Cameco Corp (CCJ) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Cameco Corporation third quarter conference call.

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

Bob Lillie, Director of Investor Relations.

Please go ahead, Mr.

Lillie.

Thank you, operator, and 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, Chief Executive Officer; Kim Goheen, Senior Vice President and CFO; Bob Stean, Senior Vice President and Chief Operating Officer; and Grant Isaac, Senior Vice President, Corporate Services.

Also with us today is our colleague, Rachelle Girard, Manager Investor Relations.

We'll start with Jerry and Kim providing comments on the quarter's business results, updates on our operations, and development projects, as well as our plans to transition to International Financial Reporting Standards next year.

Then, we'll open it up for your questions.

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

During the Q&A session, please limit yourself to two questions, and then return to the queue.

Please note that this conference call will include forward-looking information, which is based on a number of assumptions, and actual results could differ materially.

Please refer to our annual information form and MD&A for more information about the factors that could cause these different results in the assumptions we have made.

With that, I'll turn it over to Jerry.

Okay.

Thank you, Bob, and let me add my welcome to everyone for today's conference call.

Cameco's third quarter results, released earlier today, are consistent with our projections from earlier in the year when we indicated that second half uranium deliveries would be back end loaded to the fourth quarter.

Based on these expectations, our net profit per share in the third quarter met market expectations.

While uranium sales in the third quarter were lower compared to a year ago, gross profit in our core business actually increased, due to higher realized prices and lower product costs.

As well, our Fuel Services business saw improved margins during the quarter.

Looking forward, Cameco expects that almost a third of our 2010 uranium deliveries will take place in the fourth quarter.

And before I talk further about our operations, I'd like to draw your attention to the 2010 update of our Sustainable Development Report that can be found on the Cameco website.

Our sustainable development programs and reporting are a work in progress.

We are committed to both full disclosure and continual improvement, as it simply makes good business sense.

Secondly, I will ask our Chief Financial Officer, Kim Goheen, to provide a further update on our progress toward adopting the International Financial Reporting Standards, more frequently referred to as IFRS.

Kim?

Thank you, Jerry, and good morning.

The third quarter marked another quarter of progress on our IFRS transition project, and contained new disclosure.

We completed our work relating to the transitional impact of IFRS on earnings for the first two quarters of this year, and have included current estimates on the most significant differences between earnings under Canadian GAAP and IFRS.

These estimates show that for the first and second quarters, there is very little difference between our net earnings under Canadian GAAP and net earnings under IFRS.

For the first quarter, net earnings were identical.

And in the second quarter, Canadian GAAP earnings were CAD1 million lower than they would have been under IFRS.

As we have indicated previously, IFRS is not expected to impact our growth strategy, financial resources, or operations.

We've also created a new section on our website that is dedicated to IFRS.

Today, it contains a list of frequently asked questions, such as the disclosure timeline.

This FAQ will be updated as we move forward with adopting IFRS.

I am pleased to announce that we'll be holding a workshop in Toronto this December to assist our stakeholders in understanding the impact on Cameco of adopting IFRS.

I encourage you to visit our website, or contact our Investor Relations department for more information.

Back to you, Jerry.

Okay, Kim.

Thank you.

On the operational side, Cameco's focus on achieving excellence continues to pay off with ever more consistent production throughout the year.

At our flagship McArthur River operation in the Athabasca Basin, we are advancing development of new extraction chambers ahead of production.

This allows us to continue employing the cost-effective raise bore extraction method as we move into additional ore zones.

At Key Lake, the reliability of existing infrastructure is being maintained.

The capital program to renew the mill is on track, as evidenced by the progress made in constructing the new acid and oxygen plants.

As recently reported, our employees at the two facilities I just mentioned ratified a new four-year agreement.

We view this new agreement as a fair one for all involved, one that provides business certainty for an extended period.

At Inkai, production continues to ramp up.

We await confirmation from our partner, Kazatomprom, and government approval to produce at nameplate capacity in 2011.

This would provide 3.1 million pounds annually to Cameco's account.

At Cigar Lake, remediation work is continuing, with some underground excavation commencing.

Restoration of the underground freeze infrastructure is underway.

And later this month, we'll take delivery of the rebuilt heat exchangers, with the expectation of having brine circulating by the end of the year.

After ground freezing has been established, we will resume syncing shaft number two in 2011.

Later this year, we will resume installing additional freeze pipes from surface.

This strategy holds the potential to move as many as ten million pounds forward in the production schedule, as Cigar Lake ramps up from the initial production expected in mid-2013.

Within our core uranium business, exploration costs were higher during this past quarter.

This reflects our focus on growing our uranium production.

Currently, we are investing in a number of advanced projects that are moving closer to the pre-feasibility stage.

This work will help determine where these projects fit in our future production pipeline.

Spending on exploration and development, well ahead of production, is essential in the uranium business.

We need to be able to meet what will clearly be greater market demand in the coming decades.

As we look to where demand is growing most rapidly, specifically China, the facts illustrate that no one should underestimate the ability of China to achieve, or even exceed, its ambitious targets for nuclear power expansion.

Just this past month, the new Qinshan Unit Three began generating power well ahead of its original time estimates.

This is an example of China's ability to design and manage large projects, and bring them to completion on time.

I should point out that there are another 24 reactors under construction in China, and dozens more in the planning or proposal stage.

India is also well-positioned to manage its nuclear growth, with its own indigenous designs, as well as through partnerships with the world's nuclear builders.

So, where will Cameco be in these markets?

Well, we have already made announcements related to the Chinese market, and continue to advance our relationships there.

Last month, the Nuclear Cooperation Agreement, reached earlier this year between Canada and India, was tabled in the Canadian Parliament.

Anticipating this development, Cameco has had a presence in India, where we've been laying the groundwork for new business partnerships within this fast-growing economy.

We expect that the growth in the uranium fuel market will accelerate, and that primary supply must respond.

This is starting to be reflected in the market price of our commodity.

Cameco's realized price in US dollars for third quarter sales increased 19%, despite the spot price being virtually unchanged compared to a year ago.

This reflects the strength and balance of our portfolio.

As reported in the trade publications, the summer doldrums in the uranium spot market seem to have ended quite dramatically, as we move toward the end of this year.

Cameco was active in the market during the summer, seeking market [intelligence].

What we discovered confirmed our view that actual volumes trading in the spot market were, and remain, very thin, and that the prices being reported were not reflective of the underlying fundamentals.

In recent weeks, the upward price movement has been dramatic, and reflects several things.

China, of course, is in the market, looking to build inventory.

There are also utilities in North America and Europe looking for both near and long term supplies for both consumption and inventory.

By near term, we mean buyers looking for delivery of material in 2012 and 2013.

By and large, utilities are well covered in the near term.

But beyond that, into 2014 and 2015, there remains a lot of uncovered need.

We are now seeing utilities move back into the term market for supply.

It's unfortunate that the individual, who some call the guru of the uranium market, can't be with us on the call today.

George Assie, our Senior Vice President of Marketing and Business Development, is in transit on his way to meetings with stakeholders.

As you've likely read, George has decided to retire at the end of this year.

His successor, Ken Seitz, also traveling today, brings his own talents and experience to the job.

Ken and others on the leadership team within Cameco, have all benefited by being associated with George for a number of years.

And while we're going to miss George and the wise counsel his long experience brings, promoting Ken from within our own ranks is reflective of Cameco's management strength.

It is a strong indication of how our leadership development program is addressing Cameco's business needs at all levels of the organization.

Clearly, we are ready for the exciting times we see ahead for our Company.

And now, operator, if we can open up the call to questions?

Thank you.

We will now take questions from investors, analysts and media.

(Operator Instructions) The first question is from Orest Wowkodaw from Canaccord Genuity.

Please go ahead.

Hello.

Good morning.

A question for Kim on the cost in the uranium segment.

CAD17.5 this quarter is a pretty significant decrease from what we've seen the last couple quarters.

Could you just give us some insight into how that was possible?

Does that reflect just a large HEU delivery coming that quarter?

And, with the settlement now of new collective agreement at McArthur/Key Lake, the 15% increase in labor costs over four years, could you quantify what that does to your cost per pound, assuming that kind of increase is applied to the rest of the operations as those come due for renegotiation?

Thanks, Orest, and good morning.

Let's break it into some pieces, first of all.

The significant reduction on the purchase side is not so much the large HEU delivery as fewer purchases at market prices.

So, that will always impact that, just as it negatively impacted us in the first quarter of last year.

This quarter, when we didn't buy as much at squat, you have that impact.

But on the produced side, which is also down, what you're seeing here is sort of a mix of where the production is.

Year-to-date, we've had more production at McArthur River and Inkai during the same period as last year, and that's impacted it this quarter as well.

We've also had much lower royalty payments, as -- just how it works.

There were less deliveries coming out of -- physical deliveries made out of Saskatchewan material.

Those things, while averaging sounds simple, when you get into the components, you can see quarters like this where it makes significant changes one way or the other.

We have -- the guidance for the year has remained the same, though, as we put out on our outlook table there.

Okay.

So, we should expect unit costs to go up in Q4 materially, assuming your deliveries go back to normal levels.

Well, as Jerry mentioned, one third of the deliveries are in Q4.

We do expect unit costs to rise in this fourth quarter.

As for the impact of the new labor agreement over the next four years, we'll have to pass on that one for now, whereas we don't really go out that far with our guidance.

Thank you.

The next question is from Martin Lavigueur from Macquarie.

Please go ahead.

Hi, guys.

Just a question on Cigar Lake, if I may.

In the press release, you guys mentioned that you've given the go-ahead, or decided to use surface freezing, which could bring near-term production up by 10 million pounds.

But looking at your long-term forecast, you've left the first two years of production guidance at Cigar Lake unchanged at one million and two million pounds.

Just wondering the reason for that.

Thanks a lot.

Yes.

Really not at the stage yet that we want to bring that forward.

I expect you will see some changes when we come to year-end and make our more formal comments on the outlook for the rest of the profile period.

We wanted to get that information into the market, but we weren't quite ready to make that table change yet.

Perfect, thanks.

Thank you.

The next question is from David Snow from Energy Equities Incorporated.

Please go ahead.

Can you give us any further ideas on the quantity of China inventory buying this year and last year?

David, last year, recollection was, it was quite significant.

I'm looking over at Richelle there.

Remind me --

About 12 million --

I think we were thinking 12 million, but I think it was reported even as high as 16 million by some last year.

Last visible buying, in any event, by China, at least in the first two thirds of the year or so, they've been turning, as we've seen, much more to the long-term market.

More recently, we've seen some spot market activity, and maybe that indicates that through the year they've been more active and perhaps not quite as visible.

Still building for inventory though, David.

So, does it look like they'll be anywhere near last year's level?

That, I can't tell you.

I don't know.

Thank you.

The next question is from Terence Ortslan from TSO and Associates.

Please go ahead.

Actually, in the same area of those thoughts, Jerry, you see a lot of numbers coming through China in terms of different estimates.

I think people are realizing their numbers as it goes on.

What's the range of the annual demand do you foresee-- China, given the expansion plans and the execution of the reactors that they have at the speed that they do-- And how much will come from West, let's say, Kazakhstan and other places?

If you sort of surmise, which I think the plans indicate that they'll have, let's say, 70 gigawatts by 2020, and you just use a rough rule of thumb, you'd see demand there or consumption, I should say, at about 35 million pounds per year in 2020.

That doesn't account, Terry, for inventory building, strategic inventory building.

It doesn't account for the first cores that we know are going to be required for each one of the units that will be completed between now and then.

From our own perspective, a lot of buying is really going toward first core, as their building program [succeeds] and accelerates.

A lot of a lot of that uranium, we believe, is going to be supplied out of Kazakhstan, very little out of China with their own indigenous production.

But like all prudent utilities, they're going to contract with many, many different suppliers so that they've got their risk appropriately managed.

If you assume that they're going to do what Korea or Japan did in the past, there's no reason not to expect that they will have two, three, four years' inventory in the system, as working inventory just out of --

We haven't seen any official inventory policy out of China and Korea, et cetera.

We pretty well know what the inventory policies are, thus far.

We haven't-- I think it's really too early to tell just how many years, but if you have very little indigenous uranium, at least as we see it today, then you're going to have higher inventories.

Thank you.

The next question is from Greg Barnes from TD Newcrest.

Please go ahead.

Yes, thank you.

Kim, I'd like to go back to that purchased uranium price you reported at CAD17.00 a pound.

How can it be that low?

Trust me, Greg, it is that low.

I really have to repeat the same comment.

As you know, we have the HEU material and other contracted material that's there always.

It is more the other question.

Why has it been as high in sort of the past, last year and so on?

When we buy material in the market at market prices, that can screw up an average quite quickly, dragging it higher, as we've seen in the past.

We simply did not make those kinds of purchases through this period, here, and this is how the averaging works.

Okay.

Second question then.

Jerry, do you have any comments on the Areva contract?

There are numbers floating around all over the place about what it implies longer term, in terms of pricing.

What your view is?

Most of the speculation that we saw, we thought was wrong.

Too high, or too low, Jerry?

Too high.

People, I think, fail to do the calculations correctly from tonnes uranium or kilograms uranium using the proper factors for U308 and U and I think then ended up with pricing that might be a little bit higher than what we think is correct.

You think mid 60s is more appropriate?

I'm not going to speculate.

Okay, fair enough.

Thanks, Jerry.

Thank you.

The next question is from Borden Putnam from [I One Capital].

Please go ahead.

Hi, Jerry.

You made mention of the approval of the second raised bore chamber in zone two panel five.

I'm wondering what proportion of production, what percent of production at McArthur is coming from zone 2 panel 5 in the present time?

Bob, could you -- ?

There's two-- We're just completing the second raised bore

That's correct.

So is that--?

Are you focusing on that raised bore chamber of the first one, Gordon?

Total from zone two panel five, Jerry, but you but you could break it down if you want.

All right.

Bob, go ahead.

I think most of the production at McArthur is coming from zone two panel five for the next couple years.

We're in transition with the lower zone four, and bringing that on, and we still have some other production.

But right now, I would say from zone two panel five, we're getting 70% of the McArthur production.

I don't have the numbers precisely at my fingertips, but that's where most of the production is coming from.

Okay, thanks, Bob.

And then, Jerry or Bob, looking back over the report on McArthur River that showed the production profile, it looked to me like 30% or there about of production was supposed to come from lower zone four in 2010.

Is that going to be-- are you going to be able to ramp it up that fast in the fourth quarter?

Or, is that slipping a little?

No, we're still on track in the fourth quarter in bringing lower zone four online.

We hope by the end of the fourth quarter to start production there.

Thank you.

(Operator Instructions) The next question is from Lawrence Smith from Scotia Capital.

Please go ahead.

Good morning.

A question on contracts at Cigar Lake.

I've been around long enough to actually remember that you had contracts in place for the production of Cigar.

My recollection was, that they were pushed back with the delay in the start-up.

Could you refresh my memory?

What is the status of those sort of legacy contracts that were put in place when the mine was being built?

Thank you.

Lawrence, your memory is correct.

For those that were written around Cigar Lake, the deliveries under them then would have been postponed until Cigar Lake gets up and running.

Just for clarification, what percentage of the output of the mine were covered by those contracts?

I thought some of them had been pushed back toward the end of the mine life.

Is that not correct?

No, that would not be correct.

I think we went to the utilities, and with our estimates in terms of starting up production, it would've put them out three or four years beyond start-up, something like that.

Okay.

Thank you very much.

Thank you.

The next question is a follow-up question from David Snow from Energy Equities Incorporated.

Please go ahead.

Can you give us an updated number for production for the entirety of Kazakhstan this year, and what you think going forward?

Is it 18,000 tonnes?

Is that about right?

People are nodding.

There's no doubt that some of the projects are still in the expansion mode, so it's likely to go a little bit higher than that.

Kazakhstan has developed a lot of projects over the years.

Some of those, as I said, are now being expanded and finished.

Inkai is one of them.

Not a whole lot of new ones coming online following the ones that are presently under operation and expansion.

I don't think you're going to see the rate of increase accelerate, as it has over the last few years.

We've heard that every year, for two or three years.

No, I'm not sure you heard that from us.

I think we would have confirmed that they're on, have been on, a very rapid program of expansion, but I see it now tapering off, David.

Tapering off in 2011?

I'd say more in the rate of increase.

It will increase, but the rate of which it increases, will not be as steep as it has been in the last three years.

Okay.

And you see still, the HEU continuing at a half of current 24 million pound rate or have you changed that view at all?

I think that remains a conservative view on the part of the industry generally.

But, from Cameco's perspective, I think we're increasingly believing that what Russia is saying, that at the end of 2013, it will come to a full stop, is the better view.

Okay, fine.

Thank you very much.

Thank you.

(Operator Instructions) The next question is from David Snow from Energy Equities Incorporated.

Please go ahead.

Do you have an updated ten year demand forecast for uranium, industry?

We do.

What was it?

226 million pounds at the end of the ten year period of time?

220 to 230 million pounds.

That's in 2020?

Ten years from now.

Okay.

All right.

Thank you very much.

Thank you.

This will conclude the questions from the telephone lines.

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

Jerry Grandey for his closing remarks.

Okay, operator, thank you very much.

Let me just say that with the asset base that we've built over the years, we continue to execute our strategy.

That strategy is doubling uranium production by 2018, using existing assets, continuing to look for opportunities.

But in any event, to develop safe, reliable, clean production.

With that, I am going to thank you for your interest in Cameco, and have a good day.

Thank you.

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

Please disconnect your lines at this time.

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