Cameco Corp (CCJ) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Cameco Corporation first-quarter results conference call.

I would now like to turn the meeting over to Ms. Rachelle Girard, Director, Investor Relations.

Thank you, Matt, and good morning, everyone.

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

Thank you for joining us.

With us today are four of Cameco's senior management team.

They are Tim Gitzel, President and CEO; Bob Steane, Senior Vice President and Chief Operating Officer; Grant Isaac, Senior Vice President and Chief Financial Officer; and Ken Seitz, Senior Vice President, Marketing and Business Development.

Tim will begin with comments on Cameco's results for the first quarter and on current industry conditions.

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 question-and-answer 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 and the assumptions we have made.

With that, I will turn it over to Tim.

Thank you, Rachelle, and welcome to everyone who has joined us on the call today as we discuss Cameco's first-quarter results.

I'm pleased to say that we had a good start to the year, continuing our strong financial and operational results from the fourth quarter of 2012.

Most importantly, this was achieved safely and responsibly.

Safety of course is always a top focus for us and is really key to our success as a Company.

Revenue, gross profit and net earnings were all up significantly in Q1 of 2012 compared to Q1 of last year.

Primarily as a result of higher sales volumes and a higher realized uranium price.

We're seeing this increase in realized price occur even as spot and long-term prices have declined.

Some of our older contracts that were signed at lower uranium prices are coming to an end and newer contracts are coming on.

This has contributed to our strong financial results for the past few quarters since 70% of our business comes from our uranium segment.

However, as we noted in the MD&A, our deliveries are not evenly distributed throughout the year, but we expect deliveries to be the lowest in our second quarter.

Production was also strong this quarter, up 2% from this time last year.

Our McArthur River operation is largely to thank for this increase as it was up 21% from Q1 of 2011.

Our production at Inkai and Smith Ranch-Highland was down.

The challenges that these two operations are the same as those we outlined in our annual MD&A, but we are making progress.

At Inkai, our current wellfields are maturing which leads to lower grades and therefore lower production.

However, this is expected with in situ operations and we're working hard to bring on additional wellfields in order to add new higher grade wellfields to our production mix.

At Smith Ranch-Highland in Wyoming, our production has been affected by an increase in the timelines for regulatory approval of new wellfields.

We're very pleased to report that we recently received approval for the new K-North wellfield and production rates were starting to increase near the end of the first quarter.

We also saw steady progress at Cigar Lake, which is now about 75% complete.

All of the details are in our MD&A but I just will touch on a couple of developments.

In January, we broke through with shaft 2 on the 480-meter level and it's expected to reach it's final depth of 500 meters by mid 2012.

And there is been enough infrastructure development that we are now at the point where we can start putting the jet boring system in place to begin underground testing.

The first components are now on site and as more arrive, we will be lowering them into the mine and assembling the unit.

So the progress at Cigar Lake has been excellent and we remain on track for first package pounds next year.

In addition to the strong production and the progress at Cigar Lake, we are continuing to our advanced our projects under evaluation.

The Millennium Project in northern Saskatchewan is a important part of the strategy.

The biggest news on that front is agreement we announced in March to purchase AREVA's interest in the Millennium Project.

Our ownership of the Project is now expected to increase to between 58% and 70% depending on whether our Japanese partner JCU Exploration decides to exercise its right of first refusal.

We expect to finalize these details in the agreement itself by early June.

Cameco, as you will know, has operatorship of this important project.

Our fuel services facilities continue to operate well and revenue from that segment was up CAD7 million over Q1 2011.

At Bruce Power, although our share of earnings for Q1 of 2012 was lower than Q1 of last year, our realized price was up and this continues to be a good source of cash flow for Cameco.

Overall, I'd say this was a good first quarter.

We've made a lot of progress and are in line with our outlook for the year and are on track with our goal to increase annual uranium production to 40 million pounds.

We believe it's important to pursue this goal of increased production now so that we are ready when the market begins to demand further supply.

Our view is that the question isn't if the market will call for more supply, the question is when.

And while I don't have all the answers I can provide some sense of what we see in the market.

We know quite well what is happening with most nuclear programs around the world.

The majority of countries with nuclear programs remain committed to having nuclear in their energy mix because it is a safe, clean, reliable, and affordable energy option.

And others are joining the club.

There are some exceptions like Germany, but we know that their phase out will occur slowly over time.

The big question mark is Japan.

It has only one reactor running, which is expected to shut down for regular maintenance this month and a plan for the future has not yet been announced.

We believe Japan's reactors will eventually be brought back online, not just because the country needs power, and reliance on other energy sources is costly, but because we see the Japanese companies continuing to invest in uranium mining and exploration.

For example, we have the Japanese as partners in our Cigar Lake and Kintyre projects and they have been very clear that they remain committed to those projects.

We see our Japanese partner in the Millennium Project considering an increase to its equity position and more recently we have seen some Japanese utilities out in the market looking for nuclear fuel.

All of the signs seem to point to Japan eventually bringing reactors back online, which could be a major catalyst to helping the industry move out of the near-term uncertainty that we are currently in.

As I have said in the past, the real story for nuclear isn't the near-term.

It's in the long-term fundamentals of the industry which remain very strong.

Our numbers show that 96 net new reactors are expected by 2021 and 63 of those are under construction right now.

Most significant are countries like South Korea, India, Russia, and of course China, where we are seeing the most growth.

But the new growth in the United States, where the government recently granted the first licenses in 30 years for the construction and operation of new plants, two at the Vogtle site in Georgia and 2 at the VC Summer site in South Carolina.

This is very good news for our industry and for Cameco.

More reactors mean more demand for uranium.

And with the end of the HEU agreement nearing in 2013, and some producers delaying and canceling projects that are no longer feasible, we believe the industry could face supply challenges in the not-too-distant future.

That's why we are confident that Double U remains the right strategy for Cameco.

We are confident in the future of the industry and in our own ability to successfully grow the Company and build value for our shareholders.

With that, we would be pleased to answer any questions.

Thank you.

Thank you.

(Operator Instructions) Orest Wowkodaw, Canaccord Genuity.

Hi.

Good afternoon and congratulations on the results.

Tim, in terms of meeting your goal on the Double U I think by 2018, when do think you need to make development decisions on Millennium and Kintyre to meet that goal?

Yes.

Thanks, Orest.

Let me just back up just a touch and say that our Double U of course involves several different projects including Cigar Lake which is on track and Cigar Lake's the foundation really that will provide about half of what we are looking for.

You have seen the charts that we put in our annual MD&A with the different projects we are pushing forward at different rates to accomplish the Double U.

You mentioned Inkai.

Inkai, we are progressing up the chain now.

We're getting to the 1,500-ton mark this year and looking to move up to 2,000 tons once we get approval hopefully next year and going forward and then we are still working with them on double-double which is increasing production even further.

We're advancing that as quickly as we can but we are making progress with them.

On the Kintyre project, we are just finalizing the feasibility study right now.

The pre-feasibility study right now.

Just getting the final touches put on it over the next weeks and months.

We have a process inside Cameco to take a close look at the pre-feasibility results and then decide what our next move is.

And so we will have some more information on that I would say at our second quarter but that one is moving along as well.

Would you hope to make a decision on Kintyre sometime next year?

Post-feasibility, I guess?

Yes.

Well it's step-by-step.

It has to go stage-gate by stage-gate for us.

We will look at the pre-feasibility as I say over the next weeks and months and the next up would be a feasibility study which would take some time.

We'll look at [about] probably a year or so for the feasibility study and then we'd be at another stage-gate where we'd decide to move the project to development.

How about Millennium?

When can we anticipate that study and a development decision?

Yes.

So Millennium will have the feasibility study this year some time.

We have submitted some dropped environmental assessment documents in so we're that moving along.

We have partners we're looking to close up the deal on Millennium with AREVA and the Japanese partners.

We will end up seeing what the different equity interests are and then I would say toward the end of the year it will be in a better position to make a decision on going forward with Millennium.

Okay, thank you and then just one further question on a different topic.

Your comments suggest the Japanese are very much committed to nuclear.

Just wondering if you could share any more color on the cancellation of the contract that you disclosed in your MD&A today.

How we should reconcile that in our mind.

You'll note we didn't disclose where that contract was from.

You can make your own judgment on that.

I would say as we said in our MD&A, the Japanese continue to participate in the mining projects at Tepco, which is our partner in Cigar Lake, continues to pay its share of the cost of construction, JCU and others, Mitsubishi and -- So we believe that over time they're going to bring the fleet back online.

We know they have two units ready to go awaiting final approval from one of the prefectures so we're looking forward to them restarting the program.

Okay so just to be clear, you are saying we should not necessarily assume that's a Japanese contract?

I'm saying I just -- I'm sorry I can't tell you where that contract is from.

Okay, thank you.

Thank you.

Greg Barnes, TD Securities.

Yes.

Thank you.

Tim, more I guess in the discussion around the uranium market, you say see limited long-term contract occurring but in the trade press, Ux and TradeTech of the past several weeks have been talking about increasing interest in the long-term contracting market.

I am trying to reconcile the two views.

So Greg, the way we would put it is, and we have been saying for sometime now that if we looked at the long-term, demand has been somewhat discretionary and so that in the way that we are heavily committed for about the next five years while utilities have been well covered.

But we've also said that in the not-too-distant future, customers are going to have to come to start putting volumes under long-term contracts for that period beyond five years.

And that we expected that to start happening fairly soon.

I would say that today we don't see a huge amount of contract in the long term but it is in fact just starting to happen.

And I think that what makes our view consistent with the Ux's.

Just over the quarter now we've had several requests for proposals come in to put volumes under long-term contract.

So demand had been discretionary.

It's becoming less discretionary and we're seeing some customers come forward for long-term contracting.

Regionally where are those customers coming from, Ken?

In fact, there are some US customers in there; there are some European.

We are even entertaining one request from a Japanese utility and so fairly evenly distributed I would say.

What about China and India?

We know that the Indians are in the market looking for more material.

Right now, Cameco, we don't sell uranium to India, but we're working on -- we have an office there and we are certainly working on putting uranium under longer-term contracts there.

Tim and I were just there and a goal to go from five gigawatts to 63 gigawatts over the next 20 years so the Indians will be in the market and then the Chinese, we're seeing some activity there as will.

In the [share] market there, Ken?

That's right.

Thank you very much.

John Hughes, Desjardins Securities.

Thank you, Operator, just two quick ones.

One the CAD30 million for the charge in Q2, is that a before or after tax number?

I believe that is a pre-tax number.

Okay so can we just use a 35% tax rate on that for after-tax?

No, this would fit into the larger conversation about our consolidated tax number.

Of course, we do have a Cameco group of companies and we sell our product through Cameco companies that are outside of Canada.

So that wouldn't be the right tax number.

The consolidated effect really is minimal, so you saw a recovery in this period and we expect similar in quarter two.

Okay.

That helps, thank you.

Just looking at your share of production forecast through to 2014, to the 24.8 million pounds, I'm wondering how variable that number may be in that year as the HEU contract falls away?

And are we looking at plus or minus 5% to 10%?

In other words, in the absence of that contract and that 24 million pounds, could we see an additional 10% type of thing in terms of your production in that year?

We don't have a whole lot of variability in the production because of the caps that are put on through the regulatory system.

And so we -- when we put these numbers out, they are what we believe is our very best estimate of what we can produce in any given year.

You've seen us at the McArthur/Key has some flexibility to catch up on some pounds that weren't produced in past years.

We are running out of those I would say, so I would say there's little flexibility on those numbers.

Okay, thank you.

Last one, have you seen any over the quarter or so far in Q2 any kickback on any inventory coming out of reactors or otherwise out of Japan?

I think we have been pretty clear stating that we went very quickly after March 11, 2011 to our customers and said that if we could be of assistance in managing their inventories we would be happy to do that.

And so we have last year, this year, had some deferrals from some of our customers which we were happy to work with them on.

And so we have not seen any major unloading of inventories into the market by any of the utilities, and as I say, we stand ready to work with any of our customers in that regard.

Thank you.

(Operator Instructions)

Anthony Young, Dahlman Rose.

Hey, guys.

Thanks for taking the question.

In the last quarter, you guys indicated that there were about 19 million pounds of inventory that had been built up between Japan and Germany.

Do you guys have any further color on where that inventory may stand to date?

Not sure I know what you are referring to, Anthony, on those 19 million pounds of inventory.

Ken, are you --

No, I don't.

We haven't put out estimates of inventory or excess inventory holdings as a result of the events in Japan.

I would also say that those numbers are actually changing on a daily basis as well as the units in Japan come off and then come back on.

I think we would point back to Tim's earlier answer and that is we haven't seen any of that material splashing around in the spot market, evidenced by the stability in the spot market price.

Again, just making prognostications about inventory levels, we haven't done that.

Okay.

And then with respect to the chart that you guys have on page 18, it looks very similar to the chart that was produced in the fourth quarter with the cancellation of that contract.

Has that already been factored into this chart or will there be some revisions in subsequent quarters?

Yes.

I believe it been factored in.

Ken, do you have any further comments?

That's right.

It's been factored in to the latest table.

Tyler Langton, JPMorgan.

Thanks for taking my question.

With McArthur, the production in the first quarter was just a little but lower than what you would need on a run rate basis to meet your full year guidance.

Is that a timing issue or can you give just any more details around that?

You might be looking at our share of production.

I think we were on track.

McArthur tracked slightly ahead of budget so I'm not sure.

Bob, any comment on that?

I'm not sure where you're interpreting a lower production, but McArthur/Key had a very good, very strong first quarter.

I could just be looking at the wrong number.

Further out, with the US operations.

Is there any way to quantify getting the permits and delays in that, next couple of years or next year or so?

Can you quantify how much that could potentially be at risk to production?

So we're working on, as we said in the quarter, I think my comments are that we see some improvements.

I think the regulators there are swamped, are busy and we are seeing it could take us a lot longer to get the approvals we need to bring on new wellfields at our existing operations and then some of our new projects, North Butte, Gas Hills, as well.

We are working very closely with the regulators.

There is certainly more than one.

And trying to facilitate their work.

We were just talking this morning about our guidance on production in the US.

Nebraska happens to be doing quite well and are indeed on production and even a little bit more.

Smith-Ranch is a little bit behind.

We think overall our guidance is strong for the US and we're certainly working hard to bring those new wellfields and new production centers online.

Borden Putnam, Mione Capital.

Good morning, Tim.

Most of my questions have been answered.

If I could direct you back to the reserves statement for a second for you or Bob.

At McArthur River, there was some pretty material upgrades.

You had about 41 million pounds that went from inferred to indicated and that also at probable you had another 40 million-some pounds that moved from probable to proven.

Can you tell us how that was achieved?

Was it additional drilling or by infrastructure reaching those areas and where exactly do those increases reside?

And then I have a follow-up.

Thanks a lot Borden.

I will ask Bob Steane to answer that.

It was a combination of both.

There was some additional drilling that turned some of those indicated into inferred and increased the reserves.

And also some of the development and some of the success we've had in working in different mining methods in the mine that it opened up some additional material for reserves.

Is that in the Zone 4 or in Zone 2, Panel 5, Bob?

A little bit of both; more on the lower Zone 4.

Thanks, and a follow-up on Inkai.

The past three years, there is been the reverse of fortune from what we just talked about at McArthur.

There seems to be material that is moving out of probable.

A couple of million pounds here and there and 10 million pounds in this last year moving down to indicated.

Does this relate to the wellfield issues you were talking about in your quarterly results or is there something else going on?

Because it is not adding to -- I know you do produce from probable at Inkai, but maybe if you could explain a little but more about that.

Thanks.

I think that has more to do with the term of the leases that we have there, and our experts here, Alain Mainville is constantly looking at our reserve and resource base there and allocating them based on -- We have a term there of course, one of the block's term expires in 2024 and the other one in 2030 and so we have significant reserves and resources and we have to continually adjust those to the length of the leases we have and so that's why you are seeing some movement in those categories.

Greg Barnes, TD Securities.

Again, Tim and Ken, looking forward to 2014, when the HEU agreement expires, or I guess at the end of 2013, and you are beginning to ramp up Cigar, there's going to be a bit of a gap between those two events happening.

Do you think you will be able to maintain the 30 million to 32 million pound a year sales number?

And will that mean more purchases in the spot market or term market?

Yes, Greg, we do believe we will be able to maintain those numbers from several different sources and I will let Ken speak to those different sources.

Yes, we do believe that we will continue to maintain guidance in that 31 million to 33 million pounds through that period and we have a few things at our disposal.

Of course, Cigar Lake starting in 2013 and ramping up is part of it.

In addition to that, we have inventory at various facilities around the world that we utilize depending on where they sit and our sales targets and so on.

We will continue to make purchases but I would like to stress that we will never put ourselves in a position where we are forced to make a purchase.

We make purchases when they make sense for us.

But if we look at all of that, and just given our plans today, no, we expect to maintain sales guidance in that kind of range.

What you think your purchase volumes will be of that 2014, 2016 range?

Probably, we can't disclose that at the moment.

I think there's some competitive information there so rather not touch on exactly what our purchases would be to that period.

We do plan to purchase some but again, never forced to go into the market.

(Operator Instructions) Oscar Cabrera, Bank of America Merrill Lynch.

Thank you for taking my question.

I'm going more or less in the same direction that Greg was going.

But if I may ask the following.

For your Kintyre and Millennium projects, I think in the previous conference call we talked about startups around 2015.

Do you have a scoping study or an idea of how much production can come out of those two deposits?

Well that will depend, Oscar, on the results of the pre-feasibility study in one case and the feasibility in the other.

Yes, we have some ideas of what could come out of those projects but I think it's a little bit early to say what the production levels would be.

As I said, the Millennium feasibility study is just being finalized and we will have that soon.

We know there's about 60 million pounds there and so we will look at the optimized mining and milling rate for that in the feasibility study and then Millennium, same thing.

We're just waiting to get the pre-feasibility -- Kintyre the same thing, we're waiting to get the pre-feasibility study for Kintyre.

As I say, over the next weeks and months we will look at the different mechanics of that, and what would be the optimized production rate there.

We are a little bit early for us to comment on that, but we will come forward with that information in the near term.

Do you believe or do think that you need this project to come on stream before 2015 or around 2015?

We need them -- they are part of our ramp-up to 40 million pounds by 2018.

I can't tell you exactly when they come on because we don't know because there's a lot of work to do, environmental work, the feasibility engineering and then the construction and commissioning on all of them.

So they are part of the ramp-up.

That is why you've see our color chart.

We call it our heat chart here, but our color chart that show the different projects and when approximately we see them coming on, but we haven't been specific on that for good reasons, because these projects are five, six, seven, to 10 years in the ramp up.

We don't know the specifics exactly of when they will start up but they are in the period to 2018.

Brian MacArthur, UBS Securities.

Good morning.

I just want to follow up, you made a comment on you never put yourself in at risk for buying -- having to buy pounds.

When you go through that period where you are short a little more material, you talked about getting inventories.

When you make the statement that you will never be forced to go and buy, is that meaning you have inventory to back everything you think through that period?

Or does it mean you have interruption insurance or whatever you phrase it that if you had production problems, you'd be covered off at the end of the day?

Brian, since Ken made the comment, I'll let him answer.

Yes.

All of the above really, Brian.

That is, as you know, we have our supply reduction language in all of our contracts that if we do have a production problem, we won't necessarily be forced to go to the market and buy.

And so again, we are writing that into our contracts today.

In terms of inventories, we hold about six months of forward sales and inventory, which at any given time might be 15 million pounds of uranium.

Again, we work very hard to not put ourselves in a position where we would be forced to go to the market and I can say that when we say that, we mean it.

We won't push ourselves into that situation.

2014, 2013, 2014 bridge and to Greg's earlier question again, Cigar Lake, we also have the increment from 500 ton from Inkai, Talvivaara, starting production in that period to the tune of 1 million pounds a year.

And in fact some extra HEU quantities at the end of 2013.

And you look at all that and again just to give you some comfort that we expect sales to be in the range that they are today.

Great.

One other question that is little bit different.

Just your wording on the uranium market, you talk about US Department of Energy materials being introduced in the market.

I know there is theoretical LEU and [stoppage.] Did I read anything in that there's anything changed from before?

There's not any HEU or pounds or anything new that you're seeing coming out of DOE?

Brian, that's a good question.

That's a matter we're following really closely because it's a evolving topic down there with the current situation with USEC and what the DOE is going to do with that.

And I know Ken's right up to date on that, too.

So Ken, maybe you can just give an update on that matter.

It's a good question.

It is a good question.

And it's quite timely in that -- so the DOE has excess material.

And we know that, and we know that they plan to put it in the market.

Then in 2008, they worked very hard with industry to draw up a plan for that.

And so they wouldn't put any more than 10% of US requirements into the market in any given year, which equates to about 5 million pounds a year.

So that's on the books and we've anticipated that for some time.

There are discussions taking place in Washington today.

We know that around USEC and the viability of USEC and their plants and certain parts of the US where jobs are pretty important.

And so it looks as though something may be evolving between some US utilities, the US Department of Energy and USEC, whereby the Department of Energy would provide some higher assay tails to USEC for re-enrichment and those -- the natural uranium that comes out of that would go into inventories in some large US utilities.

So in terms of impact on the spot market or in the market, it's actually, it's a fairly good news story and that we expect it will go into inventory.

But I would say, Brian, to your question, it is material that would be over and above, we think, over and above that industry consensus, again, at 10%.

This could be 15% to 20% of US requirement.

Greg Barnes from TD Securities.

Thank you.

I wouldn't usually come back three times but, Ken, you said something about extra HEU quantities at the end of 2013.

What did you mean by that?

Yes.

Under the HEU agreement in 2013 and it's just given the way it's evolved over the last 10 years with respect to first and second options.

We're getting a little additional HEU in 2013.

This year, I think we've disclosed that it's about 7 million pounds, 6.8 million pounds.

Next year, it'll be closer to about 9.7 million pounds.

And that's -- that will be the year, the quantity for the year and the final quantity.

Okay, thank you.

Thank you.

That will conclude the questions from the telephone lines.

I will now turn the meeting over Mr. Tim Gitzel for closing remarks.

Thank you, Operator, and thank you to everyone who joined us on the call today.

In closing, I would just add that even though we are in a period of uncertainty now, a catalyst such as reactor restarts in Japan, China approving new builds again, or our utilities returning to the market could quickly change that.

At Cameco, we are working hard to deliver consistent, reliable results like we saw this quarter and prepare for the growth we see on the horizon for the industry.

Again, thank you for joining us and have a great day.

Thank you.

The Cameco Corporation first-quarter results conference call has now ended.