Cameco Corp (CCJ) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cameco Corporation fourth-quarter results conference call. I would now like to turn the meeting over to Ms. Rachelle Girard, Director Investor Relations. Please go ahead, Ms. Gerard.

Thank you, Ann, and good morning, everyone. Thanks for joining us. Welcome to Cameco's fourth-quarter and year-end conference call to discuss the financial results. With us today on the call are Tim Gitzel, President and CEO; Grant Isaac, Senior Vice President and Chief Financial Officer; Ken Seitz, Senior Vice President and Chief Commercial Officer; Bob Steane, Senior Vice President and Chief Operating Officer; and Alice Wong, Senior Vice President and Chief Corporate Officer.

Tim will begin with comments on the quarter, the full-year, the outlook for 2013 and the industry. 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 and the assumptions we have made.

With that, I will turn it over to Tim.

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

2012 was, again, a busy year and I will get into some of the details as we go through the results, but I want to start with the three things to take away from today's call.

First, 2012 was another strong year for Cameco. Second, the near-term challenges in the market have remained for longer than expected and we saw that reflected in the market environment in 2012. And third, the long-term outlook for the industry continues to be very strong with average annual growth and uranium demand expected to be around 3% out to 2022.

So let's start with Cameco's results. We always emphasize that annual results are a truer representation of the performance of the Company and I will focus primarily on those.

Most importantly, we delivered on and in some cases exceeded our guidance for the year. We achieve production of 21.9 million pounds, and sales volumes of 32.5 million pounds heavily weighted to the second half of the year. Our revenue was CAD2.3 billion which is only down 3% from our record revenue last year. However, our net earnings were down from last year as a result of a write down of the Kintyre property and lower earnings from our Uranium segment. The decrease in the Uranium segment was primarily a result of a lower average realized uranium price and increased production costs.

Looking forward for 2013, we expect to increase production to 23.3 million pounds at the increased revenue from our Uranium and Fuel Services segments by up to 5%.

Our outlook doesn't include revenue from Bruce Power because after January 1, 2013, IFRS requires that we account for our investment using the equity method of accounting. This means we will report our share of their earnings before taxes as a single line item on our earnings statement. And while we don't normally provide a quarterly outlook, we feel it is necessary to do so for the first quarter of 2013 as there are some unusual items that will result in significantly lower adjusted net earnings than in the first quarter of 2012.

Deliveries are always lumpy throughout the year. However, we expect uranium deliveries in Q1 to be significantly lower than usual in the range of 5 million to 6 million pounds compared to 8 million in the first quarter last year. Around 60% of our deliveries will be in the second half of the year.

We also expect the first quarter to be impacted by lower earnings from Bruce Power, due to a large number of scheduled outages. I want to emphasize that this guidance is for the first quarter only and does not reflect our outlook for the rest of 2013.

Throughout the year, we will continue to invest significantly in our growth plans. As we announced in our third quarter, we are pursuing 36 million pounds of annual supply by 2018, primarily through expansions at our existing operations and through the development of Cigar Lake.

This approach has the advantage of narrowing our focus to properties that benefit from existing infrastructure, workforce, and positive relationships with communities, governments, and regulators. It will allow us to enhance our near-term financial picture by spreading our capital spend over a longer period of time.

And we saw good progress on our plans in 2012 with the highlight being Cigar Lake. We completed a lot of key infrastructure and began commissioning the jet boring system underground. We expect the mine to come into production mid 2013 and produce the first packaged pounds in the fourth quarter.

And I can tell you that after many years of efforts to bring this mine online we are looking forward to start up later this year.

Cigar Lake will be a 2013 highlight not only because of first production, but also because of the safety culture we have fostered there and throughout the Company. It is something I like to think we are known for and is the foundation of our focus on operational excellence. It is important that we keep delivering on operational excellence as we expand our production in order to help fulfill the market demand we see coming over the next decade and beyond.

With 64 reactors under construction today and uranium demand growing by an average of 3% per year to 2022, it is clear that there is strong long-term growth for our industry. To put it into perspective we haven't seen this kind of growth since the 1970s when countries like France, countries in Western Europe and Japan and the US were all building reactors.

This growth story is made even stronger by the fact that secondary supplies, which have historically bridged the gap between production and consumption, are diminishing. We know that the Russian Highly Enriched Uranium commercial agreement comes to an end this year.

The magnitude of this event is apparent. If we think about in terms of our own production, the end of that agreement will mean the removal from the market of more annual pounds than Cameco's entire production in 2012.

But it is not just secondary supply that is diminishing. Primary supplied is also becoming more uncertain. In 2012, many producers, including Cameco, delayed or canceled projects due to uranium prices below where new projects are economic. We can't predict the exact effect of these delays, but everyday these projects don't move forward the larger the future supply demand gap becomes as we move into an environment where demand is more certain and predictable, but supply is becoming less certain and less predictable.

So you can see why we are optimistic about the future for the industry and for our Company.

Now that is not to say that the outlook for the near term is as strong. Events in Japan as well as the global economic slowdown have had a significant effect on the near term. The uncertainty around Japan's reactor fleet as well as some retirement of older reactors have led to excess inventories and discretionary buying, resulting in diminished near-term demand. This situation has persisted for longer than we had expected and there was little improvement in 2012.

But I would say that we did start to see some positive developments that could begin to catalyze improvement. In Japan, the establishment of the Nuclear Regulatory Authority brings important stability to the regulatory environment and has already brought some clarity to the issue of reactor research. And although Japan's energy policy is still to be determined, we believe the election of the Liberal Democratic Party will be similarly positive for the industry.

In China, another important jurisdiction for our industry, the approval of new reactor construction has resumed. That occurred late in 2012 and since then construction on four new reactors has begun.

And of course I already mentioned the end of the HEU supply in 2013. which will take 24 million pounds per year off the market.

So we started to see these catalysts for our movement forward and as utilities need to begin wrapping up contracting activities well in advance of their requirements becoming uncovered, we think this movement will continue and will gain momentum.

That is why we believe it is important not only to continue to pursue our current growth plans, but also to prepare for further demand into the future. You saw this in 2012 when we acquired the Yeelirrie project and a greater portion of the Millennium project. Both of these are world-class assets that we believe will serve us well into the future.

Millennium is right in our backyard and we have a lot of infrastructure and experience there already. And Yeelirrie, I am sure many of you have heard me say, is a deal I would do every day. We think it is a great asset that we got at a fair price.

Of course, NUKEM was our other acquisition in 2012 that adds a new segment to our business. Since then, we have been asked how NUKEM fits with our business and what we do. And our answer is that primary uranium production remains our core business and our core focus, but trading in secondary supplies is another significant part of the industry and we had rather participate in that aspect of the market than sit on the sidelines.

This acquisition gives us access to unconventional and secondary sources of supply, thereby strengthening our position in nuclear fuel markets and complementing our core business.

So 2012 was a busy and a challenging year, but I am proud to say that our team again delivered strong performance. I expect 2013 will be similar in those respects and I remain confident in the outlook for the industry and in our own ability to continue growing the Company and building value for our shareholders.

So with that, we would be pleased to answer any questions and I will turn it back over to the operator.

(Operator Instructions). Ralph Profiti, Credit Suisse.

Good morning. I have two questions. Firstly, the environmental assessment and approval at McArthur River seems to have changed in terms of procedures within the Canadian Nuclear Safety Council.

Is this indeed a procedural change or is there something that has changed within the scope of that expansion plan that are a result of this new agency approving it?

I don't think there has been any change to the scope of what we propose there. Certainly at the federal level over the course of 2012 the federal government has been very active in I would say streamlining the environmental assessment rules and regulations in Canada. They put forward new legislation, making it -- making the process more certain and predictable with timelines more certain.

So those pieces have changed, but with respect to our proposal it remains the same.

Understood. My follow-up question is on the 2007 tax reassessment. I just want to clarify that. The CAD54 million in tax assessments under dispute is after tax loss carryforwards are taken into account and if you could also get some clarity on where you are in that litigation process, that would be very useful. Thank you.

I am going to turn you over to Grant Isaac to answer the first part of the question. I'll just say on the second part as to where we are on the litigation. The litigation, the lawyers continue to work on the file. We are moving into, I think, the discovery phase of the file which will probably take most of this year to do. And then I think we are probably looking at hopefully going to court some time in 2014, but we just don't know that. That, as you know, is driven by the lawyers.

So, in the discovery phase this year and we'll see what happens going forward. But I will turn it over to Grant to give you a little bit more information.

Yes. Thanks, Tim. With respect to the 2007 reassessments there are provisions in the tax asset, of course, require companies to pay half of the tax associated with these types of reassessments. And so for 2007 that was CAD54 million, so half of that is CAD27 million. In the past what we have been able to do is take those assessments and put them against tax loss carryforwards. And so we have exhausted that option so now we are in the -- paying the half the reassessment amount and we will continue on that path until the settlement and Tim did describe the process there.

Understood. Thank you both.

Oscar Cabrera, Bank of America Merrill Lynch.

Good morning, everyone. Want to start with your uranium forecast in Kazakhstan. During the last conference call you provided context around what this permits are taking so long to achieve. And can you just provide an update of where you are and how confident are you on getting the permits and, therefore, the higher production levels that you quote in your release?

So just let me say on the production side, the good news for us is that the plant is operating at the 2,000 ton design capacity now and has been for some period of time now, which is good news. We are waiting on one final crew or permit from the government to have full authority to produce at the 2,000 ton a year level in 2013.

We are in contact with them every day and we understand it is forthcoming, we just haven't received a piece of paper yet, so with that said we are producing, in any event, at the 2,000 ton per year level in 2013 and we will continue to do so.

Then on the new segment and you can -- you provided an outlook for 2013, but just wondering what the -- in terms of sales you mentioned 9 million to 11 million pounds in 2013, but that includes HEU sales. So wondering how that profile would look in 2014 or going forward.

So let me turn you over to Ken Seitz, who has been very deep on the NUKEM file and can answer that question for you. Ken?

Yes, absolutely. It is a fair comment that the large part of the volumes for NUKEM are HEU, but if we look back at NUKEM's past, even prior to HEU, they have always done sort of that 3,000 to 4,000 ton range per year. And that has to do with some term contracting where they are getting terms supplies out of places like Kazakhstan and Uzbekistan and in spot market activity as well. But you put that all together and it results in a sustainable sort of 4,000 ton per year. At least that is how we are seeing the future.

I'm sorry, I am not wanting to hog the floor, but those 4,000 tons after HEU, will the profit margin change much if year end prices [were] to change?

Yes, I think it is fair to say that for those involved in HEU agreements, those are fairly attractively priced pounds and yes, for NUKEM as the HEU pounds come off, and they look for new volumes and continue to transact as I said looking into spot in the term market, I think we can assume that they will go to sort of standards trading margins for our business.

Thanks very much.

Greg Barnes, TD Securities.

I just want to go back to the CRA tax audit and you have been running a very, very low tax rate if not a recovery for a very long time. Grant, how do you see that evolving over the next five years?

Yes, we did put out some guidance to give you an idea of what the -- of really what is happening there from a structure point of view. One of the things that we have been able to benefit from over the years are the long-term sales contracts, but of course those are then underpinned with long-term transfer price agreements. And so what we are doing obviously is taking advantage of those transfer price agreements, but they will have to be renegotiated eventually.

So the guidance we put out said that -- after the 2016 period is when we looked to be transacting under new transfer price agreements. Those will be negotiated at more at the market at the time of negotiations occur. So that kind of gives you an idea of the structure and what we are looking at going forward. We continue to believe that that structure we have in place is the correct one and, therefore, we are contesting the CRA's view on it and we are not surprised.

In these types of disagreements, really, the tax authorities are typically testing two things. They are testing is the governance relationship right and then if test one is passed, they are asking is the transfer price right within that governance arrangement.

And our view continues to be that on both of those we are exactly where we need to be. As Tim said, these are processes that do take a long time to play out and but we continue to push our case.

I will move on to another subject in and I guess this is a question for Ken. I am trying to understand what is happening in Japan with regard to utilities who clearly obviously the reactors are not online. Are they still purchasing the material they have under long-term contracts?

Yes, Greg, absolutely. I can tell you that when we've talked in the past about Cameco we were looking at deferrals and agreeing some of those in some cases and then even buying back inventories when it makes sense for us. But we have seen really that drop off and I think it has a lot to do with the new federal government in Japan and perhaps some more certainty there.

The Nuclear Regulatory Authority that Tim referenced in his opening remarks being in place and new safety guidelines underway and a path -- albeit it is going to take some time -- but a path towards restarts that I think is giving the Japanese utilities confidence that those inventories that they are holding are going to be required.

We found it interesting [Yorks] Consulting just put out some numbers at the end of last year, that those utilities have spent somewhere between CAD12 billion and CAD13 billion on safety upgrades for their unit. So they are very much thinking that their units are going to restart and we see that, with respect to their inventories and how they are treating them, in that we have for the past little while now, not have any -- haven't had any requests for those types of deferrals or buying back inventories.

It seems to me though that they continue to buy over this two- or three-year period, whatever it continues to be, they will be building a fairly large stockpile of uranium.

Yes. That's a fair comment. For every year that the Japanese utilities are not operating their units, it's 20 million pounds, that is what they were consuming prior to the March 11 -- 2011 events in Japan. So yes, I think that is fair to say. But again, they are holding on to those inventories. We are delivering about 10% of our portfolio into Japan this year and that is what we expect to do.

So it is a fair comment that some inventories are building, but they are holding on to the -- with an expectation their units are going to run.

Thank you. Thanks, Ken.

Edward Sterck, BMO.

Good morning. I've got a couple of questions here. The first one is on Cigar Lake. Production is scheduled to start later this year, but I was just wondering when it was expected that commercial production from an income statement perspective would be declared.

You are indeed right. We are planning to start up commissioning in the mine mid to this year and have the first package pounds by the end of the year. So we are happy about that. I am going to ask Grant to talk about the commercial production piece because it is a little bit -- well, it is an important piece and it is a little bit different. So, Grant, do you want to talk to that?

Yes, happy to do that. It is a good question. We have been asked that quite a bit lately.

With the transition to IFRS and, of course, that is an accounting system that is always looking for a principle behind a decision, rather than applying a rule and saying 70% of production capacity or nameplate capacity or 60, I meant we would watch as US GAAP over the years has gone a little more stringent and a little more stringent in terms of when you could declare commercial production. Under IFRS it is more of a principle. And if you want to think about it conceptually, it is when you are producing from an asset according to the mine plant and the mining method with production infrastructure largely in place.

And so what it means for an asset like Cigar Lake is commercial production will likely be declared early in 2014, and of course this is an asset that ramps up. We could take the number of years to ramp up, 2017 towards the end of 2017, it will be at full production. And so that ramp-up schedule that you have seen in the technical report, the latest technical report will apply, but from a profit and loss point of view it means that the first [halves] that come out of Cigar Lake are of course at a high cost because they don't benefit from the big denominator.

So commercial production according to that principle is being declared rather early, but that is an accounting treatment.

And then my follow-up question is assimilation to NUKEM and the amortization of the acquisition cost. Is that some only going to be on the HEU sales or will some of that acquisition cost amortization be allocated to ongoing uranium sales and ongoing [SWU] sales?

Yes, NUKEM is, of course, a 2013 event. And so we wanted to disclose a bit of a framework for thinking about it, but keep in mind our quarter 1 results in 2013 is where we will indicate the purchase price allocation and the opening balance for that segment.

But what I can tell you is that the process of going through and applying value is right across the contract portfolio, HEU included as well as other commitments that NUKEM might have in place.

(Operator Instructions). Tyler Langton, JPMorgan.

Good morning. I think you mentioned in the release that some of the future supply of GAAP that you guys see could be instilled by distance to secondary supplies. Were you thinking about anything specific there? And if you could talk about how large that could be.

Ken, do you want to take that?

Sure. So we are of the view that secondary supplies will occupy a certain portion of our market for many years to come, and it's things like the US government with inventories there, over 100 million pounds still sitting there. And while the US government has had some rules in place for that to come to market, it's some form of supply coming out of that part of the world we think for some time to come. And if we look at into Russia and the end of the HEU agreement, very substantial source of supply going away.

But in addition to the HEU, we know that the Russians, they, for example, downblend some high assay sales material and some other odds and so on that are in the market. So we essentially assume that the secondary supplies over and above the HEU agreement that are in the market today continue.

Will it occupy a substantial portion of the market? Certainly not. We look at the supply gap that exists between the growing demand line and HEU going away, we feel that that needs to come entirely from new mine production. And so, is it a growing source of supply? No, it is not. New supply is going to need to come from production.

Great. Thanks. And some NUKEM and other clarifications. Were the 3% to 5% margins, were those from EBIT operating margins or are they post tech margins?

Ken?

Those are EBITDA margins about 3% to 5%. And I would like to stress that is just a forecast. But I think it is a fair assumption today.

Great. Thanks.

John Hughes, Desjardins Securities.

Two quick ones. On Kintyre, with the write off now, what is the balance sheet value? I know it was CAD346 million to buy it in 2008. So I am just wondering as we stand going forward following the recent balance sheet adjustment, what do you have on the balance sheet that is left?

Grant is just searching through his paper here to find that number. Do you have it, Grant?

Yes. It is about [CAD250 million].

Is that in essence mark to market in each quarter?

Yes, well, you do certainly the normal currency translation when you do your balance sheet adjustment and in this case we valued it using a fair value less calls to sell approach. So that is what would remain on the balance sheet for Kintyre.

Great. Thank you very much. Second question, Uranium one pendingly going private. I am wondering what are you seeing in Kazak -- do you anticipate any change in production in Kazakhstan as a result of this corporate change with Triple U is there -- can you sort of bring us up-to-date on what you're seeing on production in Kazakhstan?

Sure. I don't think this event would trigger any kind of a change to production in Kazakhstan. You've seen them clear out their numbers for the year. I think there were just over 20,000 ton again this year. Pretty stable production over the last three years, holding the line on production there. And so we are in constant contact with them and I think they plan to hold their production pretty tight until they can see, like the rest of us, some improvements in the market and more demand.

So for now I don't think the Uranium one takeover if you'd like by the Russians is going to have any effect on Kazak production.

Great. I will squeeze one more in if I could. Japan, with timing on potential announcements on reactor restart, do you have any feel for that? Is it sort of a summer period, fall period? Any help would be appreciated.

So what we have heard from them is summer 2013 is when the NRA would have their new safety standards in place and reactor owners would compare their reactors to these standards and have to be able to convince the NRA that they are ready to restart.

So we see mid-2013 as an important period of time where we hopefully will see some new reactors coming on by the end of this year. I think our analysis shows six to eight restarts this year. So if that is the case, we would be happy to see that program moving forward.

Great. Thank you.

[Evan Moore, SIM Magazine].

I was wondering, two questions about Canadian exploration activity in the future. You said that you are focusing on extending the existing projects, given the uncertainty. So I'm wondering a couple of things.

First, what would it take to return to exploration on the [Turkovich Aberdeen] project. I know that you are not planning to go out there this year, but what would it take to return, say, next year or in in coming years? Let's just go with that one first.

Yes, sure. So we are -- we always look at our exploration budget and what the appropriate amount to allocate to our projects is. We are focusing, I think, in 2013 more on some of our brownfield projects with our exploration dollars. We do have, as you know, a really great suite of reserves and resources in hand now which has only been added to by the acquisitions we made last year, a chunk of Millennium that we got from AREVA and of course Yeelirrie as well. So, we take that all into account when we determine our exploration budget.

For the Turkovich Aberdeen project, that's a project we have slowed down on for the moment. We are, as I say, we are allocating our dollars more to brownfield. Those exploration dollars to some extent are linked to to how the business is doing and so we will look at that going forward. So certainly it is an important project for us. We just haven't allocated the big budget in 2013.

Second question. Continuing the Canadian ban on foreign ownership of uranium mines, do you see this as an opportunity to join in on other projects that foreign companies might be undertaking in the Athabasca Basin?

The nonresident ownership policy has been in place for a long time and I don't think it has inhibited anyone from coming to the Basin. Our friends with AREVA are operating mines in Saskatchewan. We see others, we have seen Rio Tinto come into the Basin. We have seen many other countries and companies come in.

So it doesn't seem to have slowed down anyone coming in. I think AREVA has been happy. They have been getting exemptions to the policies to operate their projects. So for the moment, as I say, it doesn't seem to be slowing down any spending on exploration in Saskatchewan.

As far as the actual investment on the part of non Canadian companies, that seems to be true. On the other hand, someone like Rio Tinto with their Roughrider project, I'm told that that their current modeling is based on 100% ownership model. But are such investments something that you are looking at as potential joint venture opportunities?

No, we have our hands full in the Athabasca Basin. We think we have covered the best properties up there. We have been there for 30, 40 years and have really a lot of great projects already and we are only adding to them.

So you would have to check with Rio Tinto as to their plans with the Roughrider project, but we are delighted with the portfolio we have.

Orest Wowkodaw, Canaccord Genuity.

Good morning. Wanted to circle back again around the CRA review of your tax situation. Am I reading it correctly that we are -- so far we are just talking about 2007. And what is the risk that they start looking at all the prior years given that you guys have paid very little tax in Canada for quite some time. I mean, how material could this get for you is my question?

Grant, do you want to --

Yes. You've watched as we have disclosed it in the notes to the financial statements and what we have done there is tried to give folks an idea of where the case is at. Both from a conceptual point of view and that is what is being contested and our view that has been correct as well as where we are building so far to 2007. But it is fair to say that it is a structure that does go on past 2007, the structure that we currently use today.

Our view is that it is a structure that's correct and so, we do say that, according to our -- the opinions we get from our external advisors and the view that we have, we take a provision on that basis and that provision currently at CAD63 million is designed to reflect the uncertainties that as we see them in the litigation process, but we are careful to say that in the event that the CRA case doesn't go our way, then there would be an impact and but at the moment that is not our expectation and, currently, that is not the basis of our provision.

But could you qualify that? If the [theory] decision goes against you, doesn't that just opened up the floodgates here in terms of all prior years?

Well there would be a lot of assumptions there behind what the dispute looks like and the process under which we go through the contest, but I think it is fair to say we don't know what their reassessment position is for any given year until they send it to us. And at the moment all we have is 2007. So I would purely be speculating on what they would be doing 2008 and beyond.

I guess we will have to stay tuned. Thank you.

Brian MacArthur, UBS.

Good morning. I have a couple of questions. I want to be clear about this. On the NUKEM, you talked about a 3% to 5% EBITDA in 2013, but I assume in that we obviously have the HEU stuff, which I would think is still the most profitable. Does that mean going forward after that, we expect that margin to drop or is there something else going on there?

Ken, can I ask you to answer that please?

Sure. The 3% to 5% is, we quote that as I mentioned earlier, just to forecast the number and it is beyond the HEU volumes. And so yes, no, this is not -- this is beyond 2013. We are just saying around 3% to 5%.

So, that is kind of an ongoing. And would the sales sort of the similar? I mean obviously it is subject to price, but that CAD500 million to CAD600 million number, that is sort of what you would see, foresee going forward. Is that reasonable?

I think you put it well. It is subject to a number of assumptions, but yes when we look at the volume and again some assumptions behind it, we say sort of that 4,000 ton range. So that is correct.

And the second thing, you do mention this year you have long-term contracts to purchase 12 million pounds and assume that is all ex NUKEM. That is a reasonably high number and obviously we will get an uptick in the HEU as it cleans up this year. Like going forward, because this obviously affects the tax rate we were discussing earlier. You know, is that going to drop 3 million to 5 million pounds is more what I should be thinking forward and is that sort of what you are basing that tax rate on going forward? That sort of magnitude?

I would really hate to quote any assumptions around future purchase expectations. Yes, so ex-HEU, we will always be in the market purchasing. I think that is fair to say. When we (technical difficulty) a good deal we get in and buy them. We will from time to time do that under long-term arrangements as well. But at this point I really wouldn't want to quote any numbers.

Fair enough. I just was trying to get a feel because this obviously looks like a very high number this year which I assume is more just because of the HEU topping out than anything else, right?

Right. Yes.

Great. Thank you very much.

David Sadowski, Raymond James.

Good morning. Just a couple of questions on production over the next two years. Firstly, can you confirm that throttling back on output from the US ISR is due to permitting, I guess, what you would call sluggishness. And secondly on Rabbit Lake with expected production higher there now, can you provide any update as to when you will be running low on reserves and payment capacity?

Yes. You are right on the first one. The sluggishness is a good description of the permitting progress there. But I am going to ask Bob Steane to give an update on both of those matters. Bob?

Yes. As Tim has said that is exactly right, that our hopes and aspirations in the US permitting is running slower than we anticipated and it continues to stay even and slight increases as we go forward. The Rabbit Lake, our latest reserves that we have got about 20 million pounds of reserves in current production, we have got four to five years of production, something like that under what we have in our existing reserves.

And what about the [tailing] capacity? Is that affected by this uptick in production expectations there?

Actually, no. The tailing capacity, existing tailing capacity is adequate for the existing Rabbit Lake reserves. A big change there has been the change of the Cigar Lake northern strategy implementation with Cigar Lake all going to the [JEB Mill] McClean Lake, JEB Mill for processing that speed up some space at the Rabbit Lake site.

Plus we have had some reasonable success with process improvements getting better, density in the tailing have added some more capacity as well and some success in [selling some Icelanders]. So all in all, we are good for the current Rabbit Lake reserves and the existing Rabbit Lake [tests].

That said, we are undergoing an environmental assessment for an expansion should we need it. So we are continuing if you follow the regulatory process. We are continuing with our application. We are doing the environmental impact statement for the expansion and so we will have that in place. Should we need it we will be able to deploy.

Thanks, very much.

David Paddon, Canadian Press.

I would like to revisit the entire write down.

And I appreciate that in your view it was a good deal at a fair price when it was done. But can you explain why or when you think it will start to pay off as far as in the current situation following the Japanese problems with the nuclear industry and how it spread out?

Yes. As you know that property was acquired in 2008 and 2008 was a different lifetime quite frankly in our business pre financial meltdown, pre Fukushima. So it is a good project. It remains a good project.

There are significant resources there that we are planning on exploiting in the future, but right now in the market you have seen us put out numbers that we need to hire uranium price or more pounds or preferably, as I say, both. So we are working on that this year. Our drill results around the ore body were not as encouraging as we had hoped. So we have put it into our bullpen for now, but we have to see an improved uranium market to pull that project back out.

So can you give me some sense of how much improved? Like in terms of either the price or the demand or something to that effect?

Yes, I think we said we used a number of CAD67 a pound would make that project interesting. So somewhere in that ballpark. And you have seen, if you follow the market, you have seen others, our competitors are using CAD75 to CAD90, or CAD84, or somewhere in that market. We wouldn't dispute those numbers. I think something certainly north of where it is today, but in CAD60 to CAD80 range would start to get people interested in moving projects ahead.

And just on a global big picture point of view, some places cut back on their atomic energy programs or said they were going to after Fukushima. And of course, Japan had to shut down theirs and are preparing to restart.

Where is the overall demand or health of atomic energy today compared to prior to that disaster? And how long do you think until confidence is restored to that level that it was before that problem?

So, clearly Fukushima has had an effect. There has been a pause really to look at the reactor standards and safety and there are some high-profile countries like Germany who had 17 reactors operating before Fukushima, quickly shut down eight and are just running nine now and plan to phase out over time. And we will watch how that unfolds.

But what gets a bit lost, though, is the continued growth that we see, especially in Asia. And China today, I think, has 29 units under construction, 16 operating and plans for a dozen more by the end of the decade. South Korea continues to grow. India is continuing to grow. And we even see it now countries in the Middle East, like the United Arab Emirates with four units under construction.

So we see growth. We see 3% growth. As I said in my opening comments over the next 10 years, 3% per year. That is significant growth and at a time when the supply of uranium is today balanced, but going forward you lose 24 million pounds of HEU starting next year. You have projects including ours, the Kintyre piece we just talked about, but I can name many others that have been put on the shelf as being non-economic in this market and so we think those fundamentals are good for Cameco and for the uranium business. And we are still growing. We are growing from the 22 million pounds we produced in 2012 to 36 million in 2018 to be ready exactly for that growth in the market.

Fraser Phillips, RBC Capital Markets.

Thanks. Good morning. Two points of clarification. One, Ken, with respect to NUKEM, I heard the volumes I think you asked similar question twice. I got the volume from both was the same but I thought you had said originally that the margins as you've quoted for 2013, because they necessarily included HEU, would go down, be somewhat lower going forward. I didn't think I heard that the second time. Sorry, I just got to get that (please multiple speakers).

Yes, no, fair clarification. It is that the 3% to 5%, which again was a fairly rough number, we are just saying that we are assuming that as an ongoing trading margin that the NUKEM business could make on those volumes. But it does not include the HEU. So don't use that number for 2013. We will just use it for beyond.

Thank you. Grant, or Tim, just with respect to the tax situation again. Current litigation, does it only covered 2007 assessment or does it cover the prior assessments as well?

Yes, in 2008 is when the dispute began with the CRA. And right now, it covers the period 2002 to 2007. And as they -- as the CRA gets close to the statute of limitations, if you will, on a year to be assessed they have been rolling in subsequent years. So we are at 2007 now.

As I mentioned on an earlier answer, we don't know what the assessment looks like until it arrives. So for 2008, or 2009, we would not receive that probably until the end of the year. So at the moment it is just the period 2002 to 2007 and, of course, what we are working on is our case to say the governance structure was right and, therefore, within that governance structure of the transfer price methodology was correct and our view results in the CAD63 million provision that we take reflecting the uncertainties of the litigation process.

So does the CAD63 million represent potential, heaven forbid you lose the case, would you have to pay the further 50% you have not already had to pay for those prior years? And is CAD63 million that sort of estimate, or --?

No, the CAD63 million comes from an assessment that we do on the transfer price methodology whereby you would make sure you're using a credible third-party expert to derive a population, if you will, of transfer price agreements. I mean what we are trying to do is you are trying to model would an actor at that time with that information have signed that transfer price agreement. So was it sufficiently or reasonably arm's-length and as we model that, we just make -- we then bring out the data set to say that the agreement is certainly or so the agreements we've entered into do represent that population, but recognizing that these types of disputes come with uncertainties, we better take a bit of a provision to account for that. So it is from that perspective that the provision is taken. With respect to the cash taxes that are now being paid as part of the assessment. Well, because we view that our position is right, we expect to recoup those.

Yes and likewise if you say heaven forbid you lose, would you have to say or pay them the other CAD27 million plus, are there outstanding amounts from the previous years you would have to pay?

Those would have been -- those would be covered with the tax loss carryforwards that were applied against those assessments in the first place.

So you applied the full amount, not the 50%?

No, still against the 50% of the reassessed amount.

So if you lose the case you have to pay the other 50%?

Well, if that improves the situation, but that of course isn't our expectation and not the basis of our provision.

Emily Meredith, Nuclear Intelligence Weekly.

My question is how does this 3% growth in uranium demand take the Japanese situation into account? For instance, if they don't come on for more years than you expect, does it affect that 3% number?

Yes. That is a good question and we, as I said a little bit earlier, we have made some assumptions regarding the nuclear fleet in Japan. And the first one is that we expect six to eight of the units to be restarted this year and then, growth going forward, the other units to be back on. I think we would estimate that not all of the units in Japan that are existing today are coming back on, but most of them I think in the 40 unit range over the next several years. So that would be our assumption there.

And does that affect your growth projection given that they have their stockpiled -- I mean -- when you are talking about 3% demand for uranium they have obviously already got plenty of material in reserves. Does it affect your 3% figure?

No. That is just one of the markets that we are watching. As I said we are watching very closely China and South Korea and India and the Arab states as well that are getting into nuclear. And so that is an overall, that 3% is an overall taking all of the countries, everyone involved in nuclear, into account. Looking at their programs, studying them, we have people here that study them.

We also watch with the other reporters like you and others are saying about it and then we draw our own conclusions.

So we think that 3% growth is a prudent and reasonable estimate of the growth over time. Given both sides of the reactors that may not come back on and the new growth.

Thanks. And to follow up very quickly, what is the margin that you are expecting for NUKEM in 2013?

Grant, do you have that?

Well, what we said and I will just remind you that NUKEM is a 2013 advance for us and so in quarter one 2013 we will be putting out our purchase price allocation and our opening balance on that segment. We intend to account for it on a segmented basis. We did acquire and the deal closed on January 9, 2013.

So what we thought we would do is put a bit of a framework out for people to think about the gross margin and the cash flow coming from NUKEM. And as Ken has said a number of times today from a gross margin point of view, their range sort of 3% of 5% for 2013, more indicative of trading volumes. In Tim's opening remarks he had mentioned that the core business and core value is mining and NUKEM provides some exciting trading opportunities, but those gross margins will be really from a -- sort of from a trading point of view, 3% to 5%.

John Tumazos, John Tumazos Very Independent Research.

Two questions if I may. Thank you for taking my question. Allegheny Technologies has a business selling zircon alloys for nuclear plant operation. And they laid off half of their crews in January at their operation in the western US expecting, I guess, poor demand for the zirconium alloys. Could you comment on that vis-a-vis your own quarterly outlook?

And second, there is I guess I would call it in the physics community that likes the element thorium as a reactor fuel. And would you comment as to whether your deposits contain thorium? And what you think of thorium as an alternative or supplement to uranium? For example if there is not enough uranium to fuel all the Chinese and Indian reactors coming?

Thank you for both of those questions. Certainly on the zirconium front we are purchasing our zirconium for our fuel fab business that we run for the can-do units that we supply. And it is pretty well business as usual for us. We have long-term supply agreements with our suppliers for zirconium and so, really nothing new there, no change. That is a pretty steady business as those reactors run and we have good foresight on the fuel they need and the zirconium that we need. So nothing to report on that front.

On the thorium piece, we could talk about that for some time. It is an issue that comes up probably every year at some point. The Indians probably are most advised on thorium. The Chinese talk about it, but no one has really taken it very far. And we certainly don't see it as being I would say a threat to uranium in the near term. And I say in the next 20 years I think there is a lot of work has to go into it to make it any kind of a viable fuel alternative to uranium. So that would be many, many years down the road before that would threaten uranium fuel reactors.

You think that you would want to pursue it as a product if in fact the Asian reactors are more than the uranium market can -- the mines can supply?

We are certainly hoping for that outcome that there's more. But at the moment we don't see it. We see enough uranium certainly in the near term. Your question is a good one long, long term. I think as the Chinese continue to build and they have very aggressive plans and other countries have built up nuclear as an alternative to fossil fuels, because -- I mean, you just have to watch television and see Beijing on certain days, they can't see across the street.

There are issues going forward -- the climate change, clean air, just security of supply. And we think nuclear power is going to continue to play an ever-increasing role in that. And so that is important. So that is more uranium demand. As I say right now there's many years forward supply of uranium. Now that is not in the can, that is in the ground and those are two different things, but you know as they say some countries are looking at thorium as a possibility long, long term. But not for Cameco.

Edward Sterck, BMO.

I just had a couple of follow-up questions. First was going back to taxation. If CRA if CRA's position was correct which, obviously, I know the assumption is that it is not, what would the expected tax rate be in 2013 versus the full cost recovery of 15% to 20%?

Well, I actually don't have that number at hand. Obviously that is a scenario that I am not running because I don't actually think that that is the outcome that we are looking at. What we do say and it's in note 24 of our financial statements and in there under reassessments -- section E -- we go through the years that have been covered by this and then, we go through how our provision is set up. And we do know that resolution of this matter may result in liabilities that are higher, lower than the reserve being a provision of CAD63 million. We believe the ultimate resolution will not be material to Cameco's financial position, results of operations or liability in the years that are covered.

We then go on to say resolution of this matter as stipulated by CRA would be material to Cameco's financial position, results of operations or liquidity in the years of resolution and other unfavorable outcomes basically should we lose that case. So our view is that our position is very strong. It is a view shared by our legal counsel, obviously.

But in terms of what that ultimate impact would be I don't have that number at hand.

Fair enough. One follow-up question then on the reports of a storm in Kazakhstan, I think last weekend or just the end of last week. Possibly the week before. Were there any impacts on operations at Inkai and have you any information on what the potential impact to your other operations in Kazakhstan might have been on a production basis and how long it might take to restore power to these sites?

Yes. I know Bob has some information on that. There was a storm in the Suzac region, I think around [Talkint] mostly. Hasn't affected our operations but, Bob, do you have any further information than that?

No, I really don't. It did not -- other than on the base of the storm as one would expect there were some power bumps on the system and we had some very, very short-term power bumps at Inkai. It didn't have any impact or effect on operations at Inkai.

And other than what we have all read in the paper and the news briefings, I don't know of what the outcome has been to the other mines in around the Talkint area. I just don't know any more than what is already out in the press.

That's fantastic. Thanks very much.

Oscar Cabrera, Bank of America Merrill Lynch.

With regards to your CAPEX, I must say that I missed the detail that you provided before, but in talking about your growth capital what deposits are you spending this money on 2014 and 2015?

Grant, do you want to line up the growth capital?

Yes, good question. You have picked up on a change in disclosure and when you say that you missed the detail, that is something that we are certainly working to clarify as we go through the quarterly reporting.

And just for everyone else that may not have noticed it, what we have done in the past is we had growth in sustaining capital to capture our CAPEX program. But we discovered that while it may have been a very pure accounting way to defining and very simply we just said look if it doesn't add pounds, it was going to be called sustaining capital even if it was CAPEX that was being spent to enable either of us to stay in level of production.

And so what we wanted to do this year was break out the CAPEX a little bit more. So you see a definition and if you think about it conceptually on the horizontal axis is time and on the vertical axis is production capacity and sustaining capital is what is spent to run an asset out on its regulatory production life. So of course it declines.

If you think about that production capacity line being constant, capacity replacement is the capital that is spent to keep at that production capacity level and growth, of course, is to move to a higher level of capacity. So with respect to growth, what you see in there is a switch over from completing the Cigar Lake project to, then, moving into McArthur River expansion because you'll note in the last technical report, McArthur River expansion had the increase from 18.7 million pounds to 22 million pounds. So by definition that is growth capital. So that is the switch over that you see in gross capital.

So it is entirely MacArthur.

Well, it is not entirely MacArthur, but that would be the bigger weight of it and then the infrastructure requirements along with it.

Fair enough. Because then the follow-up question to that is on your profile, I mean, we are getting closer to 2018, but 2017 you are showing production of 31.5 million pounds. Where are we getting the balance to get to the 36 million pounds you are forecasting?

We have as Grant said McArthur River ramping up to 22 million. We will bring us some extra pounds the US as well is ramping up and I think we have the -- sorry?

And we have Rabbit Lake.

Yes and we have the Rabbit Lake. So with those the biggest chunk will come from McArthur River in the US.

Basically your excess in operations will get you to 36 million pounds?

And we have as well the Talvivaara piece that sort of just looking through it, to add 1 million pounds. So, yes. Existing plus that.

Thank you.

Greg Barnes, TD Securities.

Grant, I hate to go back to this again, but on the tax issue, going forward now, if you are renegotiating the transfer pricing agreements, how do you anticipate your tax rate will involve? To what level?

Well, you are going to take me out into an area of forecasting that is going to make Rachelle very nervous here. So let me just say that if you think about it from a structure point of view, long-term supply agreements that allowed us to sign long-term transfer price agreement, we will move into a new period of transfer pricing agreements as the old ones expire so sort of 20, 16. When the old ones come off the new ones will come in. Those will be negotiated closer to the markets that we see today versus the markets that we may have saw in the late '90s, for example.

You can imagine then that that is going to put upward pressure on our tax, but of course we will continue to structure our sales and our production according to what makes sense for our business needs and meeting the needs of our customers. And we will always look then within that business rationale to be tax-efficient. So while we will have more production tax expected in Canada so Cigar Lake, McArthur River coming on and they will be subject to transfer prices, negotiated closer to the markets that we know them today, prices that we know today. But ultimately we will still market in a way that makes business sense for our customers and, then, look to consolidate a tax position as the net of those two.

So we will guide the market when we have more clarity on what that number is going to be, but right now our outlook is the tax positions that you have seen so far are probably the appropriate ones to guide going forward out to the 2016 period.

Thanks.

(Operator Instructions). Evan Moore, SIM Magazine.

I have what I think are simple numbers questions. The forecast that you are using for the growth in uranium demands, does that include both the amount that would be required to initially stock new reactors and that would be required to keep our operating reactors running?

That is a great question and the answer is yes.

Second number question, you cited the number of 64 reactors currently under construction a number of times, I'm wondering I assume that includes the 29 reactors that China is building. Does it also include reactors in Japan?

It does include two units in Japan that are under construction and it does include the Chinese 29, yes.

I wonder what other components going to make that up? It is slightly different (technical difficulty) numbers estimated other risk. So I am wondering which -- what are the points that you differ from say (technical difficulty)?

So I can, I have the time, I can give you we have 29 in China, 10 in Russia, seven in India, four in South Korea, two in Taiwan, two in Japan, and two in Pakistan, two in Slovakia, one in France, one in Finland, the Emirates, one, Brazil, one. We have the US with one and Argentina with one.

Brian MacArthur, UBS.

Sorry to go back to this tax again, but to be really clear now going forward, everything you are talking about is ex Bruce because it is going to be equity accounted going forward. So the tax rates we are talking about are a combination of the uranium business, the conversion business, and the fabrication business. Is that right?

Yes, it is right. So under equity accounting, Bruce will just come in as one line item which will be earnings before taxes. Then there will be a bit of the tax effect for Bruce, but the weight of it are the components that you have identified.

Edward Sterck, BMO.

Coming back for a third round of questions. The first is on Talvivaara. Is there any -- is the agreement there collateralized on anything or is it just straight investments on behalf of Cameco?

It is an investment on the half of Cameco. Ken, do you want to just talk about Talvivaara for a moment?

Yes, absolutely. So we have been -- we obviously made the investment, but we have also the agreement providing technical assistance in Finland to see recovery of uranium. And that is all going fairly well as you, I'm sure, have seen there has been a delay in the environmental licensing, which it looks like will be received in June of this year.

So it could be that we expect or we get a few pounds this year, but could be that it gets pushed into early January -- early 2013, I should say as well, ultimately ramping up to somewhere around 900,000 pounds a year. So today, we are looking at it as a good source of supply for Cameco's collateralized. It is an investment, but of course, there is a provision to have the funds paid back if we don't receive uranium. It is an offtake arrangement whereby we think it is fairly favorably priced pounds for Cameco's portfolio.

And does the expected uranium production rate require Talvivaara to meet their overall production target with respect to nickel and zinc and so on and so forth? So the amount of all of that as you put through the plant or not the plant, but the (inaudible) presence?

I think it is fair to say that it is a commingled deposit so on the face of it the answer to that question is yes.

Thank you. And one question on Bruce Power. The agreement with the ATA and I believe also the license -- operating license reactor beginning to tick a little bit closer from recollection I think it starts towards the end of 2015, something like that. But those agreements come to a conclusion and going on for a few years thereafter. Are there any further thoughts on Cameco's ongoing involvement with Bruce B?

We are always looking at our investments including Bruce B. I just say you are right on, with respect to the floor prices they do start to come off at the end of 2015 with the first one.

That said, Bruce Power is in discussions with the Ontario government about extending those and so we will just wait to see how that is going. There is, as you know, a lot of political change going on in Ontario.

So right now, we are delighted with our investment in Bruce. It certainly was a very good piece in 2012 and it will be a good contributor in 2013.

The Bruce area reactors required a fair amount of investment when they were refurbished. If that was -- if Bruce -- I'm not sure if Bruce -- the Bruce B reactors require refurbishments. Are they in a better situation than the Bruce A reactors were before they were restarted and would cost be similar or would cost be similar to the Bruce A process?

I think -- well, first, let me say they will need refurbishment when their time comes toward the end of the decade. And so, I think they would benefit from the fact that -- the refurb would benefit from the fact that Bruce has gone through it with the A units. A lot of learnings from there. But the cost would be probably similar to what the costs were for the A units.

So that is something we will look at, we are looking at now as to how Cameco will react to that when the time comes, but for the moment no change to our position.

Thank you very much.

This will conclude the questions from the telephone lines. I would like to turn the meeting back over to Mr. Tim Gitzel for his closing remarks.

Thank you, operator, and thanks to everyone to has joined us on the call today. It is certainly a robust discussion and we certainly picked up a few themes as well that we will try to help out on going forward.

We certainly discussed a lot of the details around our business and the industry in 2012, but I think we can say it really boils down to the three things we talked about at the start of the meeting. And that is that near-term challenges persist for us in the industry. However Cameco had a very strong year in 2012 and looks forward to a good year in 2013. And that the long-term outlook for the industry continues to be very strong.

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

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.