Cameco Corp (CCJ) 2009 Q3 法說會逐字稿

Good morning ladies and gentlemen.

Welcome to the Cameco Corporation third quarter results conference call.

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

Bob Lillie, Director Investor Relations.

Please go ahead, Mr.

Lillie.

Good morning everyone.

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

Thank you for joining us.

With us today are four of Cameco's senior executives.

They are Jerry Grandey, President, CEO, George Assie, Senior Vice President, Marketing and Business Development, Tim Gitzel, Senior Vice President and Chief Operating Officer and Kim Goheen, Senior Vice President and CFO.

We are also joined by our colleague Rochelle Gerard, Manager, Investor Relations.

Jerry will start things off with a few opening comments on Cameco's results, updates on our operations and the global markets.

Then we will open it up for questions.

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

During the question and answer session please ask one question plus one follow up; if needed.

Please note that statements made by the Company during this conference call including statements regarding its objectives, projections, estimates, expectations or predictions contain forward-looking information and statements within the meaning of applicable Canadian and US security laws.

The Company's cautions that such information and statements involve risk and uncertainty and that actual results could differ materially from those contained in them.

In addition certain material factors or assumptions were applied in drawing the conclusions or in making the forecasts or projections reflected in them.

Additional information about the material factors could cause actual results to differ materially and the material factors or assumptions that were applied are contained in the Company's annual information form dated March 27, 2009, and the Company's annual management, discussion and analysis, dated February 16, 2009, both of which are available on SEDAR and EDGAR.

With that I will turn it over to Jerry.

Thank you, Bob, and welcome to Cameco's third quarter conference call.

The results we report today once again highlight Cameco's ability to produce increasing revenue and growth in cash flow from operations.

Those who follow us know that the timing with respect to deliveries with respect to any quarter in a calendar year is determined by our customers.

And as we reported in our second quarter news release, uranium deliveries in the second half of 2009 are more heavily weighted to the fourth quarter.

Despite the expected lower sales volume in Q3 and a weaker average realized price, Cameco is maintaining our guidance that we gave at the end of the quarter.

Full year revenue in our uranium segment will increase 5% to 10% based on higher volumes and the expected realized prices for the year.

Our ongoing strong cash flow reflects the continuous improvement in the performance at each of our operating sites.

We are on target to meet our primary production goal of 20 million pounds of uranium for the year.

During the quarter our flagship McArthur River mine achieved a mining industry first in completing a new development drift right through the geologic unconformity into the sand stone.

This new development area was made possible through the successful completion of the cathedral shaped freeze barrier over the development zone.

This feat of engineering demonstrates our commitment to innovation and operational excellence.

Underneath this secure cover Cameco intends to produce 80 million to 85 million pounds of uranium.

Developments elsewhere at McArthur River are proceeding according to plan.

At Key Lake, the investment to revitalize the mill for its intended role as a long-term regional milling center has begun.

The construction on the new oxygen and acid plants is just the beginning of our plans to improve the processes and reliability of the world's largest uranium mill.

Rabbit Lake is producing well ahead of its 2008 pace and our US ISR operations are slightly ahead of our expectations.

At Fuel Services, the return to operation of our Port Hope conversion facility has more than met our expectations.

The facility supply of hydrochloric acid is now tied to two reliable suppliers.

As part of our long-term growth strategy to double uranium production by 2018, we continue to advance key exploration and development projects.

Confirmation drilling has started at Kintyre in Australia as the first step towards prefeasibility.

At Inkai even as production from blocks one and two increases at a steady pace progress is also being made in the exploration of block three to confirm the extent of this resource.

And as we announced in a news release on October 23, we have resumed dewatering at Cigar Lake at a measured and deliberate pace.

Today the water level is about 250 meters below the surface and the response is in accordance with predictions.

This methodical approach is just part of the overall Cigar Lake remediation plan.

We expect to take six to 12 months to dewater and secure the mine depending on the conditions found in the shaft and underground workings.

We are confident in the approach being taken by our knowledgeable and experienced team at Cigar Lake.

We are also confident in the uranium market demand and the need for uranium from Cigar Lake to meet expanding customer requirements.

In the short term however we continue to see volatility in uranium spot market pricing.

The market is still digesting two recent developments that had opposite effects on the spot price.

First is the announcement by the US Department of Energy that uranium will be released to the market from its top file to feed clean up activities.

Second is the setback in primary mine production recently experienced by a significant uranium producer.

The DOE decision by itself would tend to suppress prices and exacerbate short term volatility.

However, as Cameco has stated in the past and as events of recent days confirm it is very difficult to the uranium mining industry to consistently produce at 100% capacity.

Notwithstanding these short term events, the long-term fundamentals of the uranium market remain robust.

We are building our business on the expectations that the long-term price for uranium will continue to move towards a realistic equilibrium price as the nuclear renaissance accelerates.

This acceleration is particularly noticeable in rapidly merging economies that require clean base load electricity on a scale to supply huge populations that are modernizing quickly.

India is a prime example with Prime Minister Singh announcing his intention to speed up an already ambitious program.

Various reactor builders from Europe, Russia, the US and Asia are already being allocated reactor construction sites.

Cameco has laid the ground work to be a significant commercial partner with India with the opening of our office in Hyderabad, the city of India's nuclear industry.

Our initiative paves the way for mutually beneficial commercial arrangements once the government to government bilateral pact is signed.

As for China the World Nuclear Association has made several adjustments throughout this year as it tracks the increasing number of reactors under construction.

Current estimates are that China will produce six times more electricity from nuclear in 2020 compared to today.

China's fuel requirements will grow accordingly.

Around the globe, Brazil, Turkey, Vietnam the United Arab Emirates and United Kingdom are picking sites for their countries' nuclear programs while Belgium and Germany halt taken steps to halt nuclear phase out policies adopted in the past.

Significantly in the US President Obama made his first speak on domestic soil where he endorsed an increased role for nuclear energy in addressing climate change.

Also notable was a new study completed by the US National Research Council, a study on the many external costs of using fossil fuels that are currently not included in the cost of energy.

The study confirms what proponents of nuclear power have said for years.

The NRC study calculated the hidden cost of burning fossil fuels for energy generation at $120 billion annually.

These hidden costs include damage done to human health, crops, forests and buildings by major air pollutants such as sulphur dioxide but do not include the enormous cost of climate change.

In contrast the NRC concluded that the external cost to the environment from a 104 operating nuclear plants in the US are negligible.

The logic of large scale nuclear power which captures its miniscule waste streams and accounts for its costs over the life time of a plant have again been confirmed.

Science rather than emotion will continue to drive the nuclear renaissance and Cameco intends to be there as a world leading producer and supplier.

With that we invite your questions.

(Operator Instructions) Our first question is from David Snow from Energy Equities, Inc.

I was afraid I would go first.

What kind of a long-term equilibrium price do you expect and how fast do you think Kazakhstan is going to increase; I hear they are going to be equal or ahead of Canada in production this year?

David, the long-term equilibrium price is clearly a function of where the US dollar is headed.

So lower of course the dollar goes the higher the price is going to be I think in terms of uranium pricing.

A lot of analysts have looked at it given some of the cost inflation that the mining industry and uranium mining industry has experienced overtime.

And that declining US dollar I think a lot of analysts have put that in the $50 to $70 range and I guess our feeling and George could comment as well as, it wouldn't be outside of that range.

Okay.

Kazakhstan is the second part of the question.

I think it is making good progress.

I think they too are seeing, in trying to ascertain where that equilibrium price is and look at their own production plans I think that's being done literally as we speak.

So I think it probably better addressed to them but I would say they've made good progress on the plans they've made over the past few years in advancing their production schedules.

Could you give us any just quick synopsis or estimate of what the uranium production may be worldwide this year versus last year and for an out year?

Recall, last year was about 114 million, 115 million and this year I think we are seeing 120 million to 130 million pounds, in that range.

And for an out year?

Out year is increasing each year I think as new production is brought online.

But still remember consumption is 180 million per year estimated this year and growing at about 2% to 3% a year so we are going to have to work quite hard to catch up.

You don't have a ten-year out year.

Sorry, David.

We'll come back to you, David.

Thank you.

The next question will be from Duncan McKeen from Macquarie Capital.

Please go ahead.

Thanks very much, gentlemen, and good morning.

I just want to ask a question, you mentioned removal of old redundant freezing pipes around zone two panel five and that representing I guess the biggest possibility for a delay.

I just wonder if you can give us a bit more color on some of the challenges with doing that and what the delay could be?

Yes, Duncan, it's Tim Gitzel.

Good morning.

We are going up above if you like the old zone two panels one, two and three up to panel five.

And so some years ago we put freeze pipes in cutting through those panels that froze off the area for panels one, two and three.

Now to get the ore from panel five we have to either take those freeze pipes out or ream through them and we can do both.

Reaming through them is slower and a bit of a messy process so we've come up with a plan to we call over core.

It's a technology that folks at the site have invented and we actually core over those freeze pipes and pull them out.

To date it has been going quite well but it's challenging because those pipes over time shift and crack.

We are working on that, we think we have the right people and the right technology to succeed on that but it is a risk.

Is it going slower than had you originally expected?

It comes and goes.

The first ones went quite well and then we've run into some tougher ones to get out.

So it's challenging but we are making good progress.

Okay.

Thank you.

Thank you.

Our next question will be from Greg Barnes from TD Newcrest.

Please go ahead.

Thank you.

I think this is for Kim.

On the gross revenue it seems high.

This is the output, the 6.2 terrawatt hours and the CAD66 per hour price, I just couldn't get to that CAD458 million in revenue.

Greg, you were cutting in and out a little bit, Kim, did you get it?

Yes, on that, Greg, if you took the CAD66 we've adjusted for the deemed generation so if you take the quarter and add, it's like 7 megawatts equivalent times 66 I think you get CAD458 million.

You have to add the deemed megawatts to the 6.2 to get to the CAD458 million.

Yes.

So those deemed megawatts are megawatts that you didn't produce at the request of OPA.

Yes, the independent system operator, but, yes.

Quickly on a follow-up question as well I guess this is for George, do you see Q3 '09 at the low watermark for your realized price for uranium all else being equal?

Yes, yes, given our guidance that we've given earlier, Greg, and Jerry's remarks earlier we expect the fourth quarter to be stronger and in accordance with the guidance we gave earlier.

What was it in this quarter that pushed it down to the 34 level?

What happened simply is that in any given quarter we may have several contracts with, older contracts with low fixed prices or ceiling prices, it's just coincidence.

But the price in the fourth quarter obviously will be stronger and overall we should average what we indicated earlier.

So those older contracts have now finished?

Well, I don't know if they've ended completely but they had deliveries in the third quarter and they don't have deliveries in the fourth quarter.

Okay.

George.

Thanks.

You're welcome.

Thank you.

Our next question will be from Brian MacArthur from UBS.

Please go ahead.

Good morning.

I think this is probably for Kim, too, but just following up on Greg's question.

Obviously with the power prices of Ontario very, very low, they asked you not to produce, which I guess you get the same price under your agreement.

And secondly, I guess the agreement guarantees a certain price if the price is too low.

Can you tell me if that's a linear function all the way down, i.e.

the price that goes lower you still get a same delta above that or just a little more granularity on how that actually, those two pieces fit together what actually happens.

Greg, sorry, Brian split them into two parts here.

The generation aspect there is two aspects too.

There is the floor price.

Right.

Which applies to all output.

The--what we call SPG's, or Surplus Baseload Generation which is when they ask to us derate the reactors that also gets that floor price allocated to it.

There is that coverage affect all output actual or deemed.

Totally separate from that we continue to have a contract portfolio that was entered into over the past several years when prices were higher.

That portfolio will run down over time but as it is right now it's equivalent to in rough numbers about half or a little less than half of the output, equivalent to.

So that's where some extra benefit is coming this year in settling those financial contracts.

Would they ask you to shut down -- that deemed, you get the floor price, whatever it is, those contracts then could be kept totally separate from that and that just functions on your portfolio of whatever you produce, right, it doesn't get weighted into that in any other way.

Those contracts are totally separate from production, Brian.

They are not linked in any way.

So the half guidance is a function of the production rate not the sales rate if I want to look at it that way.

The guidance reflects the floor price for the portfolio and then where we expect the spot price to be compared those financial contracts.

Just portfolio runs off, what, over 18 months, two years, I just don't remember?

I'm not sure.

We actually haven't disclosed that in the past.

But if it's half this year it gradually goes down over the next couple of years.

Okay.

Great.

Thanks very much.

Next question will be from Terence Ortslan from TSO & Associates

Hi, thanks.

Just back to the--actually can you remind me on the Russian exploration agreement and arrangements if anything came of out it number one?

Number two in the same context in the color, anything else can we expect in a similar arrangement with two major procurers of uranium coming up, India and China very specific with Cameco?

Thanks.

Terry, first I think the question was about Russian exploration, George?

Right, and that's not progressed any further.

Nothing is happening on that, Terry.

You guys are not actively doing anything with the group?

I'm sorry, could you speak up.

You are not doing anything actively with the group in Russia, no activity at all?

No.

Okay.

The second part of the question, Terry, you tailed off there, could you do it again?

In the context of this strategy alliances do you expect the appetite of China specifically flourishing around the world looking for procuring uranium.

Do we see any possibility of making a deal with China and also with India?

India has been active in certain parts of Asia looking for uranium on their own in competition with China, so where does Cameco fit into the equation?

We have a dialogue with both.

India a little different because India with its program has CANDU style reactors so the spectrum of opportunities in India for us is broad.

It's both uranium supply as well as cooperation in other aspects of the CANDU fuel cycle, we hope, and can span exploration activities there and perhaps jointly abroad.

China probably more focused on fuel supply but there again perhaps partnering on activities, operations somewhere in the balance of the world.

So Cameco had been engaged in discussing all of those with China and India and I think we are quite optimistic that as time goes on we will be a major partner supplier with both countries.

And there are no conflicts Jerry with respect to doing one versus the other or both.

I don't think so.

They of course are in competition.

They are both out scouring the world for uranium and we see them looking at many of the same projects.

To the extent, Terry, we look at acquisitions and we are always doing that but to the extent that we do we are going to run into competition from lots of people.

The Indians and Chinese and Russians and others are going to be there at the same time so in that sense there is competition.

Thanks a lot.

Our next question will be from Alfred Weber, a private investor.

Please go ahead.

I was concerned that you didn't make any reference to the flooded mine that you have up in Canada.

And what's the expectation of clearing that out and adding that to the uranium sales that you can make?

Alfred, welcome.

In my opening remarks I indicated that I think beginning about a week and a half ago we started the dewatering of the mine which is called Cigar Lake.

On the 23rd, we put out a news release to that effect and today we are about 250-meters--the water level is about 250-meters below the surface.

Everything so far is going as predicted.

When is it expected to be fully completed?

Is there an estimate on that?

No, we haven't put out an estimate yet.

What we say is we need to get underground, look at round, see what kind of damage, if any, the water has done and then we will be in a better position to make a forecast.

In other words, it is not going to be expected within the next year or two.

Is that correct?

We will wait until we get underground.

I see.

When that is cleared out how much percentage would that add to your production?

Analysts' perspective, when it operates at full capacity it will be on the order of 9 million pounds a year.

Okay.

Thank you very much.

Thank you.

Our next question will be from Ian Howat from National Bank Financial.

Good morning.

Sorry to belabor the point on Bruce Power but you get the floor price on 100% of production.

That's correct.

And then on approximately 50% you get the difference between your financial price and the spot price in the quarter.

Correct.

Okay.

Just one other question.

Inkai you talk about you have only had approval for 2.6.

You applied for the other approval four years ago now.

Is there any delay or any concern that you won't get the approval for the further expansion?

No, there is not.

What we have to do is first produce the 2.6 in a given year and so we are getting close to that now so as soon as we do that then we will move to the 2,000 ton approval.

So we don't have any concerns in that regard.

Thanks very much.

Thank you.

Next question, Simon Tonkin from Thomas Weisel.

Good morning, guys, in terms of the Kazak tax code what's Cameco's view on whether uranium mines in Kazakhstan will be subject to the excess profits tax.

Simon, we've recently then adhered to the change in the tax code which we think is neutral pretty much at this point in time.

We do admonish people that it can change.

But right now we view it as neutral.

Kim, I don't now if you have any other comments than that--

I would just reiterate, Simon that, we view the impact as neutral today and time will tell going forward but no reason to see anything else as we move forward right now.

Okay.

One more question on the global exploration.

I noticed there in Wellington Range you indicate you encountered significant uranium mineralization.

Can you elaborate further on that?

Probably not.

We can get back to you, Simon.

Okay.

Not a problem.

Thanks.

We are not trying to hide anything.

We are just collectively looking at one another, saying, what is it?

Hopefully it's looking good.

We will look into it and get back to you.

Thank you.

The next question will be from Borden Putnam from Eastbourne Capital Management.

Question for Tim if I could, Tim back on zone two I'm trying to understand the geometry there-- and congratulations on getting that raise bore chamber in place, that's quite a feat.

But you are also having to put a new extraction level at the 620-meter level, is that correct?

630, I think it is, Borden.

Do you have to go through the old backfilled raise bores to get that into place, and if so is that presenting any difficulties or is it going well?

In fact we do have to go back through some of that and it is going quite well so that is not posing a problem for us.

You are higher than the 640 level.

How close are you to the unconformity?

I'm not sure but I can tell you it's not very close.

We are leaving a bigger margin than we have in the past.

I don't have the exact number of meters Borden but it's larger than it was in the past.

Lastly when do you expect if you could forecast or give us guidance, when do you expect to be producing from panel five?

I think we said toward the end of this year in our disclosure and that's still our plan.

Okay.

Thanks.

Thank you.

(Operator Instructions) Our next question will be from David Vargo from JMP Securities.

I had a quick question regarding the global laser enrichment program.

I was wondering if you had an update on that.

George?

Nothing new since we reported last quarter.

Where we are at is they are currently conducting the test loop and we expect to have the results of that in the first half of 2010.

Assuming the results are good in the first half of 2010, what year could you expect to have material quantities of enrichment available?

I don't think at this point there's any schedule that's been put out by GLE, so I would have to decline to answer, David.

Okay.

That's it.

Thank you very much.

Thank you.

Thank you.

Our next question will be from John Redstone from Desjardins Securities.

Good morning, gentlemen.

Most of my questions have been asked but maybe I should ask my standard question as I do each time on Kintyre most notably when do you envisage being in the states to actually complete the feasibility study?

And how does that compare to the political timetable in the province?

In other words, the timing of the next provincial action?

George, you want to take a hit?

Well, as Jerry mentioned we are in the process of doing the confirmatory drilling.

We expect that to take really pretty much all of 2010.

Along with that we will be doing certainly a lot of scoping work and pre-feasibility work so expect the feasibility study to be done shortly after that.

So let's say moving 2011.

And in terms of the government, someone is going to have to remind me, is it four or five years there?

It was 2008.

So you are looking at four, so 2012 or so.

So the timing we should have our feasibility study done seeking approvals prior to the next election.

Thank you very much.

Thank you.

(Operator Instructions) We have a follow-up question from David Snow from Energy Equities.

Please go ahead.

Yes, hi, I'm still trying to get an out year number ten years out maybe on the uranium production world?

Ten years out I think we said total consumption is about 236, 240 million pounds.

Ten years out inventory will still be a factor.

And so I think it's, George, what, about some percentage of that?

The big challenge there is you have existing production centers dropping off.

You have new ones coming on and I'd have to go back and look and give you an answer and that says in terms of existing production centers this is what they will be doing, and this is how much has to come on from new production centers, et cetera.

I don't have the numbers at my fingertips but it's fairly involved.

Part of the other challenges, David, and what's going to happen with the Russian AGU, which everybody now says will come to an end in 2013, the rate of expansion of Olympic Dam is one of the big uncertainties out there.

Cigar Lake obviously our own project and when it's going to come.

A lot of supply and major supply sources around which there are lots of questions in that ten-year horizon and that's one of the reasons we see major utilities and countries that are rapidly building inventories, and obtaining long-term contracts to take them through that period of uncertainty.

Is there someone I could call to talk about that in greater detail?

You can give me a ring, David, it's Bob.

Okay, Bob, thank you very much.

Thank you.

We have a follow-up question from Duncan McKeen from Macquarie Capital.

Thanks very much, gentlemen.

You mentioned you were about 250 meters below surface at Cigar Lake.

Just wondering when you might expect to be right down to the bottom at Cigar in terms of dewatering?

And also just wondering if you can give us an update of how much purchasing you think has gone on so far this year by Asian utilities I guess mainly China, thanks.

I will get Tim to answer the first part and George the second.

Duncan, we are about 250 today below surface, going down at the rate of about 1 meter per hour down the shaft.

So it will be a few more weeks taking the water out and that will have to include, we stop at certain hold points for instance this weekend from Friday noon to Sunday noon we stopped for 48 hours just to hold and see what's coming back in and do some tests and checking.

So it will be a few more weeks before we get to the bottom.

And then I guess for your follow on question in terms of the spot market which volume is probably approaching in total about 45 million pounds and we estimate that purchases by China this year are in the range of 10 to 12 million pounds.

Thank you.

Our next follow-up question will be from Borden Putnam from Eastbourne Capital.

I wonder, Tim, if you could give us an update on lower zone four.

About a year ago I think it was December had you a small inflow and then in January you had put a bulkhead and backfilled some tunnels, and that needed to be finished before you continued development at lower zone four.

I wonder if that work has been done and also just in general how is your overall development and preparation there going?

Borden, in fact we have now sealed off that small inflow we had down there in lower zone floor.

It was right on the south end.

We've put a large-- huge bulkhead in there to seal off the water we've grouted in behind the bulkhead and stopped it.

So that has gone well.

We'll avoid that area going forward.

As far as the development in that area, it's going very well.

The drift is complete and we are--I don't have the exact numbers, we are about 20 freeze holes out of the 40 drilled off now so it's on schedule, perhaps a little bit ahead but on schedule.

Okay.

Thanks.

Thank you.

Our next question will be from Edward Stark from BMO Capital Markets.

Hi, just a quick question on the uranium market.

Just looking at your-- earlier in this call you mentioned prospective demand of 180 million pounds for this year.

Perhaps an unfair question, but I was just wondering versus the WNA forecast for this year was 170 million-odd pounds.

Has there been quite an uplift in purchasing this year to reach your figure or is it just a difference in the modeling between the two organizations?

It would just be a little bit of difference in the modeling, but in terms of actual requirements it's in the range of 177 I guess.

Or to be precise, our number is 177 but off of that when it comes to demand what people actually buy -- as I mentioned even the Chinese are buying more than they are consuming this year -- so it can be more than that.

Thanks.

Thank you.

Our next question is a follow-up question from Greg Barnes of TD Newcrest.

Yes, thank you, this is for George again.

On the DOE potential sales of Portsmouth cleanup, TradeTech suggested this morning that they are going to sell 4.2 million pounds a quarter for FY 2010 or part of that material.

Do you have any understanding of what's going on?

Yes, it's not 4.2 per quarter; Greg.

It's what they are talking about in total I think is more in the order of about 3.2 million pounds spread over four quarters -- 3.2 or 3.6 spread over four quarters, I believe it is.

So what's being talked about of course is that DOE is looking to barter uranium to USEC in 2010 and then to other contractors in years after that to help clean up Portsmouth.

And they are moving ahead with that program rather deliberately but on the other hand they have a number of hurdles to overcome not the least of which is secretarial determination as to whether there's a negative impact on the market and the uranium producers of America also may legally challenge them.

So it's not at all clear yet how it will play out but I would say at this point it's fair to say that the market is taking that overhang of material into account.

Okay.

And if they do use the stuff as barter and give it I guess, exchange it with some of the contractors that are going to do the clean up, would Cameco be in a position to purchase that material or resell it?

What Cameco and others would certainly be maybe interested in buying it-- but it's a real dilemma that the contractors -- if you can imagine you're a contractor and you know nothing about uranium or the uranium market and somebody is telling you, come in and do this work and I'm going to give you the uranium to pay for it, they are not too excited about this whole process.

So this has a long way to go before it finally plays out.

This will conclude the questions from the telephone lines.

I would like to turn the meeting back over to Mr.

Jerry Grandey for his closing remarks.

At Cameco we continue the pursuit of operational excellence.

Behind the scenes we are making the investment in people, projects and processes to ensure that we remain a world leading supplier of uranium fuel for the benefit of the growing global nuclear power industry and their many customers.

Such a focus means we will continue to deliver outstanding results now and into the future.

With that we thank you for your continuing interest in Cameco.

Have a good day.

Thank you.

The Cameco Corporation third quarter results conference call has now ended.

Please disconnect your line at this time.

We thank you for your participation and have a great day.