Cameco Corp (CCJ) 2005 Q2 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Cameco Corporation’s Second Quarter Results Conference Call. I would now like to 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 second 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 Jerry Grandey, President and CEO; Terry Rogers, SVP and COO; Kim Goheen, SVP and CFO; and George Assie, SVP Marketing and Business Development. As well I am joined today by my colleague Alice Wong, VP Investor Relations and Corporate Communications.

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 call by the Company regarding its objectives, projections, estimates, expectations or predictions may be forward-looking statements within the meaning of applicable security laws and regulations. The Company cautions that such statements involve risks and uncertainty and that actual results may differ from those expressed or implied.

Of course risk factors are outlined in the Company’s Annual Information Form dated March 15, 2005 on pages 41, 60, and 79. With that, I’ll turn the call over to Jerry.

Okay Bob, thank you very much. Let me also extend my welcome to everyone who is participating in the call today before the long weekend. Reviewing our financial results yesterday I noted that I had the duty to say that the quarterly results are down compared to last year.

First I’d like to point out this is generally not the preferred opening line for the CEO. I’d also like to repeat are standard admonition not to read too much into quarter results, particularly here when almost the majority of our uranium deliveries will occur in the fourth quarter.

More importantly I was struck by the irony of the situation. In spite all of the successes that Cameco has had in positioning ourselves for future growth, today we’re discussing results that are technically accurate for only a short period of time, particularly for this industry when we measure our success over a much longer period of time. I will leave the more detailed discussion of the quarterly results for Kim and will instead focus on a somewhat longer view where Cameco continues to perform very well.

On the Uranium side of Cameco’s business prices continue to be strong even during the summer where there has been a historical tendency for weaker prices. The higher priced uranium and uranium-conversion contracts we are signing today will provide significant financial return to Cameco in future years. The smile I see on George’s face indicates he will likely have something more to say about this in a few minutes.

Of course we’re working on increasing our Uranium production capacity. New facilities in Cigar Lake in Saskatchewan and Inkai in Kazakhstan will provide more Uranium and more earnings in Cameco’s future. And Terry will provide a little bit of progress on these two properties in a minute.

Additional production will come from deposits yet to be discovered. We are spending considerably more on exploration. Thus far our focus continues primarily in Saskatchewan and in Australia. Of course exploration is another long-term endeavor that does not lend itself neatly to quarterly updates.

We have submitted a project description to our regulator the CNSC to increase our production license at our Blind River plant. This will support our agreement to send U03 from Blind River to be sole processed into UF6 at the BNFL Springfield facility in the UK. We expect to receive deliveries of UF6 from the UK in mid 2006.

Our investment in Bruce Power has provided Cameco with considerable net earnings since 2001. As planned, all of the cash generated prior to this quarter was reinvested in major upgrades to the reactors that will provide significant long-term returns.

This quarter we’re pleased to receive the first cash distribution from Bruce Power. Our share received in June was $16 million. In addition, the Bruce partners have agreed to a cash-distribution policy. All excess cash will now be distributed on a monthly basis and separate cash calls will be made for major capital projects. The monthly distribution for July was an additional $11 million. As we have previously reported, Bruce Power has made many significant improvements as part of the plan before the long series of [inaudible] outages in the initial years of operation for each of the operating units. Most of this 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.

The results from Bruce Power were lower this quarter after a combination of planned outages, and one significant unplanned outage that we discussed in the conference call; however we expect that Bruce Power’s earnings in 2005 should rebound to a level that is similar to last year.

This of course is dependent on the operating performance of the power plants and the electricity price which in turn is greatly dependent on the weather. For those of you who live in the eastern part of the continent and particularly in Ontario, July has been hot as well as June. This has kept the air conditioners humming, increasing demand and has resulted in the average weight of the electricity spot price to jump about 75% over the price in July of last year.

All of us are reminded once again of the precarious balance between the increasing demand for electricity and the finite amount of supply.

Bruce Power is providing much-needed power to the Ontario electricity grid. With a reaffirmed ending shutdown of the coal-fire units, Bruce Power and its partners have been discussing the possible restart of units 1 and 2 comprising a net total of 1500 megawatts of clean electricity. Negotiations with the Ontario government ministries continue to see if we, Bruce Power and the partners as well as the province can reach a mutually beneficial transaction over the coming few months.

As previously announced, Bruce Power had submitted a preliminary proposal to operate and refurbish the Point [Lepro] Nuclear generating station. The New Brunswick government this morning announced that they did not accept our proposal. From an investment perspective we are disappointed in this decision. However New Brunswick’s decision to refurbish their nuclear reactor is another endorsement of nuclear power.

This decision was made slowly and deliberately after considering all of the alternatives, the government chose to go with nuclear. As more jurisdictions are forced to make strategic decisions about their future electricity requirements, nuclear will continue to emerge as a sound alternative from a business and clean-air perspective.

I’ll end my remarks with a news item that caught most people’s attention last week. India’s economy is growing rapidly and with that growth comes the need for more electricity. India has an aggressive plan to meet part of that demand with nuclear power. The country currently has 14 reactors with 9 under construction and 24 more in the planning stage. On the 18th of July President Bush announced that he will be working to achieve a civil nuclear cooperation agreement with India. The president wants to work with US Congress and US allies to allow nuclear trade with India for its electricity program.

One of the key objectives of this initiative is to allow exports of reactor components and uranium fuel to India under international safeguards. If international agreements and safeguards eventually allow the export of these components and nuclear fuel, it would open up significant business opportunities. And while it’s difficult to determine when or even if President Bush’s initiatives will succeed, Cameco is well-positioned to take advantage of this new and potentially large market; of course carefully monitoring events as they unfold.

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

Thank you Jerry and good morning. Overall the second-quarter results were positive and a little better than expected. The bulk of the year’s earnings and cash flows however will arrive in the second half. The second quarter; revenues were up 19% to $287 million. This revenue increase was primarily due to the full consolidation of the Kumtor mine located in the Kyrgyz republic. While earnings and cash flow decline, compared to the second quarter a year ago.

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

Net earnings were $32 million or $0.18 per share on a fully diluted basis in the second quarter of 2005, down from $62 million or $0.31 per share in the same period a year earlier. The 2004 number that I just quoted had been adjusted to eliminate the effects of an after-tax gain of $89 million for the restructuring transactions that led to the creation of Centerra Gold. Eliminating this gain provides a more meaningful comparison of Cameco’s operating results.

Decline in net earnings in the second quarter of 2005 was due largely to lower earnings from Bruce Power and higher charges for administration and exploration. At Bruce, the impact of the heavy outage schedule was only partially offset by stronger weather-related spot prices. Planned and unplanned outages totaled 138 days in the second quarter compared to 40 days in the same period a year earlier. These outages increased costs while reducing output by 22%. The good news at Bruce is that average realized prices were 15% higher at $53 per megawatt hour.

Total costs for administration and exploration increased by $19 million to $41 million in the quarter compared to a year ago. The major factors in this increase were higher costs to operate Centerra as an independent public company, greater charges for stock compensation due to higher share prices, additional expenses to comply with Sarbanes Oxley requirements and importantly, additional exploration expenses in the Gold and Uranium businesses.

In Uranium, second-quarter revenue declined slightly as deliveries were down from a year ago. Once again our deliveries are heavily concentrated in the fourth quarter, even more so than was the case in 2004. However, an 8% increase in the average realized price in Canadian dollars to $20.42 per pound helped increase earnings before taxes by 41% to $31 million.

In Conversion Services revenues and earnings before taxes declines as volume suffered solely due to the timing of customer deliveries. However again the average realized price was up 18%. As with Uranium, we expect to see the majority of our Conversion earnings and cash flow to occur in the second half of the year.

In Gold, revenue increased 87% to $118 million and gross profit rose 52% to $35 million thanks to the full consolidation of results from Kumtor. Higher realized prices up 18% verses the second quarter of 2004 and increased production at Boroo, more than offset the lower mill grades at the larger Kumtor operation.

Cameco’s financial condition remains very strong. At June 30th, total long-term debt was $674 million, an increase of 155 million from year end. And our net debt to total capitalization ratio was 16% at quarter’s end. As of June 30th, product inventories had increased by $103 million compared to the end of 2004 as production and purchases of Uranium services exceeded sales. Building inventory in the first half of the year is typical in our Uranium and Conversion businesses where deliveries are usually skewed to the latter part of the year. Consequently second-quarter operations showed a net use of cash.

Over the first half, operation-generated cash flow of $38 million, exceeding the 2004 comparative number. Also during the quarter Cameco gave up certain preferred rights held under its original 15% investment in Bruce Power in exchange for higher fuel prices and the assumption of its pro rata share, of financial assurances related to Bruce Power marketing activities.

Now let’s look at our expectations for the third quarter and for 2005 as a whole. Consolidated revenue in the third quarter of 2005 is expected to be about 9% lower than in the second quarter due primarily to lower gold production at Kumtor. Earnings from Bruce Power are expected to be significantly higher than in the second quarter of 2005 due to fewer planned outage days and better prices.

Earnings from Uranium are expected to rise moderately over the second quarter, and Conversion Service results are expected to increase in proportion with the projected 33% increase in Conversion revenue. Those profits from Gold are expected to decline from the second quarter due to higher unit costs at Kumtor. As a result, consolidated earnings for the third quarter of 2005 are expected to improve only modestly from the second quarter.

For the year as a whole, consolidated revenue is expected to grow by more than 15% over 2004 due to increases in the Uranium and Gold businesses. The gross profit margin is projected to improve from the 23% reported in 2004.

In the Uranium business revenue is expected to be about 15% higher due to a stronger realized price and increased volumes. Revenue from the Conversion business is expected to be marginally higher than in 2004 due to an anticipated 9% increase in the average realized selling price, partially offset by slightly lower deliveries.

Bruce Power earnings in 2005 are anticipated to be similar to 2004. In Gold earnings are expected to decline year-over-year due to higher unit costs at Kumtor and increased spending in exploration.

Administration and exploration costs are projected to be about 40% greater than in 2004 for the same reasons I mentioned earlier. For 2005 the effective tax rate is still expected to be in the range of 15% to 20%. With that, I’ll now turn things over to Terry, thank you.

Okay, thanks Kim. Good morning everyone. Production operations at Cameco’s uranium mines are running smoothly as the news release indicates. I’m confident that our production targets for the year will be met without too much difficulty with the exception of a small decrease of about 100,000 pounds from the Smith Ranch ISL operation in the US. The reason for that is a new well field at Smith Ranch was delayed in coming on stream this spring due to bad weather down there- hard to work in the field. And the head grade is lower than anticipated.

The construction on the Cigar Lake project is proceeding well after a slight delay caused by mobilization and start-up problems. Shaft-sinking and freeze-hole drilling are proceeding on pace with the budget, although the shaft-sinking is still a few weeks behind the original target.

The mine-development work is going slower than scheduled due primarily to competition for shaft services with the muck being skipped to the surface and the material we have to install underground being [slung] in the same shaft.

None of the off-schedule work is critical path however, and plans are being drawn up to ensure completion of all the paths of mine development so that the mine will be commissioned on time.

As we noted in the release we have filed a project description with the federal and provincial regulators to support the required environmental assessment to process about one-half of the Cigar Lake or the Rabbit Lake mill beginning in 2009.

[Inaudible] brought that Uranium-rich solution from [Coachman] is the Plain Lake operation. Coachman has a 37% interest in the Cigar Lake project. The proposal includes minor modifications to the Coachman of the Plain Lake [jeb] mill in order to load the uranium-rich solution for transport and then modifications on the Rabbit Lake mill side to receive the solution.

We also propose to continue processing uranium ore from Rabbit Lake from the ongoing conventional treatment of the Eagle Point mine, even after beginning to receive the uranium-rich solution from McClain Lake. This additional material, now anticipated from Eagle Point will require modification to the Rabbit Lake [infentaling] facility to provide sufficient capacity so we can effectively manage all of the processing-related waste materials associated with combined operations.

The proposal also includes a construction of a dedicated restricted-access haul road between McClain Lake and Rabbit Lake sites. The uranium-rich solution will be transported over this dedicated haul road in specially-designed and improved containers, similar to those approved for hauling or slurry between chemicals at the McArthur mine and the Key Lake mill.

The environmental impact statement and final design for the 5.2 million pound per year Inkai project in Kazakhstan has been submitted to the government there. We are expecting approval for construction in the fourth quarter and may actually get a go ahead for some earth works as early as next month. This sets the construction schedule to commission Inkai in 2007.

We’ve also been granted approval to expand the test mine facility at Inkai and construction contracts have been blessed. That work will increase the output of the test block to – per the operating facility there to – nominally 700,000 pounds per year, effective later next year.

In the Fuel Services division as the release indicates, production is currently down year-on-year due primarily to a change in the timing of the shut-down schedule at the Port Hope facility from last year. By year’s end production will exceed last year’s which as you know was reduced due to the labor dispute. However due to start-up challenges after the scheduled shut down this spring in the fluorine-generation circuits and a very hot spell in June and July, resulted in restricted work protocols due to high ambient temperatures and humidity indexes; we fell short of the targeted production and are revising this year’s forecast downward about 500 tons to 13,000 tons uranium.

As noted we also plan to increase production at Blind River. This will be achieved by making minor process modifications to the current circuits.

In the Gold business the operations continue to run well under Centerra as we have released in the Kyrgyz Republic however following the resignation of the sitting president and subsequent election of the new president, a political uncertainty exists that could impact the project. The operations at Kumtor are fairly unaffected although a group of local residents has blocked the road to the mine in the last few days protesting the government settlement of the 1998 truck accident that resulted in the cyanide spill to the Mamba River. We are working through this issue with the government, advising them of their obligation to allow unrestricted access.

Now I’ll turn it over to George Assie for the marketing discussion. Thank you.

Thank you Terry and good morning everyone. Market activity in the second quarter continues its strong pace set in the first quarter of the year coming in at almost 10 million pounds, and that was almost double the amount traded in the second quarter of 2004. The first half of this year has proven to be busier in terms of spot volume in the first half of the last several years and in fact spot volume of almost 20 million pounds in the first half of this year is about equivalent to the average total annual volume for each of the last five years.

The high level of spot demand from utilities so far this year was largely due to inventory building and discretionary purchases and that resulted from when the expectations of spot prices would continue to rise. Investment fund is holding a similar view of future spot prices added significantly to this demand as they also picked up material.

Spot price began the quarter at 22.55 and the high level of demand early in the quarter resulted in the spot price moving up very quickly by about $5.00 or so just over a few weeks. Ultimately the spot price ended the quarter at $29.00, almost a 30% increase from the end of the first quarter.

At June 30th of last year, industry-average spot price was 18.50 so year-over-year it’s increased about 56%. From the end of the second quarter it’s increased a further 50 cents to 29.50.

The long-term price indicators on June 30th were at $30.00, up some 10% from where they were at the beginning of the quarter and since the end of—or since June 30th the long-term price published by [indiscernible] shows that it further now stands at $31.00.

The summer period is traditionally the slowest time of the year for spot market and this year is no exception. The demand has fallen off significantly and upward price pressure has diminished along with it.

Looking forward, we do not expect the pace of spot demand to continue to be as strong in the second half of the year as it was in the first half of the year. And there are primary two reasons for that. The first relates to the differential between spot and long-term prices. You will recall that in previous conference calls I talked about the then significant spread between the spot and the long-term prices. It was as much as $5.00 at one point in the first quarter and ended the quarter at $4.00. Given that large spread and the economic supply-and-hold transactions where utility could purchase in the spot market to cover requirements even a few years out in time, we had expected this spread to narrow. And that is indeed what happened and the spread narrowed very significantly ending the quarter at just 50 cents.

But the recent increase in the long-term price to $31.00 the spread between the spot and long-term prices has increased to $1.50 which is right in the middle of the historical range of $1 to $2.00. Given that a spot buy-and-hold purchase is no longer economically attractive, and further that utilities are generally well-covered for their near term needs, we expect to look to cover any medium or longer term requirements through term purchases rather than spot purchases.

The second reason is that spot volume in the first half of the year and in particular in the second quarter, was significantly impacted by spot purchases by investment funds. At this time there is no expectation that similar purchases in such large amounts will take place in the near future.

So for those reason we think the spot prices are likely to be relatively flat over the next short while here.

The long-term contract market has been very active and contracting volume is on target to exceed 100 million pounds this year. Utilities are looking to cover their needs for a longer period of time than was the case in the past. Our data shows that uncovered requirements for the next ten years is almost 100 million pound lower for the forward ten-year period, than it was at this time last year. About two-thirds of the covers that utilities have added is for the periods five years and beyond into the future.

In summary, both the spot and long-term Uranium prices have moved up significantly in a very short period of time. The next few months are likely to see weak spot market demand and consequently price is likely to be relatively flat. Longer term, fundamentals remain strong.

Turning to the Conversion market, industry average spot prices for both North America and Europe ended the second quarter at 11.75 a kilogram, down marginally from the end of the first quarter. At the same time, industry average long-term prices in the North American and European markets have leveled out at 11.88 and 12.63 respectively; unchanged from the end of the first quarter.

One of the industry publications at least reports that the tightness in the near-term supply appears to be easing and that is the reason for the slight reduction in spot prices, frankly we are not convinced that that’s the case. From our perspective, the underlying long-term fundamentals of the Conversion market remain really quite attractive.

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

George, thank you very much and now we’ll open it up to questions. Operator?

Thank you. We will now begin the question-and-answer session. Please be advised that we will take questions from the investment community first, followed by questions from the media [Operator Instructions] Your first investment question comes from David Charles from GMP Securities. Please go ahead.

Good morning. Just a few very straight forward questions; I know maybe it’s a little bit early to give guidance for 2006 but I’m just wondering if admin and exploration expenditures will stay at the same levels next year as they are this year. And maybe I’ll just ask two other quick questions at the same time. As far as Bruce Power is concerned you talked about lowering capacity factors this year because of the outages. I’m just wondering where we should look at them going back to next year given that your expectation is that outages will [inaudible] with less. And maybe just one more maintenance-type thing; you have previously given costs for both Kumtor and Boroo in your quarterly earnings reports, and I don’t see them this quarter, if you could maybe give those numbers if you have them.

Okay, David that’s quite a menu. I’ll make a couple of the general comments and then I’ll ask Kim to comment as well. But I think if you look on a consolidated basis the admin and the exploration, you can expect in 2006 that given the results that certainly Centerra is talking about and the uranium prices that we’ve seen; exploration expenditures are likely to increase. We haven’t gone through- neither company has really gone through the budgeting process yet for 2006, but I think the results and the prices are telling us we ought to be doing more.

On the admin side, Centerra continues to establish itself as an independent company. They are increasingly separating if you will from the umbilical cord of Cameco and hiring their own professional staff. So I think you can expect admin costs to increase a little just to reflect that they’re going to be increasingly stand-alone. All of this of course we’re continually hit by costs driven by Sarbanes Oxley and other things that are being driven by the regulatory regime so we’re continuing to suffer cost increases there. And I think that we will for the next several years. So we’re doing our best- particularly in the admin side to keep it as low as we possibly can. I think it’s notable that it’s not really affecting what’s going on out in the field, but we are seeing some significant increases for those reasons on the admin side.

Kim, I don’t know if you want to add anything to add?

Just the one point David which is stock-based compensation is a very large component of the admin cost and if you look at footnote 9 your will see the various components to that. The one item to particularly note is the expensing of stock options has not tax sheltering, so the expense flows straight through to the bottom line and therefore in a way is doubly punitive. So you should note that item. The Sarbanes Oxley project will come to a close but there will be some residual cost to sustain that as we go forward.

Okay, then the next part of it was capacity factors [inaudible] as we look into 2006. There again we don’t have budgets yet but given some of the difficulties we have experienced this year and the number of outages that have been scheduled, I think our view is capacity factors overall for Bruce Power next year should be going up. It certainly will not hit next year the [90%] that we ultimately target, but it should be better than the 83 or so that we project this year.

Would it be safe to say that it’ll be 85%? Or could you even expect it to be higher than that?

I think it’s a little bit early to tell until we get into the budget for the budget process for next year David, but we’ll get to that as we get into September/October.

And maybe just on the Op costs for the gold mines?

David on that one, we’ve – it wasn’t an omission or an error. We deliberately have sort of shifted away from giving detailed information on the gold group. Certainly Centerra’s public filings have all that information. And going forward we will continue kind of in this mold of looking at it as sort of a gold investment verses right down to the mines. That’s kind of where we’re evolving to; our investment in Centerra verses individual mines.

Okay, so I’ll go get it off Centerra then.

Absolutely.

Thank you.

You’re welcome.

Thank you. You’re next question comes from Terence [Ordance] from TSO and Associates. Please go head.

I got a new name. [laughter] Jerry, the Bruce Power distribution you had in the second quarter and also in the month of July, I understand that there will be cash goals and I think it’s a requirement but can you describe your formula there roughly, given the months- similar months power rate and demands- you should take the similar rates for August and September I guess.

You’re right Terry, it’s certainly driven by performance and the price of electricity and we lag by about one month. So the distributions that we got in June will reflect really cumulative performance up to that date which was affected greatly by outages and then July distributions would reflect performance largely in June. I’ll let Kim who has been in the business of talking about the formula describe it a little bit to you but it’s just basically excess cash before major capital expenditures.

Terry, really—that really is the stage we’re at, at this point, still working with our partners on how that is to move forward but the key principle was—is to move this forward where cash that isn’t required immediately in that business for sustaining expenditures and such, will be distributed out to the partners when major expenditures come up whether obviously A1 and A2 or any large-capital program like that, they will make separate cash calls for. We are working that through and you will see more results and more explanation as we go.

Can you just tell me what the July, like the [spot average] price was – you get to the month or second quarter by totaling the July price?

July was- $84 verses $48 in 2004.

That’s a substantial increase.

That’s the spot average, not the real one, it’s the spot average.

Just coming back to do Cigar Lake again is commendable given the industry constraints everywhere from manpower to skill and all this. When are you going to make your next – sit down and stage and look at the capital costs with Cigar Lake and to be – you did mention that the costs are running on the Cigar Lake project? Do we have preliminary estimate of how much the project costs have been under pressure?

I’ll let Terry – go ahead Terry.

Well Terry we haven’t changed the estimate at all yet. We’re continually monitoring as we bid this out in separate contracts but if there is a material change, we’ll let you know.

Given the circumstances –should you expect some – I mean I could expect that there will be change in the capital costs given the circumstances. Is that a fair enough statement?

Not necessarily, no.

Okay. Just come back to George if you’re there for a second. The license extension to the United States; it looks like plenty of the reactors obtaining those extensions. The uranium report that the government put out, the uncovered requirements; does that include the extended life or is it on the previous life of the reactors?

I believe it would include the extended- for any life extensions that were granted that would certainly include them. Utilities would report based upon at a minimum life extensions that have already been granted. I’m not sure if they would be – if they would also even report upon life extensions that are expected. I could check that out for you Terry, but I don’t have a firm answer for you.

There is currently a substantial amount of extensions given in the previous numbers that doesn’t include, but in any case we’ll talk about it off-line. And finally on the Energy Bill in United States I think you referred to somewhat – President Bush – is there anything more material then what we see? Obviously there [inaudible]

Jim, could you repeat the last-

The Energy Bill that [inaudible] document tabled or Congress put through in the last couple of days?

Yes.

Is there anything there beyond the headlines [inaudible]?

Well I think within the Energy Bill which passed the House yesterday and probably the Senate today, it contains a number of very, very positive provisions for nuclear. And I think probably the most important thing is nuclear has been now recognized as a clean emitter, another words a technology that does not emit carbon dioxide or greenhouse gasses.

And it will receive much the same treatment with respect to tax credits as when Solar, and Hydro and other clean-emitting technologies. That’s one of the first instances where the non-emitting nature of nuclear energy has been recognized by governments. Up until now I think there’s been one or two states in the Northeast that have recognized that benefit from nuclear energy and now you’ve got the US Congress recognizing the same thing with respect to greenhouse gasses. There is also within that provision a recognition that if the utilities are going to start building the next generation of nuclear plants, they will be testing a new regulatory regime which is one-step licensing. And there is uncertainty about that and so Congress has put in to the Bill some insurance provisions that if there are regulatory delays, litigations and resulted injunctions, things that are beyond the control of the utility building the plant, Congress will cover the cost of that delay for the first two plants and pretty well the total cost for the delay for the first two plants and then for the next several it reduces but they want to test the regulatory regime and demonstrate that it’s working. And that’s something that’s quite positive from an industry perspective.

There are some other tax provisions that are beneficial, but overall I think nuclear was well-recognized as a technology that the US government has decided to promote.

Thank you for your comprehensive Jerry, just [inaudible] Is there a reason why the government has not incorporated in this offer that you made? Is it because of the price? Is it a government policy or is it something else?

No, I think it was probably just mostly competition. I think that they looked at the proposal that Bruce Power was on behalf of the three partners put forward. I think our strengths were well-recognized; our performance survey well-recognized at Bruce Power and like any government they want to make sure that the electricity is delivered at the lowest possible cost. And I think that they’ve concluded that doing it on their own and not involving the private sector is from their perspective a lower-cost alternative.

Thanks, I’ll come back. Thank you.

Thank you. Your next question comes from Ray Goldie from Salman Partners. Please go ahead.

Good morning. On page 14 of the news release you give a table indicating the relative proportions of and price sensitivities and sensitivities out to 2008. And because as you pointed out there are caps in your contracts and other reasons, the percentage of price incentive is steadily increasing as every quarterly report goes by. I wondered if you could help us by giving us similar tables. Your table shows the sensitivity of increases in prices above 29.50. I wondered if you could give a similar table for decreases in the spot prices below 29.50?

Perhaps in the future.

Ray, can we think about that awhile? [laughter] I think we’ve got to assume that it’s parallel, but it probably is not, you’re right. And we’ve been in this increasing market environment so we’ve kind of got the one-way lenses on but we’ll certainly work on that for you.

Thank you.

You’re welcome.

Thank you. You’re next question comes from Victor Lazarovici from BMO. Please go ahead.

Thank you. I wonder if I could ask a couple of questions on the plans for the uranium division. I believe you 2005 production plans shows a slight increase over the ’04 level and while deliveries are highly seasonal, they were seasonal last year as well. And year to date your shipments are tracking I think it’s about 8% below last year’s level. The question is are you going to be able to make up those deliveries in the balance of the year, or is there a reason why we should shift that extra volume into next year?

George will answer that question.

There is no reason to shift volume into next year. As we’ve described some 45% of our deliveries are expected to take place in the fourth quarter. We think the volume for this year is pretty firm. As a matter of fact we gave some guidance that it has actually increased a little over what we provided before so no, we don’t see volume slipping out of this year and into next.

So can we assume that the production profile will eventually be represented in the shipments i.e. year-over-year they’ll be higher?

Yes, we are building inventory to handle those deliveries later this year. So yes, those numbers are correct. We will be delivering more than we mentioned before and it’s that building inventory to accommodate that kind of delivery profile.

Okay, I have a question on the Bruce cash agreement. You mentioned that you’re going to distribute excess cash and that future capital projects are going to be funded through cash calls. Does that imply that each partner will have the option to participate or not participate in future cash calls and dilute their equity up or down in Bruce as future spending occurs?

That is, we are talking for major programs which that arrangement really is amongst the partners as to how each of them handles it. I’d best leave it that for right now.

The last one has to do with some of these mixed messages that are coming out of Washington and I guess that’s business as usual there, but I believe I read something two or three weeks ago that the Congress passed the bill or were considering a bill to not allow nuclear shipments or shipment of nuclear technology to China. And I thought that India was a less-desirable customer from Washington’s perspective. Is it strictly the administration verses shift, or do I have my facts wrong?

I think your facts may be a little bit inaccurate, Victor. I’ll ask George to-

I think maybe Victor what you’re recalling is there was some disagreement in some parts of the US government about the financing of the Westinghouse reactors that were being sold to China. The argument being that Westinghouse is really owned by a UK company and so for some of them the question was why would we finance that? So, I think the House, or one of them supports it and the other is in opposition.

The House passed the bill that says there couldn’t be [indiscernible] or Opex [inaudible] and the Senate did not take it up – frankly I don’t where they went. I suspect that the financing will allowed. Victor there was one other thing too you may have read that they’re putting increasing controls on nuclear material of any kind and that would be for use in fire protectors, smoke detectors, industrial radiological instrumentation. That’s just simply a 9/11 repercussion; that doesn’t have anything to do with China or India or ultimately the export of reactor technology.

Okay, so the China issue is a Westinghouse issue; it’s not strategic then. It’s basically not wishing to finance a foreign government’s subsidiary.

Not at all and I think they’re really recognizing that India has had an impeccable record in the [inaudible] front, with respect to its civilian programs. Over the years they have cooperated greatly and I think Bush is recognizing that they’ve got to begin bringing India into the mainstream. India does have a nuclear weapon and I think people have concluded they’re not going to give it up. But they want to bring them into the mainstream in terms of nuclear trade and civilian technology.

And I would just add that the IAEA, International Atomic Energy Agency, responded very favorably to the Bush initiative so-

Thank you. Your next question comes from John Redston from Desjardins. Please go ahead.

Two quick question, gentlemen; firstly on the Conversion Services the gross profit percent dropped from 38% a year ago to 28% in the quarter. I wonder if you could give a little bit more detail as to why that dropped the way that it did and more importantly, going forward what kind of level would you expect that percentage to go back up to?

Okay, John I’ll ask Kim to respond.

Yes. John the decline in this quarter there is a couple of factors behind that. One, the volumes were down compared to the prior period and that would increase your cost as in all operations you have a very large component of fixed costs and less volume to spread that over so you’re margin gets squeezed. And that’s just the case when your production is down quarter-to-quarter. As to the margins going forward, we do expect them to improve back up—just irrespective of what the revenue side does as more volume is pushed through you can knock them down. This and another factor that hurt us this period was we were in the market acquiring some material and those prices rose as well. Our sales prices are up and that will over time more than compensate for these extra costs that we’ve had just now.

So do you think you can get up to 38% again?

It’s tough to answer because it’s a combination John of production costs and purchased material. It’s like uranium we’re always in the market buying material. Just understand the market that to cover some of our contractual commitments. It’s a blend on the UF6 business like uranium, we’re buying on it on long-term contract. AGU is in the form of UF6 and some of the re-enriched tails are in the form of UF6. So you’ve got that [part] that’s always changing and to the extent we’re buying currently in the market, we’re paying prices that are at or close to the current price. It’s kind of difficult to predict what that margin will be quarter to quarter, but we will be realizing significantly conversion prices going forward, and our own feeling is we’ll make money on purchased material and we’ll certainly have healthy margins on what’s being produced.

We had mentioned in there that Conversion revenues will be up 33% in quarter 3. That will show for a better margin, I’m quite comfortable.

Okay. The other thing I was going to ask you about was Eagle Point. It does seem that you’re going to keep it going a little bit longer. Could you give us some idea of what kind of increment that will give to your overall production over the next couple of years?

Terry, do you want to tackle that?

John we – you know we announced the 6 million pound increase in the reserve last year but what we’re doing is we’re continuing to drill from underground and around on the surface, the brown fields around the mine to extend the life. We don’t have any news to – or anything to [inaudible], I’d just say that we’re still drilling so we’re finding some good things and our expectation is that we will continue and we’ll continue on pace as yet undefined time.

Well, let me ask you another way. Are you going to maintain production from Eagle Point?

The more that we find additional reserves as we did a year ago, then we tend to continue mining at Eagle Point.

Yes, but at the same rate – same production that you’re mining now, that’s what I’m getting at?

It’s a function of what we find and how large the resource or the reserves are. We hope to.

Okay, alright, thank you very much.

Thank you. Your next question comes from Alex Latzer from Merrill Lynch. Please go ahead.

Thanks, good morning. A quick question – can you quantify for us the impact of some of the unplanned outages or the unplanned outages in the second quarter? I’m just trying to get some idea of the increment heading into the third quarter, how that might be working in your favor?

Kim, you want to-

I don’t have them verses in plan verses unplanned. But I saw your outage cost in total- it’s better to do this on a year-to-date basis I think. We were up from, to look at page 19 the operating and maintenance costs moving up to 433 from 351, roughly half of that is outage costs.

433?

351; page 19 of the release, the nuclear highlights table.

Okay, right, I see that.

Page 20; I apologize. Page 20 there if you look at the year-to-date operating and maintenance costs, of that increase there about half of that is outage related so you can – if you move kind of looking at that as the outage come down, those costs will come down.

Okay, thank you for that.

As you recall in the second [quarter] we the major transformer catastrophic failure. I think it was 29 days of unplanned outage which severely affected the revenue side as well in the second quarter. These are highly unusual events and June and July performance of the units that have been operating; of course we’ve had one scheduled outage that we hope comes back on here in early August. But the performance of those five units that have been running have been quite good.

Alex, are you looking -- on page 25 we do tell you how many planned outages are from the third quarter compared to the second quarter, 30 days verses 51 days. Does that help?

Yes, then I’ll look at that I was just trying to get an idea of the unplanned; that whether you quantified that 29-day outage or not. But obviously it was material.

That was material as we had reported earlier and so-

I’ll work with those numbers.

The performance at the last of the year tracks pretty much on the budget.

Good, thanks for that. The other question I had was, I know that you’re moving more towards an investment perspective on Centerra but I’m trying to get my arms around- there was a settlement with respect to a spill there and I was just wondering, is there a possibility that the settlement – is this an issue of re-opening the settlement talks perhaps seeking more compensation? Or is this one off-

This is local community in a very poor area where you’ve probably got about 40% unemployment or even higher and the settlement which was done pursuant to international arbitration and ultimately blessed by the government. Really nobody is asking to reopen that except perhaps the local community. So that is not something we are at all concerned about. We are concerned that the road is being blocked and we’ve asked the government to step in and remove the roadblock. We’ve got roughly 19 days or so to supply. At the mine we anticipated it. It’s not the first time that it’s happened, certainly not the first blockade that we’ve seen in the history of Cameco. Like always, we’ll work through it.

No, I understand it’s happening in Copper as well. And lastly, do you care to – since the last guidance that you had talked about informally regarding your realization, the setting out the later this decade. We’ve seen obviously that the prices have come up from the mid 20s to where we are currently. I just was wondering if you wanted to provide any further clarity or any further guidance on where you think the Company’s realized – your realizations perhaps in US dollar terms might be or Canadian later this decade. Can you get up to that, above that $30-dollar level?

George do you want to tackle that one?

I think in a release I think we say that by 2008 or 2009 that we expect to be realizing the vast majority or most of the price increase. So that will give you some guidance. And I’ll add to that; that is still carrying along a few older contracts so one would expect to get beyond 2008 it should continue to look better.

Okay George, thanks. Thank you, gentlemen.

You’re welcome.

Thank you. You’re next question comes from Jeff Covoli from Duquesne Capital. Please go ahead.

Hi good morning, it’s Jeff Covoli from Duquesne Capital. I just wanted to see if you – I hope I didn’t miss it earlier, if you could talk about it – if you could spend a minute on what the process is with the Ontario government on actually opening up the two Bruce reactors that I believe are idle at the moment and when we might be able to see a decision on that?

Okay Jeff, I’ll go back a little bit to the beginning because when we invested in Bruce Power, there were four operating units and we had in mind looking at the feasibility of restarting Units 3 and 4 and ultimately we made that investment. We brought the two A units on, giving us a total of six units. That really was the investment model and we’re quite happy with that. We really never had an intention to restart units 1 and 2; mostly because of a contamination issue dating back to the early 90s when they were operated by the government.

About a year and a half ago the government, facing increasing electricity shortages as they looked into the future, basically said they’d like 1 and 2 restarted. We said – fine, we’d be more than happy to sit down and talk to the government about that. We’ve been engaged in that process now for well over a year and during that year we have done a lot of scoping work and technical work and engineering analyses as to what the project would entail. And we’ve now gone through a couple of rounds of discussions with the government to see if we can find an economic arrangement around Units 1 and 2 that makes sense for them and makes sense for the three partners to make the investment.

Those discussions are still ongoing and they’ve been ongoing for quite awhile. Hopefully they’re drawing to a conclusion where then we and our partners can make the decision whether it’s an investment that we want to make.

And are those – those units are about the 770 megawatts each, is that roughly right?

Total of about 1500 if you brought the two Units back into the market.

Right, and so the issue with the government is given the contamination and the cost to reopen, finding an economically feasible way for you to do it and-

Both for us and for them. Because it is a very, very large project and one doesn’t go into a very large project with the uncertainties that are there too lightly.

Got it, got it. Is there any precedent in the earlier units for – I’m just not as familiar with it-

It’s – the 3 and 4 refurbishments were purely refurbishment but 1 and 2 it’s really a rebuild of the units. So we strip out really all of the internal steam generators, [collandery] piping, fuel channels, and on and on and on. And it is a rebuild so in some respects it’s more predictable because you’re not trying to gauge the remaining life of the existing components. You’re just removing them and taking them out. Some of the control features, there will be some similarities with what we did at 3 and 4, some of the software and electrical controls and those types of things. And there of course we’ve looked at previous experience and lessons learned and all of that has been integrated into the technical side of the 1 and 2 restart which today here in August, given all the work that’s gone on, on that part of it for the last year, we think it’s well in hand and well understood.

Got it. Great, I appreciate it. Thank you very much.

You’re welcome.

Thank you. You’re next question comes from Steve Bonnyman from CIBC World Markets. Please go ahead.

Yes, good morning, thanks. I’d like to come back to the decision that’s been made regarding distributions at Bruce. After spending a year working towards a possible negotiation with the Ontario government and on the cusp of what could probably be one of the largest capital expenditure programs at Bruce, you now decide to move the financing from the Bruce partnership level to the partners independent levels. What would be the rationale for that and what advantages are there for either the Bruce partnership or any of the individual partners in that decision.

Steve, the financing never was at the partnership level; it was always with the partners. There have never been any stated intentions to finance 1 and 2 or anything like that at the Bruce Power level. So I’m not quite sure maybe where you got that impression-

Well Bruce had its own debt at one point on the start up at the partnership level.

Bruce has a working capital facility of which at June 30th there was $10 million outstanding, the same as year end. But that is all it’s ever had.

And that’s back to the partners.

The partners have put money in, in the form of debt, the 3 big partners. But there has never been any third-party term debt in Bruce Power.

And there is no advantage to locating any possible term debt in there?

Not really-

Or has simply just never been discussed?

We just really aren’t into that at this point to discussing one way or the other and all the partners- we’re not exactly of the same minds but we have had general discussions but nothing of substance on that.

Okay, fair enough, thank you.

And the other point I think is that up until now all the cash generated by Bruce, all of the earnings have been reinvested so there really has been no reason to talk of cash distributions. Now that we’re seeing an end to the capital programs that we’ve had in the past, and given the performance of Bruce Power it came time to talk about getting some cash out finally.

I guess the question then comes back to Cameco as we look forward over the next say 3 to 4 years, in the event that you go ahead or the Bruce Partnership elects to go ahead, you’ve got CapEx for Cigar Lake in front of you. You’ve got no dividends coming from Centerra. Earnings are relatively constrained from the Uranium business by the price caps as they exist right now. Then you could potentially be stepping into some very large CapEx on the Bruce side. Is my math incorrect or would you guys be looking at a pretty big requirement to be raising capital in a couple of years if this goes ahead?

No, I think you’ve touched on the capital investment opportunities that we have in front of us but they are over a period of years and the cash-generation capability both from Bruce and from Cameco I think will be up to it. That’s our present view and it won’t be constraining in the way – we won’t be pushing our debt-to-capital target which historically has been [pulling] 25%.

Would that change in light of the investments that you would make given that there is obviously very different risk profiles in your different businesses? That perhaps that 25% would be viewed as either too cautious or too generous?

That really depends on what the projects are and the timings. The issue behind that – we’ve stuck with that 25% as a growing company. We are not going to put ourselves in an awkward position of not being able to pursue when we want the growth opportunity. That’s a little bit too much speculation as to what might happen in the future depending on the projects.

Okay Kim, thanks.

Thank you, you’re next question comes from Brian MacArthur from UBS. Please go ahead.

Good morning. I was just wondering if I can follow up back on the cash distribution one more time. The 11 million in July; can you tell me sort of what – you said it was sort of for June but is it like middle of June to middle of July? Or is it truly all June because there were – the price didn’t start to spike. Is that what you’d call a normalized distribution on sort of $53 a megawatt hour?

Not at all Brian. This is distribution number 2. We’re still working the true with everyone. It is going to take a little while to reach that normalized level. So the point the note here is not that whether the first one was 16 and the second one was 11 and impute anything behind that. The fact is that there was one and then there was a second one and then we’ll continue from there, not the numbers themselves yet.

Sorry, you say 16, I thought you got 20 or did I hear that wrong?

the first distribution on net share was $16 million. The second one was 11, but I would really caution don’t interpret yet those back to something else here. It’s really just working it’s way through; the principle of the issue at this point.

Okay, thanks. The second thing is back to the agreements that came up; there’s a statement in here it goes through how you provided customer contract guarantees and you had up to $100 million and you were all protected. And then it says – after removing its preferred rates Cameco’s guarantees for the contract – talking about the customer contracts- would have been 154 million and actual exposure would have been 77 million. Am I to read that as part of the deal those went away, or what does that actually mean?

No, what we have – the actual numbers you see there are as of June 30th. We issued our notice to make this change which did not come effective until July 28th. We’re giving you the impact on a forward-looking basis.

Okay, so you’re basically, the guaranty is where you sit right now are the 150—or sort of 77 then I guess because you got rid of the preferred rights.

Actually as of yesterday they went to 77 and 154 just as we’ve stated there.

Okay so as part of the deal here, you effectively get a higher sales price, you clean up your liability but effectively you’re no longer capped on the investment. You’re basically pro rata going in for any capital from here on in. Is that kind of the way I should look at that deal?

Yes.

And my final question, just related to Blind River, we’ve talked about taking the capacity up there to 24 million pounds and I believe it used to be 18 and that sort of balances with the extra tons that are going over to the UK. I also thought there was excess capacity there to begin with. Does that mean once this is done that there’s going still be excess capacity in Blind River? Or is it totally filled up now?

George?

Well Brian, it wouldn’t be totally filled up as yet, but we need the extra capacity for the posed increases at Port Hope and in addition to Springfield’s.

And is that like the [six] is that just the right size increment from an engineering perspective or do you see plans right now where you can fill up the rest of the capacity over and above what we’ve already done?

It really reflects that you don’t operate plants at full capacity.

Okay, so wouldn’t have truly a whole lot of excess capacity then really when this is done?

I don’t think so.

Okay, great. Thank you.

Thank you. Your next question comes from Terence Ortslan from TSO and Associates. Please go ahead.

I just had a question on that [inaudible] transaction on your power, the Duane purchase. It still looks pretty low to me for megawatt power. What was the previous transaction that it would be comparable to if any?

Duane Arnold, it was one of the more expensive or amounts paid per megawatt.

I thought it was something like $700 per megawatt.

I can’t recall but-

It’s less than 600 megawatts and they paid $383 or $387 million, which included fuel, and it always makes it difficult Terry because you’ve got inventory in all of these things and PPAs on some of them. But I’d say it’s certainly reflective of the trend that the more recent acquisitions of units, particularly these single units, has become increasingly expensive.

It still sounds a bit low, but just coming back to the US market George, maybe you and I’ll address the issues of 2005 outlook. Last year we hit a certain number and there was a 15/85 distribution of stock verses long-term. What do you expect the line to be [inaudible] is going to distribute between spot and long?

Terence, could you repeat that? We couldn’t hear you.

The US market, how much of the volume has been contracted or shipped in 2004 and 2005; 2004 was 15 spot 85 on a [inaudible] basis. What would be the volume that you expect George for 2005 and is it a distribution between spot and contracted? Any guess?

You’re looking at the EIA data, are you?

I’m just looking at the data in your press release which I think it’s from the US, yes I think EIA.

Energy information, okay alright, we’re just glancing at here. Yes. 15% -- okay well normally in the market roughly 10 to 15% has traditionally been to volume of purchases in the spot market and it’s not surprising that it’s at the higher end of that range right now and I expect, once they report for 2005, given the market that we’ve seen, it’ll be at the higher end of that range. But I think, if you go back to the remarks that I made, that we’d expect to see that come down let’s say for 2006. I think we’ll see a spot market volume decrease here for the reasons that I have cited in my remarks earlier. I think that percentage will be less.

US utilities taken 64 million pounds last year, I think 10-15% above 2003. And some went to inventory obviously. What is your estimate for 2005 that they will take this year?

What’s my estimate that utilities will take in 2005? I think it’ll be larger than that, but I don’t have an exact number for you Terry.

And finally, on the ratings, you’ve been quite prolific on the rating scale with Moody’s and all and the comment that you have on the press release talks about two issues- Cameco not being able to benefit from the present Uranium market and Bruce Power. Obviously you can answer to the former, but why is Bruce Power an issue there in terms of Moody’s reviewing your ratings?

That’s a long story. I think maybe perhaps we should talk about that over a separate off-line call or something Terry. It’s quite lengthy. I’m still trying to figure out quite why they have the same issues, so I haven’t got a complete answer for you.

Evidently they just didn’t think we’re going to get money out of Bruce Power. [cross-talk] Bruce Power is a reasonable and very good investment.

The fact that you’re taking cash out in June and July, that would answer there question, then.

It should, we hope it will.

One of their problems just when we’re all the line was it didn’t strike the right chord with them, the fact that – the recognition that refurbishment of A3 and A4, preponderantly that was done with internal cash flow, very little relatively speaking was shareholder money, no third-party debt. So we’ve got now a very well-performing asset that we’ve funded out of cash flow. And yes it’s hard to redo an asset like we did and yet take distributions out of the partnership at the same time, and that just hasn’t struck the right chord with everybody.

Okay, thanks.

Thank you. Once again if you are from the investment community and you have a question [Operator Instructions]

Operator, we’re going to have draw to a close here pretty quickly so maybe just one or two questions if there are any.

We will now take questions from the media community. [Operator Instructions] Thank you, this will conclude the questions from the telephone lines. I would now like to turn the meeting back over to Bob Lillie for his closing remarks.

I’ll do it. I just simply want to thank everybody for joining us for the excellent questions and wish you all a very long and safe weekend. Take care.

Thank you. The Cameco Corporation Second 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.