers uranium for sale as fuel for generating electricity in nuclear power reactors.
CCJ is based in Saskatoon, Saskatchewan, Canada and operates worldwide.
How Does Cameco Corp Make Money?
Cameco Corp makes money selling uranium concentrate and charging fees for transportation and storage. This comes under its Uranium segment. CCJ also makes money from its Fuel Services segment. Here it sells conversion and fabrication services, including fuel bundles and reactor components, while also charging transportation and storage fees.
Last year, the company revenues exceeded $1.17bn and are estimated to come in around $1.45bn for 2022. Net income was negative last year at -$82m, but CCJ is expected to turn a profit of $77m this year.
In Q2, Cameco's Uranium revenues were up 75% Y/Y due to an increase of 41% in the Canadian dollar average realized price and a 25% increase in sales volume due to the timing of sales.
While the average US dollar spot price for uranium increased by 63% Y/Y, the US dollar average realized price only increased by 38% due to the impact of fixed price contracts.
The total cost of sales increased by 40% due to a 25% increase in sales volume and a unit cost of sales 13% higher Y/Y due to inflation on material purchases.
Production volumes for the first six months of 2022 were 262% higher Y/Y.
Cameco Corp (CCJ) will report its next quarterly earnings on October 27 before the market opens. FactSet analyst estimates provide a sales consensus of $413m.
According to the CCJ acquisition press release, Cameco has the funds and liquidity to buy a 49% share in Westinghouse. But it's opting to do so via cash, debt and equity. This is to preserve the CCJ balance sheet and ratings strength while maintaining its liquidity.
The deal is expected to close near the end of 2023.
Cameco, Brookfield, Westinghouse Acquisition
Westinghouse Electric is a well-known company and one of the world's largest nuclear services businesses. It provides its customers with solutions across the nuclear life cycle.
Westinghouse was bought in August 2018 by Brookfield Business Partners, the industrials and services business of Brookfield Asset Management Inc (NYSE: BAM), from Japan's Toshiba following bankruptcy restructuring. Brookfield has since turned the company around.
BAM has a 25% ownership stake in Brookfield Renewable, which is among the world's largest investors in clean energy and transition assets. It has approximately 125,000 MW of operating and development capacity worldwide.
From the private equity viewpoint, this joint acquisition is the next step in solidifying Westinghouse Electric's future.
Westinghouse has four key business lines:
Operating Plant Services: Westinghouse is a recurring service provider for outages and maintenance, engineering solutions, and replacement components and parts.
Nuclear Fuel: Long-term contracting for the manufacturing and installing of fuel assemblies and other ancillary equipment across multiple light water reactor technologies, including as the original equipment manufacturer for approximately half the nuclear plants worldwide.
Energy Systems: Designing, engineering and supporting the development of new nuclear reactors.
Environmental Services: Services to government and commercial customers that support nuclear sustainability, environmental stewardship and remediation.
Timothy Gitzel, President, CEO and Director of Cameco Corp, said:
The Energy Systems business of Westinghouse is poised for tremendous growth in a world where the International Energy Agency has set forth a roadmap that includes the doubling of nuclear power in a global pathway to reach net zero emissions by 2050.
The contracting strategy and reliable revenue streams of Westinghouse creates a strong financial profile, predictable business, and stable revenue with strong cash flow. We believe Westinghouse's assets are well-positioned to benefit from nuclear power's resurgence.
CCJ Stock Financial Metrics
CCJ stock has a price-to-earnings ratio (P/E) of 193. Its price-to-book-value (P/BV) is 2.3. CCJ stock comes with a dividend yield of 0.42%.
Over the past year, CCJ stock has traded between $18.03 and $32.49. Today it trades at around $22.15. Year-to-date, the Cameco Corp stock price is down -1.8%, while the S&P 500 is down -25.43% over the same period.
FactSet analysts have a consensus Buy rating on CCJ stock with a target share price of $33.46. Analysts at Raymond James and Canaccord Genuity lowered their target share prices while maintaining respective Overweight and Buy ratings on CCJ stock.
A stock with a beta higher than 1.0 is expected to be more volatile than the S&P 500. CCJ stock has a 52-week beta of 0.96.
Market trends
External market trends that could benefit the CCJ Westinghouse deal long-term include:
Critical transition technology: Nuclear power is one of the only zero-emission, baseload sources of electricity currently available at scale. Driven by electrification, decarbonization and energy security benefits, an estimated 400 GW of additional nuclear capacity will be needed by 2050.
Accelerating growth plans: Nuclear power is experiencing a resurgence worldwide, with more than 20 countries across the Americas, Europe, the Middle East and Asia pursuing new projects or plant extensions. More than 50 GW of plant extensions have been announced, and more than 60 GW of new-build reactors are expected between 2020 and 2040.
Energy security: Energy supply chains are under stress due to geopolitical uncertainty. In the short term, the transaction provides the opportunity to win new business supporting dozens of nuclear facilities across Eastern European countries traditionally served by Russia. In the medium term, demand for a stable supply of nuclear fuel and technology is expected to grow substantially, commensurate with the growth in nuclear power generation as countries look to increase energy security.
Technology advancements: There are multi-decade growth opportunities in the rollout of next-generation advanced nuclear technology and long-term nuclear energy storage solutions. Modular baseload generation, such as Westinghouse's eVinci micro-reactor technology, can play a growing role in an increasingly decentralized and decarbonized energy system.
Cameco Corp Growth Potential and Risks
From the Westinghouse acquisition, Cameco sees clear demand for its services in Eastern Europe. Since the Russian invasion of Ukraine, many Eastern Europeans are looking for new routes to supply their critical nuclear power plants to cut dependence on Russia.
CCJ believes business opportunities lie in the region's new and existing customer bases.
Cameco's uranium and conversion offering, combined with the fuel fabrication that Westinghouse can offer, could provide customers with alternative solutions for contracting their fuel supplies.
Westinghouse Electric builds new reactors, including the AP1000 reactor (China has been buying these), SMR, and the eVinci micro‐reactor technology. This means it is well-positioned to capture new reactor business. In turn, this could demand fuel supply, including uranium, meaning Cameco's growth potential is evident over the long term.
There's also potential for revenue growth via waste management and environmental protection.
Is CCJ Stock a Good Investment?
With the world facing an unprecedented energy crisis, uncertainty is leading countries to reconsider their fuel priorities. The stability nuclear energy can provide is looking more promising to many.
If you believe demand for nuclear fuel is set to take off, then CCJ stock may appeal. The CCJ share price has been steadily rising on this premise over the past couple of years. But its revenues have been slipping Y/Y since 2016, and its 5-year compound annual growth rate is -8.5%.
Some Cameco investors are unimpressed by the Westinghouse acquisition because if uranium prices fly, CCJ will be tied to selling at contracted rates rather than enjoying the upside run. Plus, targeting Europe seems risky, given the geopolitical unrest and potential price restrictions over there.
Furthermore, taking on more debt when rates are rising is another risky move.
Meanwhile, the bullish among us see this as a strategic vertical integration that could bring longer-term gains and more growth opportunities.
There's likely to be short-term risk in the CCJ stock price, but for patient investors, it may prove a good time to buy the dip.