Cameco Corp (CCJ) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Cameco Corporation fourth 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 fourth quarter conference call to discuss the financial results. Thanks for joining us.

We are pleased to have four of Cameco's senior executives with us. They are Gerry Grandey, President and Chief Executive Officer, Terry Rogers, Senior Vice President and Chief Operating Officer, Kim Goheen who is Senior Vice President and CFO, and George Assie, Senior Vice President of Marketing and Business Development.

In case you notice a difference in the line clarity, Jerry and Terry are calling in from out-of-town. We're conscious of everyone's time today, so we'll only focus on the highlights of the quarter and then get right to your questions.

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 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 the 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 risk factors are outlined in the Company's annual information forum dated March 15, 2005.

With that, I will turn things over to Gerry.

Okay, Bob. Thank you very much.

I'll extend my welcome to everyone participating on the call today as well.

Yesterday, as you would know, Cameco issued it's quarterly news release, and that news release covered three separate topics. What I would like to do over the course of my comments is address the significance of each one in turn.

The fourth quarter was another successful quarter for Cameco, and it certainly contributed to another successful year. You saw in 2005, we achieved a number of financial milestones, those included record revenue, record adjusted net earnings, and record cashflow. We watched uranium and conversion spot prices -- those prices, which represent our core products -- increase in a favorable seller's market, and as George Assie will relate to in little bit later in the conference call, we believe the market fundamentals remain strong.

Looking ahead to 2006, we expect improved results in all segments -- for uranium conversion and nuclear electricity generation. You will note that in the MD&A that accompanied the quarterly release, we have added an additional piece of information. That additional piece is an estimate of the average realized price of uranium for each of the next three years. I believe this information will improve the clarity of the relationship between the uranium spot price and Cameco's annual financial results over the period, and in each of the years covered.

Cameco strives to provide shareholders with the information necessary to make an investment decision, but as we've cautioned, we have to be balanced, and we need to be mindful of commercially sensitive information. We'll continue to evaluate our ongoing disclosure, and over time, we want to make sure we're ensuring and maintaining the proper balance between disclosure and the need for keeping commercially sensitive information confidential.

Now, I will conclude remarks here by discussing the remaining two topics covered by the quarterly news release, and also, I will refer to the news release about our acquisition of Zircatec, which we released this morning.

Cameco strong results and our future prospects have been noticed. The share price more than doubled since we last announced a three-for-one stock split one year ago. Yesterday, our Board announced a two-for-one stock split. Secondly, we announced a 30% increase in our annual dividend.

These decisions reflect our confidence -- that would be the confidence of both Management and the Board -- that we can continue to grow as a nuclear energy company. The confidence is also a reflection of the optimism surrounding nuclear power in general, and for many of you that would have seen President Bush's State of the Union address last evening, nuclear is foremost on the energy agenda of the United States.

Our most recent news release -- the one that came out this morning -- announced we have closed the deal to acquire Zircatec Precision Industries, an Ontario-based nuclear fuel manufacturer. The acquisition of Zircatec is something that we've been working on for quite a long time, and for us, is quite exciting. It now means that Cameco is involved in all steps of the Candu fuel cycle, all the way from exploration to electricity generation. With the financial strength we have tried to maintain and put in place, business expertise, we believe we're now poised and ready to take advantage of other nuclear business opportunities that offer an attractive risk reward profile. And if you have seen anything from last year's performance, I think it as we do pay attention, as we try to grow the business, to creating value for Cameco and certainly value for shareholders.

With that, I will turn the speaking over to Kim who is going to talk a little bit about our financial results.

Thanks, Gerry, and good morning, everyone.

I will comment on a few highlights for the year 2005, our financial position as we enter 2006, and then briefly discuss some of the key results we anticipate in the coming year.

In 2005, our core uranium business established new record for revenue and earning. In conversion, we saw top line growth, but our margins were hampered by higher cost, primarily due to the higher costs of purchased conversion. Our earnings from Bruce Power were also a record. However, weaker margins in our goal segment reflected lower mill head grades and higher expenditures for exploration, a program, which yielded significant increases in reserves. Terry will discuss this topic in a moment.

One of the important milestones for us in 2005, was the establishment of a policy of Bruce Power, whereby excess cash was distributed to the partners monthly. From the start of the program in June, Cameco received distributions in the the year totaling $326 million, including $200 million from the restructuring of the Bruce A assets. Further, $21 million was received in January.

Looking at the balance sheet at year's end, our net debt to capital capitalization was very strong at 9%. This sound financial footings continues to provide us with a solid platform to pursue our vision of growth. Also, in mid-January, we redeemed $150 million of senior debentures that carried a interest rate of about 7%. Funding of this redemption and the Zircatec purchase were facilitated by distributions from Bruce Power and the sale of our share holding in ERA.

Looking ahead to 2006, we expect growing margins in our integrated uranium conversion and generation businesses, driven by a continuation of this sound fundamental and a diminishing effect of lower prices in legacy contracts. The conversion business should also benefit in the second half of this year from the additional capacity contracted last March with British Nuclear Fuel.

At Bruce Power, the refurbishment programs over the last three years have been expensive, however, they have been driven by the importance of equipment reliability and long-range maintenance strategies. In 2006, we expect reliable performance from the Bruce B units, in line with the long-term target of a 90% capacity factor. For the year, there was one major outage planned in the third quarter for turbine replacement on unit 8. After this, the extensive program of capital upgrade projects at Bruce Power will be complete, and we believe the B units will be well equipped to deliver reliable performance going forward.

One brief note on the first quarter of 2006 -- while this quarter in years past has often had the lowest uranium delivery volume this years different, this year is different. We expect larger volumes in Q1, with uranium volumes double and conversion volumes up almost 40% over the first quarter of 2005. This anomaly appears to be simply a function of customer loading schedules during this particular quarter.

Finally, as Gerry noted, the Board approved a dividend increase yesterday. We do think it's important to review the situation regularly, and to adjust the pay app when appropriate.

With that, I will turn things over to Terry.

Thank you, Kim.

Good morning, everyone.

I would like to start out by saying first of all, in operations, we had a pretty good year in 2005. We also had some disappointments, and as our usual protocol here, I will cover our uranium operations first, and followed by our development projects, and discuss conversion services, and briefly touch on the goal business.

With the exception of not having received the regulatory approval for increasing the production capacity at MacArthur River and Key Lake, the Saskatchewan operation showed excellent performance in 2005. At McArthur River and Key, we are still waiting regulatory decision regarding the process to be used and obtaining the approval for the production license increase to 22 million pounds. The current status of that is if CNSC continues to annalize whether there is or is not a reasonable chance of significant impact, once that is decided, then the process used to grant approvals will be defined. Obviously, this is a big issue for us in this year and years outward.

Rabbit Lake also had a stellar year, producing beyond the budget by about 5% to more than 6 million pounds. It's a new record for Rabbit Lake since the mine was re-opened in 2002.

Exploration in and around the Eagle Point Mine is still showing encouraging results for mine life extension.

In the United States, the ISL mines increased production compared to the previous year, but Smith Ranch mine, still below its targeted production, increased for this year. In that particular case, a newly developed well field did not respond as expected, and resulted in lower grade and lower flow rates. However, by the end of the year that problem had been improved upon, yet, the deficit from earlier in the year could not be overcome.

On the developing projects at Cigar Lake, construction is half way completed in the terms of the physical works. The contracts and committed works for more than 80% of the project have been awarded. Shaft sinking for the second shaft is about 85% complete.

Beyond that shaft sinking, we had really remarkable successes and, frankly, good fortune in installing grout covers as a water control issues in stages as we developed down the shaft. Recently, however, we have been experiencing a grout cover stage that is taking much more grout work than expected. Now, we're expecting shaft breakthrough in April.

The underground development work at Cigar Lake is still a bit hampered by available shaft time. However, as we said before, priority has been placed on the critical path items to allow development and underground construction to work on schedule. Overall, for Cigar Lake, the project is on track for the start up in 2007, and is working to the forecast cost of $520 million as previously reported.

At our project in Kazakhstan, in Inkai project, site works -- that is [inaudible] and soils compaction in preparation for construction -- have taken place in the the recent weeks. It's about minus 40 there now, so the concrete works on the main processing plant are a few weeks away. Most of that work will be done by KAZAK contractors under the management of [Xpact] construction managers. The Inkai project too, is on track for 2007, and within the estimated $83 million U.S. cost estimate.

In the the fuel service division, the operations results were mixed reviews. At Blind River Refinery, production was well over our targets for the year, allowing a inventory build up in preparation of supplying the Springfield conversion plant in the UK. At year's end, about 3,700 tons of U03 were held in inventory as feed stock for Springfield.

US fixed production suffered a series of technical set-backs coming off the summer shut down that we reported before, and they were not overcome completely by year's end. Our remedial work is underway to improve the flooring generation capacity.

And as Gerry said, we're pleased that our deal on Zircatec has just closed. We will not be making wholesale changes in that structure -- it's a solid business -- and as we integrate those operations into the fuel services here Porthole.

Just briefly, on the goal business, they've had the recent press release that the gold company of the future is very bright as well. Recent announcements of significant reserves increases at Kumtor and the replacement of last year's mining at Boroo have been made.

Kumtor added 2.3 million ounces to the reserve base through a successful exploration effort targeted at the South end of the existing pit. This increase alone will add some 3-plus years to Kumtor's life.

With that, I will turn the discussion over to George.

Thank you.

Thank you, Terry, and good day, everyone.

Looking first at the spot market, activity in the fourth quarter totalled almost 7 million pounds, and that compares to 3 million in the third quarter of 2005, and an average of nearly 13 million pounds in each of the first two quarters of last year.

Investment funds continued to increase their holdings later in the year and represented about 35% of fourth quarter spot market activity. The relatively strong demand in the fourth quarter, combined with tight supply, continued to support a rising spot price. The year-end industry average price of $36.38 is 15% higher than the third quarter price, and more than 75% higher than the 2004 year-end price of $20.60, and since the beginning of this year, the average spot price increased further by $1.12 to $37.50.

For the year, spot volumes reached a record high of around 35 million pounds, and that's 75% higher than the average annual volume for the past five years. You may recall that during the early part of 2005, the long-term prices were significantly above spot prices, at times, by more than $5. That gap between spot and long-term prices made it economic for buyers to purchase and hold uranium, resulting in increased spot demand and upward pressure of spot prices. For 2005 as a whole, only about one-third of spot demand was related to purchases to meet near-term utility requirement, with the remainder being discretionary purchases. The discretionary buyers included utilities, building inventory, and investment groups. groups building their uranium holdings. The investment groups, in particular, played a significant role in 2005, accounting for about one-quarter of spot demand.

At this time, there is little differentiation between spot and long time prices, so today, we do not have that same driver encouraging large discretionary purchases. That could change as we move through 2006, particularly, if long-term contracting volume is strong and long-term prices were to again rise significantly above the spot price.

Utilities, for the most part, are generally well covered, so we do not see large volumes of spot demand coming from them to cover near-term requirements. Suppliers, including both traders and producers, are likely to come to the spot market to cover upward contract flexibilities under older legacy contracts as buyers under those contract take advantage of the more favorable pricing terms.

Spot demand will also depend on the level of participation by investment groups and any further inventory adjustments that utilities may make. At this time, we anticipate the 2006 spot demand will return more to the level of the previous five years, somewhere in the order of the 20 million-pound range. On the supply side, uranium stocks appear to remain very tight, and the general view in the market is for spot prices to remain strong during the course of this year.

Moving now to the long-term market, the average long-term price indicator ended 2005 at $36.13, up 11% from $32.50 at the end of the third quarter. Year-over-year, the long-term market price has increased by about 45%, and since the beginning of this year, it's increased further to $37.

Term market was extremely active in 2005, with awarded volumes of more than 240 million pounds, not far from tripling the 90 million pounds contracted in 2004, and the record for the industry. This number is likely to increase further as additional contracting information becomes available. Contracts being written in the current market are generally for much longer duration than in the recent past, five to seven years longer, and this trend has contributed to higher volumes.

In the press release, we provided some guidance on our expected realized prices under different market scenarios, and note, that our average realize price will move closer to the market price by 2008 than is the case today. As we have outlined in the past, Cameco's sells into the long-term market. We have a contract portfolio that contains some legacy contracts that were signed in a much lower priced environment and deliveries under new long-term contracts generally begin several years out in time. Given the history of the uranium market, the nature of contracting for uranium with the focus on term contracting versus spot sales, and the dramatic price rise of almost 250% over the past three years, it is of no surprise that our contract portfolio will lag the market for some time.

Cameco has been active in the long-term market, securing contracts that will support our ongoing mining operations and new mine developments over the long-term. The commercial terms in these contracts reflect the much improved market conditions we have seen over the past few years, in particularly in 2005.

We continue to target a 60/40 mix of market-related and fixed prices, and we may adjust that as market conditions evolve. Contracts today are higher fixed and/or floor prices, both of which escalate over time. Volume flexibilities have been dramatically reduced, and ceiling prices, to the extent they are given, provide significant up-side participation.

To summarize, we're very pleased with the contract portfolio that we're building for the longer term. For 2006, all indications point to another active year for contracting, as utilities continue to look to mitigate the risk of potential future supply shortfalls by securing long-term contracts with reliable primary suppliers. We do not anticipate exceeding the record breaking contracting level of almost a quarter-billion pounds in 2005, but we do expect the demand for long-term contracts to remain quite strong in 2006, and significantly higher than in previous years. At this point, we would estimate that something in the order of 150 million pounds will be contracted in the long-term market in 2006.

Give that expectation of significant demand in the long-term market and given that relatively few producers with the production capability to supply over the longer term, we expect long-term prices to remain strong in 2006.

Turning now to the US fixed conversion market, industry average spot prices for both North America and Europe remain steady, and end of 2005, at 11.50 per kilogram, unchanged from the end of the third quarter. That is a increase of about 20% year-over-year, with very little spot US fixed conversion purchased in the fourth quarter of last year.

In the long-term market, industry average price for North American conversion remain unchanged over the fourth quarter at $12, while the price for European conversion decreased slightly to 12.88 from 13.13 at the end of the third quarter 2005. When comparing to year-end 2004, long-term prices in both the North American and European markets increased by 20% and 12% respectively.

The demand for US fixed conversion services has continued to be very light during the first month of this year. At the same time, the tightness in U308 supplies in the uranium market has resulted in some sellers trying to de-convert, and by that, we mean they're trying to arrange transactions that will allow them to split US fixed into its component parts, so that they can supply uranium only.

To complete these transactions, a seller may be willing to take a slight discount on the US fixed conversion, so as to permit them to offer the uranium component. Both of these factors have contributed to some softening in the US fixed conversion price at the end of January, and the average spot price for both North America and Europe now stands at 11.25, and that's down from 11.50. While the long-term price in North America is 11.75, and Europe is 12.63, down from $12 and 12.88 respectively.

So that concludes my remarks on the market, and with that, I'll turn it back to Gerry.

Okay, George. Thank you very much.

And now, operator, we'll open it to questions.

[OPERATOR INSTRUCTIONS]

Our first investment question is from Steve Bonnyman of CIBC World Market.

Please go ahead.

Yes, good morning, gents.

First of all, thanks for the increased disclosure on uranium price sensitivities, and if I can follow-up on that -- based on your discussion of 60/40, and if we look out to 2008, this would seem to indicate either that we have got a lot of long-term contracts hanging in at very low prices or that the numbers you're quoting here -- this 32.75 -- is only for the committed portion, and that there is, in fact, a remainder or buffer there. Can you expand a little bit on the sensitivity as we look out into those much further years? And the second part of that question was purchased uranium, where historically, you have also had some long-term contracts that kept your margin in place. What is your outlook forward in terms of purchase uranium and contract supplies there?

Okay, Steve. Thank you for the recognition of the increased disclosure.

I will ask George to respond.

Alright.

With respect to the first one -- you chose 32.75 relating to a $45 spot price -- we need to clarify that obviously, it's not there today. The prices that are reported there are, as we indicated, based on the volumes that we expect to sell in that year. So it would represent more than just a committed volumes. It takes into account that if we do have uncommitted volumes available in that year, it would be sold at the then prevailing spot price, which, in that case, would be $45.

I think -- I tried to in my notes, address some of the reasons for the portfolio, the way it is. Obviously, the long-term nature of it, et cetera, it's important to remember that in our market a contract signed today would have delivers beginning two to four years out in time. So, if you go back -- if you have a contract signed in 2002 or 2003, you may have the first delivery under that contract coming about in 2006 or 2007, and that's going to run for several years. And the other thing, again, we go back to is the -- it's important I think to recognize -- we've had a market that has risen very dramatically here, more than -- or about 250% over the last three years. Our portfolio is going to lag that market.

Moving, then, to the purchases of uranium, for the most part, our purchases of uranium were locked in at what we would call fixed prices, and so, our margin on the vast majority of our purchases does not erode over time in light of that.

George, does that carry going forward as we look out through the next two or three years? What percentage of your purchased requirements would you have already fixed in terms of pricing?

The vast majority of them. I don't have a exact number, but it would be very high. There would be very little in there that is not already fixed. I'm quite confident we can say something like 80% of it would -- .

George, my guess would be somewhere in the 70 to 80% range would be fixed at favorable prices.

Right. Just to clarify, that is a fixed price as opposed to fixed against some market benchmark.

That's right.

Lastly, to clarify on that, if we use your 60/40 rule, and again, using the 2008 and $45 benchmark, that implies that a big chunk of your contracts in there are realizing something in the order of $14 or $15 a pound, and from that, I would infer that if the price is well above 45 -- pick a number, 50,60 -- that, in fact, that 32.75 would not move materially. Am I correct on both of those?

Not far off. Yes, but keep in mind, again, I'll go back to we could have contracts with delivery beginning in '08, where that contract was signed in 2002, and the price in 2002 was $10.

No. I appreciate that. Just making sure I understand the mathematics.

Thank you very much.

Your welcome.

Thank you.

The following question is from Alex Latzer of Merrill Lynch.

Please go ahead.

Thanks. Good morning, gentlemen.

Questions on there was some disclosure on the MacArthur River reserves and the move on some of them from proven to probably, and -- I know this is way out -- we're talking mining 100 million tons perhaps out in 2010 or 2012. I was just wondering is this more of a experiment to perhaps moving from the boring method of mining to a lower-cost method, or you have encountered ground conditions that are driving this?

Alex, I will ask Terry to respond to that.

Hi, Alex.

The change from proven to probable reserves has to due with the re-evaluation vale of the mining method to be used as you pointed out. Bear in mind, also, that this in 2012, but we recognize that the raised bore mining method, in this particular case, originally planned to be that, would have had developed in -- in above the ore body in saturated sand stone and more difficult ground conditions. We think there is a better way to do that, so we have -- we went down to South America and looked at raised boring -- or excuse me -- box-holed boring technique and decided to try that.

So we're going to get a machine that will do that, and we'll test that between now and the time we need production, but it's a cheaper method. It would be less costly and less risky presuming it works. We had the plans to change the methodology, and without the detailed data to support that it well, in fact, worked quite yet, we had to change that reserve from proven to the probably category.

I see, so it's [inaudible]. Thanks for that. Technique does not prove feasible then you could still maintain the current method?

Well yes. It's 100 million pounds, and that's a lot of money, so yes, we would get it.

Okay, understood. Thanks for that.

Just a follow-up, if I may. Had a question on the strategic nature of your holding of Centerra, of the 53% -- we've had a significant improvement in the market. It's proven to be a wise choice to hold onto that, and I was just wondering if, at this stage, you could comment on your strategic rationale going forward, and whether or not we may see a disposition of that stake?

Alex, Gerry speaking.

Obviously we're quite delighted with how [Centerra] has performed, and not only just from a standpoint of the value of the shares, but the additional reserves at both Kumtor and Boroo, and so, when we created [Centerra], now, about a year-and-a-half ago, it was set up so it could it's own vision of growth in the gold business, and I think it's begun to deliver on that. It was also set up as a way Cameco was going to exit being going in the gold business and refocus our efforts in just becoming a dominate nuclear energy company.

None of that has changed in response to recent developments in gold prices or reserve expansions, but there is no imperative either. You can see the strong financial condition that Cameco is in. There is no need to dispose of [Centerra]. We're quite comfortable with its future prospects, and, in reality, hope and expect it will continue to grow. At a time we identify a opportunity in the nuclear arena, then obviously, we'll pursue the path of beginning to exit our ownership in the gold business, but no timetable.

Okay. Thanks, Gerry.

Yes.

Thank you.

The following question is from Greg Barnes of TD News -- Newcrest.

Please go ahead.

Yes, thanks very much.

Just -- [Dennis], George, or Gerry, but with the way that the spot prices have been going, looking at the [inaudible] royalties in Saskatchewan, I am wondering if you could give it a time frame when you think you'll have to stop paying those and when the capital pull will be drawn down?

Actually, Greg, I think the best person to answer that will be Kim. He looks at that often.

Yes, good morning, Greg.

Certainly with Cigar Lake construction coming on, we're going to be adding to our pool, and it will be a few years yet, and it's also of course a function of the prices realized, but it will be a little time yet before we get into tiered royalties.

How little time?

You put your price forecast in, and we'll tell you.

Can you give us some guidance on what the capital pool is and that would help us try and figure that out.

I don't actually have that at my fingertips.

I can give you this, Greg, for the moment, certainly, we won't be paying them this year and into next year. It does -- we are maybe probably getting through next year as well.

Okay.

One just follow-up question, too -- maybe this is for Terry.

I'm wondering how recovery rates at Inkai are proceeding? Are they getting up to feasibility levels, and just how that's coming?

Yes, Greg, this is Terry.

Actually, we passed the -- what we think is the 80% test, which is required to bring Inkai to the Kazakh government that the recoveries are sufficient to -- in our test block, but we're still having very good head grades, and we are going to have great success at the test block mine.

What are the recovering rates that you're targeting there?

Well, 80% is the threshold, but we're targeting higher than that, 85% to 90%.

Great. Okay.

Thanks very much.

Thank you.

The following question is from Lawrence Smith of Blackmont Capital.

Good morning.

It's been a number of years since we have talked about the restriction on non-resident ownership of Cameco shares. I was wondering, do you have a up-to-date figure on what percentage of your shares are held by non-residents, and is there any talk of the government increasing the limit again above where it is now?

Okay. Lawrence, Gerry here.

The restriction was lifted -- liberalized -- I guess about it would have been around 2002.

I think it was actually '01.

'01, and that took several years of effort, a lot of explanation to the Canadian government, and so I suspect that it's going to be there for quite some time given the inertia and the reluctance the governments have to change these kinds of things.

The limit is still at 25%, is that correct?

It's a voting limitation, not a ownership limitation, alright?

Right. Okay.

Then there are individual shareholder limitations that are down around 15% or something -- if Kim, you can give him -- .

Correct.

Yes.

So I don't really expect the government to -- particularly, a new government that is a minority will even have any appetite to visit it, and it may be a number of years before they're even willing to entertain any kind of a discussion on it.

We have seen a pretty dramatic shift of our shareholder base, from Canada, where it used to be 85 to 90% Canadian shareholders, it's now much close to an even balance between the two countries, with just a little bit being held outside of North America.

So, in a practical sense, does the restriction on voting ownership have any implications for investors?

We haven't seen any -- any manifestation of an issue with respect to the limitations.

If you're over -- I'm sorry to make this question so long -- if you're over the non-resident ownership, do the hold of the shares have to say that they will give up their voting right? Is that how it actually works?

It's just a consequence of the rules. We just prorate the votes.

Okay. Great.

Thank you very much.

Kim, did you have anything to add to that?

Yes, the shares are fungible. There is certainly no notation that would identify them in the holders hands, it simply comes to an annual meeting where the prorating of both takes place.

Great. Thanks, Kim.

Thank you.

The following question is from [Ralph Sair] of [Sairco Associates].

Please go ahead.

Please go ahead, Mr. [Sair]. Your line is now open.

Yes, I have a question on Cigar Lake. When the production boat ramps up, how is that going to affect the overall supply of uranium, and in terms of the spot market or longer term, would this increased volume, will that have a material effect on the price?

[Ralph], I will start it and then ask George to add as well.

We're still in a market that uses about 175 million pounds a year -- that's a global figure. Production last year, 2005, is likely to be around 110 million pounds, so we're still, as an industry, drawing on a significant amount of inventory in different forms. Inventory coming from weapons dismanteling, inventory coming out of civilian stock piles, and a little bit of recycling, not a whole lot.

So, this industry over the next number of years, as those inventories are used up, is going to have to make significant investment in new mines. Cigar Lake is one of those, and, in our own sense of the market, Cigar Lake is absolutely essential in order for this industry to even begin meeting the current consumption -- demand consumption -- and certainly under a scenario of nuclear renaissance, which ought to be here, the way it looks around the beginning of the next decade, we expect the demand to be rapidly increasing as a result of the new bill and new construction of the reactors.

George, you want to add anything to that?

Yes, all I would add is that I believe that Cigar Lake -- supply from Cigar Lake -- and a [inaudible] supply from Inkai, is already factored into the market in terms of you price direction, et cetera. So, I would just make the comment that the expectation is that it will arrive -- begin to arrive in 2007, and I think what would impact the market is not -- it's more a case of if there is a delay, but I believe the price today reflects the expectation that Cigar and Inkai and the other direction centers that are firmly committed will arrive on-time and on-schedule.

Thank you.

If I could just have one quick follow-up, in terms of the current inventory, where are we in the de-commissioning of the Soviet weapons, and once that is de-commissioned, what effect will that have on the overall inventory?

George, go ahead.

Well, where are we in the agreement we're -- we're well over the half-way point of the agreement. It runs through 2013. It covers 500 metric tons of high enriched uranium. You can equate that to roughly supplying, on a annual basis, about 24 million pounds of uranium to the market.

The view today is that that agreement is pretty solid and will continue through 2013, and then everybody is speculating as to what happens beyond that. There are many that contend that the agreement will continue. There is indeed more HEU in Russia.

There are others that view the agreement will change rather dramatically, and maybe may be not -- there may not be one at all. The fact is, if you look at Russia itself, it does not appear to have a abundance of uranium production and the general convention is that a lot of the uranium component of that high-enriched uranium will be utilized to support Russia's own program and those of the clients base that it serves.

Thank you very much.

You're welcome.

Thank you.

The following question is from John Redstone of Desjardins Securities.

Please go ahead.

Yes, good morning, gentlemen.

Two quick questions -- firstly, on MacArthur River, given the state of applications for permits and so forth, when would you say is the earliest possible date that the expanded production phase could actually come on-stream.

Okay, Terry, you want to answer that?

Okay, John.

Well, we're still hopeful that we'll get a decision this year that will lead us to do that and increase production, and actually be able to do that at the end of this year, instead of in 2005, where we basically had to shut down in the end of November because the -- hadn't been granted. We're on the same path as we were last year. Hopefully, we'll be able to do that, but obviously, it depends on what the CNSC decides what process has to take place, but the ramp up would just take place over a couple of years.

Okay.

And the second point -- leaning out a little bit from the previous question, I wondered if [inaudible] would have any further thoughts on possible expansion of Cigar Lake? I know it's not on-stream yet, but down the road, looking out, if the HEU doesn't show 2013, has there been any further thoughts on that?

Terry?

Not a lot the thought.

We always think about expanding all of our facilities where we can. We're up against some license limits, as everyone knows, but certainly, those things are always in the minds of us that are doing the planning for the future. We don't have any concrete plans at this time.

John, I might just add, a year ago, we put it on an accelerated ramp-up schedule just to try to get more earlier out of Cigar Lake. Remember, this is novel technology that we're going to be using. We're going to need to get probably a year or so under our belt just settling down the height pressure-jet boring technology before we think about taking it beyond the 18 million pound-per-year level.

Okay.

So where are you would you say -- where are you focusing on for future growth in uranium production at Kazakh? Where would you say the most likely source is?

Clearly, Inkai where -- because of the size of the resource. You could come at it from a number of satelite operations or even several main processing operations.

Alright.

But the nature of ISO, I think we have to remind ourselves too, to develop well fields is a very, very lengthy process, and so, even the ramp-up at Inkai is going to go between 2007 and 2010, just to get to 5.2 million pounds. So, if you look beyond that, then it's going to have to receive a lot of attention and work.

A little bit more out of Wyoming and Nebraska over time, but you start with a pretty low production base, and then with the add of [inaudible] Basin itself, clearly, Brown Field, around Rabbit Lake, which is showing good potential year-by-year. Every year that we find another 6 million pounds is quite a significant contributor value to Cameco, and, likewise, looking around MacArthur River, where we know there is some pretty good targets that need to be better flushed out and that will then tell us how much we might be able to do at MacArthur River. Then we have got our exploration targets, some advanced and some not at [Millenium] and [Virgin River] and these places.

Will we see potential expansion and [inaudible] pressure to match that at all, or do you?

We intend to maintain our market share, and we look at Olympic Dam, and we're waiting to find out over the next two years, as they go through the pre-feasible study and then look at it and ultimately commit to expansion, because we believe they will, to see just how big Olympic dam is going to be. That is well under the next decade I guess, but Cameco intends to maintain and grow it's market share.

Okay.

Thanks very much.

Yes.

Thank you.

The following question is from Ian Howat of National Bank Financial.

Please go ahead.

Yes, good morning.

Your production this year is 21.4, and you're going to sell 35 million pounds. Can you break down what the sources are going to be from that?

The difference, Ian, or just of the total 35?

No, the difference between the production, which is around 14 million pounds.

Okay. Alright. George you're probably in the best position to answer that.

Well, yes, it's obviously purchase material, a significant amount of it is coming from HEU, and as we have shared in the past, we do have a agreement with one of the leading European enrichers for what is called equivalent natural uranium, or material being enriched in Russia and brought back to Europe, and so those are the two major sources of supply, and together, I think would make up that 70% or so, of what we have coming. And then we have other you know legacy of longer term agreements, and then we may indeed complete some spot purchases.

Do you still have supplies of inventory available if need be, as well, of your own?

We maintain a -- absolutely a working inventory, yes.

Okay.

Secondly, on the conversion, you talking about Blied River going to 18 million kilograms, but you only talk about sales out of Blind River of like 10 or 11. How does the deal actually work with British Nuclear? Is that your production or whatever on the toll refining?

It is our production from the toll refining. So, if you have Blind River producing at 18,000 tons, then if you turn to our Port Hope conversion facilities, you've got roughly -- just using round numbers here -- 13 or 14,000 tons coming there and you have 5,000 tons of US fixed production coming out of Springfield, so you very quickly get to that 18,000 tons.

And just again, on the conversion, what is the roll-off period for those contracts, like where they similar to the uranium contracts two to five years type thing?

Yes, very similar profile to our uranium contracts. I think it's probably fair to say that maybe there is -- eventually when you get down in time, there is maybe a steeper drop-off, but for the next three to four years, the profile is very similar.

And one last question -- sorry -- on Rabbit Lake, if you keep finding 6 million pounds a year, when do you run out of milling capacity with Cigar Lake coming on?

Terry?

We have plans. Actually, what happens if Cigar Lake, [slurry] starts coming over through McClain Lake to Rabbit Lake. We are in process of making the adjustments so that we'll be able to process ores from Eagle Point as well. It won't have a impact in the sense that we'll keep both circuits open as long as there is ore feed available.

So what would be the license output of Rabbit Lake on them -- 15 million pounds? I think today it is licensed at what, Terry, about 12 million pounds?

Licensed at 12.

Yes.

It's about, I guess, 10 or so, from Cigar Lake.

Okay.

So if you kept adding 6 million at Rabbit, potentially, it would have to go for an expansion of the mill capacity there, or a new license?

Out at Rabbit Lake, yes -- out at Eagle Point, excuse me.

Okay.

Thanks very much.

Thank you.

[OPERATOR INSTRUCTIONS]

Our next question is from Alex Latzer of Merrill Lynch.

Please go ahead.

Thanks for the follow-up opportunity. This question's for George. In October, the World Nuclear Association came up with a revised update on their outlook for the supply and demand, and it was incorporated to the uranium market outlook of the US group, and in there, they showed the market balanced and moving into surplus through 2016, that's how they're referenced consumption level -- their assumption. The upper level shows surplus through year 2014, and there is a considerable amount of inventory draw-down assumed in there, and thereafter, the market goes into deficit.

As Gerry pointed out, simply, the market cannot live out of inventory as it is currently for the very long-term, and I am just wondering if you could comment on at least the outlook through 2016, for a market that moves into surplus, and whether or not there is factors in that assumption of the World Nuclear Association, that perhaps are overly generous, or does your outlook -- is your outlook based on beyond that time frame, when the inventories are simply inadequate to meet the demand?

I, of course, don't have it in front of me. What I would share is this, generally speaking, when it comes to the demand side of the equation, we're are generally on-side with what the WNA puts out.

In terms of the supply side of the equation, we do take issue with a number of the supply assumptions they use. As an example, they pretty much, simply, go on the basis that there is a infinite supply of enrichment, and so whatever tails [inaudible] you might desire, and so a lot of the supply, if you will, are significant. There is a significant component of the supply that is addressed by simply using enrichment capacity to go to a significantly lower tale.

I do no recall the rest of the assumptions contained in their supply assumptions, all I can share is that generally, within Cameco, and we do -- there are a number of them that we would take issue with. Those are the ones I can think of.

I think, Alex -- this is Gerry -- there is a number of major projects, expansions, and new mines, some of which are ours, that will need to come in on schedule. A lot of them effected by permitting issues, lead times, political issues, but, within a ten-year horizon, given higher prices, I think we're bound to see a production response. That's really what it's all about, and so, sometime in that ten-year period, if we're going to power these reactors, the production industry is going to have to catch up with the draw-down of inventory.

Thanks for that.

Thank you.

Our following question is from Brian MacArthur of UBS.

Please go ahead.

Good morning.

Just following up a little more on Ian's question, so I get this clear in my mind, in the future, theoretically, MacArthur can go to 22 million pounds. Cigar does 18, but you have a capacity at Rabbit of 12, and I think part of it goes there. I just want to -- if we looked out five years and, assuming you can get permits, it strikes me that really the restraint is not resources, it's actually processing capacity. Can you just walk me through where that would go at Rabbit, like where are the Cigar at 18 million pounds would go versus Rabbit's 6 or 7 million pounds a year?

Okay. Cigar is producing 18, and all of that, or all of the slurry, will go to the McClain Lake mill.

Right.

And there, it's divided -- I think the ratio is -- 57/43, or there abouts, and 57% of the resulting uranium-varying solution is then transported to Rabbit for final processing and packaging. Right?

Right.

So, that's roughly 10 million pounds coming out of Cigar -- Terry, you're going to have to confirm my numbers -- but, license capacity is 12. Obviously, we're looking at what does it mean if Eagle Point, or other potential resources in that area, and there are some, can continue to contribute, and should we raise the license life because the front-end of the gnome, Brian, at Rabbit, is not being utilized.

Right.

Right.

But then, if you had Millenium and everything else, then it would have to be -- .

Well, Millenium would go to Key, and there you do have a constraint on the mill's ability to handle more, but that's just simply a decision on investing capital.

Now, there are other issues. Power supply in the North, the ultimate road network, tailings capacity, all of these things in the much longer term horizon are going to have to be dealt with. Those are the kinds of things strategically we look at and try to balance between all of the existing mines, the potential expanded mines, and new mines.

So are we talking significant capital to clean that all up?

Not the first little bit, but if you wanted to expand Key Lake, then you would be talking about some significant capital beyond the 22 million pounds probably, but, Terry, you would know much better than I as to what we would be looking at. It's probably even a little early to prognosticate.

It is a little bit, Brian, but we have looked at many different alternatives for milling in the North in general. They're far away from actually becoming a reality, but these are the kinds of thing we get together on strategic planning and talk about.

You have to keep in mind that the Rabbit Lake mine -- or the Eagle Point mine -- was supposed to be played out, so there wouldn't have been any kind of interference, and now the good news is that that's a problem we have to deal with.

Right, which is just what I was just trying to figure out all here, that you don't want to get constrained with those pounds in the future and not be able to efficiently utilize them.

That's correct.

But Gerry talked briefly about the road system, and we have lots of ideas about that. Roads that basically would make a loop and connect all of the facilities with a much straighter shot, so there is logistic -- logistical opportunities that make some of the mill sighting issues a bit moot.

But just, hypethetically, if we looked because we've talked about -- and it's back to John's question -- looking out, you want them to maintain your market share. Let's say we're out -- the market grows to 200 million pounds, you want to 35% market share, you're going to need somewhere around 40 to 50 million pounds of production assuming once the 2013 agreement runs out. I mean that's a fair ways from 20 million pounds today.

Yes. It may not all come from the [inaudible] Basin.

Right, but if most of the others are ISL, you can only grow this them so fast too.

There is a time -- as I was saying -- a time horizon for ISL that's lengthy in terms of increasing production, but it can be done, Brian. It can be done in that 2007 to 2013 horizon too.

Just another quick question, you made a good point of saying, right now, if we look back to when you had problems at MacArthur River a few years ago, the market was so tight. There was no buffer in the system. Obviously, when you lost one of the major producing mines,, there was a fairly rapid respond in the uranium price.

Is the market now as tight, do you think, or is there a little buffer that if we were to have some unforeseen problems at either one of the four, five big mines globally, that the security of the supply issue would become critical quickly? There is obviously the normal pipeline inventory, but is there any extra buffer now, do you think?

George?

My view is that there is no extra buffer. I think that the buffer is being worked down more and more.

I think if anything, it's much more critical now, Brian, than it was back then. Back then, there was still plenty of inventory. Cameco had inventory. Other producers had inventory. A lot of intermediate had inventory as well, and a lot of that has been drawn down over the ensuing years.

So the world is relying, in some extent, in four or five big mines in a big way?

I think so.

And a final, just simple question, Zircatec, will it be accounted for a separate division when you -- are you going to break out results in the future, so it will like a fabrication division?

Kim?

No, at the moment on that, we're probably going to include it in a fuel services group, it subsides it that. We haven't finished, but that's where we're leaning at the moment.

Great. Thank you very much.

You bet, Brian.

Thank you.

The following question is from [Ralph Sair] of [Sairco Associates].

Please go ahead.

China is projected, as we know, to be building -- I don't know -- 30 or 40 reactors in the next 20 years. Where does Cameco fit into the supply for this, and does China have significant sources of uranium themselves?

Okay, George, you want to try that?

Sure.

Well, in terms of the production capability, our intelligence is that they have very limited production capability, they have smaller deposits, higher cost. They have been self-sufficient up till now, but of course, they have a fairly strong program. As you point out, they have designed on expanding that very significantly going forward, and as a consequence, China has been quite active in terms of coming to the market to at least talk with people. They have signed some significant contracts, in particular with the Kazakh.

In terms of our relationship with them, we have supplied uranium to China. We supplied the initial charges for the two Candu units that were built there. We've had a lot of dialog with them, and certainly, there is a lot of interest on their part. They will be a major buyer.

Thank you.

Thank you.

We will now take questions from the media community. [OPERATOR INSTRUCTIONS]

Our first media question is from Murray Lyons of Saskatoon Star Phoenix.

Please go ahead.

Yes, Mr. Grandey announced earlier about tiered royalties, which in the Saskatchewan context, have nowhere near the interest level in the business community that the elimination of the capital tax has, but tell me what, if the industry moved to a flatter royalty or if you were able to achieve that, what would it mean for the industry as a whole?

Well, because uranium prices, Murray, have been low for years and years and years, the whole tiered royalty issue hasn't been much of a issue. It was altered some three or four years ago to be much less than punitive, but if you compare the tiered royalty system in Saskatchewan with other major uranium producing jurisdictions, be it US or Kazakhstan, Australia, I think Saskatchewan is unique in the size of royalty -- royalties as uranium prices increase, and it will become a factor. They will not be a small number once we step into them.

So any savings you might have if the capital tax is removed, might end up going in taxation to a higher royalty?

We certainly hope that the capital tax is removed, that will be good for business in the province, and over time, we should be talking to -- as an industry. we should be talking about expanding production and the effect of tiered royalties.

One final question from me -- on MacArthur River, not having an approval to go to 22 million pounds, is there a way to characterize the economic impact of that for the province?

I don't think we have done it, Murray. We do know that you're talking several million pounds a year that we're not able to produce. Of course, it's still in the ground, and prices have been going up and not down, so there is a time-value affect, but from Cameco 's perspective, we're quiet eager to begin producing at a higher level and serving our customer needs. They're looking at us to produce more and so are the investors, and as I think as Terry said earlier, we've been working with the CNSC on just identifying the impacts and the process they'll use to allow the production to increase, but it's partly time-value of money and partly, taking advantage of opportunities.

Thank you very much.

Yes.

Thank you.

[OPERATOR INSTRUCTIONS]

The following question is from [John Partridge] of [Global Mill].

Hi, Mr. Grandey.

I'm wondering, just looking at your catch position has tripled in a year from what -- from more than tripled from 189 to 620 odd million. I'm just wondering are you -- are you building up a war chest for major acquisitions?

John, not really.

What it represents is a number of strategic moves that we completed last year, sale of ERA shares, the restructuring of Bruce Power. revenues coming in for the first time from Bruce Power, so all of those things that we did to re-position Cameco . Yes, we did it because we thought it was quite prudent, and we did it so we could position the Company to take advantage of opportunities as they come by in the future. Right now there is nothing more to talk about, but we've always positioned the Company so that when a opportunity arises that is consistent with our vision and will return value, we don't have to go ask permission to do it. We'll have the financial wherewithal and the financial strength to do it, and to do it in a timely way. So, some of the cash that you see at year-end, obviously, has gone into the purchase of Zircatec, and that was a relatively small transaction, and into restructuring the way in which we're holding our debt.

We have to remember that a good bit of the cash, is within the gold company. [Centerra] having that cash and being debt-free has been well-positioned to pursue it's own vision of growth as we talked about earlier. So it isn't just building up a war chest, it's a result of activities we took and decisions we made last year, and a little bit of redeployment this year and looking for opportunities.

Do you want to add anything to that, Kim?

That covers it, Gerry. Thank you.

Could I ask a follow-up there?

I'm wondering if we're more likely to see -- you're holdings in [Centerra] is worth 1.5 billion roughly?

Yes.

So, if that were available, that's assuming you didn't want to pay with shares of course, but you have a couple billion dollars, theoretically, to go on acquisitions. Do you think we're more likely to see a series of smaller purchases, such as -- really strategic purchases such as Zircatec, or a major -- couple of very large ones? Do you have a sense?

Well, I often observe, in the nuclear industry, opportunities are lumpy. There aren't a lot of them out there, and they're difficult to find and getting more difficult as nuclear energy is recognized and valued by the rest of the world.

So, what we have tried to do is identify things that are strategic and make sense and add value. That's not easy particularly in a industry where they come just occasionally, not all the time.

So unlike the gold business-based, metal business, where you have perhaps have lots of opportunities, certainly in oil and gas you would, nuclear tends to be a little bit different, and you have to work quite a long time on opportunities. So, I think, right now, as we always do, we just survey the universe, and we're working on many, many fronts, and in the fullness of time, we'll identify things to pursue.

Very last thing -- here are you speaking from?

I'm sorry.

Where are you speaking from?

I'm sorry?

Where are you speaking from? I gather you're not in Saskatoon?

No, no. I'm speaking from New York.

May I ask what you're doing there?

I should say to you that it's a big, big, deep dark secret. No, I'm actually here with the US Nuclear Energy Institute. I sit on the executive committee and a number of other committees. It's a wonderful opportunity for us to meet our major customers and their Chief Executive Officers and talk about the future of the production industry. So, that's what I'm doing and then, talking a little bit to investors as well.

Yes, great. Thank you.

You bet.

Thank you.

Our following question is from Gary North of the Canadian Press.

Please go ahead.

Yes, Mr. Grandey, just quickly, I wonder if I could get a little more color on how you see the nuclear renaissance playing out, and what indications you have in change and public attitudes?

I thinks as time goes on, the level of interest in nuclear seems to be accelerating. You see it in comments certainly in North America. We have Ontario studying and maintaining, and probably growing the percentage of nuclear contribution to its electricity supply.

The UK is now engaged in that debate. Countries that we're talking about, phase-outs, are now quietly backing away and even in some cases, talking about building again. Just a lot of examples in many parts of the world, not just in India and China where the appetite for electricity is immense, and they need to have a percentage nuclear, and they start from a pretty small base.

But lots of places, North America, Europe, South America, Africa. We have South Africa making significant investments in a different technology called Pebble Bed.. [Pewdent], out of Russia, announcing that Russia intends to be a nuclear center for the world, providing technology to countries and fuel services. So almost every day, as you survey what is in the media, and you try to just map the level of interest, the level of commentary, positive versus negative, I think you see increasing evidence that the world is once again turning to the technology.

Now, having said that, the lead times for building new plants are still quiet lengthy, but the best evidence of all is what are utilities doing? In North America, utilities are now actively in the licensing stage for that next generation of new plant. So it at isn't just a phenomenon of Asia. It's occurring in North America and Europe.

Okay.

And just one other quick question, we would then interpret the acquisition of Zircatec as a vote of confidence in the Candu technology from you?

Absolutely.

You know, Canada is where Candu technology exists. That's it's home.

We see in what Bruce Power is doing and what OPG has done with the refurbishment, that Candu technology will be around for quite a long time. We'll operate and we'll need to have services of fuel providers like Cameco, and so Zircatec was an absolutely essential move to put us in the position of being a fuel supplier to the Candu technology.

Okay. Thanks for your time.

You bet.

Thank you.

This will conclude the questions for the telephone line.

Okay, operator. Thank you very much.

And to all of you that are out there, thank you very much for your interest in Cameco, and we now will turn our attention to 2006, and hope to continue to deliver value.

Thank you.

Bye.