Cameco Corp (CCJ) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cameco Corporation Second Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Bob Lillie, Manager, Investor Relations. Please go ahead, Mr. Lillie.

Thank you, Operator. And good morning, everyone. Welcome to Cameco's Second Quarter Conference Call to discuss the financial results. Thanks for joining us. With us today are Cameco's--four of Cameco's Senior Management Team. They are Jerry Grandey, President & CEO, Kim Goheen, Senior Vice President & CFO, Terry Rogers, Senior VP and Chief Operating Officer, and George Assie is Senior Vice President, Marketing and Business Development. In addition, we are joined by our colleague, Alice Wong, Vice President of Investor, Corporate, and Government Relations.

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 first from the investment community, followed by questions from the media. Please note that statements made during this call by the Company regarding subjectives, 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.

With that, I'll turn the call over to Jerry.

Thank you, Bob. And let me also extend my welcome to everyone participating in the call. Yesterday, Cameco issued its second quarter results. Those results showed overall good performance, with strong revenue, earnings, and cash flow. In a moment, I'll turn it over to Kim to discuss some of the financial details.

One of the contributing factors to these results was significantly higher earnings and cash flow from our nuclear electricity generation business. These results were part of a plan that goes back a number of years. Following the initial purchase of Bruce Power, Cameco and its partners believed that it would be a good investment to refurbish the Bruce B reactors, and this we did.

Over the last few years, we have invested significant amounts, taken reactors offline for extended periods, and completed the work necessary to achieve the refurbishment. It's gratifying to know that this year's refurbishment programs have been reduced to only one planned outage later in the year. Even more satisfying is that the 95% capacity factor achieved during the first six months with a target in the low 90% range for the year.

Moderate temperatures in Ontario have kept electricity prices lower in the first six months than what we experienced last year. However, with lower costs and expectations of solid capacity factors going forward, Cameco expects a solid earnings contribution in the longer term. These will be complemented with strong cash distributions to Cameco that have already reached 89 million in the first six months of this year.

Moving to the world nuclear stage, there have been many industry developments since we last got together on a quarterly conference call. I would expect that all of you will read every detail of the second quarter MD&A. But in case you haven't quite got there, I want to quickly highlight a few positive side posts that have occurred in the nuclear industry.

Looking into the future, we can expect to see new reactors being built in Canada, the United Kingdom, and the United States. And here's why. In Ontario, nuclear reactors currently supply about 50% of the province's electrical requirements. And recently, the government official confirmed the importance of nuclear power by indicating that Ontario must maintain its current nuclear capacity. That means, new reactors will be built at existing sites, and they will determine if any of the currently operating reactors can be refurbished to extend their life spans. It's still too early to say if there are potential opportunities for Bruce Power. But we will certainly be looking to see if there are.

Further afield, the UK government also confirmed that new reactors will be an important component of meeting electricity needs in the future. The government came to the same conclusion as have other governments and utilities around the world. Nuclear is cost effective and a clean source of reliable power.

In the U.S., interest in building reactors continues to grow. During the last quarter, the number of entities proceeding with applications for early site permits or combined operating and construction licenses grew to 12, up from the 11 we reported in the first quarter. In other parts of the world, reactor construction is more advanced. In May, China connected another reactor to the grid, and in June, India did the same. Given the ambitious nuclear energy plans of both countries, you can expect similar announcements to be repeated over the coming years.

The last news item I want to share with you occurred on June 23. Louisiana Energy Services received a combined construction and operating license to build an enrichment facility in New Mexico. This is a significant achievement because it is the first major nuclear facility licensed in the U.S. in more than 30 years.

On that positive note, I'll turn it over to Kim, who is going to talk about our financial results. Kim?

Thank you, Jerry. And good morning, everyone. Our second quarter came in more or less as expected and in line with the guidance we provided in our Q1 report. I will briefly summarize the highlights before outlining our financial condition and discussing the outlook for the third quarter and the year as a whole.

On a consolidated basis, our adjusted net earnings and cash flow rose strongly in the second quarter compared to the same period in 2005 due to improved results in the electricity and gold business. Although realized prices and margins for uranium are steadily improving, delivery volumes for Q2 declined, leaving profitability unchanged compared to the same period last year. And in fuel services, the cost of UF6 purchased at current market prices constrained profits.

As Jerry noted, Bruce Power had an outstanding quarter due to a strong operating performance. For the second quarter in a row, a capacity factor of about 95% was achieved. Operating costs below $30 per megawatt hour contributed to excellent margins despite constrained spot power prices when compared with 2005. These results are very encouraging, and we believe Bruce B is on a track which will see robust reliable performance be the norm. We referred in the quarterly report to a new Candu fuel that's being loaded in one Bruce B unit. We expect this new fuel to be used in all Bruce B units in the future. The units will be able to operate at slightly higher generation capacities and increase revenue accordingly.

Centerra Gold continues to benefit from not hedging its gold sales. They realized an average spot price of $632 U.S. per ounce in the quarter, slightly exceeding the average spot market price, and up almost 50% over the same period last year. However, this improvement was moderated by less production, the result of lower [head grades] at Kumtor and Boroo.

Cameco's financial condition remains exceptionally strong with long-term debt of about 700 million at June 30 and cash of almost $500 million. Centerra held about half of the cash.

Now let's look at our expectations for the third quarter. The supply of uranium is expected to remain tight for some time. As a precaution, to address any disruption that may occur in our supply chain during the next few years, we have put in place two agreements that provide access to an additional 5.6 million pounds of material. George will discuss these arrangements more in a moment. But let me briefly indicate the accounting impact.

While these agreements are in place, the revenue associated with any deliveries to these customers will not be recognized up to the limits of the loans. Such deferrals are required until these loan agreements expire, irrespective of whether any draw down has been made. This approach is in accordance with generally accepted accounting principles. We expect revenue on about 3 million pounds to be deferred during the third quarter, and a further 1 million pounds will be impacted in Q4.

The sales contracts involved are predominantly older agreements signed in lower price environments. As a result, we expect these deferrals to have a moderate impact on 2006 profitability. These deliveries will still occur as scheduled and we will receive payment, as it is the reporting of the revenue that is to be deferred.

We expect consolidated revenue for the third quarter to be lower than that of the second quarter of 2006, reflecting a reduced contribution from the gold business. Uranium revenue is projected to be about 10% lower in the third quarter than in the second quarter of this year due to the deferral of revenue I just mentioned and a lower realized price, reflecting the quarter's mix of contract deliveries. Fuel services revenue is projected to increase by about 5% compared to the second quarter. And at Bruce Power we have a two-month outage that Jerry just mentioned scheduled on one unit to begin that--the outage will begin this quarter.

In the aggregate, third quarter gross profits from the uranium, fuel services, and electricity segments are expected to be in line with the results of the second quarter.

With that, I'll turn things over to Terry.

Okay. Thank you, Kim. Good morning. As usual, I'll brief a little bit on mining and then follow that with fuel services.

The Saskatchewan operations are slightly behind our production targets for the first half of the year, but we expect to meet year-end numbers. McArthur River and Key Lake will meet their license limited--their license limited production before the end of the year at 18.7 million pounds. And Rabbit Lake will be mining in slightly higher grade areas and increasing mill throughput in the second half to recover from a small deficit that was experienced in the first half.

All of the operating sites in Saskatchewan are experiencing excellent safety records and environmental performance, which is similar to previous years.

While collective bargaining agreement negotiations have been taking place since the beginning of the year, last week the union and Company representatives, having not agreed terms of the new contract, have turned to conciliation as the next step to reach a new contract. The process will play out over the next several weeks. And while we are confident that the Company's offer is generous and attractive, and the conciliation process has been used for all of the contract renewals in the past few years, ultimately, the vote to accept is up to the membership. And there is no guarantee that a labor disruption will not take place. Should a labor disruption occur, the production targets mentioned before will not be met for Key Lake and McArthur River.

The U.S. in situ mines continue on track overall in our forecast to produce 2.4 million pounds by year-end. That's 14% more than produced in 2005.

On our developing projects, Cigar Lake underground development for the construction of mine infrastructure, such as ore receiving and--or ore handling facilities is continuing. And some preliminary construction works are underway. With the broader mobilization and construction efforts, underground will commence in early August. Surface facilities construction is progressing satisfactorily. As to the remediation of the second shaft water in-flow, we are expecting approvals from the regulators for the freeze-hole drilling in the next few days. Assuming that that progresses as planned, we expect to be back [shaft sticking] in the fourth quarter.

The Inkai project in Kazakhstan is continuing with no surprises. The test mine is performing outstandingly since the expansion has been commissioned. Construction for the main processing plant in the block one area is on schedule for completion next year. The plan is to complete the building itself this summer and fall, then install the process equipment over the winter and into next year, all working indoors.

In the fuel services division, the refinery operations at Blind River, Ontario continue well ahead of the budget, still building an inventory for continuing shipments to Springfield's conversion facility in the UK.

And port hold operations at the conversion facility have been hampered by a few process related difficulties. Early in the year, fluorine generation was a problem. And having that pretty well resolved by installing more capacity, during a shutdown two mechanical failures of critical equipment further negatively impacted the output in the UF6 plant.

The integration of the newly acquired workforce at the Zircatec plants in Port Hope and Cobourg, Ontario has gone exceedingly well and the operations at the fuel assembly plants have been normal.

Just briefly to the gold business, I think it's most appropriate that inquiries be made directly to Centerra for the details, but it should not go unmentioned in this call. The recently announced ground movement at Kumtor has resulted in a revise forecast of some 100,000 ounces less than originally estimated. While that is disappointing to this year's results, the total reserve base was not affected, as they are neutralized and the near term is still within the ultimate pit limits.

So that ends my comments, and I'll turn this now over to George.

Thank you, Terry. And good morning, everyone. Looking first at the spot market, activity in the second quarter totaled about 6 million pounds bringing total volume for the first six months of this year to almost 14 million pounds. And while that's significantly less than the 24 million pounds contracted in the first six months of last year, it's still well ahead of the page for the years prior to 2005.

As has been the trend over the past 18 months, discretionary purchases continue to make up the lion's share of demand, amounting to about 90% of second quarter volumes. Utilities accounted for about 20% of the total volume, which is similar to the first quarter, with some portion of that demand attributed to inventory building. The balance of demand came from producers, traders, and others selling upward flexibility under legacy contracts or speculating on further strengthening of spot prices. The spot price continued to rise throughout the quarter, ending at 45.75, about 12% higher than the first quarter, and almost 60% higher than the price at the end of the second quarter of 2005.

Since the end of June, the spot price has continued to increase and it now stands at $47.25. In the past, the summers have traditionally been very slow, and usually there is little movement in the spot price. This summer, the tight supply situation continues to push the spot price higher, notwithstanding the moderate levels of demand.

We now expect total 2006 spot volume to be at or above the high end of the 20 to 25 million pound range we had earlier forecast. Traditionally, a spot market transaction was based on a price fixed at the time of the agreement for delivery up to 12 months later. In the current market, suppliers are demanding the market price at the time of the future spot delivery with a [fore] price that is very at or near the current spot price. In general, this results in fewer data points for price reporting, but it is being offset somewhat by the bid to sell or auction transactions that I talked about in the last call.

Moving now to the long-term market, the average long-term price indicator at the end of the second quarter was 46.75, up 13% from the end of the first quarter. Year-over-year, the long-term market price has increased by over 55%. As expected, the term market was very active in the second quarter and we continue to expect that total term contracting for 2006 will be in the order of 200 million pounds or better.

In May, the head of Russia's Rosatom advised U.S. utilities that there would not be an extension to the current Highly Enriched Uranium Agreement that ends in 2013. That could result in the volume of term contracting going even higher as concern about supply availability after the current HEU Agreement ends pushes more utilities to increase their long-term contractual commitments.

As reported in the MD&A, and as Kim has already mentioned, we have concluded some standby loan agreements for uranium and UF6. Among Cameco's major strengths is its positioning and reputation as a long-term reliable supplier, which allows us to secure more favorable commercial contract terms. So notwithstanding that our contracts provide us with excellent protection in the event of a disruption in any of our sources of supply, we take our reputation as a very long-term and reliable supplier very seriously and we look to position ourselves to maintain it.

For that reason, we felt it prudent to ensure that we would have access to additional uranium supplies in case of any near-term disruption in any of our sources of supply. And by any of our sources of supply, I mean both our primary production and our purchases of HEU.

While we could also look to make spot purchases to cover all or some portion of any supply disruption, quantities available in the spot market may be limited at times, and we prefer to have the flexibility to make any purchases in the amounts and at the time of our choosing. There were a couple of items recently reported in the trade press that I would also like to highlight. The first is the U.S. Department of Energy Uranium Marketing Annual Report published in May, which provides a detailed look at U.S. utility contracting in 2005.

U.S. utilities took delivery of almost 66 million pounds in 2005 at an average price of 14.36 as compared to an annual average spot price of 28.67. And the price U.S. utilities paid for delivery under term contracts in 2005 was $13.70. You may recall that Cameco's average realized price for that year was $15.45. Similar data is published for the European Union utilities by the Uranium Supply Agency in their Annual Report, which shows that European utilities paid an average price of 16.06 for deliveries under term contracts, about 55% of the spot price in 2005.

The U.S. DOE and Uranium Supply Agency prices highlight the impact of legacy contracts signed when contracted pricing terms were much less favorable for the seller.

Another recent event in the market was the Nufcor Uranium Limited IPO. Investor funds are now estimated to be holding on the order of about 15 million pounds of U308. In general, all of the funds have indicated that they are long-term players in the market. Some are reportedly looking to acquire more material and others have expressed an interest in signing long-term uranium supply contracts. So for the near term, no downward pressure on prices due to fund liquidation is expected.

Turning now to the UF6 conversion market. The North American spot conversion price increased by 1% in the quarter to 11.63. The European price remained unchanged throughout the quarter at $12. In the long-term market, the industry average price for North American conversion increased to $12.25, a 4% increase over the end of the first quarter. The European conversion price also increased by 4% in the quarter to $13.50.

I'll summarize by saying, as I have for the last several calls, that we continue to expect the markets for both uranium and conversion services to remain strong for the remainder of 2006 and into 2007. So that concludes my remarks. And with that, I'll turn things back to Jerry.

Okay, George. Thank you very much. And then, we'll open it up to questions. Operator?

The first question is from David Snow. Please go ahead.

Yes. I was wondering if you have an idea what is the price now in the HEU? The uranium U308 component of the price in the Russian HEU agreement?

George?

That's confidential information, and so it's not public at all. We can't release that.

Has it been essentially done? I've heard various people say around the $10 or $13 range, not up in the current market?

Again, we don't comment. So--.

Okay. Could you give me some idea as to--you had mentioned in the past conference call you're seeing some utilities talking about second first core. And I assumed that was for the existing--for the new reactors. Do you see any move in that direction of adding the equivalent of a second first core for the existing installed capacity?

Well, I'll answer your question this way. In terms of the first core effect, we're certainly seeing more utilities--those utilities that are getting more and more serious about building looking at--making arrangements to have that first core in place. And so, some of that--some of those discussions are already ongoing. I'm sorry that I--I don't understand your question with respect to a second initial core.

Well, I read that in the past they had wanted about a six-year or a seven-year inventory in order to build a new plant. I thought you had referred to a second first core, which would be equivalent to another three years. But maybe I misread it in the past conference call. I'm wondering what you are seeing the desired inventory being for the utilities?

All right. Now I understand. What you're talking about are the follow-on reloads for those new reactors. And at this point, I think the utilities are more concerned about the initial charges and that will take them through, as an example, for reactors starting in 2013 or so, that lasts them for some time. So I don't know that we're seeing a lot of additional demand for the follow-on reloads at this point in time, but it's more the initial charges. And they're larger in volume, and with the number of utilities that are looking at new build, they could all come at the same time and could have a significant impact.

Well, what about to the existing installed capacity? Is there an inventory building to get more ample supplies of inventory for the existing installed capacity?

Sure. Utilities are today looking to build inventory wherever it's--they can reasonably do it. And they've done that through taking--exercise of upward flexibility in their existing contracts, some spot purchase, as I alluded to in my comments here. But it's been fairly moderate just given the type of supply situation and they prefer not to push prices even higher today. But to the extent that they have any opportunities to build inventory, most utilities that I'm aware of would take advantage of that.

Okay. Thank you very much.

You're welcome.

Thank you. The next question is from Terence Ortsland. Please go ahead.

Thanks. George, the uranium fund you mentioned that probably has somewhere around 50 million pounds nowadays. Do you think all of the 50 million pounds have been procured, number one? And number two is that the expectation somewhere it will be forming. What numbers will be you be incorporating in your calculations that it will come to the market for? And three, in that context, I kind of term that 50 million pounds plus or minus kind of hot. And is there anymore in the speculators hands--however you define speculators--that do you think they have the volumes?

Well, I guess to answer your first question, the 50 million pounds I referred to is the amount that they're holding. So that's the amount that they have accumulated so far, and that includes the Nufcor IPO where the money they raised was going to be used to take delivery of 2 million pounds from an affiliated company. So first--so in that respect, there is 50 million pounds held by the investment funds.

There certainly I think is interest on the part of the investment funds to acquire more uranium. And we see evidence of that. And I see most recently that UPC announced that they had bought a small quantity of uranium. So that continues. In terms of any disposition of it, as I said in my remarks, we don't see really any evidence of that at all. The only sales that I'm aware of that the funds have made is from in effect sort of within the funds from one holder to another.

So we haven't seen any of that come to the market and I'm not aware that any of them have yet concluded a long-term sale arrangement. But again, we're hearing that that might be a possibility going forward. And I can understand that. If they can do it under a market-related mechanism with a good floor, and they still see upward movement in the price, that would be a good way for them to go.

George, on the--I read the Russian statement from your release and also otherwise. Can you get to the bottom line what this all means anecdotally shedding--one portion of your MD&A talks about [indiscernible] and elsewhere. What is the script here by the Russians?

Well, the announcement that made quite clearly is that there will not be an HEU2 and there continues to be speculation that--.

--Are they bargaining? Are they bargaining or is that definitely?

No, I don't think that's bargaining at all. In my view, that is their intention. And then, there's two schools of thought, Terry. One school says that very likely they will continue with a more limited amount of HEU blend-down, and that will serve as their own source of uranium for their operations and for their--the client states that they serve. But it would be at a much lower rate than what we've seen in the past. And the other school of thought suggests that the--that really the remaining HEU is going to be held by the Russian military and no more of it will be coming.

Interestingly, there was a news release that came out yesterday where the Russians announced that after the existing arrangements for tails coming from the European enrichers hands, which I believe is in 2009, that they will not accept any more tails from the West. And what's interesting about that is, as you may know, to blend down HEU they need relatively clean tails, which they then re-enrich and blend with the HEU.

So just putting all of those little dots together, one could surmise maybe the latter suggestion is the correct one. But who knows? At any rate, for our planning purposes, we assume that they will continue to blend down some quantities for their own use, but that it won't come to the West.

Fair enough on that. Given the volumes this year - spot and the longer term volumes last year and this year, where do you think the uncovered demand is for 2007 and 2008?

I think that uncovered demand in '07 and '08 is really very low. We're probably down to maybe 5 to 10 in '07 and 15 to 20 in '08. I think it's very low. But interestingly, when you go 2010, 2011, it starts to move up again very quickly. The EIA data I think supports that where they show that notwithstanding the very high level of contracting done by U.S. utilities, when you go out about five years or so into the future, their uncovered requirements really have not--changed that much.

Okay. Just a last question to my other brother, Terry, here. Does Inkai have a permit in terms of volume? I forget how much they can produce.

Have a permit in terms of volume?

Correct.

I don't think it's limited like it is in Canada, no.

So you can produce--okay. There is no limit? I mean, given the volumes that you have for 2010, which seems to be the optimum, it's not permitted--it's the physical engineering capability?

That's for the plant. That's for what the plant can produce through--basically flow through the plant, Terry.

Okay.

To expand it, Terry, you'd have to go back through a [cause act] per bidding agency I guess. So I don't think you could automatically go up just unilaterally above the 5.2 billion. We have to go back to the cause act agency for a permit.

So that's permitted then. Is it no more than that?

And that would just be associated with plant expansion and whatever other objectives they might have.

Thank you very much, guys. And I really appreciate those pages on the release, let me tell you. Great. Thank you.

Terry, thank you.

Thank you. The next question is from Greg Barnes. Please go ahead.

Yes, thank you. George, the Russians seem to be talking about the Suspension Agreement. Can you provide some color on where that's going, if anywhere?

Well, Greg, the news I think that just came out this week was that the ITC, the U.S. International Trade Commission, did uphold the Suspension Agreement. So that agreement will remain firmly in place. Now there is a lot of speculation that notwithstanding that now the U.S. Department of Commerce - and we've heard that there are meetings planned with their Russian counterparts - will begin to discuss some sort of a compromise situation. But all of that--our expectation is, if there is a compromise, it's intended to grant or to allow the Russians access for enrichment services into the U.S. market.

And in large part, the Russians are looking to make sure that they have access beyond 2013 when the current HEU Agreement comes to an end. So that's where the focus is. And all the evidence we've seen has not led us to at all believe that the Russians are looking to place uranium into the market. As a matter of fact, in their desire to place enrichment services are looking to ensure that they can get access to the uranium and take it back.

But you're still a little bit concerned because you--in your comments you noted that the loans that you've done this quarter are in part possibly for potential disruptions on the secondary side that you get.

They weren't at all focused on the secondary side. All I was intending to highlight was that really our supply interruption language in our contracts protects us both from any disruption in our primary sources of supply, as well as supplies under the HEU Agreement. We have those protections. The loan arrangements are really in place to assist us in the event that we have any hiccup in our sources of supply, not at all targeted at HEU.

And I guess the other thing I should reinforce is that with the Suspension Agreement being upheld, really what that does is it serves to reinforce the HEU Agreement as it stands today. So I certainly didn't mean to suggest that we were concerned about HEU in particular being a problem.

Okay, great. That clears that up. Thanks a lot.

Thanks, Greg.

Thank you. The next question is from Brian MacArthur. Please go ahead.

You did the 5.6 million pounds. I can see why you put the buffer in there. But was it more because of--you just said it's not really you're worried about the Russians not showing up, although I might argue if they don't get tailed in 2009 I guess, maybe they don't have the tails to blend that past 2009, and maybe they will cut you off. I don't know what your covenant is on that. But just secondarily, if you're not worried about the HEU source being cut off, is it more you're worried--the 5.6 million pounds was for the strike, or just the fact that Cigar and McArthur are quite a bit behind where you were planning?

Brian, I think it's just like having a standby credit facility. It's just added flexibility and the accounting side I think is most unfortunate, but that's just the way it is. I was just looking at it as we had the opportunity to do these loan arrangements. We had talked about it for years, frankly. And we thought it was a prudent move just to add that kind of flexibility for whatever might occur in the coming years. And I wouldn't read anything more into it than that.

Because if I actually just look at the production that's deferred, it's sort of a similar sort of number between the slower ramp up at Cigar and the delay in permitting at McArthur.

Yes. But that would be just coincidental.

Okay. And then, secondly, just on that issue in 2009. One of the original issues when the Russians were blending the first materials is they couldn't get enough clean tails and the first material into the U.S. wasn't clean. Do you still believe that they have enough tails if they don't get access to the European tails that post 2009 they'll have enough tails for blending to meet the commitments during years 2009 and to 2013? Or could they just sort of quit?

Brian, all the evidence we have from the Russians is that they intend to honor the agreement through 2013. So given what they've said to the U.S. government and to the Western companies and then taking into account this latest announcement, which says that they're not going to accept any more tails after the existing agreements come to an end, leads me to believe that they're going to have enough material to allow them to continue to honor that agreement through 2013.

Great. And on just a totally different topic for the financials, you talk about the 73 million, Kim, for the cumulative effect of the change in the [indiscernible] tax legislation, which I can find that in the financials. But then, you also talk about the additional 12 million reduction of future taxes related to the provincial resource surcharge. Is that 12 million--where is that in the actual statements or is it even yet in there? Have you got the cash for that part too?

The reverse order of your questions. Neither one of these is an actual immediate cash impact. They are all future tax-related. Both items are reflected in the financial statements. What we did was the 73 million for the tax rate change we've isolated and taken out and that's what we've reflected as adjusted net earnings.

Right.

But the other item is sort of a much more normal course item and it's just included in the regular tax provision.

Right. So it's just apples-to-apples before this all happened. In a sense you've just had a--and if it's true adjusted earnings of--call it $0.21, you both will get the benefit of that 12 million effectively.

Correct.

Okay, great. That's what I thought. Thank you.

Thank you. The next question is from Robert Thenack. Please go ahead.

Hi. Thank you for taking my call. I'm interested in--obviously, with the Cigar Lake problem, I wanted to find out what you folks are looking at as far as potential acquisition of other uranium sources - M&A, other companies that might be of interest, not that you would ever mention the companies' names. But what is your planning in looking at some of the juniors that are doing good exploration right now? I can name a number of them that have exciting prospects, some of them in your backyard drilling right now as we speak. What's the Company's position on sooner or later getting into some M&A action with some of the juniors?

Robert, it's very true that if you look back just even four or five years there were only a handful of junior exploration companies active worldwide. And today, we wake up and there's--.

--Hundreds--.

--400 that have been created or more.

Right.

And probably 250 of those that are active.

But there's a handful that have--really, seriously awfully exciting--.

--And that's exactly what I was going to say. I mean, of that 230 or so that say they're active, there's only a handful that have got good prospective properties - grassroots exploration, or indeed they've gone back to discoveries that were made in the 60s and 70s where perhaps access to production was a little bit quicker.

You can rest assured that we survey the universe. We watch what they're doing, particularly those that are active in our backyard. Lots of issues there in terms of aboriginal relations and what not that we all have to be sensitive to. My own sense is because this exploration effort is now only about a year and a half to two years old, and it takes a while to mobilize. And certainly, once you begin to find evidence of uranium it takes a number of years to delineate it and understand whether you have a discovery of economic consequence or not.

So we do watch. That's part of what our exploration and corporate development groups do. And over time, as they succeed--the better ones succeed, then acquisition is certainly a possibility or possibly joint ventures help--and technical expertise, marketing, all of these things. And we hope Cameco is positioned and viewed as a desirable partner and that's part of our effort to stay close to a few of them. As you've seen, investments we've made in UEX and more recently in [indiscernible], those that we think are prospective, well-managed, well-run, and they've got good potential.

Are there any juniors our there that say in the next couple of years you would definitely be interested in acquiring?

I think it's too early to say right now. We do watch the universe. And again, we're in the early stages of this most recent exploration cycle for uranium. So at this stage of the game, I think it's too early to answer that question.

I would think that--early exploration. But also, there's some supply side challenges coming up down the road that need to be addressed. And one way would be to acquire some of the better juniors right now. Go out on a limb a little bit. Do a little speculation and get--when there's a major discovery, doesn't the price go up considerably?

It does, but--.

--Full documentation. Isn't it better to--.

--I think that's the reason we--.

--Is there a happy medium somewhere?

--Have taken a strategic position in a few and that's why we continue to watch. And that's--all of those observations are exactly how we approach the universe of juniors out there.

Well, I have a significant block of Cameco shares. So I'm just curious to see how you folks are looking at that.

Please know that strategy - rest assured - is in line with you're saying.

Thank you.

Thank you. The next question is from Brian Hodgeman. Please go ahead.

Good afternoon. I missed nearly the entire call due to some technical difficulties. So forgive me if--.

--Sorry about that--.

--My questions have been addressed. Today's release stated that you expect the realized price in the third quarter to actually decline by 5% compared to the second. Considering that the average spot this quarter is already significantly higher than it was in the second quarter, could you expand on this at all?

Kim?

Sure. What happens is that we continue to make deliveries into historical contracts.

Sure.

Signed in different periods when prices were certainly different than today. It's just a function of when those deliveries take place. Some older contracts are--there's more--with slightly lower prices that are being delivered in Q3 as compared to Q2.

So, we--you really see no upward exposure for Q3?

No, I wouldn't--I don't think that's the issue. We've given some comments here--it really was just a reflection that if you compare those contracts that have fixed prices or pre-determined prices, Q2 versus Q3, Q3 is slightly lower than Q2.

Okay, great. Also, it appears the gross profit margins in the uranium segment seemed to decrease to 26% in Q2 down from 34% in the first quarter. I was wondering is this due to higher production costs or just the way the contracts are--?

No. As much as anything, I would focus your attention on the fact that we do purchase material and that purchase costs were higher than in the first part of the year.

Okay. Also, have you ever commented on the profit margins related to any of the Russian HEU feed sales that you do relative to the rest of your sales portfolio?

No, we have not.

Could you?

We could, but I'm pretty--that's not an area we go. So, no.

Also I was wondering--.

--We're just bound a little bit by confidentiality restrictions.

Sure.

Plus--I mean, first of all with the Russians. But all of this was done under the umbrella of the U.S. and the Russian government with the help of the Canadian government. We have to be quite mindful of our confidentiality restrictions.

Okay. Also, how exactly is your minority interest formulated?

Well, the minority interest that you'll see on our statements reflects roughly 43--or 47% of Centerra that we don't own.

Okay. And I see those fluctuate depending on the quarter. I was wondering if there was a set formula or--?

It's purely the math driven by how Centerra's performance is during the quarter.

Okay, great. Thanks again for another great quarter.

Thank you.

Thank you. The next question is from Lawrence Smith. Please go ahead.

Actually, my question has been asked and answered. Thank you very much.

You bet, Lawrence.

Thank you. The next question is from [Ralph Phair]. Please go ahead.

I have a question on Cigar Lake and I'm wondering, since this is really some of the first new uranium production, do you see a somewhat glut on the market, or are you currently developing future contracts for this production? And secondly, would--do you see some of this Cigar Lake production going to either China or India?

Well, this production has long been expected, so--and I can assure you there's no glut on the market in the near term as a result of the expectation of Cigar Lake production. There are some baseload contracts for Cigar Lake production that go out--these are 10-year contracts for some of it.

And then, with respect to China and India, today we're not able to sell to India. But as a result of initiatives by the U.S. government, and it appears as blessed by the G8 and onward, that before too long we will be able to sell to them. And this relates to the nuclear suppliers non-proliferation regulations, et cetera. So we will--we do expect that to be marketed in the future. And China--we have sold to China in the past and are able to--there's a nuclear cooperation agreement between Canada and China, so there's no problem selling to China.

Thank you very much.

You're welcome.

Thank you. The next question is from David Snow. Please go ahead.

Yes. I wanted to go back to the Russians. They have indicated they want to eliminate the [Yusak] monopoly and sell their services directly by 2009. And I'm wondering how that plays out--how you see that and how it would affect you.

Really what the Russians have said they want is to ensure--as I said earlier, the HEU Agreement ends in 2013 and the Russians want to be sure that they will have access to the market after 2013. Given the Suspension Agreement that exists today, their concern is with these regulations, they don't have access to that market. And so, what they're trying to do is to arrive at an arrangement that basically guarantees them and the U.S. utilities that they are able to sell into that market post-2013. And part of the argument is that one way to assure that is to give them some limited access for their enrichment services in the near term.

And they've made it very clear that they're not looking for large volumes that they can sell in the near term. They just want to get the relationships established and ensure that they have access for later. So as I said earlier, all indications are that the HEU Agreement will continue through 2013 and that all of the negotiations ongoing at present are really to allow the Russians access for their enrichment services post-2013.

That wouldn't affect the U308 component?

No.

Okay. Thank you very much.

You're welcome.

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Grandey.

Okay. Well, we certainly appreciate your interest in Cameco. Unless there are--are there media questions, Operator?

There is one more question from [Amrick Duhuit].

Okay.

Hi. Thank you for taking my questions. I've got a couple of questions here. Every quarter, Cameco's profit margins seem to improve. Can we expect more profit margin increases in future quarters?

As we realize higher prices over time, as we've forecasted in our releases, the answer would be yes.

Okay. And my second question is, in your annual report you give some charts on the uranium price - on what Cameco would receive if the spot price was $40 or $45. Now that the spot price has exceeded 45, can you give guidance on a $50 and $55, $60?

In the release we just issued, we went up to $55. So if you look at that release, you'll see that range - 35, 45, and 55?

Right.

Okay?

Okay. And the third question is when can we expect a dividend increase or a special dividend since Cameco's balance sheet--?

--We've increased our dividend now three years in a row. We look at every year and we'll do so again this year. But there are lots of issues revolving around utilization of Cameco cash. Our primary function and purpose is to profitably grow in a way that makes sense to our shareholders to deliver and continue share price increases through growth. So that's what we look at as we debate. And just rest assured we look at it every year.

All right. Thank you for taking my questions.

You're quite welcome. Thank you. Any others, Operator?

Yes, there is another question from Fraser Phillips. Please go ahead.

You're right under the wire, Fraser.

Yes. Sorry. Just under the wire. Just take us back to those boring arrangements you've made. Could you say some more or say again what you said about the reason for that given that you--I think I heard you say that you have full protection on your current sales arrangements. So the extent you fell short for any reason - or I interpret that to mean to the extent you fell short for any reason, you wouldn't be--there'd be no obligation arise. So why--if that's the case, then why again have you--I'm curious what the timing ,what the 5.--what relevance, if any, is the 5.6? How did you get to that number?

Well, I wouldn't read too much into the number. But it's really--it comes back to the reputation of Cameco. And we have never through all of the years ever declared force majeure. We've never suggested to our utility customers that because of a major supply interruption we were going to do anything other than sit down and talk with them, and this loan provision - and the loan arrangements that we're making just give us that added flexibility to provide the same kind of assurance to our customers that Cameco's a supplier choice.

And this timing is--I mean, now as opposed to six months from now or six months before this?

No significance whatsoever.

Okay.

Okay?

Thanks.

You're welcome.

Thank you. The next question is from [Jeremy Sanaken]. Please go ahead.

Hi. Just one question more than anything else. I was wondering how you take title to the Russian materials? Is it in the form of U308 or is it in the form of UF6? And how does that kind of affect your balance sheet and how do you account for it?

It's in the form of UF6 and it just is recorded at cost.

But if you sell U308 on the open market, then how is it--if you're taking it in one form versus the other, how is the [indiscernible] conversion accounted for?

We will--well, we sell in various forms. We sell U308. We sell conversion services. And we also sell UF6 as a finished product. So the form we get at, we will--it depends then--we'll come in at the cost we paid for the material. Then it will depend on what form we turn around and sell it at as to how we report it.

I mean, does that affect where--so if you take a chunk of uranium from Russia and it's in the form of UF6, I wouldn't see it as a produced uranium. I would see it under the uranium operating segment. I'd see it underneath the conversion operating segment. Is that correct?

No. If we're selling it in the form of UF6 then it would show as a UF6 sale.

Okay. Great. Well, thank you very much.

You bet.

Thank you. The next question is from David Rosen. Please go ahead.

I was wondering if you guys could give a little perspective on the nuclear fuel cycle. I missed if you guys talked a perspective on where you thought uranium prices were going to go, where you thought conversion prices were going to go - if they're going to be stable, and where you thought fuel prices were going to go. Thank you.

George covered that in his opening remarks. And basically he said while we don't forecast prices in any of those segments, at the present time given the dynamics we see in both the long-term and the spot market, continued demand, continued upward pressure, and we'll--in this period, the summer period, when normally you'd see markets in kind of the doldrums, here even in the summer we've seen upward pressure, which indicate that there's inventory building going on and continued demand, and utilities thinking much longer term about supply.

And the same on conversion prices and SWU prices?

Well, SWU we don't comment on because we're not in the enrichment business. But certainly, the same is true with conversion.

Okay. Thank you very much.

Thank you. The next question is from David Snow. Please go ahead.

Yes. I just don't under--I can't visualize the specifics of the mechanics, if you will, of the loan of 5.6 million. Did you borrow this from another producer and is it repayable with a certain term or can you give me some color on how the specifics work on that?

It's a standby arrangement, so you can think of it just as a--like a personal line of credit at your bank. We have the ability to draw on these--we have agreements in place that give us the ability to draw on those loans whenever we want to.

And there simply was other holders of inventory that would be participants in the fuel cycle market.

Yes. In this case, I mean, they are customers and that's the reason for the accounting treatment whereby the routine deliveries to those customers we'll have to defer the recognition of revenue on those.

David, in note three you can see the terms like the arrange--what the cost of the facility is - in note three to the financial statement.

Okay. All right. And then, is there a term in which you can hold them before you have to deliver them back out to the owner?

Absolutely. There--that's covered in the agreement. There's a period by which we have to repay the loans.

How long can you hold them?

2009.

Yes. I think it's '08 and '09 where we have to repay.

Okay, great. Thank you. And then, do you repay at the same price plus interest kind of charged?

Well, what we would be doing is we will redeliver in kind. So payment in kind. We will give them product back.

Yes. Plus--.

--Plus interest.

--Interest in kind or in cash?

I think there's one of each.

One of each.

Okay, great. Thank you very much.

Thank you. There are no further questions registered at this time.

Okay. Well, Operator, thank you. And let me thank everybody for joining us, and I wish you a very enjoyable weekend. Thank you.