Cameco Corp (CCJ) 2003 Q2 法說會逐字稿

... meeting is about to begin. And please be advised this call is being recorded.

Good morning and welcome to the Cameco Corporation's second quarter conference call for August 1, 2003. Your host for today will be Bob Lillie, Manager of Investor Relations. Mr. Lillie, please go ahead, sir.

Thank you, operator.

Good morning everyone. Welcome to Cameco's second quarter conference call to discuss the financial results. Thank you for joining us today.

We're pleased to have four of Cameco's senior executives with us. They are Jerry Grandey, President and Chief Executive Officer, Terry Rogers, Senior Vice President and Chief Operating Officer, David Petroff, Senior Vice President Finance and Administration and CFO, George Assie, Senior Vice President Marketing and Business Development.

Today's conference call is open to all members of the investment community and the media. During the question and answer session, we'll take questions from the investment community first followed by questions from the media.

Please note that statements made during this conference call by the company regarding its objectives, projections, estimates, expectations, or prediction may be forward-looking statements within the meaning of applicable Securities Laws and Regulations.

The company cautions that such statements involve risks and uncertainties and that actual results may differ from those expressed or implied. Important risk factors are outlined in the company's annual information form dated April 26 - April 16; excuse me, 2003 on pages 36, 45, 57, and 58. With that, I'll turn the call over to Jerry.

OK, Bob (ph) . Thank you very much and good morning to everyone. And this is Friday morning before a long holiday weekend.

In my remarks today I will touch on the highlights of the quarter, provide a brief update on Bruce Power as well a little bit of an update on our gold restructuring efforts. And I'll ask David to review financial highlights of the second quarter and following that George will provide an update on the Iranian market and then Terry a review of our operations, both gold and uranium. I will make one of the - our remarks with some recent developments in the uranium industry as a nuclear energy industry and then we'll turn it over to questions.

Well I'll begin with the quarter's highlights. Net earnings in the quarter were impacted by four major items: first, the McArthur River water inflow, second the continued pit wall clean up at Kumtor, Bruce Power earnings, and lastly a tax adjustment recently from gradually reducing federal income tax rates.

Now tucked behind these items are conversion services business showed an increased profit margin. Uranium stock price was up about one dollar from the second quarter, 2002 to the second quarter of 2003. Obviously going the right direction.

Obviously the tax adjustment had the biggest impact on the second quarter adding net earnings of $1.54 per share. While we're pleased to see tax rates decline and in particular with respect to future earnings, this quarter adjustment emphasizes a one time, non-cash entry and is not reflective of our normal course earnings.

Overall, we are satisfied with the results of our business segments, which accounted for net earnings of 32 cents per share excluding the tax change. This is line with our expectations given the impact on uranium profitability caused by the water inflow problem at McArthur River, which began in early April.

In addition, our Kumtor gold mine has regain access to high-grade ore and as a result, third quarter gold production should be 50% higher than the second quarter.

And we are pleased that the McArthur River mine is now back in production earlier than expected. We just comment that it's a reflection of the dedication and the creative problem solving of our employers, our contractors, and our suppliers.

Moving to Bruce Power, the sight continued to build on its solid track record generating five point three terawatt hours in the second quarter, slightly more than the same period last year.

With respect to the Bruce A units, all of the modifications and physical work for the first A unit is now complete. And efforts continue to test or commission some of the enhanced safety modifications that we have made in accordance with regulatory requirements. In making this investment, our first priority has always been perform this work safely and properly so these units will run reliably for years to come once they are restarted. And our expectations is they will run as reliably as have the Bruce B units in the first part of - or the first half of this year.

The regulator is reviewing Bruce Power's documentation associated with the first unit, which will return its service following final stage commissioning and regulatory approval.

Our expectation remains that the second unit will restart approximately one month later.

And once the investment is complete and the two units return to service, this will add 1,500 megawatts capacity to the Ontario grid.

Now during the second quarter about $40 million per month was invested by Bruce Power on the A restart, bringing the total investment to date to about - total investment to the end of the second quarter to about $610 million.

The largest portion of the investment is due to internal salaries. Since there has been continued need, a continued need for internal labor dedicated solely to the restart, as well as our ongoing contractor support.

Going forward, as contractor support declines, the investment rates should be in the range of $30 to $35 million per month dropping to half that amount after the first unit restarts.

And speaking as an owner looking for a return on Cameco's investment in Bruce Power, the level of investment so far for 1,500 megawatts of additional power we believe is a solid investment and certainly worth being patient for.

Let me now turn to our efforts to negotiate an agreement with the government of Kyrgyzstan to restructure the Kumtor mine ownership. Additional discussions took place during the second quarter and the Kyrgyz government has asked for a second fairness opinion on the proposed restructuring.

The first opinion was contracted for by our joint venture partner. In the International Monetary Fund, or IMF, has suggested that the first opinion for them may not have been sufficiently independent nor did it examine the macro economic impact of the restructuring on Kyrgyzstan's national budget.

Subsequently, the IMF suggested in a second opinion to consider these larger or more macro impacts. The World Bank will be responsible for this work and the recommendations are expected by the end of the third quarter.

As might be expected, the restructuring issue has become politically sensitive within Kyrgyzstan. And while we continue to pursue the ownership restructuring, because we think it is in the best interest of all parties, we cannot be sure of the outcome.

We made the statement previously and in completing the restructuring we believe it would be in the best interest, as I indicated, of all parties and obviously would be an important step on our strategy to consolidate Cameco's gold assets into a single entity that is better positioned to realize higher value for our shareholders and for the Kyrgyz republic.

We will continue to examine all options to maximize the value of our gold assets for our shareholders.

With that I'll now turn the microphone over to David who will talk about second quarter financial results. David?

Thank you, Jerry.

Well, excluding the non-cash tax adjustment, which I'll discuss in a minute, our year to date earnings were $55 million or 99 cents per share, which was pretty much what we expected. And the results benefited from improved contributions from Bruce Power and our uranium conversion business.

Now I won't go into detail as you probably have the news release in front of you, but I will briefly mention some highlights in the segmented results for the quarter, provide some background on two special issues, and then conclude with a preview of the second half of the year.

Turning first to the uranium business, McArthur River rehabilitations costs, including the care and maintenance costs of the Key Lake, resulted in an after tax reduction in net earnings of $12 million or 22 cents a share in the second quarter. Now this was pretty close to the forecast we provided to the market soon after the problem developed in April.

We hope to have the affected area of the mine permanently sealed off by mid August. But in the meantime, rehabilitation costs at McArthur will continue to reduce net earnings by about one million a month.

At fuel services, our conversion business continues to produce solid results. Earnings before tax increased three million dollars during the quarter compared to a year ago.

In the electricity business, Bruce Power contributed $17 million pre-tax to the second quarter results, also an increase from 2002. And this was due to higher output, higher prices, as well as the increased ownership that Cameco has.

And in gold, pre-tax earnings were slightly higher quarter-over-quarter and this was even the case although less gold was poured and delivered.

So the two issues in the quarter requiring some additional comment are the tax adjustment, which we recorded, and Cameco's earnings from Bruce Power.

So I'll start with the easier one first, which is the tax adjustment. Reduction in income tax rates was an important contributor, obviously. In June, the federal government introduced amendments to the Canadian Income Tax Act that will provide for a future reduction in the corporate tax rate on income from resource sector activities. Federal tax rate will decline from 28% to 21% over a five-year period beginning this year.

So under Canadian accounting rules, the effective a change in income tax legislation is included in a company's financial statements when that change is being substantially enacted. Which means, essentially when the proposed tax legislation enters the Parliamentary approval process. This occurred in June with the first reading of the proposed legislation. So as a result, Cameco has reduced its provision for future income taxes recognizing this one-time, non-cash favorable income tax adjustment of $86 million or $1.54 per share in the second quarter. The cash benefit will occur over time as we pay lower taxes in the future.

Now excluding this one-time tax adjustment, year to date income tax expense increased $17 million over 2002 primarily as a result of the significantly higher earnings from Bruce Power, which are taxed at the rate of about 33%.

The effective tax rate on a consolidated earnings basis was slightly lower at 33% compared to 35% last year. Now this was due largely to lower earnings in our uranium business. In other words, proportionately more of our earnings came from jurisdictions with relatively favorable tax rates.

So that leaves me with the other item that I want to talk about and, which is a little bit more complicated.

During the quarter, Cameco's earnings before taxes from Bruce Power were $17 million. Now you may ask, as I did, how can Cameco's pre-tax earnings be $17 million when Bruce Power's total pre-tax earnings were only slightly more at $19 million. Good question.

The explanation lies in the fact that Bruce Power is a limited partnership. After Bruce Power does all its--all of its accounting, there is still more accounting entries that Cameco needs to make, and I'll give you two examples. Cameco paid $204 million for the added 16.6 percent interest in Bruce Power this February. Now this amount is on Cameco's balance sheet and needs to be amortized over the life of the asset--over the life of the purchased asset. Cameco, not Bruce Power, but Cameco needs to make appropriate accounting entries to reflect this circumstance. Part of the acquisition was not just on the asset side, but on the liability side. We acquired $69 million liability which was related to the marked to market value of the power purchase agreement. If you see note two to our quarterly financial statements, this amount is disclosed. But just like assets are amortized, so are liabilities. So this liability is amortized over the life of the power purchase agreements. Because the power purchase agreement only extends to 2007 currently, this amount is amortized in a much quicker fashion and front-end heavy compared to the amortization of the assets we purchased. So amortization of this liability increases earnings that Cameco reports from Bruce Power.

Now those are two examples, there are other adjustments and I won't detail them all, but the net result was a $10 million increase to Cameco's pre-tax share of earnings from Bruce Power. Now this amount will reduce over time. It's likely to be, I would say 10 percent lower for the third quarter and maybe significantly lower for the fourth quarter, but we still expect additions to our proportionate share of Bruce Power's pre-tax earnings for the balance of this year.

And so finally--hopefully that was as clear as mud to some and crystal clear to others. Finally, as we enter the second half of the year, we expect to see improved earnings from operations at Cameco because the river is now back in production, at Kumtor the higher grade ore is being accessed, and there is a favorable outlook for Bruce Power. So for each of our four products, uranium, conversion, power and gold, quantities delivered in the second half of the year are expected to be, say about 55 to 60 percent of annual volumes and for these volumes, about--well, a range of 30 percent to 50 percent of the prices are already fixed by contract. So we feel very confident about the outlook.

And with that, I'll pass things on to George.

Thank you, David, and good morning everyone.

The industry average spot price at the end of the quarter was $10.90 per pound U3O8, which is an eight percent increase from the end of the previous quarter and a $1 increase from the value reported at the end of the second quarter of 2002. And all these prices that I'm referring to are in U.S. dollars. 2003 spot market volume to the end of June was just under 10 million pounds as compared with volume of about 12 million pounds in the same period last year. And although we're slightly behind it mid-year, we still expect 2003 spot volume to be similar to last year and we expect the end of the year somewhere in the 18 to 20 million pound range.

Spot price moved up quite significantly in the latter part of April from $10.10 to $11 and it subsequently settled at $10.90 and remained there for really the rest of the quarter. And we're now into what is traditionally the slowest part of the year for the market. However, near term uranium supply is relatively thin, and based on limited market demand, the July 31st spot price as reported by TradeTech (ph) this morning has moved up from the $10.90 to $11.20 per pound U3O8. Unfilled utility requirements for the remainder of 2003 are relatively small and we expect the market to be fairly quiet for the next few months. However, as we move into the fourth quarter, we expect demand to pick up as utilities look to cover some of their early 2004 spot requirements and that may result in some additional strengthening in the spot price prior to year end.

Looking at the longer term, long term price indicator as reported by TradeTech (ph) moved up significantly at the end of April from $10.60 to $11.75 and that's where it remains today. Going into 2003 we had expected the volume committed under new contracts to be in the same order as last year, which was about 70 million pounds. There is now some speculation in the nuclear press that activity in the long term market may be increasing more than what had been anticipated and consequently, that volume may be somewhat higher. An increase in long term contracting volume is not totally unexpected given that the industry generally has been aware for some time that uncovered utility requirements increase quite dramatically within the next few years. Looking at the U.S. in particular, the Energy Information Administration recently reported that not only have cumulative contract commitments over the forward 10 year period declined, but reactor requirements have also increased due to higher capacity factors and uprates (ph) . As an example, the Energy Information Administration reported that at the end of 2001, unfilled needs in the U.S. in 2006 were about 42 million pounds U3O8. At the end of 2002, they report unfilled needs in 2006 were reduced only very little to 41 million pounds. Again, the reason is not only that volume contracted has been significantly less than needed, but also that reactor requirements in the forward period have also increased. And this is true to some extent for non-U.S. utilities, although the degree to which they are uncovered is not as great.

In summary, the level of long term contracting will have to pick up appreciably over the next 12 to 18 months and as it does, the expectation is that both the spots and long term prices will strengthen as well.

Turning to the UF6 conversion market, the spot price for North American conversion declined slightly over the quarter by eight cents to $4.95 (ph) a kg, while the European spot conversion price increased from $6.38 to $6.50 (ph) . And again, these prices are all in U.S. dollars. The price differential is due to the imbalance of UF6 supplies available in North America versus Europe. The fact is that there is significantly more conversion capacity in North America than in Europe, while there's significantly more enrichment capacity in Europe than in North America.

The price differential is, in large part, reflective of the comp of transporting the UF6 to Europe, which is in the order with [Inaudible] . It is also impacted negatively by the fact that in the near term, there are excess supplies of UF6 available to North America that are not easily transported to Europe. This is having a dampening effect on the North American spot conversion price in the near term. And as those excess supplies are worked off, the spot to UF6 conversion price should recover. The long-term UF6 conversion value for North America held steady at 520 and is reported as 650 in Europe.

And finally, a few words on the HEU Fleet (ph) agreement. The agreement continues to work well, and we expect the equivalent of 24 million pounds, U-308 to be delivered as UF6 in 2003. UF quota this year is 12 million pounds, and we estimate that at least that amount will be purchased. The remainder will be returned to Russia, and of that quantity, just under 7 million pounds will be available for use by the Russians for blending, and the remainder will be placed in the monitored inventory. That concludes my remarks, and I will turn the call over to Terry Rogers, our Chief Operating Officer.

Thank you, George, and good morning everybody. First of all, as Jerry and David have indicated, McArthur River restarted ahead of schedule on June 30th, which kept the shut down to just under three months. However, water is still flowing into the mines, but it is contained and we are in the final stages of backtowing and routing the field tunnel to enable us to significantly reduce the inflow in about two weeks time.

While we have three mining machines backing ore at present, we will not be able to return to the Swedish production chamber until late this year or early next year. That area is the one that was closest to the failure area, and that's been filled with concrete to protect against potential failure during the pressuring up of the failed cavity.

The routing works will continue there for some weeks yet and we will continue to monitor the ground conditions closely. We're still experiencing total inflows of up to 900 cubic meters per hour, and we are pumping that from the mine to the water treatment facility. No untreated mine water has been discharged during this event.

And internal incident review team was assembled to review the circumstances of this incident. The team is comprised of chemical technical people, who are not directly involved in day to day operations with McArthur Mine. While the review does not point to a specific trigger event, the lesson learned is that as we approach the unconformity, as we did in this case, we'll be taking a sort of belts and bridges approach to ground support. That may include any one of a number of options. Freezing the ground in advance of the development, perhaps extending the route curtain or installing structures in the drift to doubly protect against failure. We would not anticipate these types of measures to add appreciably to the unit cost of operations.

So, allow me to address production. As noted in the quarter release, it has been a challenging six months for production. McArthur River and Key Lake fell about 5 million pounds behind schedule during the flooding event. And we have reset our year-end target of 13 1/2 million pounds U-308 for McArthur and Cameco's share of that is 9.4 million.

While Rabbit Lake made its first-half target of 3 million pounds, production continues to be constrained by poor ground conditions. As a result, Rabbit is expected to produce 5 1/2 million pounds in 2003, slightly below the 6-million-pound target. The ISL operations in the U.S. are slightly ahead of their targets and are expected to reach their original planned production of about 1.9 million pounds this year. In total, Cameco's production is expected to reach 16.8 million pounds compared to our original target of 20.9 million pounds.

On our uranium development project, our ISL test mine in Kazakhstan, the Inkai project, is ahead of schedule. Work continues on preparing the feasibility study with the results expected by year's end. At Cigar Lake the summer site preparation work is progressing well after a slight delay in start, awaiting approval of the CNSC. This is an important project that affords us flexibility to accelerate the construction schedule once the decision to proceed is made by the joint venture committee. Our fuel services division in Ontario was also on track for the year to meet its production target of 12,900 tons of uranium is about 4% higher than 2002's production.

In our gold business, the Kumtor mine in the Kurdish Republic is, once again, back in the high-grade zone that was covered by last year's pit wall failure. Although the entire debris field is not yet mined through, we were able to start mining a narrow bench in the high-grade zone. Mining through the rubble was delayed to allow the establishment of drill benches for the geotechnical investigation work. This will [Inaudible] the access to the high-grade zones. Expect average mill feed and grade to reach 5.6 grams per ton the second half of 2003 compared to just 3.6 grams in the first half.

Right now our gold production is about 10% ahead of budget, so we expect to meet the annual target of 670,000 ounces. It's an average mill feed rate of 4.6 grams per ton on the year. The Boroo project in Mongolia is about three months from construction completion and its test startup. Commercial production is expected to start in the first quarter of 2004. The expiration project, REN, in Nevada has finished its Phase I drilling and its results are still quite encouraging, although no resource estimate has yet been made. Phase II drilling will start soon and is budgeted for $2.6 million. That includes about 11 drill holes and a scoping study for possible development. That's it for production. Back to Jerry.

Terry, thank you very much. Before opening the phone lines to questions, there have been a couple of significant developments in the nuclear energy industry. I just want to touch on those briefly, and in particular, on the political front.

First, the Ontario government announced that it will encourage the development of new energy capacity through a program of tax incentives for clean, alternative and renewable sources and specifically included nuclear energy. I would say that this is the second North American government - regional government - that has specifically recognized the clean air benefits of nuclear energy.

At the U.S. federal level, in an effort to reduce the reliance on imported oil and to cut greenhouse gas emissions, the U.S. Senate voted to provide up to $16 billion in loan guarantees for the construction of new nuclear power plants. This coincided with a report to Congress by Alan Greenspan, who expressed concern about tight natural gas supplies, higher natural gas pricing, and what that might mean for electricity prices in the future and the U.S. economy. And Greenspan specifically encouraged the U.S. government to explore ways to expand the utilization of nuclear power.

These are important steps taken by governments, laying the groundwork I believe for a future with clean, affordable, and reliable nuclear electricity.

And finally, in Japan, where Tokyo electric power has been struggling with it's fleet of nuclear plants, they have now restarted about four units and while they're making slow progress, they are making progress toward the restart of all of their units.

So, in sum, the industry continues to gain recognition, it continues to gain momentum, it's something that we look at constantly, and I believe that it will lead to significant new nuclear construction in the - in the future.

And with that, we'll, then, open it up to questions from all of you.

Thank you. We will now begin the question-and-answer session. We will be taking questions from the investment community first, followed by the media. If anyone from the investment community has a question, please press star, one on your touch-tone phone. If you are using a speakerphone, please pick up your handset and then press star, one. If your question has already been asked, you may press star, two to withdraw it. Please go ahead if you have any questions.

Your first question comes from Victor Lazarovici. Please go ahead.

I am. Jerry, can you hear me?

I can hear you fine.

OK. Number of questions on the accounting - for Bruce, I guess is the first place to begin. The note that David referred to suggested that the adjustments in the quarter related to the acquisition of the second tranche of Bruce and in that adjustment was a negative allocation of purchase price to the contract and that was the mark-to-market adjustment. There doesn't appear to be any disclosure on what happened to your carrying values for the first 15%, so I'm wondering if the adjustments shown are net to date or if there's another adjustment as well. And I guess the question is, "Was the acquisition of the 16.4% a triggering event to restate your carrying values for the first 15%?"

OK, Vic, I'm going to - I'll ask David to respond to that.

Vic, the acquisition of the second tranche did not trigger anything differently in the way that we account for Bruce. From the very beginning when we purchased the 15%, we did have - we did and we still do have adjustments for our purchase, but they are much more modest in size. And I think I mentioned that there are a number of adjustments, not all of which that I went into, which are affecting things.

Did you mark-to-market the 15% interest in the contracts, as well, or just the 16.4?

The mark-to-market value was based on what we acquired at the time. So it would be just the 16.6 percent of the contracts.

So, you're carrying the same contracts on your books for the initial tranche at book value, and you're carrying the 16.6% interest in the same contracts at a lower value. Is that correct?

When we acquired the 15%, we valued the assets that we were acquiring at the time. There was no mark-to-market amount recognized for the contracts at that time. [Inaudible]

Would it help (ph) that there was no contracts - no long-term contracts at the time because it was a regulated market.

No, I understand that. Then, as you booked these contracts, they were booked at presumably book value, and then when you acquired the second tranche, you assessed the value of those contracts to be less than the book value that they were on your books for.

Right, because we're required to, when we allocate the purchase price, we're required to value individually the assets that we're acquiring, so we had to look at the portfolio of power purchase agreements by themselves and say, "What is the value?" And because the spot price and the longer-term price was high in the first quarter of this year, we had a mark-to-market loss on that portfolio at that time.

If I'm following you, you had a mark-to-market loss on half of your interest in the portfolio because you haven't marked down the first half interest - the 15% you had initially.

You're right. We were not - we were not required to revalue the 15%. It was just the 16.6 that we were acquiring.

OK. Just sticking to Bruce for a minute, in the quarter when we adjust for the difference between the Bruce accounting and the Cameco accounting, the production costs at Bruce were about thirty-nine-and-a-half dollars per megawatt, which was quite a bit higher than in the prior quarter. Can you explain why that [Inaudible] cost went up and then what we should expect for the third quarter and beyond?

Part of the reason that the costs went up on a - on a unit basis was the fact that Bruce Power is paying higher interest on amounts, you know, as the - higher interest on the amounts that it's using to fund its operation. And I expect that that will not go away until they start generating some more cash from the Bruce A (ph) reactor.

So, that will stay high for at least part of the third quarter?

You also had one unit that was an outage - scheduled outage, Vic.

You're comparing first quarter to second?

And also to guidance for the second.

Pardon me?

And also to the guidance we had from the second quarter.

I don't remember the guidance for the second quarter but, you know, when first quarter we had 100% capacity factory utilization and the second quarter we did not. We had the one unit out.

Yes.

So you have the same fixed costs spread over a lower quantity of production.

OK, if I could leave Bruce for a minute and turn the HU agreement. I'm not quite sure I followed the numbers that were mentioned. I think the suggestion was 24 million pounds of the U308 was going to be delivered to North America by the Russians in equivalent form UF6. And that only 12 million left the quarter and that the rest would be returned to Russia, which I think George said was seven million. I'm not quite sure how we get from 24 to 12 to seven?

OK.

I'm not really sure those are the correct numbers, either.

All right. I'll ask George to respond there.

OK, the 30 metric tons of HU expanded down each year yield, in fact, about nine thousand tons of UF6 or the equivalent of 24 million pounds of U308.

The quota in the U.S. this year is 12 million pounds. So you start off with 24 million pounds equivalent coming in under the HU feed arrangement. You have the purchases of the HEU feed buying somewhat in excess of the 12 million pounds, slightly over the 12 million pounds.

So, let's make it 14. So then you've got 10 remaining. Of that 10, it gets shipped back to Russia, that's the arrangement. And the Russians themselves have the ability to withdraw the equivalent of about seven million pounds or blending down HEU, for their HEU.

So does that mean there's three million pounds that goes back into inventory?

That's correct.

OK. Thank you that kind of fills in the blanks.

Anything else there?

No. That's it, thank you.

Thank you.

Thanks. You next question comes from Rudy Mueller (ph) . Please go ahead.

Yes, I have a question, two questions. First is on the ink high time schedule. And the feasibility study you say will be done by the end of this year, what kind of a size mine are we anticipating and how many years worth of production might there be against that production target?

Rudy (ph) , good day. Yes, the feasibility study is on track for completion by the end of the year. Assuming it's positive, then we would proceed with the construction of a ISO here leeching facility. And I think our best guess at this point in time is 2006 for operation.

And because ISO operations are flexible in terms of their production size, you know, we've been looking at anywhere between say 2.6 million pounds or a thousand tons U per year up to perhaps double that over time. That would take some time to arrive at the higher levels. But that will be a market dependent decision and also a decision based upon the investment climate and Kyrgyzstan at the time.

OK. Thank you.

Yes.

Second question on the Mongolian gold mine. You say that's going to start up in the first quarter. How soon will you reach full production and how many years worth of reserves do you now see against that production?

OK. I'll ask Terry to respond to that, Rudy (ph) .

Hi, Rudy (ph) . Yes, it'll start in commercial phase or the ramp up to it really shouldn't take very long. Our Kumtor experience is any example it should be just a matter of a few weeks.

So we're looking in a nominal production of 180 thousand outputs a year there.

How many?

One hundred eighty thousand.

One hundred eighty thousand, OK. And how many years worth of production do you have?

About eight or so, I guess.

OK. And what are your prospects are for finding additional reserves as you produce?

Quite good. There's quite a big reserve and we are continuing to drill that. We have adjacent property as well to investigate.

Thank you.

Thank you, Rudy (ph) .

Your next question comes from Terrence Orthland (ph) . Please go ahead.

Thank you. Good morning, everybody.

George, to continue with the markets, maybe for 2003 you said the un-contracted demands is pretty small. Yet, could you review if there are any unusual characters show up for the since the McArthur and the psychology has changed. And two, on the 2004 do you have any feel for the contracted volume?

To answer your first question, with respect to well the aftermath of the McArthur River situation, I think that it's probably fair to say that certainly at the time that that happened a lot of people started to review their inventory policies or contracting policies. It's also fair to say that probably not a lot of them have done much about it in the interim.

Now having said that, if you look at the EIA data you'll see that utilities have been very active over the last few years contracting on through and of course as I pointed out in my remarks, have not been very active contracting on uranium. So I think that some of the implications of what happened at McArthur River may result more as those utilities come to the market to actually contract, it'll be reflected in what inventory policies they decide to implement there. Or the way they intend to contract.

I guess what I'm looking for is that, in that context, are any of the comparable lines, let's say over the years, living from hand to mouth also in changing to the picture, in changing the picture and coming back in the sense of saying, OK, we'll be the ones leading the pack here. Are there any outstanding reactions like that?

I, certainly, you know, there's utilities thinking about that, Trey (ph) , but I don't want to suggest that there's a, you know, a huge rush of utilities looking to change their contract position at this time. I think it's, as I said, I think it'll be self as they implement their contract strategies over the next year or so. That's when we'll see the impact.

OK.

You also asked about the level of the spot volume for next year? At present the way the market shapes up, utilities, you know, like you said wells demand in about '06. So it's generally speaking utilities are still relatively well covered in 2004 and I would expect a spot market volume to be, you know, in that 20 million pound range.

As price starts to move rather quickly then you could see things happen where, you know, utilities just discuss what inventories to add to their inventories and that might increase the level of spot market volume. But at the present we're forecasting something in the order of 20 million pounds.

OK. Let's come back to McArthur, Terry. Not in cubic meters an hour, how does it fluctuate from time to time? And with the shaft number one, I think it caused the [Inaudible] in the shaft, you have capacity of now 600 cubic meters an hour?

We have capacity of about a thousand cubic meters an hour if everything's ready, but we have quite a bit of fluctuation in the inflow and it varies even from day to day. But we're able to easily contain now with not running all the pumps [Inaudible] coming in.

[Inaudible] as an average, but are you hitting more on that obviously?

Oh, no, no. Actually in the last few days it's down a couple hundred cubic meters an hour from that figure.

OK.

And that's as we're--as we're grounding (ph) that cavity and peeling (ph) it off, the flow is reducing.

OK. So critical rate (ph) for that is for the next four to six weeks?

Yes.

... grounding (ph) is over?

I think the grounding will continue. The low pressure grounding, that is to cement--you just fill the void of the caved area, may go a little quicker, but the pressurized grounding (ph) above, in the rock above that, will maybe even last for months from here.

OK. So you go like 2004 if the go-ahead comes true, then what happens?

At that point in time, assuming we have permission of the regulators, the second quarter of 2004, then under the partnership documents the partners would come together to decide upon a development, basically make a development decision at that point in time. The way the partnership agreement is constructed it requires a vote of over 50 percent to take the project forward for development.

OK.

And that mechanism persists for about a two year period. So a party (ph) Cameco of course has over 50 percent, can make the decision whether the project proceeds with development. And as we've indicated a number of times in the past, the decision is a market based decision from our perspective.

Sure. Yes, sure. And finally a big comeback to Kurdese (ph) issue of Fairness Opinons and all, obviously the [Inaudible] going on for awhile, I can't see--the issue--is the issue really comes down to owning the asset versus the cash flow?

Well, are you speaking from the Kurdish (ph) side or...

Correct. In other words, can it be resolved in such a way whereby Cameco will take their one-third of the production as in kind and put into Cameco gold and--or is going to be--initially this thing started with them rolling in their interest into Cameco gold, right?

Yes, a subsidiary of Cameco gold.

Right. And I guess I'm--I can't see the [Inaudible] of parting way with this asset. As you said, they are gold to gold (ph) connotations to it. So can it be resolved in such a way that each party will take their gold in kind and this thing is dealt with or you still looking into the original business plan whereby they roll in their asset into some subsidiary of Cameco gold.

We explore really all kinds of options here as to how to structure this thing to overcome political sensitivities. Obviously Kumtor has been and continues to be a very important asset for the Republic of Kurdistan and it's that political sensitivity that I think is the largest impediment. We do have the suggestion now, the IMF to go back and have a second Fairness Opinion. The first Fairness Opinion was supportive of the transaction, but we are now in the mode of obtaining a second opinion; that's underway and hopefully by the end of September. The possibility of taking in-kind production really can't be done until we have the banks paid back, in any event. but I'm not sure that that's--that would really answer the political sensitivities for the government.

What is the political sensitivity...

I think it's just simply the importance of the asset and the fact that the government now participates directly. It receives dividends, which are sporadic as we know, and what we've offered is a more predictable revenue stream and that's attractive to the government. So it's the balance between more predictability so that they can plan budgets and conduct affairs and respond to the international banks, versus being an owner and receiving dividends on a less predictable schedule.

Well, we can tell them that [Inaudible] is a solution, so. [Inaudible]

Thank you, Terry (ph) .

Thanks.

Anything else?

No, I'm done.

OK.

Your next question comes from Steve Bonnyman. Please go ahead.

Yes, good morning, gentlemen. A few questions, if I may. First on Bruce; we've had sort of continued slippage in the restart of the reactors. At this point in time, what guidance are you getting from the partnership in terms of the timing of restarts of those reactors?

Steve, you're right and it makes us a little bit reluctant to set another date out there. We'll emphasize that everybody at Bruce Power is working extremely hard, weekends and 24 hours a day, seven days a week on the restarts of these units and the guidance from partners and people at Bruce Power has been to make sure that this is done safely and properly. So that is the overriding concern. The physical work is finished, as I indicated in my opening remarks, and now it comes down to making sure that the documentation for what has been done, for all of the safety features that have been put in, that the documentation is now up to speed and that it's fully done in compliance with CNFC regulations and signed off by the appropriate people. So I think from--you talk in terms of the guidance, I guess, that we're getting, I think that Bruce Power management feels quite comfortable that they're just on the final legs of the race here to get this thing done from a quality perspective to the satisfaction of the CNFC and then ultimately bring these units back to, hopefully the first one still within the month of August and the second one a month later.

Well I guess then, following that on, then, on the assumption that all of these are running by the end of the year, could you refresh for us what the capacity utilization expectations are for next year? What scheduled downtimes are in place for...

They're...

... A or B series?

Only one now scheduled outage for the B units. I think we said that that's a two month outage for the balance of the year. There will be no other outages, any other scheduled outages, if you will, for either A or B units. We have said that once the first A unit is running for about eight months then it will be taken down for a schedule outage just simply to see how it performs and to make sure that all of the upgrades are performing as expected and that we can understand, you know, how it has performed. So that will not, occur, however until 2004.

Sorry, just refresh, then. The B unit's going down for two months that was in Q2 if I recall.

It'll be, no, there was a - it was one outage in Q2 that was one of the units. There is one other B unit scheduled for a two-month outage and that will straddle the third and fourth quarter.

Three Q, four. And, if I just heard you correctly, you said after eight months you'd take the A units back down for ...

One of the A units.

OK, so that would obviously be in Q3 or, sorry, in 2004?

That's correct, Steve.

OK.

On the gold side, obviously you're back into the high grade. The forecast that you've given for production profiles in the latter half of the year would be a couple of real booming quarters for you. Can you share any guidance with us on cost structure for those quarters for the second half?

Yes. I'll ask David and Terry to make contributions to that.

OK, well the, obviously the costs are going to come down. We've had a run up in costs. I think the first quarter that it happened after the slide, which would be third quarter, the costs spiked up fourth quarter last year and first quarter this year the - we found a little bit more gold than we were expecting in the benches and the costs came down.

And then in the second quarter the costs were back up there, as you can see in our quarterly report. We expect that the costs are going to come down below $200 an ounce for the third and fourth quarter. How far down below $200 we'll have to see.

OK. I would just guess slightly below $200 would be a safe guess, Steve (ph) .

OK. No, that's helpful. Thank you.

And I guess the last one for David, if I may. With the changing tax rates going forward, your guidance for this year obviously won't change. You're in the 30 to 35% band. How can we see that evolving, all other things held equal, over the next year or two?

Well it's, Steve, it's going to be - it's hard to predict. It depends on which assets are generating the income. But certainly to the extent now that our uranium our conversions are uranium activities are going to be taxed lower than the - they were before. That's definitely going to bring our tax rate down.

So it's seven percent over time on the federal side. There are - we lose the resource allowance, of course, but we do get to deduct provincial royalties. So that's going to help quite a bit.

So I'm thinking if our, on the uranium side, if it's about 45%, 46% then it'll be phased in over five years and come down seven. So that should help overall.

But down seven percent over five years? And it's a relatively linear transition over that period?

It is relatively linear and then remember that uranium is not our sole product. So it's to the extent that, you know, it's proportionate shares, 45%, so it's going to be lower. So that's ...

Sure.

... it's going to be a slow phase in.

And that decline would obviously apply to the uranium, the conversion. Can I assume it has no impact on Bruce Power?

It has no impact on Bruce Power.

Fantastic. Thank you very much.

Thank you.

You bet, Steve.

Your next question comes from Greg Barnes (ph) . Please go ahead.

Thank you, Terry. I don't belabor the Bruce A situation, but my understanding is the regulators are reviewing about 55 issues that they wanted to address in the restart process. I was wondering if you had any idea where they stand on those issues now? How many they've picked off?

Greg (ph) , my understanding is that most of the outstanding issues have been dealt with, ticked off, and they're now done to sort of the final issues. The exact number I can't give you. But I think from the sense I get is that everybody feels like they're very close now.

OK. Thank you.

Yes.

Your next question comes from Brian McArthur (ph) . Please go ahead.

Good morning. A couple of questions, if I could, please. First of all, David, not to do this Bruce accounting over and over but just so I'm clear on it, the excess of fair value over book value of $124 million, I assume that's just being amortized linearly over the 'til 2018. And it's the very valuation of the Bruce Power sales agreement of negative 69, which is being amortized basically as contract expires.

So that as we go forward, the only change on this, if you want, negative amortization relates to not price but how many contracts expire between now and 2007 and you're saying there's a lot more come off in the third quarter so there's a big hit and then after that it's going to be smaller.

Is that sort of correct?

You've got it correct, Brian (ph) . The - what we pay for the assets is amortized over the - over the life of the lease. The purchase power agreements are amortized over a shorter timeframe.

There isn't a big drop from third quarter to fourth quarter from those. But another factor, and I try not to go through all of them 'cause it is quite technical as you know, but Bruce Power and Cameco have different accounting policies. And they expense their interest during construction and so to the extent that they're accumulating their pay interest in respect of Bruce A restart costs, that's just being expensed on their statements. Cameco's policy is to capitalize interest during construction. So we are adding that interest back.

And that's the big difference between the third and fourth quarter.

The contract will continue to run as a gradual reduction. They are front-end loaded.

Right. But if power price went way, way up so that it even went higher than where they were set originally, are we going to have a negative adjustment or could we, no, right?

No. We don't revalue ...

Right.

... the assets. It was done once on February 14.

Right. So it's just the volume fall off basis that has the impact?

Yes.

OK. Second question maybe for George. I just wanted to, you talked about how the ATU agreement worked and your estimate is there's three million pound going back into the stockpile this year. Can you tell me where that stockpile sits in Russia right now?

If it's three million pounds that go back into it, Brian (ph) , it would sit at about 45 million pounds by year-end, 2003.

And if, if I remember, it 56 or 55 million, which is the critical level.

Yes, 58.

Fifty-eight. So if we look forward to next year, you know, you'll bring 24 in, there'll be 14 that go into, you know, the U.S. And I assume the seven is sort of an ongoing number that they need to blend each year, like the quality is not changing over there so they need 8 or 9 or 6. Is that a fair assumption?

Yeah, it is. And so, as the U.S. quota increases and more and more of the material is bought, we really start to peak out here over the next year or two with respect to the level of the monitored inventory and then it would actually start to decrease, 'cause they could continue to withdraw their 7 million pounds a year.

Right. And I guess, I was just checking, there's no way, I know it's a chemical equation or whatever, it's unlikely that they would ever use less than 7 as we go forward.

No. I think it's fair to say that, economically, it's in their interest to withdraw 7. They don't have the ability to withdraw more than that in any given year. They're only able to withdraw 7.

Withdraw 7, ok. Thank you. And my final question, sir, just following up on Steve's for this tax rate. You know, the Canadians, we say the uranium operations were at 45. I thought there were tax pools and things that gauge that so that full 7% might take longer to come off, or is that not correct any more?

Well, there's the difference between the cash taxes and the accounting taxes. So, the accounting tax rate, the effective tax rate that we reported in our financial statements will come down. But there are tax pools and we're not expecting any cash taxes from the uranium business for a few years yet.

So, from a P or NPV point of view, even though this is fairly helpful because you were getting a lot of it sheltered anyway, a lot of this will still be, I mean, if you might normally think it's in years three to five, it's more likely to be years five to seven. Is that a reasonable assumption?

In terms of the cash and the NPV, yes, it's farther out than the book rate. You're right.

Great. Thanks very much.

Thank you, Brian.

Our next question comes from Steve Bonnyman. Please go ahead.

Well, back to the front of the queue. Thanks, guys. One quick question on Peru. Obviously with a quick ramp-up, when can we expect that to be brought into the income statement?

Well, it comes into the income statement when it hits commercial production, so that will be 2004.

Which quarter?

Likely the first quarter.

Q1. Super, thanks.

We will now begin taking questions from the media. If anyone from the media has a question, please press star, one on your touch-tone phone. If you are using a speakerphone, please pick up your handset and press star, one. Please go ahead if you have any questions. There are no questions from the media at this time, Mr. Lillie.

OK. Then I will thank everybody for joining us this morning and I will wish everybody a very, very nice, healthy and safe, long weekend and look forward to talking to you again next quarter. Thank you. Goodbye.

This concludes today's calls. Please disconnect your lines and have a wonderful day.