Cameco Corp (CCJ) 2007 Q1 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good morning, ladies and gentlemen, welcome to the Cameco Corporation's first quarter results conference call.

  • I would now like to turn the meeting over to Mr.

  • Bob Lillie, Director Investors Relation, please go ahead, Mr.

  • Lillie.

  • - IR

  • Thank you operator, good morning everyone.

  • Welcome to Cameco's first quarter conference call to discuss the financial results.

  • Thanks for joining us.

  • We're pleased to have four of Cameco's Senior Executives with us today.

  • They are Gerry Grandey, President and Chief Executive Officer, Kim Goheen, Senior Vice President and CFO, George Assie, Senior Vice President Marketing and Business Development and Tim Gitzel, Senior Vice President and Chief Operating Office.

  • Also with us today is our colleague Alice Wong, Vice President of Investor Corporate and Government Relations.

  • Each of the speakers will touch on their highlights of the quarter, then we will get right to your questions.

  • Today's conference call is open to all members of the investment community and the media.

  • Please note during the Q&A session we would ask that you ask one question only, receive a response from management, and then you may ask one follow-up question.

  • If you have additional questions please return to the queue until others have had an opportunity to participate.

  • Please note that statements made during this this conference call by the company regarding its objectives, projections, estimates, expectations or predictions may be forward-looking statements within the meaning of applicable securities laws and regulations.

  • The Company cautions that such statements involve risks and uncertainty 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 30, 2007.

  • With that I'll turn it over to Gerry.

  • - President , CEO

  • Okay, Bob, thank you, I'll add my welcome to everybody.

  • We have now issued our financial results for the first quarter of 2007.

  • And for those of you that either are new to Cameco or have not followed us closely you might be a little bit surprised that these results appear to be somewhat inconsistent with the record setting financial performance of last year.

  • For those of you who have followed Cameco closely you would know that our quarterly results vary significantly and are certainly not a good indicator of our annual results.

  • So in order to give you some perspective of what we see for 2007 we have indicated in the quarterly report that we expect consolidated revenue to be 50% higher than in 2006.

  • I'll leave it to Kim to discuss these results in more detail.

  • Cameco is engaged in a growing and an exciting industry on which to focus our efforts.

  • The nuclear industry is strong now with a promising future.

  • New developments continue to be an announced daily and people really around the globe are becoming much more confident that the potential for nuclear energy is now great.

  • Recently the U.S.

  • Nuclear Regulatory Commission awarded a second early site permit for a new reactor.

  • These early site permits certify that a site is safe and environmentally suitable for a new nuclear unit.

  • There are now a total of 33 new units in the U.S., that are under consideration for future build.

  • In India, one reactor began operations in February and another is nearing completion.

  • The country is also including in its construction plans six large 1650 megawatt reactors..

  • And this month, the New York Mercantile Exchange created a little buzz in the industry with plans to introduce an opportunity for futures trading in uranium.

  • A commodity that is now in great demand.

  • And that demand really amid tight supply has pushed up uranium prices, shattering almost on a monthly basis if not weekly previous records and sending out a strong call for more production centers.

  • The market is responding, five new uranium mines started production in 2006.

  • More are scheduled in 2007, and we estimate that in 2007 production will be approximately 13% higher than last year.

  • And of course we have got a very much reinvigorated expiration program throughout the industry that continues to pursue new discoveries, new ore bodies.

  • These developments and many others are pushed along by the increasing interest and demand for sources of electricity that do not pollute and do not contribute to global warming.

  • As uranium prices have risen we continue to build an ever stronger contract portfolio.

  • Our long-term orientation that combines floor prices and upside potential is building a powerful base that will handsomely reward Cameco stake holders for many years into the future.

  • The strength of these contracts is more than matched by the diverse and large sources of supply at our disposal.

  • Our two existing operations in Northern Saskatchewan are complimented by two U.S.

  • production centers and of course our development projects, Cigar Lake and Inkai will add when they come into production to this diversity.

  • We also have purchase agreements for the 7 million pounds annually through 2013, primarily from recycled Russian weapons material.

  • Our future is secured with more than 500 million pounds of proven and probable reserves.

  • With several hundred million pounds of resources in some of the world's best locations that are awaiting further definition.

  • This year we will spend about $45 million in worldwide expiration to add to our asset base.

  • Before I move on from our uranium assets I should note that the efforts to move Cigar Lake into production are progressing according to the schedule we provided in the technical report.

  • Tim will be providing some detail on our progress.

  • After independent expert review of the water inflow at Cigar Lake we are now finalizing the reports that will go to our regulators in early May.

  • We will advise you when the reports are filed and provide the opportunity to discuss the reports and Cameco's corrective actions in a conference call.

  • At that time, we will be able to tell you what we have learned and about our plans to make improvements.

  • We look forward to production from the Cigar Lake Mine, which will service our customers for many years to come.

  • And while my remarks have focused on uranium mining, our fuel processing plants are adding significant value to Cameco and to our customers.

  • I am pleased to note that our conversion and fuel manufacturing plants recently received five year operating licenses from the Canadian Nuclear Safety Commission.

  • As you would expect, a strong Company like Cameco operating in a rejuvenated market is building on a position of financial strength.

  • Our conservative balance sheet and strong cash flows provide us with the financial ability and backing to pursue discipline growth.

  • When the right opportunities arise at the right value we are poised and ready to build on our assets.

  • If the right opportunities are slow in coming we will return cash to our shareholders.

  • With that I'll now ask Kim to comment on our financial results.

  • Kim.

  • - SVP, CFO

  • Thanks Jerry, good morning to you all.

  • Today I'll review our first quarter financial results and our outlook for the second quarter and year as a whole.

  • First quarter this year compares with an exceptionally strong first quarter in 2006.

  • When uranium deliveries were concentrated earlier in the year than usual.

  • On a consolidated basis, revenue of $409 million in the first quarter of 2007 was 25% lower than a year ago.

  • Net earnings of $59 million were 47% lower than in 2006.

  • Turning to our business segment, revenue from uranium business decreased by $101 million to $183 million compared with a year ago and earnings before taxes were down 51% to $44 million.

  • Lower revenue reflects 48% decline in reported sales volumes, due to the timing of deliveries, which more than offset a 23% increase in the realized selling price.

  • Reported sales volumes continue to be affected by the stand-by product loan agreement that were put in place during the second quarter of 2006.

  • Resulting in the deferral of an additional 35 million of revenue in the first quarter.

  • Looking at fuel services, revenue and earnings before taxes were unchanged from the first quarter last year.

  • In nuclear generation our pretax earnings from Bruce power were 11 million in the first quarter of 2007, compared with 47 million a year ago.

  • The decrease was the result of lower generation and higher operating cost, relating to the planned outage of the B6 Reactor, that the return to service April the 10th.

  • Finally, turning to our gold segment, Centerra's revenue decreased 10% from a year ago to $96 million.

  • Lower production more than offset higher realized gold prices.

  • Looking to the second quarter, we expect consolidated revenue to be about 50% higher than in Q1, resulting from increased sales volumes for uranium, conversion and electricity, as well as an increase in Cameco's realized price for uranium.

  • This projection also includes recognition of $47 million in deferred revenue as a result of the termination of two of the three product loan agreements.

  • For 2007 as a whole, we expect consolidated revenue to be nearly 50% higher than in 2006, due to projected higher revenue from all four of our business segments with the largest increase being in the uranium business.

  • Sales volumes in our uranium business are expected to be 12 million pounds in the second quarter, including recognition of 3 million pounds from terminating two product loan agreements.

  • For the full year we are projecting reported uranium revenues to be 90% greater than in 2006.

  • Based on the March 31 spot price of $95 U.S.

  • per pound and a 6% increase in reported sales volumes.

  • Our average realized price will improve as a result of higher expected prices under current contracts relative to 2006.

  • In addition, approximately 4 million pounds of uranium deliveries under legacy contracts have been deferred from 2007 to later years.

  • Thereby making available an equivalent quantity for sale this year.

  • About, one half of those pounds have already been committed to new contracts, but it is not assured that the balance will be contracted for delivery this year.

  • Our average realized price will increase on the strength of current market prices.

  • As we previously discussed in 2007, we will begin paying presential tiered royalties on sales of Saskatchewan produced uranium.

  • We expect to pay about $15 million this year and have provide an example of the royalty calculation in our MD&A.

  • For the second quarter, fuel services revenue has projected to be 50% higher than in the first quarter as a result of expected increase in deliveries.

  • At Bruce Power, there are no additional outages planned for the second quarter and unit costs are expected to be lower than in Q1 while revenues forecast to be 20% higher.

  • For the full year, our forecast remains unchanged with an expected 18% increase in revenue based on higher realized prices and a capacity factor in the low 90% range similar to 2006.

  • For the year, we expect gold revenue to increase by 20 to 25% over 2006, based on increased production and higher prices.

  • In summary, the first quarter will be our weakest quarter in 2007.

  • We anticipate a stronger second quarter and much higher revenue for the year as a whole.

  • I will now turn it other to Tim.

  • - SVP, COO

  • Thank you, Kim and good morning everyone.

  • This morning I'll make a few comments on our mining operations, our mine development projects at Cigar Lake and Inkai, the fuel services business, and then close with a look at the year ahead.

  • First two uranium mining.

  • In the quarter uranium projection was 4.5 million pounds, slightly ahead of last year's first quarter.

  • And all operating sites met or exceeded the output levels achieved a year ago.

  • At Key Lake, during January and February there was an issue with excessive concrete dilution in the ore feed, which led to poor quality effluent.

  • This issue first cropped up in 2006, at that time we installed sand filters, but they haven't been as effective as we have hoped.

  • So last month we added a hydrogen peroxide circuit and from early results, we are optimistic this will improve the quality of the effluent to the standard necessary for discharge to the environment.

  • Also at Key Lake and after many months of discussion with the regulator, we have an action plan to further reduce molybdenum and selenium in mill effluent.

  • The first phase of the plan is underway and expected to be completed by the end of the year.

  • Progress on this front is expected to help advance the environmental assessment we submitted to increase the annual license production limit to 22 million pounds at McArthur River and Key Lake.

  • Including the preparatory work plus a ramp up period we are still a few years away from producing above our current license limit.

  • At Rabbit Lake, we are doing further drilling in the vicinity of the Eagle Point Mine to test for additional resources.

  • Earlier this year we announced an extension to Rabbit Lake reserves, will provide mill feed through 2011, but we think there's good potential to add more.

  • Turning now to our mine development projects, as many of you know we filed a technical report on the Cigar Lake project in late March, on how we intend to rehabilitate the mine.

  • A few highlights from the report include, first, a five stage remediation plan expected to culminate in production in 2010, about 2.5 years later than we had originally planned.

  • This timetable is subject to timely remediation of the underground workings and of course will only be able to assess their condition once the mine is dewatered and we get back underground.

  • The dewatering is expect to be complete by the end of the third quarter subject to regulatory approvals.

  • Second increase in our share of the capital costs to 508 million, this increase is due primarily to higher construction and labor costs, increased energy costs and scope additions such as increasing the pumping capacity and more underground freezing in areas such as access tunnels to the production level.

  • During the underground remediation program we will continue to work on the remaining planned surface facilities, including the administrative services building and the installation of mine ventilation fans, as well as facilities required as a result of the remediation such as additional dewatering pipelines and Brian lines foreground freezing.

  • These activities represent the capital costs until construction resumes in 2008.

  • Lastly, it's worth noting that the classifications of reserves is essentially unchanged as a result of the technical report with 226 million pounds remaining as proven reserves.

  • In terms of the status of the remediation work today at Cigar Lake we have decided to drill a 15th hole in the reinforcement area to pour additional concrete and this drilling is now underway.

  • When this work is complete over the next two to three weeks, we will be finish-- we will finish pouring concrete into the ramp reinforcement area and we're currently awaiting regulatory approval to begin pouring concrete into the inflow area.

  • In the meantime, we have begun to drill four dewatering holes down to the lowest point of the mine workings near the main shaft.

  • Once these holes are complete we will lower submersible pumps, each with capacity to move 250 cubic meters of water per hour.

  • However, the required approvals for this stage of the work are not yet in place.

  • At Inkai in Kazakhstan, the project continues to progress steadily toward production with commissioning expected late this year and commercial production in 2008.

  • Over at fuel services, the Blind River Refinery, Port Hope conversion plants and Zircatec, all received new five year operating licenses from the CNSC during the quarter.

  • Fuel services production in the quarter was 3.9 million kilograms.

  • Up from the 3.2 million kilograms produced last year in the quarter.

  • At Blind River, the plant is in transition phase in terms of the volume of customer material stored on site.

  • As we noted in the quarterly report, this volume has been declining over the past few years and is reflecting the fact that customers have less inventory and they are delivering it to blind river almost on a just in time basis.

  • This means we have to match the plant operating schedule more closely to the supply of uranium feed on hand.

  • This may lead to intermittent shut downs at the refinery and as a result we have reduced our 2007 forecast production of UO3, to 15.4 million kg of U down from 16 million kgU.

  • However we have adequate inventories to keep the Port Hope and Springfield plants running on normal operating schedules.

  • Looking forward through the year, we remain on track to meet our 2007 original production targets with the exception of Blind River, which has been revised down about 4%.

  • So with that I'll pass things over to George.

  • - SVP Marketing and Business Developmment

  • Thanks Tim.

  • And good morning everyone.

  • Spot market activity in the first quarter amounted to about 6 million pounds with about 60% of that volume considered discretionary.

  • So really maintaining the trend we saw last year.

  • It is expected that demand will remain strong through the remainder of the year, total spot volume is forecast to be in the 30 million pound range, similar to the 2006 level of about 33 million pounds.

  • Industry average spot price at quarter end was $95, which was up more than 30% from the end of the fourth quarter and more than double from a year ago.

  • Since quarter end the spot prices increased further to $113.

  • Moving to the long-term market, the average long-term price indicator at the end of the first quarter was $85, up almost 20% from year-end 2006.

  • And also more than double from a year ago.

  • The term market remains active with the current estimate for long-term contracting in 2007 being about 200 million pounds.

  • Cameco maintains a mix of both market related and fixed pricing which is a base price escalated by inflation.

  • Our portfolio has traditionally reflected a 60/40 mix of market and fixed price contracts.

  • For each of the last two years, 2005 and 2006, new contract volumes signed for deliveries in the future were weighted more to market related pricing with approximately 70% being market related and the remaining 30% fixed price.

  • Our quarterly release provides guidance on the anticipated increase on average realized uranium price for 2007.

  • We had expected to update the 10 year schedule of expected realized prices at mid year but with the dramatic move in prices to date in 2007, we decided to provide an update in the Q1 report.

  • As noted in the report, we now expect that about 4 million pounds of uranium that had been planned for delivery under legacy contracts in 2007 will be deferred for delivery for several years and some as late as 2014.

  • These deferrals will allow us to place as much as 4 million pounds for delivery in 2007 at prevailing market prices.

  • The consequences of this is that our average realized price in 2007, based on the quarter end $95 spot price is now expected to increase to about $37, almost 80% higher than the 2006 price.

  • These prices are in U.S.

  • dollars, the percentage increase in Canadian dollars is more like 75% after taking into account changes and exchange rates.

  • Approximately half of this amount has been committed for delivery in 2007.

  • If, for some reason, all or some portion of the remaining volume is not delivered in 2007, then the average realized price for this year will be lower than now forecast.

  • I would like to note that our customers have been very understanding and cooperative in working through the impact of supply interruption and the deferrals of 2007 delivery commitments to later years.

  • As a result of that cooperation, the increase in revenue resulting from these deferrals will help mitigate to some extent the financial impact of the water inflow incident at Cigar Lake.

  • Looking to next year, other than for the Cigar Lake base load contracts at this time we do not anticipate any deferrals of 2008 uranium deliveries resulting from the application of the supply interruption provisions in our legacy contracts.

  • The primary reason for this, is that the decrease of production related to the Cigar Lake event has been offset by the additional reserves and production expected at Rabbit Lake for the most part preserving our overall supply capability for 2008.

  • A relatively recent market event was the announcement that NYMEX and Ux Consulting have partnered to offer uranium future contracts starting in early May.

  • The contracts are to be financially settled based on spot prices published by Ux Consulting.

  • The futures contracts are financial tools and do not involve physical material.

  • At this time, NYMEX estimates that contracts will be for 250 pounds of uranium and will be listed for 36 consecutive months.

  • Ux Consulting will provide market information including prices and education while NYMEX provides electronic platform for trading on two exchanges, CME Globex, part of the Chicago Mercantile Exchange and NYMEX ClearPort.

  • Market reaction to this announcement is mixed, but it is early and further education of commercial market participants including ourselves is still taking place.

  • There appears to be significant interest by financial parties while commercial parties are more weary.

  • Some nuclear markets participants are of the view that the uranium market is too small to warrant futures trading, but most are hoping it will bring price transparency.

  • Turning now to the UF6 conversion market, the North American spot conversion price held firm through the quarter at 11.63, and the European spot conversion price also held firm at 11.15.

  • In the long-term market industry average price for North American conversion stayed steady at 12.25 and in the European market it decreased to $13 at quarter end.

  • That concludes my remarks.

  • And with that I'll turn things back to Gerry.

  • - President , CEO

  • Okay, George, thank you very much.

  • Now operator, we will turn to questions.

  • Operator

  • Thank you.

  • We will now take questions from investors, analyst and media.

  • In order to respect everyone's time on the call today we will take your question and allow one follow-up question.

  • Then if you have further questions please return to the cue and we will get to them after others have had their chance.

  • If you have a question, (OPERATOR INSTRUCTIONS).

  • There will be a brief pause while participants register, thank you for your patience.

  • Our first question is from Fadi Shadid with Friedman, Billings, please go ahead.

  • - Analyst

  • Hi guys.

  • Question on the cost side, the new update talks about 25% year over year rise the last update was 20%.

  • Could you break that down for us, how much of that rise is the royalty, the royalties and what else is in that number.

  • - President , CEO

  • Fadi, I'll ask Kim to go ahead and respond to that.

  • It isn't production cost, you'll see it's really acquisition costs, purchase pounds and royalties and these kinds of things.

  • Kim.

  • - SVP, CFO

  • We don't actually break that information down, but Jerry's comment is correct.

  • Production cost changes is very minimal there.

  • It is slightly higher cost material purchase, higher royalties based on basic royalties, higher the price, the more your basic royalty is and inclusion for the first time of small inclusion for tiered royalties.

  • But it is not straight cash production cost, that's a very small piece of the rise.

  • - Analyst

  • Of the 25% how much do you think is just royalty, is it --

  • - SVP, CFO

  • We just don't break that out.

  • - Analyst

  • Okay, fair enough, thanks.

  • - President , CEO

  • Thank you, Fadi.

  • Operator

  • Our next question is from Brian Mac Arthur from U BS, please go ahead.

  • - Analyst

  • Good morning.

  • I was just trying to get clarity on all the calf yet for the new chart you have given for realized prices.

  • There's one in interest that says for 2008 to 2012 base load contracts are impacted and deliveries deferred to the end of those contracts.

  • Have we pushed out under supply, you just finished talking about how you didn't have to change anything in 2008, have we pushed out in this chart the assumption of when that material is going into this chart?

  • - President , CEO

  • George, can you respond to that.

  • - SVP Marketing and Business Developmment

  • Yes.

  • On the Cigar Lake base load contracts Brian there was no change, they were immediately pushed out to the ending period.

  • So, you know, I don't think there's any further change that occurs in the chart as a consequences of that.

  • And supply interruption for 2008 had not been included and it's premature for us to add in any impacts for supply interruption in 9 and 10.

  • So the only year for which you're seeing supply interruption is 2007 and for Cigar Lake base load contracts those are pushed out to the later years.

  • - Analyst

  • Right.

  • So for 2009, 2010, we're still running through quote the legacy lower priced assuming they're going to be filled by something else, is that correct?

  • - SVP Marketing and Business Developmment

  • That's correct.

  • - Analyst

  • And then basically what's actually been pushed out then to the back end of those contracts, what's actually been pushed out?

  • - SVP Marketing and Business Developmment

  • It's only the 07 volumes that have been pushed out.

  • - Analyst

  • Okay.

  • - SVP Marketing and Business Developmment

  • For the supply interruption legacy contracts.

  • - Analyst

  • Right.

  • So nothing's been pushed out in 08, 2012 basically?

  • - SVP Marketing and Business Developmment

  • Other than the Cigar Lake base load contracts, those are different.

  • - Analyst

  • Right.

  • - SVP Marketing and Business Developmment

  • Those have been pushed out to the end of their term, but for supply interruption only the 2007 volumes have been adjusted.

  • - Analyst

  • But then those base load have supply interruption that you could have pushed out?

  • The base load contracts have been pushed out, they're done.

  • They're moved out.

  • - VP, IR

  • There's two different kinds of contracts we're just trying to distinguish between Brian.

  • The base load quarters that specifically refer to Cigar.

  • - Analyst

  • Right.

  • - VP, IR

  • Those contracts have been adjusted and pushed out in the chart.

  • - SVP Marketing and Business Developmment

  • Right.

  • - VP, IR

  • The other contracts where we're protected by supply interruption we have made no adjustments.

  • - Analyst

  • But effectively I thought the base load contract had if you want to call it it quote, unquote, supply interruption as well, you effectively used that to push those out now?

  • - VP, IR

  • We did, yes, ones that refer to Cigar Lake specifically

  • - Analyst

  • Okay.

  • Thanks very much

  • Operator

  • Our next question is from Orest Wawkodaw from Canaccord Adams, please go ahead.

  • - Analyst

  • Yes, good morning.

  • A question about your realized sensitivity chart.

  • If I look back at Q3 the last time you issued it, at $100 uranium for '07 you had a realized price of 39.50, yet today you're talking about deferring 4 million pounds and selling those under better market terms, but your realization only shows an increase of $0.25.

  • I'm wondering if you could recite site that?

  • - President , CEO

  • Well, George, can you handle that one or Kim.

  • There's so many contracts that by the time you get it all digested I'm not sure you can point to any one thing.

  • Kim, give it a try.

  • - SVP, CFO

  • Yes, Orest.

  • One of the key elements of course is back in the earlier version we were looking at a higher sales volume.

  • So you had more pounds back then being sold at the higher selling price.

  • We are now looking at 2 million less pounds in delivered under this forecast, so you have less of that pickup.

  • You also have the unfortunate impact of the sales deferrals under the product loans where deferrals from 2006 are being taken into income this year at lower prices.

  • So there are those two factors are what's causing this to kind of come out of this result.

  • - Analyst

  • Okay, thank you.

  • And as a follow up, in terms of your revenue guidance for Q2 I'm also having trouble reconciling that.

  • If you're guiding to 50 or a hundred percent increase in uranium deliveries in Q2 why is revenue only going to be up 50% on overall basis, what's offsetting that.

  • - President , CEO

  • Kim.

  • - SVP, CFO

  • Yes, we're moving in there is we have the 3 million pounds of deferrals coming forward from the cancellation of the two product loan, that's again kind of mixing things up a little bit to produce the result that's there.

  • - Analyst

  • Okay, thanks.

  • Operator

  • Our next question is from Raymond Goldie from Salman Partners, please go ahead.

  • - Analyst

  • Thank you, good morning.

  • My first question was in the press release it suggests tiered royalties will amount to about 10 million this year and I heard on your presentation just now 15 million, I wondered if you could give us an idea which is the correct number?

  • - SVP, CFO

  • They're both correct.

  • - President , CEO

  • Okay, go ahead Kim.

  • - SVP, CFO

  • The $15 million is the payment, the $10 million is the earnings impact.

  • - Analyst

  • Thank you.

  • Then second question, I think this one has been answered by your responses to Mr.

  • Mac Arthur, you say that all your contracts contain standard force majuere language and the base loads contract put in place to support Cigar Lake also contained similar provisions.

  • What about nonbase load Cigar Lake contracts, I am trying to distinguish between them as your were trying to do as well.

  • If Cigar Lake were delayed for the year how much uranium would you have to acquire to meet your contracts or I think from what you're saying is the answer is none, is that correct?

  • - SVP Marketing and Business Developmment

  • That's correct.

  • The Cigar Lake base load contracts were specific to Cigar Lake product.

  • So to the extent there's no Cigar Lake production or it's cut back or whatever we are able to reduce the volumes under those contracts by an equivalent amount.

  • Under the rest of our contract, if you ignore those Cigar Lake base load contracts, about 70% of the rest of our contracts also contain supply interruption, which provides protection as well.

  • So there's I can't think of a scenario where we are required to go purchase product to make up for further delay in Cigar Lake.

  • - Analyst

  • I guess I'm still having trouble with understanding the difference between seeing 75% contracts have been interrupted and then all contracts, then another statement all contracts contain force majeure language.

  • - SVP Marketing and Business Developmment

  • The force majuere language is just standard language you have in all contracts.

  • In addition to that Ray, back in 2003 we introduced into our contracts, into new contracts or contracts at that time, supply interruption language.

  • So it goes beyond force majuere.

  • What it says is these are intended sources of production.

  • To the extent that that plan production does not it materialize we have the right to reduce prorate an or delivery commitments under our contracts.

  • So the standard force majuere protection, but this supply interruption goes well beyond the standard force majuere protection.

  • - Analyst

  • Okay.

  • - SVP Marketing and Business Developmment

  • So all contracts have force majuere, 75% of contracts also have supply interruption protection.

  • - Analyst

  • Okay, thank you.

  • I have a third question, so I'll get back in line.

  • - SVP Marketing and Business Developmment

  • Thank you.

  • Operator

  • Our next question is from Greg Barnes, T.D.

  • Newcrest, please go ahead.

  • - Analyst

  • Yes, thank you.

  • George, it does appear your effective sales guidance for the year has come down by at least 2 million pound, I'm just wondering why that has happened.

  • - SVP Marketing and Business Developmment

  • In part Greg it's because when we go into a year we're also looking to be fairly active in the market in procuring material.

  • In this year in light of where the market is at, etc., we don't expect to procure as much as we had planned.

  • And to some degree that's moderated our sales targets accordingly.

  • - Analyst

  • Is that because it's not available or you just think it's too expensive?

  • - SVP Marketing and Business Developmment

  • Frankly it's not all that readily available and it's 2 million pounds.

  • So rather than continue to give guidance on something we think is a long shot we thought we would roll our targets back.

  • - Analyst

  • Just a quick follow up.

  • In the development part of the press release about uranium you mentioned a feasibility activities on the molybdenum deposit, I might have completely missed that but I don't even know what the molybdenum deposit is.

  • - President , CEO

  • Greg, molybdenum is a discovery chemical, I think it has about 43%, 44%, that we have been sort of bringing along for a number of years.

  • It's not too far from the Key Lake Mill and we have been engaged in kind of prefeasibility work.

  • Tim, do you want to elaborate on that.

  • - SVP, COO

  • That's exactly where we're at.

  • It's a project that we have operator ship of with minority interest.

  • We're just in the prefeasibility stage of it.

  • We're putting a team together internally to work on it, so it's something that we will continue to work on the feasibility of and then move into the environmental approval process, which is complicated and lengthy process, we will hopefully start moving that way in the near future.

  • - Analyst

  • Okay, thank you.

  • Operator

  • Our next question is from Charles Frank, private investor, please go ahead.

  • - Analyst

  • Hi.

  • Just a brief question, the value of the dollar, Canadian and American that's down to almost $1.11, I think your thing talked about $1.15, how's that going to affect things.

  • - President , CEO

  • Kim.

  • - SVP, CFO

  • When the Canadian dollar rallys like that much of our sales are dominated in U.

  • S.

  • dollars so that our earnings and revenues will decline when the Canadian dollar rallys.

  • To the extent that we haven't got it fully hedged we do a currency hedging program to try and smooth the impact of currency fluctuations out, but it doesn't cover all of the impact.

  • - Analyst

  • Well, I guess the question is this is almost immediate, are you not surprised that, I was surprised it was $1.18 a little while ago, now it's down to $1.11.

  • - SVP, CFO

  • It is quite volatile, it will move up and down fairly within wide swings.

  • So no, I'm not really surprised by it, no.

  • - Analyst

  • All right.

  • Well, thank you.

  • Operator

  • Our next question is from John Redstone, from Desjardins Securities, please go ahead.

  • - Analyst

  • Yes, gentlemen, just a quick clarification.

  • When the NYMEX contract starts trading today, going forward will that indeed be your term of reference price for your market related contracts?

  • - President , CEO

  • George.

  • - SVP Marketing and Business Developmment

  • No, it will not.

  • We will be looking to the -- well, to the extent that Ux is providing that spot price and that forward-look, but our contracts reference the market price at the time and delivery when we get there, which might be different then the 3 year look ahead put up by NYMEX today, so I think the answer is, no.

  • - Analyst

  • I'm completely confused.

  • Ux is involved in the setting of that price, right?

  • - President , CEO

  • Ux will be consulting with them, but what you're talking about is Ux today giving them guidance on what they think the spot price might look like three years hence.

  • But of course that's the futures market, that's the financial market.

  • We're talking about the physical market, 3 years hence from now, you got 3 years from now the spot market that day might look a lot different than what Ux thought it might look like into May of 2007, that's all I'm saying.

  • And our contract will reference the spot price published at the time of delivery in three years, not the spot price that was published in May 2007 for delivery three years hence.

  • - SVP Marketing and Business Developmment

  • The contracts we have don't make a provision for someone like NYMEX setting the spot price at time of delivery.

  • Those contracts would have been written well before NYMEX started down this road.

  • What future contracts use as their reference point will depend on how well the commodity kicks off, future market for uranium progresses.

  • - Analyst

  • Okay.

  • Well, it should be interesting, thanks.

  • Operator

  • Our next question is from Gordon [Putman] [Isborn] Capital, please go ahead.

  • - Analyst

  • Good morning.

  • For my first question I would like to go to the center square to Tim, if I could with your approval, Gerry.

  • Talking about the remediation plan for Key Lake, the submittal you gave to CNSC in December talks about there's 9inaudible0 a chart in there that shows a three year time line and this is really a three phase program up there as I understand it.

  • Phase one is going on now, you said that would be done at the end of this year.

  • But then you need approval from the commission again before proceeding with phase two and again there's another report that has to be written for approval to go to phase three.

  • So this could be a bit protracted process and I wonder if you could share with us what might be involved in those follow-up revenues by CNSC staff or commission before you get the phase two or three approvals, Tim.

  • - SVP, COO

  • Gordon, let me distinguish, you use the word remediation quite freely.

  • You're talking about the effluent remediation plan, there's that one that's going on that we are in front of the commission on.

  • We also talk about remediation at Key Lake in a larger sense, which is a revitalization of the assets, which is also ongoing.

  • Let me go back to your question, indeed we got approval, we got the license condition put into our license in the quarter for Key Lake.

  • To carry on with or go ahead with the three phase program.

  • Phase one of which is already being implemented and that involves installation of some equipment at Key Lake and the Key Lake Mill at clarifier and some solids handling will when running will reduce significantly the Moly and selenium that we're putting in the effluent.

  • So that's underway.

  • That construction should be complete by about the third quarter of this year.

  • And then you're right, phase two we have approval to do that although we have to go back first.

  • I think what we would do is go back once the phase one equipment is up and working, give them a status report on how it's going, what affect it's having, then move to phase two.

  • And phase two just in simple terms involves reducing some of the flow through that Mill effluent treatment circuit at the mill.

  • So yes it is a phased approach.

  • Our goal obviously is to reduce the moly and selenium as much as reasonably achievable and we're spending some considerable capital and time to do that.

  • - Analyst

  • Yes, okay.

  • Before I ask my follow up, just so is the mine going to be ready and prepared at the end of the three phases so that you can go right into an expanded case or then would you start development only after the three phases have been approved and sanctioned.

  • - SVP, COO

  • It's a little more complicated than that, because that's kind of the table stakes, we have to get that part right before we start thinking about increasing production.

  • In the meantime we're moving in the mine up at Mac Arthur to new mining areas, new zones, and so there's a lot of work to do there as well to increase the production there that would then be sent down to Key Lake.

  • So were a couple years, a good couple years away on both front.

  • I think McArthur and Key to moving up the ramp on production.

  • - Analyst

  • Okay, I appreciate that.

  • My follow-up question is about the emulsions.

  • I've read about an (iso decoal) emulsion it is in the effluent coming out of Key Lake, the Mill that relates to the processing of the concrete that's in the back filled raise bores and this is a normal consequence of your mining because the raised bores overlap previously backfilled areas, I get that.

  • Looking at my understanding of the mine plant going forward at Mc Arthur River, in the next year or so as things progress normally there's three zones that will become dominant to provide ore.

  • And that zone 2 panel 5 where you had the break through in 2003.

  • There is zone 4 lower but there's also a thing that's been called zone 2 remnants where it looks like you go back into zone 2 areas from phase one mining if you will, of zone 2 and your going back to get the remnants, the last bits.

  • There could be even more concrete going through the mill at that time and I wonder first part of second question is what, you have been recycling this effluent to get rid of isodec you're retreating this, how much mill capacity do you lose when you have to recycle or retreat.

  • - SVP, COO

  • Well, you've got a question that I don't have the answer in front of me to that, but you're on in your analysis of the mining plan.

  • And that is an issue that concrete will continue to be an issue.

  • It was first quarter '06, we thought we had it kind of solved for first quarter '07, we don't yet.

  • But we're getting closer.

  • So I can't speak exactly to your question, but it will continue to be something to work on going forward.

  • - Analyst

  • Okay, thank you.

  • Operator

  • Our next question is from Bernard Picchi from Wall Street Access, please go ahead.

  • - Analyst

  • Yes, good morning, just a quick question and change of pace toward gold and the Kiryghiz Republic Could you give us an update on what is happening there with the political turmoil in the country as it relates to the Kumtor Mine and how that in turn might affect sort of operating costs going forward, also maybe longer-term your plan to spin-off the remaining 54, 55% of the shares to Cameco stockholders.

  • - President , CEO

  • Bernard, really the mine's been unaffected by all of this.

  • We obviously watch it carefully, but throughout the demonstrations that occurred in April, which is pretty typical, they do it annually in April, the mine's been unaffected, operating fairly well.

  • Everything now seems to have quieted down in the Capital City, the protest were disbanded about a week and a half ago, and we're sort of getting ready now to reengage the Kiryghiz government into discussions that have been ongoing for quite a while.

  • And, you know, we continue to look for Centerra to grow and that is what we have been looking forward to do for quite a while, both organically which they have done a great job doing and perhaps through acquisitions and mergers.

  • We have no plans, no definite schedule yet for divestiture.

  • When we do it will be really timed looking at growth and looking at other opportunities that Cameco is looking at.

  • So with that Kim happens to be a little bit closer to it, if you have anything to add Kim, go ahead.

  • - SVP, CFO

  • Thank you Jerry.

  • That pretty well sums up where we are.

  • It's the political situation that continues to evolve.

  • I think that settled down and we just keep watching it.

  • - Analyst

  • Okay, thanks very much.

  • Operator

  • Our next question is from Ian Howat from National Bank Financial, please go ahead.

  • - Analyst

  • Yes, good morning.

  • I just want up on th Inkai and the excess impact tax, if you explain that further and sort of agree that your effective marginal tax rate will be approaching 60% within two to three years of startup.

  • - SVP, CFO

  • No, I can't confirm that.

  • I'll have to come back to you separate from there, but I can't come to that number.

  • - Analyst

  • Okay.

  • There's the first tax rate is 30%, this one would be if you get your IRR above the certain rate you get another 30%, is there also a 15% withholding for potential dividends.

  • Research in the last sort of hour and a half since I read that was, is this sort of a locked in tax situation under your agreement or is this the most recent taxation brought in by the Kazakhstan government.

  • - SVP, CFO

  • I'll answer the last question, but I won't get into the specifics with you.

  • The rates are those published by the Kazakhstan government and as they apply to all projects, not specifically Inkai.

  • But to your specific, I'm sorry, I'm not going to try today.

  • - Analyst

  • Okay, thank you.

  • Operator

  • Our next question is from Terence Ortslan from TSO and Associates, please go ahead.

  • - Analyst

  • Thanks.

  • Just keep you on your toes, as the commodity becomes more scares and prices go up there seems to be a tendency historically the market stops paying for pounds and ounces is and tons in the ground.

  • Do you think that chemical you should be reporting more reserves and resources in the ground and adjust effect and get as high price possible and what that price should be?

  • And 2, chemical has been very proud of being able to go to regulatory agencies because the industry has a barrier of entry through permitting which is quite substantial, significant and complicated.

  • Do you think you still have that competitive advantage for other people entering the industry easily, thanks.

  • - President , CEO

  • Sort of second question first, because I'm not sure I caught the first one or all of it.

  • There is a rather in almost every country I guess this is a better way to phrase it, in almost every country there is a specific regulator for nuclear activities.

  • And the rigger that you have to go through for your environmental protection, safety as well is considerable.

  • That's true from all the way from exploration through the generation of electricity and ultimately waste disposal and those do present barriers.

  • Now it's much easier to sort of tackle the exploration and discovery part of it but once you have found an ore body then you have to enter into the environmental, mine design and safety aspects that come with being in this industry.

  • It's a long learning curve, we know that, we don't Ian pretend ourselves to having learned it all.

  • We're always learning additional things, trying to get better and practice what we call continual improvement.

  • So it's there.

  • Much less on the expiration discovery side than as you move up the chain.

  • So and it's true in virtually in ever country that has an active uranium production program.

  • - Analyst

  • Do you have an edge whereby it would be very difficult for a lot of juniors inclinations of all the market capacity exceeds chemicals that they all seem to be able to come to production because they do have the resources or capability although it's a risk that this may develop into a far more (inaudible) -- so the chemical agree there's still a laborious process ahead for a lot of the juniors come into production.

  • - President , CEO

  • It highlights the importance of having existing facilities in all of our production centers, because with that, with the expertise that we have maintained and built up over the years we hope that we can hold out to being a partner of choice with people that want to get through those bare yes, sir a little bit earlier.

  • - Analyst

  • And become a partner of choice issue, right.

  • - President , CEO

  • Uh-huh.

  • - Analyst

  • And the pound in the ground, market adjustment, I mean you're junior mid cap companies today got far bigger dollars in the Federal Reserves in the ground than you have.

  • - President , CEO

  • I think if you look at what we have talked about in our M D&A this year and some of the statement made, we have got just an incredible reserve position coupled with our the purchases we will be making at least through 2013.

  • We haven't really talked a whole lot about our resource position, which also is considerable.

  • I think we will now do that a little bit more together with as I indicated in my comments earlier a rather robust global exploration program so people can get a sense of the magnitude of the reserves and resources that we hold.

  • We have tended not to talk about them because they still require further definition as I indicated earlier.

  • But we also through the global exploration program hope to be adding considerably to the asset base both in the best hunting ground in the world, (inaudible) but also where around the globe.

  • - Analyst

  • Anything new about the Russian JV developments?

  • - President , CEO

  • George, do you want to make a comment.

  • - SVP Marketing and Business Developmment

  • Nothing new at this date really as per the most recent announcement.

  • We will continue to meet with the Russians to work out the definitive agreement.

  • The expiration areas have been agreed upon so it's just a case of finalizing the agreements before we go forward.

  • - Analyst

  • Thank you.

  • Operator

  • Thank you.

  • Our next question is from Murray (Lyons) with (inaudible) please go ahead.

  • - Analyst

  • Yes.

  • Mr.

  • Grandey, one of the read between the lines interpretations that seems to have come out of the lengthy April 20th Bloomberg news focus on Cigar Lake incident was CNSC has lost confidence in Cameco's ability to manage the deposit or at the very least lost patience with the Company.

  • What is your reaction to that perhaps interpretation.

  • - President , CEO

  • All of this will be in the investigation report which are just in the process of being finalized.

  • I think when you have an episode of the size of Cigar Lake virtually everybody involved will lose some confidence, including the Company itself and it takes a while to restore that.

  • I've indicated in the Bloomberg interview and subsequent to that there's no doubt that we're going to find there were a number of human factors, human errors that were sort of encountered along the way that contributed to the water inflow event, it wasn't just geology.

  • And when that happens you go back and look at why it happened and try to implement lessons learned will certainly not shy away from that and stand up and say these are the things we have learned, this is what we need to implement to make sure it doesn't happen again.

  • - Analyst

  • If I can follow up, one of the puzzling things to me since I was given a tour of McArthur River along with several other journalists about a month before the Cigar Lake incident, it it struck me that the mine people were showing us boring machines that they said had replaced drill and blast.

  • And yet on the very day of the Cigar Lake incident I think somebody, some executive during a conference call, I'm sorry, I can't remember which one, said, referred to development tunnel at Cigar Lake that had been created through the drill and blast technique.

  • I'm puzzled why if you dropped such a technique in Mc Arthur River why you still maintained it in Cigar Lake.

  • - President , CEO

  • We do a combination at all of the mines including McArthur River.

  • But in higher risk areas, this is true of Cigar Lake as well, we have tunnel boring machines with reinforcement, that comes along with the tunnel boring, so it is assessment of risk which we readily admit at Cigar we didn't appreciate the full extent of the risk where the inflow occurred.

  • In all of the mine plans in the higher risk areas we have employed and always plan to employ teleboring machines.

  • - Analyst

  • Very good.

  • Operator

  • Once again please press star one at this time if you have a question.

  • Our next question is from Gordon Putman from Isborn Capital, please go ahead.

  • - Analyst

  • Yes, I have a follow up if I could or second rounds of questions.

  • I was going to go to George, but I reflipped the coin and I'm going to Tim if I could, center square.

  • At Cigar Lake, Tim the 43101 which is a really interesting report has a diagram on page 105 that shows rock classification that's called MRMR, modified rock mass rating.

  • The area beneath the deposit is class 7 ground and I'm trying, which is entitled extremely poor to good and the report says the majority of future mine development will occur directly below the ore body in this ground class seven ground wherein rock strength part is weak and this gets worse as you get closer to the ore body and to the unconformity both vertically and horizontally.

  • It looks like this ground will be sort of the nature of things going forward at Cigar.

  • Were you in class 7 when the rock fall occurred or were you still in the adjacent ground which is a little greater strength.

  • - SVP, COO

  • I can't confirm whether we were or weren't in the class 7.

  • We were certainly in ground that we thought was competent for the mining method we were using, we were using a jumbo to drive that drift along.

  • - Analyst

  • Right.

  • - SVP, COO

  • So I can tell you we're looking again and we will look again at the mining methods we're using and the freezing we're using, we will be looking at several of those things.

  • But, you know, as Jerry said we were going competently.

  • If we could go back would we change some methods, yes, probably we could, but we were doing what we thought was right.

  • So we will look at that again, that 465 level and you will see some more freezing from us and you'll probably see some changes to our method of supporting in that area.

  • So those are changes we will make.

  • - President , CEO

  • One follow up to that though.

  • It wasn't class 7 ground where we were.

  • And kind of relating back to the previous question that Murray had, that's why tunnel boring was the method of choice when you approach the ore body and go under it.

  • And of course the remediation or the method of mining anticipated always has been to freeze all of that and get the structural integrity that allows development of the mine to proceed under the ore body.

  • - Analyst

  • Okay.

  • So you weren't yet in class 7 ground.

  • Have you done any development even for the freezing drifts in class 7 ground yet or is that still future experience.

  • - President , CEO

  • We were in the process of doing that freezing when the inflow event occurred.

  • - Analyst

  • Okay.

  • Last or follow up question on this, thanks, Gerry.

  • You mentioned there's 2200 cubic meters of concrete that's been put into the reinforcement area what do you estimate is needed there, and you mentioned there's an additional hole that you're going to drill there to assist this, what's that based on.

  • - President , CEO

  • Tim.

  • - SVP, COO

  • We put, you're talking about the ramp area.

  • - Analyst

  • Yes.

  • - SVP, COO

  • That's just a little few meters below and to the east where the inflow was.

  • We put the holes in, poured concrete a little over 2200 cubic meters.

  • We're going back in with another hole, a 5th hole, because we think there might be a void when you pressure up with the concrete it will run back up into the hole.

  • Between holes we think there might be a void.

  • We're going to fill that in, make sure that's competent before we pull out of that area.

  • So that what we are up to now.

  • - President , CEO

  • Look at it as two hills from adjacent placement of concrete we think there might be a little valley.

  • We're not sure, but again being cautious we want to go back in and see if we can get a little bit more concrete in there.

  • No big deal really, won't be a lot, it will just be a little valley.

  • - Analyst

  • Okay.

  • On the volume, what's the volume expectation you have that's needed of concrete to fill that, you said you're at 2200 meters what do you believe is needed for that?

  • - President , CEO

  • It's insignificant.

  • - Analyst

  • Okay.

  • And I was just wondering your going to drill four big dewatering holes to find out if the plug is holding, why don't you just core the plug and see what its durability is.

  • - President , CEO

  • The plug will be fine, the issue is is it sealed adequately between the plug itself, the concrete mass and the walls of the tunnel.

  • Concrete shrinks when it sets up so we will go back and pressure grout and make sure all that's done.

  • Coring the plug will tell you it's a mass of concrete, it won't tell you whether the water is leaking around the mass itself or indeed even to the rock outside of the tunnel.

  • So all indications are from the rate of movement in the shaft as we place concrete we are getting an effective seal just with concrete grout we're putting into drill the holes.

  • But we won't be able to tell ultimately until we do some pump testing.

  • - Analyst

  • Okay.

  • The McClain lake mill has a tolling arrangement with some stand by charges that say if the phase one mill modification are complete and the mill ready but the phase one ore is not delivered that you might incur stand by charges.

  • I don't know what these might amount to and what exceptions might be allowed with the situation you've got at the mine.

  • Can you

  • - President , CEO

  • It's true, I think it's way too early right now McClain has ore that will keep that mill running, at least for a good bit of time.

  • There obviously looking around for more.

  • So I think it's way too early to speculate on what those might be.

  • Cameco would just be a share of it in any event.

  • - Analyst

  • All right thanks.

  • Operator

  • Operator, are there any further questions before we entertain any more from Gordon.

  • Our next question Raymond Goldie from Salman Partners.

  • Please go ahead.

  • - Analyst

  • Thank you very much, apologies to Mr.

  • Putnam.

  • I'm just wondering if the average world nuclear reactor were to pay $120 a pound for its uranium, have you worked out what the cost per kilowatt hour of nuclear fuel purchases would be and probably make it easier exclude conversion refining and fabrication prices?

  • - President , CEO

  • George.

  • - SVP Marketing and Business Developmment

  • At a$100 where you would be is about just looking at the front end fuel costs, front end fuel costs represent about 25% of their total and at a hundred dollars the uranium component would be about two thirds of that, would rise to two thirds.

  • - Analyst

  • So at a $ 100 it would be 25%, is that what you said?

  • - SVP Marketing and Business Developmment

  • Well, fuel costs are generally 25% of total operating and maintenance costs at, I'm sorry at a nuclear plant.

  • And with uranium at a $100 a pound it's risen to the point of being about two thirds of that.

  • - Analyst

  • Oh, got you, okay.

  • Thank you very much.

  • Operator

  • Our next question is from, Murray Lyons from (inaudible), please go ahead.

  • - Analyst

  • Yes, gentlemen, this sounds like a strange outdated tecnology question because I'm asking it from a newspaper point of view which publishes only once a day, but I was, I've been increasingly puzzled overtime as to how late in the evening you folks put out your quarterly reports.

  • I think last Friday was an example.

  • Almost ten hours after the market closes and ahead of, just after midnight according to the e-mail I've got.

  • You put out the Q1 results, which means I guess that the for all of Saturday the only place you can find them is on the internet.

  • I'm just wondering why so late in the day do your results go out.

  • - President , CEO

  • I'll ask Alice in a minute, but if you understood the process you need to go through then I think you would understand, we need to get obviously Bruce Powers, Centerra, and Cameco results all coordinated, then get it through the audit committee, the board of directors on and on, that takes up most of the day.

  • And the day before.

  • So then once you get everybody's comments and questions and everything else answered it tends to be a late night exercise in order to be as timely as we can possibly get it out.

  • It has nothing to do with trying to keep it out of the hands of the media.

  • Alice, you got anything else to add to that.

  • - VP, IR

  • Sometimes I'll go through with you in excruciating detail what happens when we send it to the wire service, you will greatly appreciate.

  • Basically they strip out everything that we put in so they can go over the wire and that means for a 40 page document plus the financial statements which bring it up to about 80 pages, they strip out the formatting, which means we have to go through and proof all that.

  • And that takes several hours before we even get a proof back.

  • - Analyst

  • I feel sorry for all these financial analysts that have to work on the weekend.

  • - VP, IR

  • I do too.

  • - Analyst

  • Thank you.

  • - President , CEO

  • Operator I think we're probably drawing to a close here.

  • So what I'll do is simply thank everybody for joining us today and wish everybody a good and productive day.

  • We will look forward to talking to you in the future, thank you.

  • Operator

  • This concludes the Cameco first quarter conference call.