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Japan nuclear crisis prompts Cameco downgrade

The nuclear crisis in Japan has hit uranium shares hard today, with fears that it may prompt a rethink of the "nuclear renaissance" that's been slowly moving forward on a global scale in recent years. There's also a more immediate demand issue: several of the reactors in Japan affected by the earthquake are unlikely to be brought back online any time soon, if ever.

TD Newcrest analyst Greg Barnes hasn't wasted any time expressing concerns over the impact to Cameco Corp. . He downgraded the stock today to "hold" from "buy" and cut his 12-month price target to $42 from $51.

Mr. Barnes notes that Japan accounted for about 12 per cent of global uranium demand last year. He estimates that Cameco sells 10 to 15 per cent of its annual volume into the Japanese market. "We estimate that in a worst-case scenario, if Cameco were to lose 10 per cent of its sales volume in 2011, that could not be replaced with sales to other customers, our earnings per share estimate would decline to $1.35 from $1.71," a drop of 21 per cent.

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"We do not believe that the nuclear renaissance would come to a complete halt following the events in Japan, but there is certainly potential that some reactor construction gets delayed, particularly in earthquake-prone areas (like China)," he said.

Desjardins Securities Inc. analyst John Redstone was taking a slightly more optimistic stance. He maintained a "buy" recommendation on both Uranium One Inc. and on Cameco. He has a price target of $8.20 on Uranium One and $46 on Cameco.

"We would suggest that in the medium term (2011-15), the underlying fundamentals of the uranium market should not be affected and world demand should rise from 72,500 tonnes to 78,000 tonnes," said Mr. Redstone.

He does not expect any significant cancellations of future reactors that have already been announced, so uranium demand should continue to grow two per cent on average.

"What is called into question is the potential acceleration of uranium demand - ie the construction of new reactors that have not already been announced.

"We continue to believe that demand will slightly outstrip supply though 2012, taking prices to $80 (U.S.) per pound. Furthermore, we maintain our long-term uranium price of $60 (U.S.) per pound, which we believe is necessary to bring new mines into production," said Mr Redstone.


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Magna International Inc. shares have declined about 17 per cent since mid-January, and the company is now trading at a price-to-earnings multiple of 10.5 times, based on 2011 estimates, said Canaccord Genuity analyst David Tyerman. This is "probably on the low side of the company's potential valuation range, given significant positive corporate governance moves in the past year and Magna's increasing exposure to the higher-growth emerging markets," he said.

Upside: Mr. Tyerman upgraded the stock to a "buy" and maintained a $64 (U.S.) price target.

Savanna Energy Services Corp.'s earnings were slightly below expectations, but the company's Contract Drilling division saw revenues and margins rise to their highest levels in almost two years, noted Canaccord Genuity analyst John Tasdemir. "After spending much of 2010 re-positioning assets, we believe SVY is well positioned for superior growth over its peers as we expect EBITDA to increase 35 to 40 per cent in 2012 year-over-year," he said.

Upside: Mr. Tasdemir upgraded the stock to a "buy" and raised his price target to $11.50.

Agrium Inc.'s stock has dropped nearly 10 per cent over the past four weeks, providing "an attractive risk/reward re-entry opportunity, especially given the lack of negative fundamental developments," said TD Newcrest analyst Paul D'Amico. Meanwhile, fertilizer fundamentals are still strong, with the latest USDA report suggesting that corn ending stocks will remain tight through next year despite increased planted acreage, he said.

Upside: Mr. D'Amico upgraded Agrium to a "buy" from a "hold" and maintained a 12-month price target of $105 (U.S.).

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Patheon Inc.'s restructuring of its Puerto Rico operations - where overcapacity has been a problem - is taking longer than expected and is a significant drag on the performance of the drug manufacturing service provider, said TD Newcrest analyst Lennox Gibbs. He's also concerned by instability in Patheon's executive leadership.

Downside: Mr. Gibbs lowered his price target by $1.50 to $3.50.

Cascades Inc. has agreed to divest Dopaco Inc., a subsidiary that converts packaging paper for use in the restaurant industry, to Reynolds Group Holdings Ltd. for gross proceeds of $400-million (U.S.) in cash. TD Newcrest analyst Sean Steuart said the sale was at "a compelling valuation" and will add to equity value over time.

Upside: Mr. Steuart raised his price target by $1 to $8.50.

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