Cameco Corp (CCJ) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Cameco Corporation first-quarter results conference call. I will now turn the meeting over to Mr. Bob Lillie, Manager of Investor Relations. Please go ahead, Mr. Lillie.

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

We are pleased to have four of Cameco's senior executives with us. They are Gerry Grandey, President and CEO; Terry Rogers, Senior Vice President and COO; Kim Goheen, who's Senior Vice President, Finance and CFO; and George Assie is Senior Vice President, Marketing and Business Development. Also with us today is my colleague, Alice Wong, whom many of you know.

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

Please note that statements made during this call by the Company regarding its objectives, projections, estimates, expectations or predictions may be forward-looking statements within the meaning of applicable securities laws and regulations. The Company cautions that such statements involve risk and uncertainty and that actual results may differ from those expressed or implied. Important risks factors are outlined in the Company's annual information form dated March 15, 2005.

With that, I will turn things over to Gerry.

Thank you, Bob. Let me also extend my welcome to everyone who is participating in the call today.

First-quarter results show the impact of rising commodity prices, creation of Centerra Gold, revenue and cash flow were up from a year ago, but for a variety of reasons which we'll explain in a little bit more detail later. Net earnings are down.

As we have stated on many occasions, Cameco's quarterly results can and do fluctuate significantly. The nature of our business does not generate consistent, predictable quarterly results. However, those investors who have been with us for some time recognize that Cameco's strength is revealed over the year and in its longer-term results, as well as in its ability to capitalize on the unique opportunities found in the nuclear energy industry. I will leave the more detailed discussion of the quarterly results for Kim. However, I would like to talk briefly about Bruce Power's performance. I will then move on to how Cameco is positioning the Company for future growth.

Bruce Power impacted our results with a number of planned and unplanned outages since the beginning of the year. When you operate a large multi-unit generating station like Bruce Power, it is reasonable to expect that there will be unplanned outages from time to time. Unfortunately, there have been a number of these events since January that were unrelated and each relatively minor, including a brief transformer fire outside of the Unit 6 reactor building on April 15. Bruce Power work crews responded quickly to each of these incidents, and, with the exception of Unit 6, that is expected to return to service by late May, we were able to restore power efficiently and relatively quickly.

While these incidents are disappointing, they need to be viewed in the context of our overall plan. Bruce Power's intention has always been to perform a series of long-term maintenance outages in the initial years of operation for each of its units. Many significant improvements have already been completed to these units and most of the work will be completed by the end of this year, with the exception of a long-term scheduled steam generator replacement to take place in 2007 on one unit.

As the number of planned, longer-term outages are completed, capacity factors are expected to rise and allow Bruce Power to achieve our goal of a consistent 90% capacity factor over the next few years. In the short term, Bruce Power will continue with its maintenance and upgrade program.

Our investment in Bruce Power has provided Cameco with considerable net earnings since 2001. As planned, all the cash generated to date has been reinvested in the upgrade program.

One of the avenues for growth is the possible restart of Bruce A units 1 and 2. In March, we announced a tentative agreement reached with the Ontario government negotiator to restart the remaining two A reactors at the Bruce site. That agreement requires the approval of the entire Ontario government, which is currently conducting a thorough, independent review before sending it to Cabinet for approval. At this point, the government has not provided a firm time table for the approval process. While that process continues, Bruce Power has initiated an environmental assessment for the A unit restart. A one-day hearing before the Canadian Nuclear Safety Commission is scheduled for May 19.

The Ontario government has promised to close its coal-fired plants by 2007 in order to reduce Provincial air pollution, and has embarked on the road to find reasonable replacement generation that is inexpensive and clean. Assuming that we are able to reach a mutually acceptable binding agreement on restarting the two reactors, we will be able to deliver a further 1500 megawatts of clean electricity to Ontario's grid and achieve significant progress in growing the nuclear generation side of our business.

The other nuclear generation opportunity that we have publicly announced is the Point Lepreau Generating Station in New Brunswick. Cameco, TransCanada, and BPC Generation Infrastructure have made a proposal to New Brunswick Power, and we are now awaiting a response. There is no definitive deadline for decision. A planned outage is underway at Point Lepreau, and we have representatives at the facility as part of our due diligence process.

We are also growing in our conversion business. In March, we announced an agreement with British Nuclear Fuels that increases our UF6 conversion capacity and eventually our market share, and allows us to engage unused refining capacity at our Blind River, Ontario plant. Under this ten-year agreement, Cameco acquires the capacity of BNFL's relatively new Springfield's conversion plant in the United Kingdom.

Cameco will ship UO3 From Blind River to Springfield's, where it will be converted to UF6 for a fee. This deal will increase our annual UF6 production capacity by about 5 million kilograms, or approximately 40%, for the relatively small capital investment of about $10 million.

And in the uranium business, work continues on the world's largest uranium mine that is currently under construction. Terry will say more about Cigar Lake and about the status of our Inkai partnership in a little while, so I will leave it to him to provide more information.

Cameco continues to pursue growth opportunities in nuclear energy that add value for our shareholders. With clear objectives and financial discipline, we are building on our extraordinary assets to position ourselves as a pure play investment that will deliver the full potential of nuclear energy to our shareholders.

Nuclear energy has been rediscovered. And every day there are many examples of positive new stories coming from the global nuclear industry. I will leave you with just one from the United States. Three years ago, the Bush administration launched a $1.1 billion effort aimed at resuming construction of nuclear plants in the U.S. by the end of this decade. Many were skeptical.

Last Wednesday, in a speech to small business representatives in Washington, President Bush identified nuclear energy as the single most promising technology to reduce dependence on foreign energy sources. He said, and I quote, "Nuclear power is one of the safest, cleanest sources of power in the world and we need more of it here in America." I certainly agree with those sentiments. The President went on to say that he was asked -- that he has asked the U.S. Department of Energy to change the existing law in order to reduce uncertainty in the licensing process and protect investors who build the first four reactors against delays beyond their control. This is yet another sign pointing to the potential reactor build in the United States, and a strong signal that the demand for our expanding uranium production will accelerate as we move through the next few years.

I will now ask Kim to provide an update on our financial situation. Kim?

Thank you, Gerry. The first quarter unfolded more or less as expected and largely in line with the guidance we provided in our Q4 report. Typically, our first quarter is one of the weaker ones during the year, while the fourth quarter this year is now expected to see 45% of our 2005 uranium delivery.

I will briefly summarize our quarterly results and discuss each of our business units before outlining our financial condition and describing the outlook for the second quarter and 2005 as a whole.

Revenues were up 64% to $216 million in the first quarter, with the increase due to both higher commodity prices and consolidating the results of Centerra Gold. Net earnings declined to $26 million or $0.15 per share compared to $39 million or $0.23 a share a year ago.

Gross profits improved in uranium and modestly in conversion. In both cases, largely due to increases in realized prices. In gold, gross profit in Canadian dollars increased 125% to $27 million, thanks to the full consolidation of results from Kumtor and full quarter of results from Boroo. Last year, Boroo entered commercial production partway through the first quarter. However, these improvements in gross profit were largely offset by a smaller contribution from Bruce Power, where our pretax share of earnings declined to $29 million from 46 million, due primarily to planned maintenance outage, planned maintenance shutdowns, plus higher costs associated with operating fixed units.

Another factor contributing to lower earnings was administration costs, which increased by $9 million. This increase included 3 million that was directly related to Centerra, which, of course, is now a stand-alone public company; $2 million due to the cost of Sarbanes Oxley-related compliance; and 2 million for higher cost of stock compensation, which was attributable to higher share prices.

Exploration spending also increased in the quarter by $6 million, of which 5 million was related to gold and 1 million to uranium. Exploration is a core function, and our regional and global exploration expenditures are important investments to sustain our strong reserve base. We plan to invest $23 million in uranium exploration during 2005, up from 17 million in 2004 in orderer to maintain our position as the leader in uranium production.

Looking at realized product prices, Cameco's average realized uranium price during the first quarter was 16% higher in U.S. dollar terms compared to the same period a year ago. In conversion services, we achieved a similar price increase, which served to offset the effect of lower delivery volumes. In gold, the average spot price for the first quarter was up 5% compared to the same period last year, at $427 an ounce. Centerra continued to benefit from winding down of its hedge position in 2004, and as a result, it's realized price of $417 U.S. per ounce was up 14% compared to Q1 2004.

Cameco's financial condition remains exceptionally strong. Cash from operations totaled $84 million during the quarter, compared to 46 million in the same period last year, the result of higher uranium and gold revenues and reductions in working capital.

Total long-term debt increased $26 million during the quarter to 545 million, primarily attributable to higher capital expenditures. However, at March 31, our net debt-to-total capitalization ratio had improved marginally to 12% from the 13% at the end of 2004.

Now let's look at our expectation for the second quarter and for 2005 as a whole. In the second quarter, consolidated revenues expected to be about 50% higher than in the first quarter of 2005, due primarily to increased deliveries in the uranium business. Conversion results are expected to be similar to the first quarter. At Bruce, earnings are expected to be significantly lower than in the first quarter as a result of higher costs associated by -- with planned outages, the impact of the Unit 6 unplanned outage, and an expectation of lower power prices. Consequently, consolidated earnings for the second quarter 2005 are expected to be only moderately higher than those of the first quarter.

For the year as a whole, our guidance has not changed very much from that provided in our Q4 report in January. In 2005, consolidated revenues are expected to grow by about 15% over 2004, benefiting from increases in the uranium and gold businesses. The consolidated gross profit margin is projected to improve from the 23% reported last year.

Uranium revenue is likely to be significantly higher, due to stronger realized price and increased volumes. Conversion revenue is likely to be marginally higher than in 2004, as a result of an expected 5% increase in the average realized selling price, largely offset by lower volume -- deliveries.

Bruce Power results in 2005 are anticipated to decline modestly from 2004, due to higher depreciation and amortization charges on the restarted A unit, higher maintenance outage costs, and higher fuel costs.

We continue to move forward with plans to re-wind generators and replace low-pressure turbines at the Bruce B plant. As a result, the number of longer duration outages will be reduced over the next year or so and capacity factors are expected to rise accordingly.

Revenue in the gold business is expected to be higher, primarily a reflection of a full year of consolidating the results from Kumtor. Overall, gross profits from gold in 2005 are projected to be similar to 2004. The benefit of increased revenues is likely to be offset by higher cash costs, a result of lower grades expected at Kumtor.

With that, I will now turn things over to Terry.

Thanks, Kim. Good morning, everybody. As the summary report indicates, McArthur River production was down from last year's first quarter, as principally from three things: First, the normal sequencing of mining upon completion of a mining chamber, for those of you who have been there, and then the subsequent move to the next. This requires the backfilling of the vacated chamber and the excavation of the next set-up station. That only happens a couple times a year, so it just depends on which quarter it falls in.

Second, we did have some problems with the -- the lines from the surface that deliver concrete to the underground for backfill and that slowed operations. But we have corrected that problem.

And third, the maintenance shutdown for the Key Lake mill was scheduled in the first quarter of this year, resulting in lower operating time. As a result, Key Lake production was down in the first quarter of 2005 compared to the same period 2004, when we had the shutdown actually in the second quarter last year.

However, we anticipate being back on track by midsummer. We have submitted to CNSC an application to increase the annual production output at the McArthur and Key Lake complex to 22 million pounds and are hoping for approval by year's end or early in 2006.

The Rabbit Lake line has been producing well this year, some 25% ahead of the pace of a year ago, resulting from slightly higher grades than last year and higher mill availability.

Development of the extension of the Eagle Point Mine got underway. You may recall that, as a source of additional -- that Eagle Point Mine, as a source of an additional 6 million pounds added to the reserve at last year's end.

In the U.S., our ISL mines are on target with last year's production rate. At Smith Ranch-Highland project in Wyoming, well field development is underway to expand its production, beginning this year and into the next couple of years.

The Cigar Lake is -- excuse me, the Cigar Lake project is under way. Some slight delays in beginning shaft sinking, freeze hole drilling, and underground development were experienced in the first quarter, but the overall completion schedule is unchanged, and that being completion in the first half of 2007. We will make a more comprehensive progress report next quarter.

Also, on the development front, the Inkai project in Kazakhstan is in its final design and environmental impact statement approvals process. We currently expect a construction permit in July. This project, as you may know, will be a 5.2 million pound per year producer when complete and at its full capacity.

In the fuel services division, the conversion facility at Port Hope, production is down from 2004 levels as stated in the report. This year, we will have, however, a single month-long maintenance shutdown at Port Hope as compared to a two-month combined maintenance and vacation shutdown in years past. Last year this shutdown was extended for an additional seven weeks as a consequence of a labor destruction. This change of schedule will enable us to increase production from the facility, year-over-year.

At the Blind River refinery, production of UO3 will increase in 2004 to develop an inventory of feed stock for the UF6 conversion facility at the BNFL Springfield's plant, in accordance with the recently announced contract that Gerry discussed. Only a minor modification to the Blind River refinery are required to meet the additional output. We intend to seek an increase in the annual license capacity of the facility, as well as a 24 million kilograms from its -- currently permitted 18 million. And despite some vocal local opposition to the project and basically to all things nuclear, work on the SEU facility at Port Hope continues, both engineering and permitting.

We expect a late summer, likely August, public hearing after the CNSC issues its screening report, with their recommendations for the project. That will be a one-day hearing, after which the CNSC will make its decision. Assuming project approval, the next stage will be obtaining a construction and operating license to allow us to physically start work, which we hope to have by March of next year.

Touching briefly on the Gold business, the recent forced resignation of the president of the Kyrgyz Republic and the installation of an interim government has had no effect on our day-to-day operations of the Kumtor Mine. Gold deliveries are being made on a regular basis. Banks are functioning normally. Flights in and out of the country are regular, so our rotational ex-patriot employees are able to make scheduled shifts and so on.

We know most of the people leading the new interim government, as they had been in the past involved in the previous government. So we know them well. Much of the passion of the earlier days of the unrest has diminished and things on the street are more or less back to normal. A presidential election is scheduled for July, but meanwhile, production at Kumtor is down from last year's first-quarterly production, principally due to just an anticipated lower grade from the mine.

At the Boroo mine in Mongolia -- still doing very, very well, ahead of its budget. Since the mine was put into commercial production in March of 2004, quarter-on-quarter comparison is not yet meaningful.

So with that, I will turn that over to George. Thanks.

Thanks, Terry. Good morning, everyone.

Spot market activity in the first quarter of this year was very strong, amounting to about 10 million pounds. That was almost double the amount traded in the first quarter of 2004, and about five times the volume traded in the fourth quarter of last year. Spot demand continued strong during April, and total volume year to date is about 11 million pounds. Currently, there is another 7 to 8 million pounds being requested in the spot market.

The spot price continued to climb throughout the first quarter, increasing 9% from the end of the previous quarter to 22.55, and of course all my references to dollars here are U.S. dollars. At the same time last year, the industry-average spot price was 17.63, so year-over-year to March 31, it has increased about 28%.

Since the end of the first quarter, the spot price has continued its rise. The weekend before last, it was reported at $24 and by this past weekend it was reported by Tradetech as having increased to $26. In its publication, Tradetech noted that the jump of $3.40 in the exchange value from March 31 to April 30 was the largest increase in the month-end values since December of 1975.

The high level of spot demand so far this year can be attributed to inventory building and discretionary buying, with the latter amounting for about 70% of the volume. This high level of discretionary purchasing is due to the expectation among buyers that prices will continue to increase further in the near term.

As has been the case for some time now, buyers are generally trying to keep the demand as quiet as possible so as to minimize upward pressure on price, and in excess of 90% of first-quarter spot purchases were classified as off-market or, in other words, not open to the formal RFQ process.

Over the past two quarters, we have seen some new spot market participants adding to demand. These are investor groups, which expect to see continued strengthening in the spot price and have chosen to participate directly in the market by buying and holding uranium inventory.

Moving to the long-term market, the industry-average long-term market price ended the first quarter at 27.25, up about 9% from the end of the fourth-quarter 2004 and over 55% from the end of the first quarter of 2005.

Since the end the first quarter, the industry-average long-term market price has increased further, to 28.50. Actually, UX reported at 28 earlier last week and Tradetech reported at 29 at the end of the month. One -- another market publication notes that offers for delivery further out in time -- and by further out, they reference delivery in 2010 -- are already at prices above $30 per pound.

Activity remains strong in the long-term market. As we had noted in one of our conference calls in the latter part of 2004, we were beginning to see indications that procurement activity in the Asian market would begin to pick up sooner than most market participants expected. That, in fact, has materialized and over the past two weeks, we have seen new long-term demand of some 20 million pounds of uranium come to the market from Asian utilities. Given the current pace of contracting, we now expect 2005 long-term contract volume to exceed the level of contracting of 2004, which was about 90 million pounds.

As is the case in the spot market, a large percentage of the long-term contracting that is taking place is being done off market. At one point in the first quarter, the spread between the spot and long-term price indicators was $5, and currently it's more in the order of $3.50 to $4 a pound, about the same level as at the end of the fourth quarter of 2004 and significantly higher than the $1 to $2 that has been the case historically. Given this spread, discretionary by hold [ph] transactions can be economic when compared to long-term prices and some buyers are, in fact, pursuing that strategy to cover requirements that are a few years out.

Turning to the UF6 conversion market, near-term supplies -- and by near term I mean here for the next few years -- remain very tight. As a result, the industry average spot price for North America ended the first quarter at $12 a KG, up 33% from the $9 reported at year-end 2004.

In Europe, the spot price is also $12, up from $10 at the end of last year.

Industry-average long-term prices in the North American and European markets have also increased significantly from the end of the fourth quarter of 2004 to 11.88 and 12.63 respectively, up from 10 and 11.50.

Demand for new contracts in the long-term conversion market is very strong. Asian utilities are also making their presence known in this market, with new demand for about 6 million kilograms of conversion services also surfacing in the past two weeks.

Gerry made note of our new agreement with BNFL in his opening remarks. This agreement is a perfect fit for Cameco for several reasons. It allows us to fully utilize our UO3 refining capacity at Blind River. In addition, enrichment capacity is much larger in Europe than in North America, and shipping UO3 rather than UF6 to Europe is less complicated and costly. And very importantly, this new agreement -- new agreement fits nicely with the underlying fundamentals of the conversion services market.

Prior to this transaction, Cameco's conversion contract portfolio mirrored, in many respects, its uranium contract portfolio. Our sources of conversion supply were our primary production in Port Hope, supplemented by our purchases of HEU feed and some other secondary supplies which come in the form of UF6.

We were generally heavily committed for several years out, and about 20 to 30% of the contract portfolio turns over each year. Almost all conversion is sold under fixed price -- and when we say fixed price, it's really a base escalated price -- type contract. If you look back at where conversion prices have been in recent years, you would see that prices average between 5 and $6 a KG. Prices today are more than double that level, and the new contracts we are now entering into reflect this much-improved market. So as our current portfolio contract rolls off, it will be replaced by contracts at much better prices.

As we noted in our March press release announcing the BNFL toll-conversion agreement, we have already underpinned this agreement with a significant volume of new contracts, such that even with the addition of this new source of supply, we are all -- we are already heavily committed for the next several years. The volumes associated with the BNFL transaction were placed only recently and consequently, we will begin to already see the benefit of the higher prices associated with these new contracts as the supply becomes available next year.

That concludes my remarks, and I will pass things back to Gerry.

Thank you, George. We will now open it up to questions.

Thank you. We will now take questions from the phone lines. Please be advised that we will take questions from the investment community first followed by the questions from the media. [OPERATOR INSTRUCTIONS]. Our first investment question is from Ray Goldie. Please go ahead.

Good morning. Thank you. And I have a very tiny question. Page 11 of the press release, uranium outlook. You are looking for uranium revenue to rise 10% based on an 8% improvement in the price and 4% improvement in deliveries. I just can't make the numbers work.

Hey, Ray, thank you for that. While we look around here for the answer -- [ LAUGHTER ] --

Yes, Ray, probably -- it's just rounding, through the process there. We can try and maybe come back to that, but I would answer for you right now is that's just rounding.

Thank you very much.

Our next question is from Rudy Mueller. Please go ahead.

Yes, this is for Gerry. If you took a contract with deliveries in 2007 and '08 and '09, in rough terms, what would the base price be, and what would be the column look like?

Well, Rudy, if we were writing that contract today and, you are right, usually contracts written today would have deliveries starting about two years from now, so in the market we would be looking at -- the long-term price that George quoted, in that range of around 28.50, $29, or perhaps try to do even better than that.

From a standpoint of -- of the -- other terms of the contract, obviously, bargaining power has shifted so there wouldn't be a lot of flexibility in that contract either, and we have a number of other protections.

So that would be a base escalating contract. If it were in market-related contract that we were writing, then we would make every effort to -- to not have any upside limitation and try to put into it as we have reported before, some downside protection in the way of floors, which would probably reflect today's current spot market value or something relatively close to that.

And roughly what proportion of the contract would -- of the price would be based on the price that you see two years out now and roughly how much would be based on what the spot price will be at that time.

We are in the process of sort of an evolution. Historically, you'll recall, that 60% of our contracts had been related to the spot price at the time of delivery.

Okay.

And then 40% had been base price or fixed price escalated by inflation.

We have generally followed that rule as prices have increased and as bargaining strength has shifted from the buyer to the seller, so that whole relationship has been under review for some time, and as we succeed more and more in getting downside protection, we will shift to preserving more of the upside through market-related contracts, either contracts that quote [ph] spot price at the time of delivery or perhaps the long-term price indicator at the time of delivery.

Okay. Thank you.

Thank you.

Our next question is from Lawrence Smith. Please go ahead.

Good morning. Two questions. First, on your realized uranium price in the quarter: My recollection is that your guidance for Q1 was that the realized price should be about 20% higher than it was in the year-ago quarter. And I think -- I think the number actually was 16% higher, and I was somewhat surprised that the realized price for this quarter was slightly below the Q4 realized price. I wonder if you can explain why that is.

And then my second question relates to your outlook in terms of price-sensitive versus price-insensitive, out to 2008. When you talk about percentage of sales target, are you incorporating your growth in volumes from projects like Inkai and Cigar Lake? Thank you very much.

Lawrence, I think -- probably the difference between 20 and 16 is simply the mix of contracts that we find in a quarter. It is very hard for us to predict exactly what deliveries are going to be made under which contracts, and you saw, really, a significant shift of deliveries to the end of the year to the fourth quarter. So I suspect that what we find is more contracts that either have ceiling price limitations or base price -- base price escalated being delivered into in the first quarter than we have assumed when we put out our guidance. I wouldn't read anything into it. It ought to come out to pretty well where we predicted by the end of the year. Again, looking at quarterly results is a little misleading.

Second part had to do with sensitivity, and we do that about one year -- about one year or 12 months out. We don't really look at it all that much to the period of time 2007, 2008, when Cigar Lake and Inkai will be in production, if I understood your question.

Yes, I guess what I'm asking is, when you talk about for 2008, you are talking about 40 -- say, roughly, 41% is price-insensitive, the balance being price-sensitive. Is that based on higher production and sales numbers resulting from Inkai -- the ramp-up at Inkai and Cigar Lake?

It would include our forecasted sales. I would say, remember, when we say sensitive to spot price, that's on that part of the portfolio which is related to the spot price or the long-term price at the time of delivery, and it ignores for the moment the base price or the fixed prices that we're able to achieve in today's market. Those are obviously by being fixed, insensitive, but not necessarily low.

Yes. They could be higher than the current spot prices, obviously.

Yes.

Good. Thanks, Gerry.

Our next question comes from John Redstone. Please go ahead.

Good morning. I wonder if you could update us on the status of Rabbit Lake. That operation is becoming a bit of the Lazarus of the uranium market. Is it possible it may actually be producing beyond 2007?

Terry? [ LAUGHTER ]

John, that is a very good question. We haven't referred to it as Lazarus, but it kind of makes sense. We continue to -- we continue to drill into and seek other possibilities to extend that ore body. We do have some brown fields exploration and some underground drilling targets. Certainly that is our hope, to keep it going. We will just see how it develops.

But no firm dates as yet?

John, you know how difficult it is to put these things into resource or reserve categories under the new rules. So, we are hopeful.

Okay. All right, thanks.

Our next question is from Terence Ortsland. Please go ahead.

Thanks. Actually, I was going to follow-up John on the Rabbit Lake exploration and your massive drilling, what you've got so far to report on. In fact, maybe you will review your exploration program as well?

Could you repeat that last sentence, Terry.

Also, your global exploration program. You talked about six active projects beyond the Rabbit Lake and Eagle Point and Dahl [ph] Lake, and all the -- just, maybe you want to review because I think this market is becoming very prone towards exploration news and more pounds in the ground.

So what have you got to report? Thanks. Including Rabbit Lake, which -- 21,000-meter drill that you have first quarter. You are going to go another 50,000 meters, which is a lot of drilling.

And indeed, we have increased our exploration budget from 17 million last year to about 23 this year, which just simply reflects our confidence that uranium will be required for nuclear power plants well into the future on kind of an accelerating base.

Again, I've come back to the point where -- way too early to report any kind of results. We are -- we have got a very active program, although I would say, the winter in Saskatchewan was so strange that it was pretty limited. We had cold, and yet a lot of snow and that snow hampered exploration considerably. So we are having to push some of that program into the summer. We've got a number of projects that we are actively engaged in and with encouraging results -- enough encouragement, I guess, to continue spending money, but certainly nothing to announce.

And likewise, spending a fair bit of money in northern Australia where we're outside of Kakadu National Park, we have amassed over the last decade a very, very good land position that we have pretty much exclusive access to. And there were early stages, but, you know, we know uranium has been produced from that area. So we are quite -- well, we are glad we have the land position and we are encouraged with some of the early results that we have, but again, nothing by any means to get too excited about.

So in essence, North American exploration news, we'll get it, I guess towards the -- with the third quarter conference call, as your exploration would be more -- more pointed to given the seasonality, correct?

Well, with the increased exploration spending, as we have done now in the past couple of quarters, we do spend a little bit more time and make comments on it. And we feel that spending that much money, that's warranted so that you have a sense of how much is being spent and whether it is producing results.

I might say, just coming back to the previous answer, we're not only looking in Australia and -- and Saskatchewan here, where the geology is -- is similar, but we've expanded our horizons now to begin looking more globally, in areas that will have the same kind of potential, whether they be in Canada or North America, United States, or, indeed, elsewhere.

Okay. Thanks for that, Terry.

George, could you review, if any of the utilities are building any inventory anywhere? I guess they would like to. But have you seen any inventory position change or are they still feeding hand-to-mouth in respect to the activities. So, long term, or are they spot markets?

There has been a limited amount of inventory building, and most of that has been done, I think, Terry, through utilities exercising flexibility on order contracts to take more than -- than they really need, to meet actual requirements, near-term. So there's been some of that occur, and there were utilities that came into the market a little sooner, and so, there has been a limited amount of it, but nothing of any great significance.

Well, I guess if the corollary would be, George, then, are there any intentions to build inventories, given the market's circumstances and are they handling it, either strategically or -- how are you accommodating it yourself for inventory, just given through contract flexibility only?

Sorry, I didn't hear the last part.

Are you only allowing them via contracts for the flexibility instead of actual physical delivery?

The amount of flexibility we are giving under contracts is, in some cases, none or it is extremely limited. So we are long gone from the days of the large flexibility in that regard.

As to whether or not we will see more utilities building inventory, I think it will all be based upon their perceptions of what they think is going to happen in the market, and as we speak, we are in a very volatile market here, and if utilities get concerned about supply, you will see more of them come to the market to cover -- or to take on additional inventories. So it is an interesting time, and I think it will be very interesting over the next few months.

Thanks, George. Just two other small questions. Inkai, .1 million pounds per use in the quarter. Could we talk about the success and how would you measure that in terms of either the operational or the metallurgical success.

And number two, on the McArthur -- as we get the license and all, how long will it take you to get up to 22 million pounds?

Terry?

Terry, at Inkai, the test block mining, I think things went very well there, frankly. That's -- very -- it's a sufficient -- sufficient plant, and it bodes well for the project. It falls right in line with what we are anticipating for -- for the long term.

Now, McArthur, the ramp-up to 21 or 22 million pounds is going to -- will just take a few quarters. Maybe a year or two years, something like that.

Thanks, I will come back later. Thank you.

Thank you, Terry.

Our next question comes from Greg Barnes. Please go ahead.

Thanks. George, I am just a little bit curious about the spot volumes in Q1 and how high they were. Does that reflect just material changing hands between traders? Or is there more material available out there, although the prices are higher?

Well, there was -- the sellers were really the traders, and then the U.S. enricher managed to get some materials as the result of a barter arrangement to clean up contaminated material, so that also contributed to the volume in the first quarter, but it was primarily coming from traders.

So you expect to see that -- that more trading kind of activity going on now then?

I think -- I will be surprised, but I don't believe it can continue at this pace, because I don't think the -- that the traders have that much uncommitted material to make available to the spot market. So, Greg, my expectation is that total spot volume for the year will probably be something more in the order of 25 and -- maybe it will hit 30 million pounds, which would be a significant increase over the roughly 20 million pounds a year we saw the last couple of years. But I just can't see it getting much higher than that.

Okay. And the Tradetech $26 spot price. What does that increase from?

They were at 24 as well. They published the previous Friday, and then UX would have published on Monday evening, I guess. And then at the end of the week, when Tradetech publishes their month-end price, they published 26.

That was the spot price as of last Friday then?

That's correct.

Okay.

They call it their month-end price.

Just one final quick question. You -- is Cameco beginning to see or are you being able to write in a premium to spot all long-term prices, just because you are Cameco and you are a premium supplier?

It's probably fair to say that where we've seen that premium is that -- to the extent that we have done base escalated contracts, we've been ahead of the curve in terms of were the base price is at at any given point in time. But when you see the published base price, we've generally been asking for something above that and getting it. And then also, in long-term contracts, as was noted in the press release, we have shifted from -- in market-related contracts, we have shifted from just solely relying on spot price at the time of delivery to in some cases relying on long-term or a combination of both spot and long-term prices at the time of delivery.

Okay. Thanks very much.

Our next question comes from George Topping. Please go ahead.

Hello, everyone. Could you provide us with details on the -- the Inkai production build-up to 5.2 million pounds, how many years that's over and comment on expansion potential beyond that.

Okay, we will ask Terry to do that.

Okay, George, we are looking at Inkai coming on-stream in 2007 and building up to, I guess, 5.2 million pounds over two years or so. And that will -- the plant that we are building is -- is a 5.2 million pound per year or 2,000 tons, I guess, plant, and that would have to be expanded if we are going to go beyond that. But we -- we will just start with the 5.2 and see how things go, I think.

Okay.

George, I might just add to that a little bit. The resource base is -- as sort of displayed by the Soviet drilling 15 years ago or longer, would warrant a bigger operation, but I think we are quite interested in establishing the plant and the fact that we can operate in Kazakhstan and we can operate at that level that the logistics work and the import-export regime works. We want to sort of make sure that it all works before we start planning something beyond it. With a resource base and, again, under the qualified person rules, we can't claim anything beyond the 114 million pounds we show on the financials, which clearly support a bigger operation at some point in time. Obviously market dependent.

That's right. Common wisdom has it that uranium price is above $30 a pound which is pretty much where we are going right now. You would see quite a -- you would see a surge in ISL production from that region. Can you comment on that and where Cameco stands with other ISL targets, if any, in that area?

In that region, Inkai is the one. Again, I will come back to the comments about its fairly large resource base, if you will. We have the other ISL operations in Nebraska and Wyoming, which -- much smaller reserves and resources, but we do intend to, in essence, double their production capacity from where it was in 2004. That will take about a three or four-year period of time.

Okay. And on -- and on Kazakhstan's future production, do you --

Our own sense of it is that they will continue to expand. That they will -- they will, over time, and I'd say over the next five years, which will include Inkai production, remain and increase their -- they will remain a significant producer and they will increase their production capacity.

Okay. Thank you.

Thank you.

Our next question comes from David Beard. Please go ahead.

Hi, good morning. Could you just help me understand some of your long-term contracting? Will you actually sign a long-term contract for pounds delivered and then have price reopeners at the time of delivery? And secondly, if the contract is structured that way, would you have both a fixed price and a price reopener over this long-term delivery time frame? Thank you.

George?

Well, the nature of our contracts is such that it is not -- it is not common for us to have price reopeners, as you put it. About the only time we would have a price reopener is if we had a very long-term contract and then we might desire something at the end of it to allow us to open it up and adjust, as may be necessary.

But generally speaking, if it's a base escalated price, that is the price for the duration of the -- at least the firm term of the contract, and -- and then the market-related contracts, there, the price is calculated at the time of delivery and is dependent upon the market prices then being reported, and -- in the current market, we are inserting hard floors, which escalate in our contract. As Gerry mentioned, the floor is usually -- generally around the level of the spot price at the time we enter into the contract. Those would escalate. So, you would calculate that price at the time of delivery, based upon the market indecies, subject to that floor price.

Okay. Thank you.

You're welcome.

Our next question comes from Casey Boorman. Please go ahead.

Are you considering setting up a uranium trust to generate fees for storage and management, similar to what Denison is trying to do right now?

That is not something that we intend to do.

Is there -- is there a reason why you don't think it is a wise idea?

I think from Cameco's perspective, given the projects we have, the development projects we are engaged in, the level of activity we see in the market, just trying to place our own material, trying to set up a trust and obtain a few management fees and these kinds of things would be too much of a distraction for us.

Is that -- has that trust been a big driver of prices in the uranium market?

Not yet.

Thank you.

Our next question comes from Robert Mitchell. Please go ahead.

Hi, Gerry. Two unrelated questions.

First, you noted in your opening comments that you expected the Bruce assets to be operating at 90% over the next few years. I wondered if you might be able to be a bit more specific, perhaps one year out, two years out, at what rate would you expect those assets to be operating as presently configured, not including the Bruce 1 and 2. It would be my experience that when you own a utility operating at less than optimal performance, you are typically sort of paid to wait in the form of -- a high dividend. So I wonder if you can be a little bit more specific.

And then, completely unrelated. Are you finding more utilities are exercising their contractual flex provisions, perhaps more than you had modeled internally last year at this time, or are the flex provisions being executed at pretty much a pace that is consistent with the way that you might model that sort of thing internally?

And then also on flex, on new contracts, my understanding is on older contracts, utilities have perhaps as much as 25, 30% flex. On new contracts, is it a much lesser amount now than what you had been configuring contracts formerly? Thank you.

Okay, Robert. Let me come back on Bruce Power. Remember, we have been engaged -- and this was when we made the initial investment. What we and our partners knew is that there would be -- would be considerable extended outages to refurbish the B units and obviously the two A units that are operating. So we didn't expect to achieve the optimal performance for a number of years.

We are still -- as I indicated, we are still in that process of upgrading units, and we hope to be through that by the end of the year, with the exception of the one unit that I talked about that will have a steam generator replacement in 2007. Our own guess is that coming close or achieving that 90% factor is probably two years or so away.

If you come back to the flex provisions in the contracts, I will turn to George and ask him to give you a little bit of insight into what's happening, but I think you -- you've heard already that in new contracts, we are giving almost no flexibility, speaking from Cameco's perspective, because we don't know really what our competitors have done, but if we give any at all, it is relatively modest, certainly less than 5% and generally we avoid it altogether.

You asked how utilities are behaving with respect to old contracts, I'll ask George to make a comment.

Yes. Just to add to Gerry's last remark, we are either giving none or maybe a maximum of 5% and in many of those cases, it is just 5% annual, but over the term of the contract , you have to take the nominal -- the elected quantity. So it is -- it is some variance by year, but over the term it's a fixed quantity.

Coming back to your earlier question, in terms of utilities exercising upward flexibility on our existing contracts. Frankly, we have modeled it quite accurately. There have been no surprises. We were able to identify those that we thought would be -- would be going up, and we are very close to that. So there has not been a huge surprise on the upside that we had not accounted for.

Okay. Thanks for your help.

You're welcome.

Our next question comes from Terence Ortsland. Please go ahead.

Just a couple of follow-ups. The CapEx number for Bruce was 53 million in the first quarter. So what is the annual number again for 2005 you expect to be?

Sure. I don't have that at my fingertips. We will have to come back to you on that one.

Okay. Because there was a number somewhere before, I think maybe it just changed. And -- and I guess that's it. Thanks for the detailed results, by the way, earlier. I appreciate that. Thank you.

Thank you, Terry.

Once again, if you are from the investment community and you have a question, please press Star 1 at this time.

You have a question from Alex Latzer. Please go ahead.

Thank you. Question on your -- if you can provide any guidance on this -- on your expected uranium price realization going forward. There was -- it was noted earlier, a little bit of volatility in the Q1 and it was hard to predict the decrease like we saw through the mix. Is there any forecast mix changes coming during the course of 2005? That is, some blending of older lower-priced contracts or some of the higher costs so you can at least provide some idea whether we'll see sort of a step forward, higher, like we are seeing in the market, or whether it will tend to be a little bit lumpier.

I think the guidance that we gave, which as I recall was around 20%, remains true for the balance of the year.

Okay. 20% up. All right, we'll stick with that then.

What about using a tax rate? What generally -- is the statutory or the tax rate going forward?

Well, for this year, we have put out a range from 15 to 20%. And why the range is there, it really does depend on where the income is originating. Which country and which commodity. An effective rate of 15 to 20 is what you should be using.

Okay. Thank you.

There are no further questions from the investment community.

Okay, Operator, then you can turn to the media.

We will now take questions from the media community. [OPERATOR INSTRUCTIONS]. There are no questions in the queue.

Okay, Operator. Thank you very much and I will thank everybody for joining us this Monday morning and wish you all a good week. Thank you very much. Bye-bye.

Thank you. The Cameco Corporation first-quarter results conference call has now ended. Please disconnect your lines at this time. We thank you for your participation and have a great day.