Cameco Corp (CCJ) 2013 Q2 法說會逐字稿

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

Thank you, Donna, and good afternoon, everyone. Thanks for joining us. Welcome to Cameco's second quarter 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 VP and Chief Commercial Officer; Bob Steane, Senior VP and Chief Operating Officer; and Alice Wong, Senior VP and Chief Corporate Officer. Tim will begin with comments Cameco's second quarter results and current industry conditions. After, we will 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'll turn it over to Tim.

Well, thank you, Rachelle, and welcome to everyone who has joined us on the call today as we discuss Cameco's second quarter results. We certainly appreciate you taking the time to join us today. Overall, I would characterize our financial and operational results as consistent and as expected. I'm happy to say our financial results were up across the board this quarter, with revenue, gross profit, and net earnings all increasing over the second quarter of 2012.

For the first six months of the year, our net earnings are below what they were in 2012. That's mainly because of the light first quarter we had in 2013, which you'll remember occurred as expected due to a very light delivery schedule and lower earnings from Bruce Power. You can see that earnings from Bruce Power were low again this quarter, but that was expected as the utility continued with its planned outages. Overall for the year, we expect earnings from Bruce Power to be only 5% to 10% lower than they were for 2012. And we are on track to deliver on our outlook in general, as uranium deliveries increase over the next two quarters.

Turning to production, it was down this quarter from 2012. The decrease was a result of some planned maintenance shutdowns at McArthur River, Key Lake and at Rabbit Lake. Both operations are on track to deliver on their production targets for the year. At Cigar Lake, we continue our journey toward first production. As we pointed out in our MD&A, our capital expenditures at Cigar will increase by 15% to 25%. That's mainly because of some scope changes at the mine and at the Areva Mill, as well as the same upward pressure being felt on costs across the mining industry. In addition, the previous estimate only included our expenditures to first ore and not the capitalization of startup costs. However, Cigar Lake remains an important source of what will be low-cost production and our team keeps making solid progress toward first package pounds in the fourth quarter. I was at Cigar Lake recently and am consistently impressed with both the quality and the tenacity of our team that are a talented and enthusiastic bunch who are committed to getting this job done safely and efficiently. The Cigar Lake project is a big part of our strategy to increase supply to 36 million pounds per year by 2018 and remain a successful, low-cost producer.

On the subject of remaining a low-cost producer, we took further steps this year to ensure we are continually improving our position over both the near- and long-term. We made changes that target increased capital efficiency and a sustainable 10% reduction in future expenditures. The changes were necessary, given the current market environment, which requires us to be leaner and more efficient in order to stay competitive, but they will also help us continue to grow the Company profitably over the long term.

Today, the importance of increased efficiency cannot be overstated. The uncertainty resulting from the continued shutdown of Japan's reactors and the resulting inventories remains the biggest issue. It's the primary reason we continue to see downward pressure on uranium prices, along with discretionary buying from utilities who remain well covered for the time being. There have also been some other unforeseen developments, like the four reactor shutdowns in the US, as well as the shutdowns in South Korea for safety reviews. There's no doubt that the market conditions continue to be challenging.

But today I would also say that we're starting to see some tangible movement. In July, Japan's nuclear regulatory authority finalized their new safety regulations and four utilities have applied to restart 12 reactors. The next few months, as the reviews progress, will be very informative as to what we can expect for Japan's nuclear fleet and should provide some certainty around how the inventories those utilities hold will be managed. Of course we'll be watching that closely, but our focus is certainly not limited to the near term.

Ours is a long-term business and those long-term fundamentals remain very strong. We're expecting average annual growth in uranium consumption in the order of 3% per year out to 2022. That's being driven by the growth in reactors around the world, from 430 today to more than 520 by 2022, 67 of which are under construction today. China alone has six reactors planned to come online this year. One of those has been connected to the grid and the others are getting close. So this growth is not just something we think will happen. It's happening as we speak. As we've said before, it's just a question of how long it will take for that growth to become the more dominant force in the market than the challenges currently being faced. We know it will happen. We continue to prepare for it, but I can assure you that we also continue to adapt to remain efficient and profitable throughout this period of uncertainty. So with that, we would be pleased to answer any questions.

Thank you.

(Operator Instructions)

Greg Barnes from TD Securities.

Yes, thanks, operator. Good afternoon, everyone. Ken, a question for you. Clearly, the uranium spot market is under pressure but my understanding is a lot more volume's been done in the midterm market now than even the longer term market. Can you give us some idea of what the dynamics are around spot midterm and long-term contracting purchases, inventory builds, whatever?

Yes, absolutely, Greg. So thanks for the question. The dynamic at the moment, you're looking at a substantial spread between the term market at around CAD55 and the spot price of around CAD34.50. And it has a lot to do with the fact that indeed there is very little demand in the long-term market. We look at year-to-date numbers, we're just a little bit below 9 million pounds long-term contracted through 2013 and that's well below what we would have seen in previous years. So there's -- in terms of exercising the buy and hold, in other words, buying spot volume today at very low prices and holding it through and delivering it into a CAD55 contract, there's just not that many opportunities to do that in a low demand environment -- long-term demand environment that we're seeing today.

There are a few midterm deals being done. That's true. But there's some -- quite a bit of negotiation around what the midterm price is today, is it discounting the long-term price backward, is it escalating the spot price forward? So there's a little bit of that being done today, but not much because if there were significant volumes, you would expect increased pressure on the spot price. Then just moving to the spot market, we're in what we call our summer doldrums when a lot of fuel buyers, lot of people on vacation over the summer coming back to look at their budgets in the fall. So we have that dynamic. We have very little in the way of demand over the summer here and yet some material that people are moving. And we've seen some deals done, traders moving some material, as well as a few producers, and hence the drop in the uranium price.

As we head into the fall here, we'll see how that dynamic unfolds. I will say that just in the last few days, we've seen these very low spot prices draw out in excess of 1.5 million pounds worth of demand. So we've hit this CAD34.50 and now we're seeing some substantial new spot demand. So, Greg, probably doesn't answer the question perfectly. There is that dynamic taking place at the moment. But I think it's all in the context of anyone looking to buy uranium is in a little bit of a wait-and-see mode. As prices fall, demand somewhat discretionary continuing to stay out of the market and looking for that inflection point when prices turn and then I can expect that we'll see more demand coming into the market.

Okay. That's great. Thanks, Ken. Just my follow-up question is around the Cigar Lake CapEx increase. You mentioned scope changes at the mine and mill. I was wondering what exactly that involves.

Yes, thanks, Greg. I'll ask Bob Steane to talk about those scope changes that we referred to. Bob?

Yes, sure. Greg, the two aspects -- first, I'll say I was at the mine, I'm up at Cigar Lake often, weekly and I assure everyone things are progressing on schedule. We will be starting and everything is looking very, very good at the site.

There's some other scope changes at the Cigar Lake mine site. As we have been into this final press in putting things together, we've had to do some additional piping. We've recognized that we had increased our surface freeze area, we needed some additional freeze capacity. We've added that. We've had some different development that we've had to do based upon the ground conditions we've encountered. And that's changed some of the scope at Cigar Lake.

And the [Jev] mill -- the mill is related to the expansion, so it's the post-2014, 2015 significant expansion of the Jev mill, some of the spoke changes, they are in that stages of design. It's still a work in progress. But as we're going into the design, they are seeing some changes in some of the equipment sizes, some of the built-in geometry, perhaps some of the site infrastructure, relocating some ammonia tanks from one location to the other, that type of thing. And both sites, I have to say, the biggest cost, one of the biggest cost drivers is escalation. We're seeing it at Cigar and with the mill changes farther out in time for the expansion to the Jev mill, the escalation compounding it. But that's the background to that escalation and scope change.

Okay. So none of this is going to increase the actual capacity of the mine to produce something [cause] 18 million pounds a year, though?

No. This is -- these are all to do the 18 million pounds.

Okay, good. Thank you very much.

Thanks, Greg.

Ralph Profiti from Credit Suisse.

Good afternoon. Thanks for taking my questions. Tim or Ken, in previous pull backs in the uranium price, we've seen producers like Cameco willing to step in as buyers, either to support the price or just for opportunistic purposes. This type of activity seems to be noticeably absent in the recent pullback. So I'm just wondering, has Cameco been less active than usual? And can you discuss how you think your own strategy may evolve over the next three to six months as prices would seemingly want to trend lower from here?

Well, Ralph, we'll see where things go. I would say Cameco is always around the market, in and out, sometimes to a greater extent than at other times. We continue to watch the market. We haven't been overly active I would say right now and for all the reasons that Ken gave, we've seen the spot price slip. So I think throughout the summer, it's not surprising to us that things, as Ken described it, are in the summer doldrums. More interesting for us will be probably the fall around the World Nuclear Association big symposium in London mid-September when we see how utilities start to react to the market, HEU coming to an end, Chinese build continues, Japanese restarts, we'll have even better information then.

What's maybe a bit encouraging to us, I guess, is the point Ken made about when the prices hit this level, you did see some demand come out of the woodwork in the million-plus pounds I think. So through the summer, I would say we'll -- we're not overly concerned. We'll wait and see how things turn out. We're more interested in what happens probably in the next quarter and into the end of this year.

Thanks for that. My second question is on Cigar Lake. And now that we have a more defined capital cost estimate, I'm wondering about operating costs. And as you cite scope and scale changes at the mine and the mill, how you're shaping up to meet the CAD18 a pound long-term cash cost target.

Yes, I think there's been no change from the information we put out on that. We're sticking to the numbers we've put out, which is around the CAD18 per pound -- sorry, grant's just reminding me it's --

CAD18.16.

Yes, CAD18.16 per pound. No change to that at all.

Understood. Great. Thanks for taking my questions.

Thank you.

Edward Stark from BMO.

Good morning, or good afternoon. I've got a couple of questions today. The first is just in the lights of the weak uranium price environment, is there any move to rethink the UU strategy and trim production output in the future or expect production outputs?

So, Ed, you'll recall we did pull back on that in October of last year, at the end of October. We rethought our UU strategy, which had us getting to 40 million pounds by 2018 and then continuing on up from there. So today we're looking at a revised strategy where we're focused on our Brownfields operation, expanding where we're already producing and getting to 36 million pounds by 2018. So we're constantly looking at that as well. Right now, we still think that's a good strategy. Cigar Lake, of course, is the bulk of that strategy, and so we continue on that path and we'll watch very closely as this market evolves.

Okay. Thank you. Just as my follow-up question, although [Greek] CapEx has increased for this year, mainly due to Cigar Lake obviously, it looks as though you've reduced your guidance for next year and the year after. Where is the CapEx being reduced and what are the savings? Are there any compromises that are being made by -- through that CapEx reduction?

Ed, that was part of our exercise to really look at the organization in these challenging times and look at our costs, our G&A or our administrative costs, our operating costs and our capital costs. And so it's pretty much across the spectrum that we've tried to pull back our costs or defer capital where we could in this difficult environment. So I think it's pretty much across the board.

Okay. Thanks very much.

Thank you.

Oscar Cabrera from Merrill Lynch.

Thank you, operator. Good morning, everyone. Or good afternoon. Just following up on Cigar Lake, can you please provide us the capital spent to date in the project? And then what should we expect to -- for this CapEx to be over the next, I don't know, two to three years once you have all the 15% increase that you describe in your release?

Okay. Oscar, thank you very much. I'm going to ask Grant Isaac to comment on that.

Yes, thank you, Oscar. The cost as at December 31, 2012, so of course we have some additions to that. Cameco has invested about CAD911 million in our share of the construction costs to that point. We also did have some remediation expenses as part of reclaiming the mine after the floods. So that was CAD86 million. And then we did have some standby costs as well, which were also expensed to CAD63 million.

You'll recall from the technical report that -- the last technical report we put out on Cigar Lake, our share of the construction costs was CAD1.1 billion. And of course with what Tim was talking about earlier, based upon our view of potential scope changes and anticipated escalation at both Cigar Lake and the -- and Arriva's McLain Lake mill, this takes out to 2015. We put out a range of an additional 15% to 25%. So that really takes us from that CAD1.1 billion to CAD1.3 to -- sorry, CAD1.27 billion to CAD1.38 billion for the Cigar Lake project for the construction phase of it, taking us out to 2015. And as I said, that's mine and mill.

That's mine and mill, okay. Great. Thank you. That's very helpful. And then my follow-up on this is you are trying to -- the expansion at McArthur river, are you seeing similar type of increases in CapEx?

Oscar, we're seeing some cost pressure in Saskatchewan in general. I think we have been to date. Other industries have been busy. The Oil Sands, Potash at least to date have been busy as well. So there are those cost pressures. But from McArthur, we haven't changed any forecast that we've put out or any of the information in our technical report that we put out about one year ago.

Are we to imply that there hasn't been any material change to -- despite the cost pressure that you see?

Not to date there hasn't.

Okay. Thank you.

Peter [Homas] from Arthur Wood.

Good afternoon. Thanks for taking my call. I have two questions. I'll ask them both at the beginning and you can take them as you wish.

First is, can you describe the mechanics of Russia ending their HEU contract? In other words, on December 31, if a contract expires on that date, is there still product in the conversion pipeline which continues to flow into the market in 2014 or does it stop there, et cetera? In other words, is it going to provide incremental inventory beyond the date of the expiration? And it's important, because that amount -- annual amount as a percentage of worldwide consumption is a meaningful percentage. If I understand correctly, equal to or slightly more than your annual production.

And then secondly, you are -- your goal now is 36 million pounds per year by 2018 and I'm not familiar -- perhaps you said it on a previous call, but in fact, between 24 million pounds and 36 million pounds, how much of that 12 million pound differential increase is Cigar Lake meant to provide?

Peter, thanks very much. It's Tim. Maybe I'll start with the second question.

Thank you.

First, and so of our increase to 36 million pounds, of course, 9 million pounds will be from Cigar Lake. The project, once up at full speed, will produce 18 million pounds and our share of Cigar Lake is 50%, so 9 million pounds. Then there's some increased production we're expecting from McArthur River, a little bit from the US. We've got product coming out of Finland, Talvivaara, so those will get us up to the 36 million pound mark by 2018.

I'm going to turn the first question on the Russian HEU piece over to Ken, just to say that you're right, that has provided about 24 million pounds of product onto the market every year. It does end this year. Our last delivery is this year. But, Ken, you may want to just give us a bit of the details of how that's going to wind up.

It's certainly relevant, Peter. So I can tell you that some of the closing celebrations have been planned around the HEU agreement, one of which is actually a delegation going over to the port of St. Petersburg to watch the last HEU cylinder loaded on a boat and coming west.

Do you have an attendee?

(laughter) Yes, well, it's gelling. So in any event, it's relevant. And I can tell you that source of uranium is ending this year. It doesn't continue into next year and those sorts of things.

Now, could there be HEU-related material? Could there be Russian-origin material finding its way into the market in 2014? That's possible. But that's just a case of inventory policy and what people are holding as inventory. We've long said we hold 5.5 to 6 months worth of inventory. That would be various origins of material and some of that could be HEU. But I think to your question, it ends this year.

So just to be certain that I understand, the demand -- the expectations on the part of utilities who currently are receiving from you or other folks some portion of their supply from this source, they are looking at a hard cutoff.

That's right.

More or less on January 1.

That's right, yes.

And why does that, in your opinion, not affect the spot market, given the expectations for this year's worldwide consumption?

That's a great question, Peter. We think it's one of the factors, one of the catalysts. I think utilities are probably pretty well covered. They have seen this coming. This hasn't -- this has been telegraphed pretty well. And so they have seen it coming. I think they are covered for the next few years. But this is one of the catalysts I think along with China, Japanese restarts, some of the supply deferral and destruction we're seeing that are going to have to have some impact on the price going forward.

Okay. Thanks very much. I appreciate it.

Thank you.

Thank you.

(Operator Instructions)

Tyler Langton with JPMorgan.

Thanks for taking my question. Just had a follow-up on Cigar Lake. Can you talk a little bit how much of the remaining CapEx is fixed versus variable and any commentary where there is a risk to see additional inflation at this point?

Tyler, we're not quite sure we understand between fixed and variable. Grant, do you have any comment on that?

Yes. Well, on the construction CapEx, so the new range we put out, so think of it as going from CAD1.1 billion to CAD1.27 billion to CAD1.38 billion to encompass mine and mill completion, construction completion up to 2015. That's based on packages of work obviously. Those are packages that we deemed are required in order to bring these assets into full capacity. And so I guess from that point of view, you might think of them as fixed once it's in commercial production. And we will have more typical categorizations of sustaining replacement and growth capital at that Cigar Lake project like we would have at any mine asset. But of course we're not in that commercial production phase yet. So I guess if I understand your question right, I would just sort of think of those work packages as -- we deem them as required in order to get the assets into full production, so think of them as fixed.

Okay. I guess I was wondering something that is not [bearings] where there's labor costs where you can't control it from this point, where [that back] it's the inflation or something like that I guess is what I was getting at.

Oh, I'm sorry. Certainly there's the productivity impacts that might happen because you have a lot labor environment and you're competing with other projects for trades or you may have worker turnover affecting productivity. Absolutely, that's in part captured in the escalation that we're signaling with this guidance of 15% to 25% increase. Of course we'll work very hard to make sure that that's the appropriate range and do even better than that, quite frankly. But you're right, those are some of the pressures that we can see.

Okay. Then just a follow-up, in Japan, I was just wondering over the last quarter whether you guys have seen any increase or decrease in either deferrals or requests to buyback inventories?

Ken, have you seen anything?

No, we haven't. No, and I think it's just a lot of clarity coming out of the country now in terms of the political process and of course the regulatory process. And so any utility with a fleet that's on the restart schedule, growing confidence that they are going to need that volume and we haven't had additional discussions.

Okay, great. Thanks a lot.

Thanks, Tyler.

David Snow from Energy Equities, Inc.

Yes, this could have just been asked, but I'm trying to see if you have any more possible deferrals of contracts to future years at a higher price as you've done in the past. And also if you are likely to hold back on some of the spot sales that you normally do in this weak environment? That's my first question.

And the second one is, on your release, you mentioned other projects have been reaffirmed, especially sovereign. I'm wondering if you could tell us a little bit more about who that is, what that is. Is it Kazakhstan or what are you referring -- who could be included in those, as well as who might still drop some volumes in this weakening market?

Yes. So, David, certainly again I'll start with the second question. As producers, we did mention the new sub project that the Chinese appeared to be moving forward. We're watching to see how that's going to progress. Those are not easy projects to move forward, and we'll see. I think they put some time lines out. We'll see. But we assume if they say they are going forward, they will go forward with that.

We can tell you on the other side, there's probably a larger list. We think of some of the other pieces, including our own Kintyre piece that we've said just in this price environment don't make any sense and we've seen from our competitors the same type of language. So it's a bit of a mix as to who is moving ahead. But I can tell you at CAD34.50, I think you won't see a whole lot of projects moving ahead in that environment. So on the other piece, I'll just ask Ken to comment.

Right. Yes. So I think there was two questions there on deferrals and spot sales. On deferrals, I think it's fair to say that the ones that we've done in the past, as we've said, they make sense for Cameco and for Cameco's shareholders. And while we're not receiving those requests today, would we entertain them? Well, only to the extent that they make sense and they make sense for our shareholders. And that could mean something like deferring out, as you said, at higher prices, recognizing you take on a little bit of risk with later deliveries, and so we need to be compensated for that. Those are the kinds of things that we would look at. But again, we're not in those discussions today.

With respect to spot sales in this environment, I'll just say that we do have a portion of our long-term portfolio that's being deliberate reference in the spot price. We have no interest in seeing the spot price go lower. We make sales, fortunately where we have a contract portfolio that we can lean back on today that's giving us average realized prices well above the current spot market. And we are in not -- in no way backed into a corner having to make spot sales. So you would -- you probably won't see Cameco making bunches of spot sales in this market.

Well, would that mean that the roughly 50% of the total sales could be subject to some downward discretionary curtailment then?

Well, you -- I would just refer you to our price table on our MD&A, which actually delineates that all very well. It's true that we have some exposure to spot prices, but that's all subject to those market-related contracts [bumming] into [floors], for example, and I would also say our market-related contract is not just subject to spot prices. 50% of those market-related volumes are delivered at long-term prices, which today is at CAD55. So there's some simplifying conservative assumption that our price stay low. But it generally reflects our portfolio performance.

Just one follow-up on the -- do you see any indication that Kazakhstan might slow down its rate of ISR, well field additions?

Well, I clearly think, as Tim -- I clearly think they will slow down the rate of growth that they have had. The last -- we talk to them all the time. The last numbers that we saw come out were that they would go from the 20,900 ton they produced last year. I think they were looking to increase to about 25,000 ton over the next I think four or five years. So those were the numbers. We'll see. They are very prudent, very market savvy and good partners. And so we'll see where they take that. But that was the last we had heard.

Okay. Thank you very much.

Thank you.

Emily Meredith from Nuclear Intelligence Weekly.

Hi, thanks. I just was wondering if you could talk a little bit about the Cigar Lake ramp up and if there are any conceivable price scenarios where perhaps you would adjust the ramp up there.

No, the ramp-up, as Bob Steane said, or the construction at least is going very well. We're on schedule, on track. We have a ramp up schedule that we plan to stick to. This is material that we need -- at least Cameco need and we know our partners need. Replacing some of the HEU that is ending this year, there's -- we've been beneficiaries of that HEU for many years and so we need to replace that. And the Cigar Lake -- our share of the Cigar Lake product is a great replacement for that. So we plan to ramp up as planned.

Okay, and then just in regards to [U chem] and revising down the sales volumes 8 to 10 million, can you just talk a little bit about that decision and whether or not that means anything for your inventories?

We just thought that in this market environment, it was prudent not to put inventory bounce onto the market at that price. That's our thinking there. We put in our MD&A the effect of that. And we I think will just hang on till the market improves before we put some of those inventory pounds on the market.

Thank you.

Thank you.

Thank you.

(Operator Instructions)

Edward Sterck from BMO.

Hello, again. So I've got two questions again. The first is just regarding the 10% cost reduction from next year and onwards. Is that a target or is that a definitely achievable -- is it definitely achievable target, or is it an aspirational target?

Well, it's achievable. I can tell you we've worked very hard over the last six months and taken some really, I would say, difficult decisions here, Ed, in the house but decisions that we're required to take to remain, as we say, streamlined and lean. And so we very much believe we will achieve those goals.

Okay. Thank you. And then just as a follow-up question, if the uranium price continues -- or the spot uranium price continues to slide at all, is there any level at which you would need to look at impairing some of your assets? I mean, I guess some of the acquisitions Like Kintyre that occurred when uranium prices were substantially higher in more of a bull market acquisition type scenario?

Thanks, Ed. Grant, you're on that all the time.

Yes, that of course is an annual exercise to go through your asset portfolio and see how it shakes out compared to where the current market is at. We saw, not just for Cameco, but for a lot of mining companies one of the effects of International Financial Reporting Standards. You saw us take an impairment charge on our Kintyre asset, because as an advanced exploration project, you have to use the fair value less cost to sell approach, which if we think about it conceptually, you're pounding a for sale sign into the ground and trying to sell the asset today. So you are really rooted in today's price, in today's price dynamic, and quite de-linked from your strategic intent. So we'll go through that process again as part of our annual review. I don't want to prejudice what those evaluations might turn out to be, but that is work that we'll certainly do through year end.

Okay, great. Thank you very much.

Thanks, Ed.

Blair Veenema from Manning and Napier.

Yes. Thanks for taking the question. I wanted to get a little language from you guys on the conversations that you're having out in the market right now with non-Japanese-based utilities specifically, given the clarity or the improvement in clarity that we're starting to see in the path towards restarts and just HEU falling off and in general seeing the potential for the supply and demand dynamics tighten a little. Is it utilities sitting there actually waiting still for some form of inventory liquidation or is there more that you're hearing from your counter parties? Thanks.

Thank you very much, Blair. We talk to them all the time. We're always out with our customers talking to them. Right now, as Ken mentioned, not a lot of long-term contracting going on, because they may be looking to where the market's going and thinking it might be going lower. We certainly have perhaps an opposite view. So not a lot of contracting going on but, Ken, do you have any comments on that?

Yes, a fair question. I think there are a number of utilities who are watching Japan quite closely and with a little bit of clarity. And demand being I'll say somewhat discretionary, it could be that if someone is looking to layer on volumes, they may do it sooner rather than later. This is this inflection point that I talked about in terms of seeing that additional demand and prices turning. I'll also say though it has been our experience that in the past in a low price environment utilities in terms of inventories tend to feel quite comfortable. And there's a sense that there's a lot of cheap uranium around. And in a rising price environment, tend to layer on additional inventories with the sense that there's not as much uranium around. So at the moment, I think utility is somewhat discretionary demand, waiting to see what happens in Japan and comfortable within inventory levels in a low-price environment, again, we haven't seen those large demand numbers coming out. And so it's just for my -- in my mind a question of when.

Okay, great. Thanks. And one follow-up, with the recent move that we had down from that line of support at 40, down breaking 35 or I'm not sure where we're at today actually, but other mines beyond just your own out there, from a cash cost or from an all-in cash cost and maintenance CapEx standpoint, are you seeing -- what do you see in terms of global supply that potentially is operating at a loss or moving towards operating at a loss and the potential for any mine closures or curtailments? Thank you.

Yes, thanks, Blair. At CAD34.50, we know it's tough out there for a lot of producers. We know our own costs and we have a sense of what some of the other ones are. And it is very -- a very tough market. Now, in our case, we're fortunate to have the basket of contracts, the strong sales portfolio that we have that is certainly at a much higher level than the spot price. So we're okay. We're -- as we say, we're keeping our heads down and our spirits up and trying to really watch our costs here.

Other producers I think would be in a -- if they have a nice portfolio, they are probably okay. If they don't, then they would be in a tougher position. And then as to how long you keep going at that rate depends on what it costs you to shut down and a lot of other variables. So it's tough to say. It's tough for us to say for others. But I can just -- we can just speak for Cameco and say that in this market, our basket of contracts, our portfolio is doing us a good service.

All right. Great, thanks.

Thanks, Blair.

Thank you.

(Operator Instructions)

Greg Fontana from Convergent Capital Partners.

Yes, hi. That's convenient because the question is related to the one that was just asked. So maybe two questions on that topic. One is if you look at the capacity out there today, at what -- what is the sensitivity to say another CAD3 or CAD2 drop in the price of uranium to coming offline? I mean, is it in the order of 2% or 5% or 15%? And another question related to this is if you say there's 67 plants under construction, to what percentage of their initial load has been purchased to date? When will we see demand coming from that catalyst?

Yes, those are both tough questions. I would say the sensitivity to a CAD3 drop in price, you would have to go probably company by company or project by project and ask that question. I can just say in our case, again, if you look at our price table, you can get some sense as to what price we would receive in a CAD20 market, 40/60, and that gives you some of our numbers and we're not overly sensitive to that CAD3 drop. But again, for the other projects, I would really hesitate to comment on others. The 67 units under construction, I think 28 of those, Ken, are in China, 10 in Russia, I think seven, [seven], three and numbers like that. And again that would be country by country. I'm not sure we have any real precise numbers on initial core. Ken, do you have any further on that?

Yes, it's really difficult to say. For example, 28 units in China. I think we know that the Chinese have been doing a lot of buying obviously over the last five years in anticipation of this large build out. And so it boils down to inventory policy in each of these places, how many pounds they want sitting behind each reactor and so on. I think we fall back to -- we expect uranium demand to grow in our business at about an average of 3% per year. So we translate all of these initial core demands and requirements and add it all up and we get to this 3% per year growth average -- annual growth in uranium demand.

Okay.

Thank you.

Oscar Cabrera from Merrill Lynch.

Thank you for taking my follow-up. Just like to focus on the uranium market if I can. In your previous conference call, you had talked about possible six reactors getting started in Japan. Just curious if you still maintain that view after you've seen so far in the Japanese utilities that are looking for their restarts.

Yes, thanks, Oscar. We were speculating at that time. The situation's really started to firm up in Japan. And I think back--I was just looking at some notes this morning--to last September when different government planning to phase out nuclear power in Japan by the 2030s, with an S, we were pretty glum here I could tell you at that time. Today, new government in place controlling both houses, pro nuclear, has the NRA, the regulatory authority in place. Standards have been set now and we have four utilities with 12 reactors in the queue or at least brought their projects forward for restart. So certainly more clarity.

I guess the piece we don't know is how long that review or those reviews will take. We know the NRA has three teams set up to look at the different projects being brought forward. We've heard it could take six months to do the reviews. I think the OE reactors that were reviewed were done in much less than that. So I guess we're just -- rather than speculating, we're just waiting and watching day by day the situation in Japan, but I would say it's certainly a lot better than it looked some months ago.

Great. That's great color, Tim. Thank you. And then as a follow-on, with respect to the US, you commented on the four reactors being shut. How do you see the market evolving over there? Based on the numbers I have here, the US accounts for about a third of demand in terms of uranium. Do you think that this number of reactors that we have in operation right now will decline further or -- we have one starting soon. So how do you see that market evolving to 2020, I believe that was the number you gave us.

Yes. So some of us -- I'm certainly heavily involved with the Nuclear Energy Institute, which gives us a chance to meet with all the utility CEOs on a regular basis and I know Ken was just down there. He could maybe even speak about his visit to the Vogel site and the [Summer] site, seeing the new construction there. We believe that the US will continue to have nuclear energy as an important part of their energy strategy going forward. I do think and we're seeing it that some of the merchant plants are under pressure from a cost point of view and, quite frankly, a regulatory point of view as well, that the regulatory burden is not light. And so I think we'll see, as we've heard, several of the units closing down, but there are also some coming back up. So we think it will be flat.

Clearly, I would be remiss not to mention natural gas in the United States, which today seems to be the answer to everything. But I would say on that if you build a gas plant, the price of gas is very, very important to your electricity price. And so we've even seen I think in the south the price go up from CAD2 and something in MMBtu to CAD4 something. So that can swing a bit. Bottom line, we think nuclear will continue to play an important role in the United States. Ken, do you want to just say anything about your visit down there?

Yes, absolutely. So as Tim mentioned, I just a few weeks ago was at the both the Summer sites and the Vogel sites in southern US. And obviously, very encouraged to see a couple really substantial new nuclear projects in the US and by every measure, I think things are going quite well at those sites. And I think importantly, if we look at the US, I would like to talk about gigawatts as opposed to units because, as Tim mentioned, there are these -- we've seen smaller merchant plants and often single units, but smaller. And so, you have in terms of gigawatts, these 1,000 megawatt units that are being built at Summer and Vogel, a total of four of them. And so on a net basis, as Tim said, we're looking at the US and saying they are going to be in this for a long time and on a net basis maintaining their gigawatts.

Great. Thank you very much.

Thank you, Oscar.

Peter Homas from Arthur wood.

Thank you for my follow-up. As a follow-up to my previous questions on demand, et cetera, do you have either -- do you have reasonably hard estimates of what worldwide production versus worldwide consumption will be this year? And what -- and production including -- or not including HEU and what worldwide production versus consumption will be in estimated terms for next year. And then secondarily to that, you mentioned, Tim, I think that the utilities were "pretty well covered for the next couple of years." Does that mean that they have two years' worth of inventory and therefore have actually no reason to buy anything for two years, or -- I would think that they want to be in a position of, just as you do, you have inventories to cover five or six months. I would think that a utility would also have something that is a base case inventory level. So the question is if they are covered, does that mean they are not buyers under any circumstances until two years passes?

So, Peter, thanks for the question. Just back to the first piece, our forecast production numbers for this year, about 158 million pounds. That's not with the HEU.

Right.

And then the consumption we see around 170 million. So then you see what the HEU, the market's probably well supplied this year.

Right.

Now, if you take the 24 million pounds out of the market and your consumption is growing by 3% year over the next 10 years, you can see that clearly fresh production's going to be needed in order to fill a gap. And as I said, utilities foresaw this to some extent. And so that blends into the next question. And that is inventory policies of the utilities. And as we go from maybe west to east, we've I think often said that in the US, we see utilities holding inventories 1.5 to 2 years, Europe maybe two to three, and then the Far East, three to four years of inventory, just as a -- that's a really general rule of thumb. And so the piece maybe to answer your question is that utilities will not wait till months before they need the material to come to the market unless it's just a small piece that they will get on the spot market.

Right.

The big utilities will normally come three to four years in advance of needing big quantities. If they are coming to us, we'll say we would like to put a ten-year contract on the table, starting deliveries in about 2017 if they came today because we're sold down to the end of 2016. And then that contract would run from 2017 to 2027 or something in that order. So that's -- Ken, I think, a typical contracting situation for us. So we're expecting -- as we see that our portfolio -- we're heavily committed, as we say, to the end of 2016 and so we know we have utilities committed as well. But we know their needs open up in the 2017 period to going forward. And so we expect that they won't wait too long now to start coming back to the market to sign new long-term contracts.

So as a follow-up to that, isn't what's going on with utilities and the departure of the Russian contract -- and given their inventory policies as you described them, isn't what's happening sort of a game of chicken? No one -- you're going to be in sort of a balanced supply/demand situation once HEU has gone. And given these lead times that you're talking about, someone interested in acquiring products for 2017 would like not to have to have the spot price go up because to the extent contracts are written on that, related to that, that would hurt them. So is there some sense in which everybody is kind of waiting with bated breath to see who moves first?

Yes, I think that's the case. I would just say this, that in the market that today consumes about 170 million pounds, going to 220 million pounds by 2022 in a market that produces fresh production from the mines, 158 million pounds, that is not rising very quickly going forward. New production has to be brought on. Today, we are not as one of the producers getting signals from the market to invest in new production. Unfortunately, we're not very good at bringing on new production in a hurry. It takes us seven, eight, nine years. So the longer we have to wait to get that signal to bring on new production, the longer it's going to be at the other end when we bring it on. So that's the -- those are the fundamentals of the market that we are encouraged by and here we are today in the doldrums just waiting to see what's going to happen with the market, but something has to happen going forward.

But even next year, you're going to have a supply/demand either equality or balance.

Peter, I'm going to have to ask you to get back in the queue. We have a number of questions. Sorry.

I'm happy to do so.

David Snow, Energy Equities, Inc.

Hi. The 158 million pounds of mine production this year, do you have a estimate for what it may look like next year?

I'm not sure if we put those numbers out. I'm looking at Rachelle. I don't think we do. I think it probably -- we will see what happens with the existing mine -- mines and what decisions are being taken but might be similar nature next year.

Even with your Cigar Lake expansion?

Yes. Well, David, it's going to take us several years, about four years, a little over four years to ramp up to full production, so there will be a bit more coming from Cigar, but that will take us some time to ramp up.

And then I'm wondering, can you tell us in pounds of U3L8 how much HEU deliveries you're getting this year?

We get normal -- in any normal year, we would get about 7 million pounds of HEU. This year, the number is closer to 10 million pounds.

Okay. And then--

David, we're really going to have to try to limit you to two questions.

Okay. All right.

David Stadler from PCO capital.

Hello. I have a question. I'm just trying to go through your MD&A amongst all the earnings reports today. You talked about inventories going up CAD369 million. But production volumes were up 4.4 million pounds -- or were 4.4 million pounds and sales volumes were 6.4 million pounds. So I'm just trying to understand how I square the production versus sales and the inventory increase that you saw in the quarter.

Yes, the way, the way to just think about that is we can have significant swings from quarter to quarter in our sales volumes, as we do note in our MD&A, that our customers determine when they want deliveries. And so at the beginning of the year we wait for those delivery notices to come in. And we -- but we continue to produce on our mine plans on an annual basis. So we have periods where the inventories build up and then we'll have a period where we make a lot of deliveries and the inventory will come back down. In addition, if you're comparing year-on-year numbers, you'll also detect that there's some -- there's higher values driven by the new chem inventory as well. And as we said at the outset, we made the decision not to sell down some new chem pounds, just because the price isn't there to support it. So all of that is baked into those numbers, which kind of disassociates them, if you will, from the production number.

Okay, and then just so I understand it, did new chem close in the first quarter or in the second quarter?

First quarter. January 9. Okay. Okay. Thank you. Thanks, David.

(Operator Instructions)

Emily Meredith from Nuclear Intelligence Weekly.

Hi, just quickly, this is the follow-up from last time, to see if you all have seen any effects to your own deliveries because of the issues with licensing uranium imports into China and if not, if you've seen those issues resolved?

Yes, thanks, Emily. It's a good question. Ken's going to answer that.

Yes, thanks, Emily. As you may know, the material is flowing into China again and it's true that we were facing some delays. But with the material flowing both from Kazakhstan, Uzbekistan, we expect to actually deliver for the first time Canadian-origin uranium this fall. We fully expect that we will be within our guidance of 31 million to 33 million pounds of deliveries for the year.

Okay. So the licensing issues are -- you don't expect those to be a problem for that this fall?

We don't expect those to impact our guidance, no.

Okay.

Thanks, Emily.

Thanks.

Edward Sterck from BMO.

Thank you very much for taking my second round of follow-up questions. Just regarding China, and I apologize if this has already been asked and answered, I understand that aside from the imports issues, the Chinese have been somewhat absent, especially from the spot market. Are they seem to be returning any time soon in your view? And could you also comment on levels of inventory in China at present?

Yes, thanks, Ed. So I think a couple things going on in China. One, we all know that they hit the pause button post-Fukushima and assessed their Greenfield program and now have restarted all of that. And so revisiting inventory in China and questions about layering on new volumes and I can tell you that we have sold material to China this year and I can tell you that there are discussions about longer term volumes with China at the moment. And so question about inventory policy, we believe that the Chinese are taking a view that they want to have sufficient inventories, multiple years of inventories behind each new unit along with initial cores and all of those things for these 28 units that are under construction, so we just continue to see them in the market. With an eventual 50 million pounds a year being consumed in that part of the world, we expect to just on an ongoing basis to see them in the market.

Thank you. And then just a final follow-up question regarding Bruce Power and the second course of contract sales, can -- in the MD&A, it didn't define how -- what percentage of Bruce Power's output was sold into financial contracts. Can just give me that percentage?

Edward, I'm not sure we have that but we will follow up on that with you.

Super. Thank you very much indeed.

Thank you, Edward.

David Snow from Energy Equities, Inc.

Yes, I think you just answered that, but I was thinking when you mentioned the numbers of years of inventories in the different regions, that's beyond the inventory that's bought a little bit in advance to fabricate the initial fuel loading, is that right?

Yes, David, that would normally be the case. We use as a rule of thumb that for initial cores on the new unit, the utility would come to the market probably three or four years before. If it was 1,000 megawatt unit, they would probably be looking for about 1.5 million pounds to get it fired up. That said, that's pretty general, but that's what we use.

And so beyond that is what you're talking about. Is it two years, did you say, for the west and three to four for China?

Yes, that -- well, China, that's a little bit of a different bird because we don't know that one so well yet. They are just really getting the started. We were thinking more of the Japanese, Korean situation.

Okay. Terrific. Thank you.

Thank you.

Thank you. 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.

Well, thank you, operator. And thank you to everyone who has joined us on the call today. As you can see from the many topics we went over today and the questions we discussed, there is a lot going on in our market but still not a lot of clarity. It's difficult to know what to expect next--when Japanese reactors might start, when the uranium price might increase, when long-term contracting might pick up. And while no one can tell you exactly when those things will occur, I can tell you what you can expect from Cameco. You can expect us to take the kinds of actions you've seen us taking over the past two years, monitoring the market and adapting as needed in order to stay competitive and to stay profitable. That has meant adjusting our growth plans when the market called for it, making acquisitions when they made sense, and restructuring the business when it was needed. Our decision-making, we believe, has been thoughtful, strategic and disciplined and will continue to be during times of uncertainty, as is the case now, and during times of growth we see ahead for the industry. So again, thank you for joining us, and have a great day, everyone.

Thank you. The Cameco Corporation's second 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.