Cameco Corp (CCJ) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Cameco Corporation first 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 and good morning, everyone. Welcome to Cameco's first quarter 2006 conference call to discuss the financial results. Thanks for joining us. We have four of Cameco's senior executives with us today. They are Gerry Grandey, President and CEO; Kim Goheen, Senior Vice President and CFO; Terry Rogers, Senior Vice President and Chief Operating Officer; and George Assie, Senior Vice President, Marketing and Business Development. We're conscious of everyone's time today so we'll review 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 Q&A session, we'll take questions from the investment community first followed by questions from the media. Please note that statements made during this conference call by the Company regarding its subjective projections, estimates, expectations, or predictions may be forward-looking statements within the meaning of applicable securities laws and regulations.

The Company cautions that such statements involve risks and uncertainties and that actual results may differ from those expressed or implied. Important risk factors are outlined in the Company's annual information form dated March 17, 2006. Now, I will turn the call over to Jerry.

Thank you, Bob. Let me also extend my welcome to everyone participating on the call today. On Friday, you would know, Cameco issued its first quarter results for the year. These results were particularly strong in terms of revenue, earnings, and cash flow. However, I feel obligated to remind everyone, as we generally do, that our quarterly results are relatively lumpy, and therefore, not necessarily indicative of future quarters or annual results. While we're primarily here to discuss the quarter, I want to take a few moments to note that Cameco must and does have a long-term orientation.

On this conference call we have discussed our vision many times. And I'm confident that it will guide us to continuing financial success, in an industry whose greatest promise is just beginning to be realized. We build, we will build on our exceptional assets, including more than 500 pounds of proven and probable reserves, and years of talented people and management expertise we have acquired to grow into a dominant nuclear energy company. Along the way, we know there will be operational challenges, such as the one at Cigar Lake, as we deal with water from difficult ground conditions.

Terry will be providing more information on this in a few moments. There will be other challenges, such as the delay in getting approval for expanding production at the McArthur River Mine and Key Lake Mill. As we mentioned in the quarterly report, this delay is due in part to the fact that we are now able to measure potential impacts, some of our effluent discharges, and perhaps we did not react quickly enough to the new science and evolving regulatory environment. But these challenges are temporary. And they are already being addressed through the application of creative minds.

Our future success lies in our ideas and their implementation. We have teams in place that are developing a comprehensive strategy to take Cameco to the front of environmental leadership. This will take time, effort, and resources, but it's something that we at Cameco collectively feel quite passionate about. We are also looking at Cameco's infrastructure, that is our existing plants, analyzing them from the perspective of our long-term growth plans to determine our priorities in the coming years and decades.

What will be our future needs? What opportunities await in a world that we anticipate will require substantially more uranium? We fully intend to be ready and prepared to maintain our leadership position in this industry. And on the exploration front, we are preparing by actively looking for the next high-grade uranium discovery that will mark the beginning of the next generation of uranium production. In the last few months, we have expanded our reach in two quite different parts of the world.

In Gaban, we have signed a letter of intent to jointly explore a basis in the east central portion of this west African country. This is our initial foray into the area. Moving back to this continent, to the far Northern Territory of Nunavit , Cameco has signed a non-binding memorandum of understanding to acquire 19.5% of Hornby Bay Exploration, Ltd. and form a strategic alliance with them. This relationship leverages the expertise of the Junior Uranium Exploration Company that has both a prospective land package with similar geological characteristics to the Athabascan Basin and a solid technical team.

Cameco continues to have significant exploration programs in Saskatchewan and Australia, and is now expanding with significant global exploration initiatives and new projects in Nunavit, the Northwest Territories, Quebec, Australia, and prospective properties in Asia and Africa. While we continue to explore our many quality exploration properties, we are confident that other companies, too, will make uranium discoveries.

We will be ready, when appropriate, to consider joint ventures, alliances and acquisitions consistent with our production goals and overall vision. In summary, while shareholders enjoy the results of a strong quarter, they can also have confidence that Cameco has its eye on the future. With that, I'll turn the speaking over to Kim, who is going to talk a little bit about our financial results. Kim?

Thank you, Jerry. And good morning, everyone. Our first quarter unfolded pretty much as expected and largely in line with the guidance we provided in our fourth quarter report. The results reflect one of Cameco's best first quarter in recent years. I will briefly summarize the results and discuss each of our business units before outlining our financial condition, and describing the outlook for the second quarter and touching on the year as a whole. Our consolidated revenues more than double to in the first quarter due to higher uranium volumes and prices and the inclusion of our share of powers revenue. Consolidated revenues more than doubled to $542 million in the first quarter due to higher uranium volumes and prices, and the inclusion of our share of Bruce Power's revenue. Consolidated net earnings rose to $117 million, or $0.32 per share on a diluted basis, up $91 million.

Gross profit margins in uranium climbed to 34% on much stronger delivery volumes and realized prices. On the other end, the cost of purchase conversion at current market prices constrained profit from fuel services in the quarter. At Bruce Power, pre-tax earnings increased significantly to $49 million. Last year's first quarter was dragged down by higher down time over the six units and substantial refurbishment expenses. 2006 Bruce results reflect our interest in the ownership and operation of just the four Bruce B units while the 2005 comparative reflected six units.

In the quarter, Cameco received $43 million as its share of cash distributions from Bruce Power. This brings the total received since they began in June 2005 to $181 million, excluding the special Bruce A related distribution at the end of last year. In gold, gross profit rose as higher gold prices more than offset a significant decline in the production at Kumtor caused by lower mill head grade. Exploration spending also increased in the quarter by $2 million. Privy to Jerry's comment, uranium exploration is a core function in our business and we view our regional and global exploration expenditures as important investments in sustaining our world class reserve base.

Looking at product prices, Cameco's average realized uranium price in the first quarter was up 29%. The stronger Canadian dollar held back additional upside as the realized price in U.S. currency was up 45% compared to the first quarter a year ago. In fuel services, the average realized price edged up only a nominal amount over its comparative quarter, and Bruce powers was unchanged quarter-over-quarter at approximately $50 per megawatt hour. Centerra Gold continued to benefit from its unhedged position. It realized an average price of $542 U.S. per ounce, which was within 2% of the spot market average for the quarter.

Cameco's financial condition remains exceptionally strong. Cash from operations totaled $286 million in the quarter, up over $200 million against the first quarter of 2005, primarily due to higher revenue in the quarter and the collection of accounts receivable from year end was related to the higher sales volumes in the fourth quarter of last year. Long-term debt decreased to about $700 million and as a result, our net debt to total capitalization ratio ended the quarter at 5%.

Now let's look at our expectations for the second quarter. In the second quarter, we expect uranium price, uranium market prices to remain solid, while uranium deliveries are expected to be about half those of the first quarter. This means that for 2006, uranium deliveries will be split almost evenly between the first and second half of the year. In fuel services, we expect deliveries to rise, but margins will be held back as the effect of the annual maintenance shut down at Port Hope will increase unit costs.

We expect results to be similar at Bruce Power in the second quarter as we experienced in quarter one. As those first quarter results indicate, the Bruce B unit should now be on track to achieve robust, reliable performance for many quarters into the future. We do have one planned outage later this year. Overall, we continue to see signs of a solid year in 2006, although we expect the second quarter earnings to be significantly lower than the first quarter. With that, I'll now turn things over to Terry.

Good morning, and thanks again. I'll start my comments with the operations topic that may be of most interest to the audience. The situation at Cigar Lake is this. The inflow of water at Shaft Two resulted from a mechanical failure of a device designed specifically to prevent such an occurrence. Because of conflicting eyewitness accounts, we can't be sure if the valve assembly failed at the threaded joint of the pipe, or that the pipe itself broke off. The decision was made early to allow the shaft to fill since the inrush of water brought with it several tons of sand and pebble debris that have filled the shaft to a depth of about two meters, and getting to the failed connection at that point was rendered impossible.

The plan in place now is to drill up from under the shaft and install a freeze wall around the shaft alignment that will extend from bedrock, upwards to incident area. And once freezing has sealed off the area, we will pump the shaft down and begin shaft sinking once again surrounded by and protected by frozen ground. This procedure will mean a delay in completion of the Number Two Shaft of some six to seven months. And meanwhile, all other underground and surface construction activities are continuing. The cost of the freezing program and schedule delay will be about $15 million.

Overall, the project cost has been reestimated to $660 million with significant increases in contract costs for installation and services. Our contractors are competing for trades persons from the boom in the construction businesses all across Canada, and quite significantly in our neighboring province of Alberta.

I'm turning now to our operating uranium facilities, production from Key Lake for the first quarter is behind our budget, due primarily to the amount of cement contained in the feed stock from the McArthur River ore. As the amount of cement increases, the operation of the Key Lake mill is made less efficient and results in decreased output. And once the current phase of mining at McArthur River is completed, in these back filled areas, the problem disappears until we once again enter that part of the mining cycle. And to combat this, we are installing sand filters in the mill circuit which will improve our capability to process ore with high concentrations of cement.

We still expect to produce our licensed capacity of 18.7 million pounds from McArthur River and Key Lake this year. As we noted, we are deferring our plans for a production increase at McArthur/Key this year. The CNSC staff has prepared a report for peer review by other regulators, Environment Canada, Saskatchewan Environment, and Department of Fisheries and Oceans that assesses the environmental impact of low-level selenium discharges at Key Lake. We have submitted a plan to the CNSC to alter the process at Key Lake mill that will significantly reduce selenium loadings by nearly one-half.

However, these modifications have not been approved nor implemented and it is possible that we'll need some operating experience under the revised process to prove to the regulators that the modifications are effective. We expect the peer review to be complete in a month or so after it's issued, and at that time we will determine which course of approval actions we seek.

Moving along to our other producing mines, Rabbit Lake, Crow Butte, and Smith Ranch-Highland are all on target for the year. Internationally, at Inkai in Kazakhstan, the test mine is producing at its budgeted level. And recently modifications have been made to increase the output from the test mines yet this year. Test mine construction is complete and the scale up is underway. Formal government approvals are expected this summer.

Construction on the main processing plant is beginning in earnest, now that spring has come concrete pourers have started on the plant and we expect a busy summer through the construction schedule to put us in production in late 2007. In the Fuel Services Group, the refinery at Blind River is producing ahead of target. In Port Hope, the UF6 production facility is still experiencing some problems with generating sufficient fluorine gas to produce at its planned target rate. Additional electrolytic cells to generate the gas have been installed and more are to come.

As it now stands, we expect to produce a little less than the target for the year, 14 million kilograms versus our planned target of 14.2. I should mention also that just in closing that the Zircatec transition has been going very well in the three months that we've had that organization. And it's on target. With that, I'll pass that on to George Assie for his comments.

Thanks, Terry, and good morning, everyone. Starting first with the spot market. Activity in the first quarter totaled about 5 million pounds. And this is a more normal level than the very high volumes that we saw in the first quarter of 2005 when a total of 12 million pounds were transacted in that quarter and a total of 36 million pounds were transacted in the year. Utility spot demand has remained light, but suppliers have been active in the last few months. One reason for that activity is that some utilities have maximized their upward flexibility in older, lower-priced legacy contracts. And that has resulted in some suppliers being forced to acquire material in the spot market.

In other cases, suppliers have purchased in the expectation of realizing trading margins on further spot price increases. Even with the return to this more normal level of spot market activity, the spot price continues to rise in response to the very tight supply situation. The quarter ended industry average price of $43.75 is 12% higher than the end of last quarter, which was $36.38, and about 80% higher than the $22.55 reported at the end of the first quarter last year. In the month of April, the spot price has continued to increase further to $41.50.

Looking at the rest of the year, the volume of spot demand will not only be impacted by the amount of supplier demand, but will also depend on the purchasing activity of investment groups and any further inventory adjustments that utilities may make. Both of the investment groups that hold material are now able to purchase in the form of UF6, as well as uranium, which could result in increased pressure on conversion prices. For the time being, we have not revised our earlier estimate for 2006 spot volume to total about 20 million to 25 million pounds.

As for the spot price outlook, the continued tight supply situation is expected to lead to further price strengthening, with some analysts predicting that the spot price will increase to over $50 by the end of the year. A new phenomenon in the uranium market are the bid-to-sell transactions, or auctions. Historically, the market was driven largely by the timing of demand. Buyers required sellers to provide a price on a ceratin volume of product for deliver at a specified time, then generally chose the lowest price offered as long as the other commercial and legal terms were met.

More recently, a few suppliers have come to the market asking for offers with the delivery timing specified by the seller and with the seller then choosing the highest priced offer. Given the tight supply situation, this has had the effect of increasing prices in the spot market. In the quarter, the U.S. government has chosen to sell some of its inventory utilizing this mechanism, both directly and indirectly.

Moving now to the long-term market, the average long-term price indicator at the end of the first quarter of 2006 was $41.50, up 15% from $36.13 at the end of last quarter. Year-over-year the long-term market prices increased by about 50%. In the month of April, the average reported long-term prices increased further to $43.75. As has been widely reported, the term market was extremely active last year with contracted volumes of more than 240 million pounds. The current term market is also very active with very significant off-market volumes being requested by utilities.

We now expect that in excess of 200 million pounds will be contracted in 2006, and that is up from our earlier estimate of 150 million pounds for this year. As was the case in 2005, long-term demand is generally for longer time periods, in the order of 10 years or more, and that adds to annual volume when comparing to past years. Although new build may be some years out, the increasing optimism about orders for new reactors in the U.S. is causing some utilities to think strategically about contracting for first cores sooner rather than later.

This "first core" effect could place significant and somewhat unexpected near term command on the long-term market. As regard to current terms being offered by suppliers for new long-term contracts, I refer you to the nuclear industry press which has speculated that current contracts contain floor prices approaching $40 a pound and ceilings, if offered, of at least $60 per pound. We estimate that 2005 world production increased to about 109 million pounds of U308, a 4% increase over the 2004 volume of 105 million pounds. And we forecast 2006 production will be pretty much at that same level, which means that production will only meet about 62% of world demand this year, with the rest of the supply coming from secondary sources.

The increase in 2005 production was largely as a result of existing mines producing more and not as a result of the addition of new producing centers. In fact, in 2005 there was only one new production center producing small amounts of uranium. Despite the increase in the uranium price, nuclear fuel costs remain a relatively small portion of the cost to generate electricity, particularly when compared to oil or natural gas.

The Nuclear Energy Institute statistics show that in 2004 25% of the cost of producing nuclear electricity was attributed to fuel as compared to 88% and 91% for oil and gas respectively. At today's uranium prices, about 12% of costs are attributal to uranium, allowing nuclear to remain the lowest cost source of base load electricity after hydro.

Turning now to the UF6 conversion market. Industry average spot prices for both North America and Europe remained stable in the first quarter. The North American price decreased slightly in January, but increased to end the first quarter at $11.50, the same level at year end 2005. After a very modest decline in the month of January, the European price also strengthened to end the quarter at $12.00, a 4% increase over the price at the end of 2005.

There were very few conversion services transactions in the first quarter with the vast majority activity of spot activity in the form of UF6 leading to very little price variation throughout the period. By the middle of the quarter, the increase in the spot conversion price had analysts predicting that the abundant UF6 supplies, which had been exerting downward price pressure, had been absorbed and the market would strengthen going forward. In the long-term market, industry average price for North American conversion decreased slightly in January to $11.75 where it remained for the rest of the quarter. European conversion prices increased slightly from end of year 2005 to $13.00 on March 31, 2006.

At the end of April, Tradetec raised its spot North American conversion value from $11.50 to $11.75, and at the same time they also increased both their North American and European long-term prices by $0.50 to $12.00 and $13.50 respectively. And it's worthy of note that the long-term conversion market is also experiencing strong demand, as a significant portion of the term uranium demand discussed earlier includes request for UF6 or conversion.

So in summary, our whole outlook for 2006 has not changed from last quarter's report. We expect the markets for both uranium and conversion services to remain strong for the foreseeable future. That concludes my remarks and I'll turn you back to Jerry.

Thank you, George. Now we'll turn it back to the operator for questions. Operator?

Thank you, we'll now take questions from the phone lines. Please be advised we will take questions from the investment community first, followed by questions from the media. [OPERATOR INSTRUCTIONS] There will be a brief pause while the participants register for questions. Thank you for your patience. Our first investment question is from David Snow, Energy Equity, please go ahead.

Yes. Hi. I wondered if you could give me the -- since your annual report showed the effective demand fell, I think to 175 from 180, because of tails assay decrease, what was the average tails assay in the two years and what do you think it will be in this year? In the years '04 and '05 to cause the decline that you showed and what is it likely to be this year?

Okay. David, thank you for your question, I'll have George answer that.

Earlier on, David, we would have been estimating tails assays of between 0.3 and 0.32. Currently, given the relative prices of uranium and enrichment, it's probably something more in the order, the optimal tails assay, may be more in the order of, you know, 0.23 or 0.24. The challenge is that utilities will elect that differently. For example, if they have a legacy uranium contract where they're subject to a ceiling, they may still choose to be operating at higher tails, others look at the practical or the level of the market price and determine it that way. I think if you use those numbers, those would be the best guide I could give you.

Is there enough capacity in the enrichment end for them to operate at those low tails?

That gets to be a real challenge and that's why you're seeing SWU prices, enrichment prices, rising quite dramatically. They are currently about $123 a SWU, and I think most people in the market would argue if you needed near-term SWU, it would be a whole lot higher than that, so you raised a good question. Enrichers are being forced to the limit of their capacity and that's having an impact.

So you think the average was actually as low as that in the year just ended? Or what do you think the average was in '05?

In terms of the actual tails assay transacted?

Yes.

You know, perhaps by the time you mix it all together. I would suggest it would be maybe 0.26, 0.27, an average between the two.

And going lower this year?

I think it could be a real stretch to go much lower because of, as you pointed out earlier, the lack of enrichment capacity.

Right. Okay. Thank you very much.

You're welcome.

The next question is from Lawrence Smith, from Blackmont Capital. Please go ahead.

Good morning, follow-up question for Terry on Cigar Lake. Looks like the CapEx has gone up by $140 million Canadian. I just wanted to clarify, so 50 of that relates to the water inflow problem and the costs associated with that, and the rest is just capital cost escalation?

Yes. That's correct. $50 million we're attributing to the delays and the additional freezing of the shaft. And the rest is the escalation, basically of contracts, of works being done. But it includes not just Cigar Lake, but also McLain and Rabbit Lake.

How much has been spent on the project to date, or to the end of the quarter?

I don't know if I have that number off the top. Sorry, I don't have that at my fingertips, sorry.

Okay, that's no problem.

Ready for your next question?

I don't have another question.

Okay, good, thank you.

Our next question comes from [Dr. Ralph Sear] from [Ciracol Investment]. Please go ahead.

Good morning, everybody. Question is, you mentioned that the deliveries for the first half of '06, that the delivery would be about the same as '05. The deliveries, and the question is what would the revenue projection be for '06, '05? As the price of uranium is up significantly even though the deliveries might be the same, wouldn't the revenue be quite a bit higher?

Deliveries, Ralph, vary quarter-to-quarter based on what our customers give us as their delivery schedule. So you find the first quarter deliveries this year were considerably greater than they were a year ago.

We continue to deliver into contracts that were negotiated back in the 2001/2002 period of time when uranium prices were significantly lower. Those contracts, as we've explained, have got either fixed prices, much lower than today's spot price, or if they're market related they may have ceiling price limitations.

So as we've discussed a number of times, our realized price will go up gradually over the period of time. And that's why, yes, revenues will be larger than last year, significantly. But are not going to reflect $41 prices.

Okay. You've answered my question. Revenue for the first six months of '06 will be significantly higher than the first six months of '05 then, is that correct?

Ralph, let me help. Perhaps I was confusing, there. I made a comment that was really to say that the sales volumes for the first half of this year will be more or less the same as the second half of this year. Our volumes in '06 compared to '05 will be up slightly in total, and we're looking at our revenues maybe being up about 20% higher than 2005 revenues out of uranium.

Okay. Thank you very much.

Your next question comes from Greg Barnes, from TD Newcrest. Please go ahead.

Yes. Thank you. George, you mentioned that mine supply only represents about 62% of demand in 2005, and now we're seeing delays at McArthur River, at Cigar Lake, and the expansion at Olympic Dam until 2013. How does that 62% trend in your supply model over the next years?

I only looked at it for '06. My comments really related to 2006, Greg, where we, I just checked with our people, and our estimates are that production in 2006 will remain relatively constant as compared with '05. And demand is only going up 1 million pounds so really no change between the two years.

What about over the next three or four or five years, though?

I don't have that in front of me. I'm just looking at it very near term.

Okay. I guess I'll try another aspect then, on Centerra, you've had a big win there, and the stock's at $45, or $46. Jerry, are you looking at your position there and what you might want to do with it?

Greg, we continue to say at Centerra, which has performed quite well as you point out, is not a core asset, there is -- which means over time, the reason we set it up to ultimately exit. There is no timetable for that, we've indicated that if on the nuclear side we see an opportunity that would cause us to monetize Centerra, then we'd do it on a disciplined basis, and on the other time if we see Centerra grow and we ultimately drop below effective control, then likewise we'll begin an orderly process of exit. So those would be two triggering events you should look for.

Okay. Thank you.

Your next question comes from Ian Howat from National Bank. Please go ahead.

Higher the higher sales volume in the first quarter, you pointed out that's unusual, do you have any sort of thought process as to what the utilities were doing on buying more in the quarter? What were their driving factors?

It really is, Ian, just a case of -- of how they're taking deliveries from various suppliers and how their reactors are operating and where their refueling outages are. That's happened to us before, most often, you would see fourth quarter being the heaviest quarter because utilities of course contract by volume, for volume by year to the extent they had not needed it at all, they would take it in the fourth quarter. We're starting to see that spread out a bit more, and it was just a function of demand. And the particular contracts that we happen to have.

So, [INAUDIBLE] it pushed them off in the fourth quarter because they really don't need the material?

Historically, that's what they've done.

So this is sort of more bullish than the fact they're saying, I need it now, would be a good interpretation?

It would be, absolutely, given where prices are at. They're not looking to cover in the spot market or take any chances that way, so they're taking delivery from their contracts under a more even flow, if you would.

Thank you.

You're welcome.

Your next question comes from Bruce Peters from [Charmed] Assets. Please go ahead.

Thank you. I had a couple of questions. I wanted to start with, is it possible for you guys to outline your, your longer term strategy for hedging going forward? The philosophies behind it, whether, you know, you plan on fully hedging in the future, whether you would hedge in the future with a cap on pricing in the future given the changing conditions in the uranium market? And I would hold my next one until you finish that.

Okay. Bruce, we provide guidance on that very question quite frequently, we had historically a portfolio waiting of 40% fixed price contracting. That is been very important as we are one of the active participants in the market, continually testing the price levels.

And then 60% of the portfolio would be weighted to the spot price at the time the uranium is delivered. So that comes back to a reference to the spot market price that is being quoted at the time of the delivery. Spot market, you may know, is a very, very thin market.

Roughly 10% of the total volumes being traded or being consumed, I guess, in any particular year. Given the structure of the market, given our participation, and the size of deliveries that we're responsible for, we think that that weighting, that portfolio weighting, is then prudent and important, particularly as we go through the construction phase for Cigar and Inkai.

As we succeed in getting market-related contracts with some downside protection, which has been a phenomenon of the last year, year and a half, then we review that 60/40 weighting, but so far we've concluded that that's prudent. And that's together with the guidance we provided, I think it was in the first quarter, or the fourth quarter, quarterly, we provided on what that means for Cameco's realized prices. That's the type of hedging, if you will. Hedging in the form of long-term contracting that we do.

Yes, I can appreciate that, and it's very well laid out in your guys' financial statements. I think I'm just sort of asking on your philosophy beyond '08, beyond some of your construction startups and I'm not suggesting you would want to sell into the spot given the size of player you are, but you're talking about the changing dynamics of the term market in what utilities and other players are willing to pay. And I'm curious whether or not you have to be held to fixed, or caps on terms sort of contracts in the future in your guys' opinion.

I think in all of the scenarios we see, you know, market scenarios, that some fixed price contracting will be necessary, simply because that constitutes the bulk of the market. That's what is really establishing price levels as we move out into the future. So, again, the relationship between that and the spot price and the thinness of the small volumes being traded in the spot market tell us that we may deviate from the 60/40 relationship, but there will always be a rule for some fixed pricing in the portfolio.

And just my second follow-up question, just on Centerra Gold, I believe it was Greg Barnes asked you about potential divestiture scenarios to which you answered either timing of needing the funds or if we get diluted below a control position. I just wonder if there's any parameter in management's mind whereby if value's been realized or exceeded that it might trigger a sale potential, as well? Nowhere did you mention that if it ever got to a high enough price we'd sell it. And, you know, as allocaters of capital one would hope that would be one of the factors in your mind as opposed to we need the money.

I can assure you it's something we do not ignore.

Perhaps that might prevent you from hedging too much of your forward uranium, you could use those proceeds, thanks guys.

Your opinion's noted, thank you.

Your next question comes from Greg [Golinksi] from [Printing, Steam, Seales]. Please go ahead.

Hi, I was wondering if you could, you know, we've seen, obviously, a dramatic rise in the price of uranium over the last few years. But if we think about the cost of mining that, and clearly there's some disconnect between supply and demand, but if we think of the cost of mining uranium, is this a profitable venture on the margin at $30, uranium $40, like is there a long-term way of thinking about how much it costs to get this out of the ground? You know, notwithstanding how this is going to take some time?

Are you speaking generally?

Yes, generally, so like thinking out over the next few years for the market as a whole. Obviously, uranium price has been strong, and that's helped you guys. Is it rational, given cost of production, for uranium in general?

I'll start and maybe I'll throw it to Terry, as well. But the difficulty in answering that is you've got such a wide range of uranium-producing assets. You've got some that survive quite well in a $10, $11, $12 market. Remember, the industry was producing almost, only 50% of what was being consumed several years back and now it's only 62%. So you've got properties that survive in that kind of a market. You've got properties that require higher prices that were kept online by higher-priced contracts that dated back some years, and you've got properties that are now being brought into production in a $20, $30, and now $40 market.

Depending on the quality, i.e.,the grade, whether it's an open pit or underground operation, where it sits geopolitically, all of those are going to play into its cost of production. I think the analysis that we do is take a look at what's going to be required from a production perspective over time as this industry needs to begin producing as much as is being consumed.

And today that's 175 million to 176 million pounds growing at about 2% a year. So when you do your long-term analysis as to what's the appropriate price, it's what is going to be required, likely in a jurisdiction outside of the U.S. where the currency is important, as well, to satisfy 175 million to 176 million pounds growing at that 2% per year. Terry, do you want to add anything to that at all?

I think I would just say that this market is interesting in the perspective of the time it takes to react to it. There are properties that would have been late-stage development in the, in the old days when the price decreased dramatically, those properties that depending on where they were with permitting and things might be brought on relatively soon. But, you know, the gutsy move, what do you bet on the price long-term on a project that's probably, you know, eight to 10 years away. We have our suite of properties that we hold and we continue to evaluate them in this market, but you have to remember that typically the permitting process is quite long in our market, in our business.

Great. Thanks. And just one other one. Spot markets, volumes are down versus last year, is there any impact from perhaps utilities taking more flexibility on their contracts that makes less spot available, or is that not the way it works?

No the utilities have been taking, certainly looking through their legacy contracts as I noted, as opposed to going to the spot market. They're going to take everything they can under those legacy contracts. But where that demand then finds its, some of that demand finds its way to the market is where suppliers are not fully covered with production or purchases or secondary supplies and have to come to the market to buy it any way. Utilities, for the most part, are doing the very best they can to avoid putting any demand into the spot market.

Okay, thanks very much.

You're welcome.

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

Good morning. Just in the case of, with respect to the exploration strategy we heard a few minutes ago, the industry environmental issues still run quite high. So in other words, it's the major that can develop all the ore bodies. Is it of use to want to hold that ore value with respect that no matter who discovers an ore body is eventually going to come to the big guys and try to make a deal with you? Or you say you want to jump the bandwagon, on the bandwagon and to get more involved at this stage?

Terry, I think right now we're only about a year, year and a half into the third exploration wave I like to call it where you have lots of companies being created. All of them now able to raise money and go out and do the high-risk game of exploration in a lot of different areas of the world. Right now Cameco's been in kind of a watch mode because it takes quite a while to find a significant ore body. We have entered into strategic alliances with a few, where we think they're in prospective areas and they have some technical expertise that go along with prospective properties.

Over time, we know that some of them will succeed. And we do acknowledge your point that we are the most heavily regulated mining industry, that the core confidence we have and built up over time and that is in the environmental arena, and we recognize that we're not perfect, but we think we have a lot of expertise there, will at some point in time be an important asset that we bring to the table.

You know, it will come about in just the way you process uranium ore, the way you protect and mitigate your impact on the environment, so there'll be lots of issues like that. It's, obviously, not just environmental, it's safety and health and the non-proliferation regime that we deal with. So we believe that over time as discoveries are made that people will talk to Cameco about strategic alliances, joint ventures, or indeed, acquisitions, which will allow us to then to expand production base through those mechanisms.

Good. Another question, actually, again, maybe market related. Really have to go back a long time before you find a level of concern that escalated to a panic by the utilities. How far are we away from this point in volumes or in prices?

Terence, I'm not sure that I'm -- I think we're some ways away. I don't think people are looking at a panic situation. Obviously, there's concern about ensuring reliable supply for the longer term, et cetera, but I don't think, I would not classify it as panic.

How many people are going to say cost escalated price with much higher raise on today's market. And where are you going to come around?

I'm sorry, I didn't catch it, Terence.

We've seen in the past, there were crazy numbers being put on the table with respect to escalated prices and escalated cost based on those, all the costs you would incur. I'm going back now about 30 years, or so, 35 years. Why not that time, that time may not come around this cycle?

You're right, it could. It could get there.

So I'm asking on a scale of 10, where are we? Is it 5 or an 8? I'm using metric. Thank you.

Thank you, Terence.

[OPERATOR INSTRUCTIONS] Your next question comes from Brian MacArthur from UBS. Please go ahead.

Good morning, I'd like to go back to the tails assay question. You talked about getting down to maybe 0.2 or 0.3 or whatever. I know there's a tradeoff between [fru] and tails assays, but is there any physical limitation about how low you think tails assays can actually go? Like 0.15, 0 .1? Or is it going to reach a point where that part everybody talks about feeling supply get like maxed out just from a technical point of view?

I think, Brian, I'm not the technical expert here, but I think we're getting to, when you get down to 0.23, 0.24, you're already getting to levels that is causing a fair amount of angst among the enrichers, so going to 0.15, et cetera, other than in Russia, perhaps, where today given trade restrictions, or whatever, stripping tails down to that level might still make sense. Nowhere else in the world would it make sense. I'll put it this way, in the past, when tails assays were at 0.32, it would be a surprise to most utilities to know that there's -- number of the enrichers were actually producing uranium, they were mining uranium, they were taking it down a little lower than that. They were going down to 0.3, let's say.

Right.

Today, I would not be surprised to find that utilities are electing 0.23, 0.24 and we're going to have enrichers that are going to be consuming uranium in order to meet the capacity that they need to have to meet their delivery commitments, the utilities for SWU.

Right.

So it's -- but I don't see practically tails assays being able to stay down or going much lower than 0.23, 0.24.

So that source of additional supply or less demand is pretty well maxed out in your view?

I think it is. And the other factor here, of course, are enrichment prices. Enrichment prices are moving up quite dramatically, and last week, talking with some consultants, the view was that if you actually had supply available today you'd see prices in the near term market that would be significantly higher than what's being reported. They're being reported at 122, 123 simply because there are no transactions taking place. There's nothing to point to. So, you know, when the utility goes to contract for SWU, that's what they're going to run up against.

And do you think most of the SWU is maxed out globally, too, now?

I think, I think that the western enrichers are pretty much maxed out. Could be that in -- in France, there might be a little bit, but as you know electricity prices have gone up dramatically there as they have in the U.S. So I think in terms of commercial SWU, I would say, yes, I think in the west they are maxed out.

Great. Thank you very much, George.

You're welcome.

Your next question comes from Victor Lazarovici from BMO Nesbitt Burns, please go ahead.

Thank you. I have a question, I believe, George in your presentation you made a comment that the market this year is expected to grow by 1 million pounds. And I guess that doesn't really compute relative to the 2% that Jerry suggested the secular growth rate of the market is growing at. Now, obviously, in the short run, the trend and the year-over-year number can be different, but can you explain why we're getting such a low rate of growth this year?

Victor, Jerry's referring to average annual growth over a longer period of time, over a 10-year period. I think what we're seeing between 2005 and 2006 is just a minor variation and probably still some impact from that tails assay that we've just been discussing.

So you're saying that the demand is being displaced by the increased enrichment?

Yes.

And that would be a one-time adjustment to the market?

Yes, as we discussed the enrichers are being pushed to the absolute max on commercial SWU. So it will be much more difficult to see further adjustments at that level going forward.

Okay, thanks.

You're welcome.

Your next question comes from [Dr. Ralph Sear] from [Ciracol] Investment. Please go ahead.

This is a little longer term, but was the news that Australia will be selling uranium to China, I was just wondering what the plans that Cameco may have, and do you see China as a long-term strong customer? And if so, who might be your competitor?

The announcement coming out of Australia simply then means that Australia can now sell to China. China has been in the market for a number of years, in fact, given the fact that there's a bilateral contract between Canada and China, we've been able to sell to them for awhile, indeed, we've made sales in the past. So it just -- because uranium is a fungible commodity and moves around the world for pennies, China's presence in the market adds to the demand. They've got a very aggressive nuclear construction program. It bodes well for all suppliers.

The one country that's in a little bit different position, that one I made note of is India, which up until now, because they have not been a signatory to the non-proliferation treaty, no supplier has been able to sell to India, and India, too, has a very aggressive nuclear power construction program. When the impediments are lifted by the international community, which we expect will happen within the year, then their demand, again, which is growing in a healthy fashion will, indeed be additive to the market. Cameco is in constant communication with all customers, including those in China and India. So over time, we'll have customers in both countries, we hope.

Okay, thank you very much.

Your next question comes from Greg Barnes from TD Newcrest, please go ahead.

Thank you, George. You mentioned that the U.S. government sold some material, put some material up for tender in the first quarter, is there more coming and how much did they sell in Q1?

Well, they sold a total of, I hope my timing isn't off here, they sold a total of 400 tons as UF6 in two [traunches] and I believe one occurred in January, and the other one, more recently. The expectation is that there is likely another 200 tons that they would sell this year. And this is material that you may recall in the past, they bartered material with USEC so that USEC could do the cleanup of the technetium contaminated material.

Yes.

And that's what this material really is. Rather than bartering it to USEC, they arranged for USEC to sell 200 tons into the market to help pay for that earlier on, and then they have done another 200 tons, so it's the 600 tons in total that we expect for the year which would have otherwise have been bartered to USEC to pay for the technetium cleanup.

And how much is that in terms of the 1 million pounds U308?

Well 200 tons comes out to about 540,000 pounds. So they sold almost 1.1 million pounds so far, another 520 or 530 to come.

Do you see anymore over and above this material coming from the U.S. government?

I think there could be small amounts like this in the future, yes.

But nothing significant in your mind?

No. No I think it would be in the order of the numbers we've seen here 600 tons a year, maybe going to 1,000 tons a year.

Great. Thanks, George.

You're welcome.

Next question comes from please [Amrik Dak] from [India] Capital. Please go ahead.

Yes. My question concerns, in this report you have stated your profit margins for 2006 to improve to 32%, previously you stated 28% margins for the year 2006, now is that a raising of your earnings projections? Thank you.

Can I -- can you repeat the last part of your question again, I'm sorry?

I'll repeat the whole question.

Okay.

In this report, you've stated that your profit margins for 2006 improved to 32%.

Right.

And your last quarterly report you stated that for 2006 you expected profit margins to be 28%, so does that mean that you're raising your earnings projections for the year?

We don't give earnings projections for the year. But certainly if the profit margin improves, as you've stated there, it will flow through to earnings, but we don't project earnings.

Right, one more point to that, so you've increased your profit margins by 4% from the previous quarter, correct?

Yes.

Right so --

I haven't got the fourth quarter one in front of me, I'm sure you've got the numbers correct, yes?

Yes. So would that have a significant impact on your earnings from previously?

You're modeling, I don't really want to duck you on that one, but certainly a higher margin is going to lead through to better earnings, yes.

Okay. Thank you very much.

Thank you.

You have a follow-up question from David Snow from Energy Equity, please go ahead.

Yes. How much of the -- how much did the U.S. government sell in tons of UF6 last year, or million pounds of U308?

I'm not aware, I don't recall if they sold anything directly last year. As, on the previous call, I stated they actually bartered it to USEC, so they gave material to USEC and said, here, from this you go out and sell this and you'll get the money you need to clean up technetium-contaminated material. I believe it was in the same order, about 600 tons, but I'll admit I'm guessing there.

Okay. And how much did the HEU take last year from the supply to the total industry's demand?

Well the, on a worldwide basis, the HEU contributed 23, almost 24 million pounds in total. Now of that, as you know, a significant portion of it gets returned to Russia. They withdrew, I guess for last year what I can say is 2005, think of it as 23.4 million pounds, and the Russians withdrew 6.7 million pounds for their own use.

Okay. That was a little less net increase in the previous year?

Well it's been running around that number 23 million to 24 million pounds annually.

I'm talking about the return was a little more than the previous year?

No, that return is the standard one. They are allowed to take out 6.7 million pounds each year.

Okay. So the net amount of demand, 16.7, has been pretty much the same as -- year-to-year going --

That's right, you can think of that as material that's come into the western world market.

And, okay, real fine, thank you.

There are no further questions from the investment community. We will now take questions from the media community, if you have a question and you're from the media, can you please press star one. [OPERATOR INSTRUCTIONS] There are no questions in the queue.

Okay. Operator, thank you very much. And thanks to all who have jointed us on the conference call today, Monday, start of a week. Have a good week and a good day. Thank you.

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