Cameco Corp (CCJ) 2013 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Cameco Corporation's third-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 Alena, and good afternoon everyone. Thank you for joining us. Welcome to Cameco's third-quarter covered 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 comment on Cameco's third-quarter results and current industry conditions.

After, we will open it up for you questions. Today's conference call is open to all members of the investment community, including the media.

(Caller Instructions)

Please note that this conference call will include forward-looking information, which is based on a number of assumptions, and actual results could differ materially. Please refer to our annual information form and MD&A for more information about the factors that could cause these different results, and the assumptions we have made. With that, I will turn it over to Tim.

Thank you Rachelle, and welcome to everyone who has joined us on the call today as we discussed Cameco's third-quarter results. We appreciate you taking the time to join us today.

I'm happy to say our financial results were positive across the board this quarter. Revenue, gross profit, and net earnings all increased for the quarter and for the first nine months of the year.

Our uranium segment was the main driver of those results. It returned revenues 89% higher than the third quarter of 2012 as a result of increased sales volumes and a significant bump in our average realized price, which really reflects the strength of our contracting strategy in this lower price environment.

We are also starting to see some of the cost benefits of the restructuring we undertook earlier in the year. Overall, we are on track to deliver on our outlook, and even expect to realize better results in some areas than previously indicated.

We've updated our outlook to reflect these expectations, including increased revenues from our Uranium and Fuel Services segments. So our sales drove strong financial results this quarter, but our production was just a strong, coming in at 9% higher for the quarter than last year.

Our US operations were a big part of that. Smith Ranch-Highland increased production over last year, and our North Butte satellite operation has been continuing to ramp up. Rabbit Lake and Inkai also increased this quarter over last year.

And we received more good news yesterday when the Canadian Nuclear Safety Commission announced its decision to renew our licenses for McArthur River, Key Lake, and Rabbit Lake and granted our request to increase those licenses to 10-year terms. We are very happy with the decision and look forward to continuing our work at those operations, and working with the surrounding communities.

At Cigar Lake, good progress continues. You will recall that in September we announced that we had discovered some seepage in the run-of-mine, or ROM areas as we call them, during commissioning of the uranium processing facilities.

We determined we needed to install steel liners in both ROMs in order to ensure the mine would meet our high standards for safety and efficiency once up and running. I'm pleased to say that those installations are essentially complete.

And of course we have also been continuing with the other regularly scheduled activities to bring the mine into production and we are, as we speak, jet boring in waste rock just below the ore body. So we are pleased about that. At the McClean Lake mill, the team at AREVA continues to work on the hydrogen issue in the leaching circuit, and expects to begin processing Cigar Lake ore by the end of the second quarter of 2014.

If we turn to the market, it's much the same as the previous quarter. The overhang from Japan's idled reactors remains, and more recently we've seen some operational issues and shutdowns in South Korea and in the United States.

Added to that, fuel buyers are well covered for the time being, and as a result are not under a lot of pressure to contract right now. So in that environment, the downward pressure we continue to see on the uranium price is not a surprise.

The good news is that the Japanese reactor restarts continue to edge ever closer to reality. As of today, five utilities have applied to restart 14 reactors, and Japan's regulatory body is currently carrying out those evaluations.

As one of the biggest catalyst for improvement in our industry, this is important progress that we are pleased to see. And while it certainly doesn't capture the headlines as much, there continues to be growth in our industry, significant growth in fact, to the tune of 69 reactors under construction today.

China is leading that growth with 30 reactors under construction, having started on 2 more just this past quarter. India, South Korea, and Russia are some of the other countries with aggressive build programs.

As a result, by 2022 we expect over 90 net new reactors to be added to grids around the world. As we've said before, it's just a question of how long 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.

So for the time being, we've pulled back our own growth and have put serious cost restructuring into place. But let me assure you that we have not lost that forward focus. We still want to preserve the ability to be rewarded over the long term for the industry growth we see coming our way.

That's why you see us taking the path we are on now, continuing with our plan to increase production, but in a more moderate way, a way that is appropriate for today's market conditions. So just before we move to questions, I'm going to ask our CFO, Grant Isaac, to say a few words about our cost of sales and our average realized prices, both of which have generated a few questions. Grant?

Thanks, Tim. As Tim mentioned, I simply want to comment on our quarterly average realized price and average unit cost of sales, which we have noticed has generated some comments since our disclosures earlier today, likely because of the very strong contribution of both to our quarterly uranium gross profit.

For those of you who are navigating with the quarterly MD&A, I will be referring to the uranium financial results segment starting on Page 15. When you look at the average realized price, this of course reflects the strength of our contract portfolio, and the mix of contracts, both fixed and market, that we delivered into during the quarter.

Our price sensitivity table, which you find on Page 17 of our quarterly MD&A, is meant to illustrate, subject to some assumptions, how the mix of contacts performed under market price scenarios. This then suggests that declining market prices do have a moderate impact upon our adjusted realized price going beyond this quarter.

When we look at the average unit cost of sales on the operating cost side, we would just note that this reflects an average inventory or single-bucket approach we have to accounting for our uranium cost. So all production, and all purchases flow into the same bucket on about a two-thirds to one-third basis, if you wanted to think about it that way.

With respect to the produced material, the costs have fallen. The costs have fallen on a unit basis because of higher production, but they've also fallen because of our restructuring and our efforts to reduce costs. And of course, we aim to lock in these benefits and make them as sustainable as we can.

In thinking about the costs of the produced material, you could turn to our outlook table. Our outlook table still has the annual guidance of an increase of 0% to 5%, so a moderate increase in our average cost to produce material for the year, and we've held back guidance in the third quarter.

When you think about the purchased material, the costs have fallen due to the purchase opportunities in the quarter, and of course this source is subject to more variability. Of course that quarterly activity on both a produced and a purchased basis flows back into the single-bucket approach, or inventory accounting, and then to the extent that we see reductions, that has a bit of a life, or a bit of a legacy effect, on average unit costs going forward. So, Tim, I just want to make those comments.

Thank you, Grant. So with that, we would be pleased to answer any questions.

(Operator Instructions)

Ralph Profiti, Credit Suisse.

Thanks for taking my question and for the added discussion on revenues and costs. I would just like to switch to the nuclear business, if I may. There was a restated supplemental lease charges in the quarter for actually something that was in Q2. Just wondering how much is that, and are these costs now capitalized or captured elsewhere in the P&L?

Ralph, we are scratching our heads a little bit here. Grant do you know --

I think that is something we can follow up, and just to add a little more clarity to. Ralph, I don't have the answer in front me at the moment.

Okay, and if I can ask a follow-up, because you have left the guidance on the unit cost of sales unchanged. Is there any reason to expect Q4 operations on a unit cost basis to be higher? Or is that guidance maintained just so that you are leaving the door open for possible market purchases? Thanks very much.

Thanks, Ralph. Grant?

Yes, as we just explained, to the extent that the unit cost of sales reflects both purchased and produced activities, we think of purchased, some commitments that we have, as well as opportunistic purchases. So that guidance is maintained because we look out for the rest of the year and we see good restructuring performance, but we just don't fully know what the purchase opportunities might be, and that's the appropriate guidance to maintain.

Steve Bristol, RBC Capital Markets.

Actually my question was also similar about the Bruce Power, the cost went down to CAD187 million. I was wondering if that's was one-time adjustment for this supplemental lease charge adjustment, or if we can expect similar costs going forward?

The operating cost for the quarter were based on a number things. In Bruce Power they reflected some deferred maintenance that was happening at that site, and that of course has shifted out some of those operating spins. The supplemental release, again I'll get more information on that in a follow-up, but the benefits were just, if you see them from a cost point of view, were just the shifting of the activity plan at Bruce Power.

Thanks, and then just a follow-up. Going back to your comments about the cash costs for purchased uranium, it was much lower this quarter. Is that mainly due to HEU material, or is this low cost sustainable?

Well, I think those numbers reflect the long-term purchased commitments we have in place, and a good chunk of that would be HEU.

David Talbot, Dundee Capital Markets.

Good morning, gentlemen, and congrats on a good quarter. Thanks for this cost discussion, but I would like to go into a little bit more because you are down significantly quarter over quarter.

So this CAD17.68 from the operations, you mentioned the lower cost due to the purchasing from the -- and putting that into inventory, but really that can't just be the whole story. Are you getting some decline because perhaps Rabbit Lake's not up to full production, or can you quantify this impact of the restructuring and the cost control program on your operating cost?

Grant?

When you look at the reductions on the produced side, the produced is in fact a unit impact that comes from higher production of course, and then the balance is the reduction in cost. We would apportion those roughly 50/50.

So to the extent that you're looking for sustainable cost reductions on produced material, we are starting to see the benefits of our restructuring program. The purchased material has already been talked about.

It refers to purchase commitments that we have, and there is variability, obviously, when we add opportunistic purchases into that as well. If you just want to focus on the produced material, we see good contribution from cost performance as well as from higher production.

Okay, and when you talk about decreased activity in your [New Cam] purchases, CAD50 million to CAD70 million cash flow for this year, does this really account for volumes? Are you purchasing and selling about the same amount, and that would flow into this inventory as well, but just at lower prices?

Ken?

I can tell you that in terms of activity, New Cam is performing as we had expected in terms of purchases and sales. I think what you are referring to is that New Cam had intended to perhaps sell some inventory into the market, but given this current market situation, obviously elected not too and just deferred.

So I would say absent those -- if we set those inventory sales aside, New Cam is performing as expected. Of course it varies quarter to quarter, just like our own purchases and sales do.

(Operator Instructions)

Oscar Cabrera, BofA Merrill Lynch.

Just like to ask you about [Talvavar]. There is commentary in your MD&A that suggests that the company could have liquidity issues and production from that may be affected from the uranium site. Was wondering if that production, if you could quantify what that production is, and if that is part of your strategy of producing 36 million pounds by 2018?

Yes. Thanks, Oscar. It is part of our strategy, and you know we have heard -- and we are in constant contact with the folks at Talvavar. In fact, we have people over there helping with the uranium circuit so we know -- we're very close to them and we have good information. In fact some of them are coming over here as well.

So we understand they've got some liquidity issues. We are watching that very closely, working with them and we will see what comes out.

I don't know what the results will be. I think they're going to put some information out by the end of the year, sometime in this quarter. So we will watch that, but that is part of our drive to 36 million pounds by 2018.

Okay. Thanks, Tim. And then the follow-up, would it be possible for you to tell us what the amount of purchases during the quarter were 3.8 million pounds. Would you quantify how much of that was HEU?

Yes, Oscar, that is something that, as you know, we haven't done in the past and we can't do that now.

Would you say it was the vast majority or --

I would certainly say HEU was included in that.

Mike Jalonen, BofA Merrill Lynch. Mr. Jalonen, you line is now open. Please proceed with your question.

Hello, Mike. Are you there?

(Operator Instructions)

Hearing no response, we will move onto the next question, which is from David Snow, Energy Equities.

You've lowered the amount of Cigar Lake contribution for this year. Can you bring us up to date on the schedule of what is going on there and how it will play out going forward?

Yes, I'm going to in the second turn it over to Bob Steane. You will recall, as I said, we gave an update on Cigar just a few weeks few weeks ago, and not much changed from that. We are happy to say we are doing some jet bore machine testing right now in a cavity and waste, and so that is good. But Bob, you want to give an update on it?

Sure Tim. David, really we've, I guess a couple of months ago we announced that we had those problems with the run-of-mine systems with the leaking. We've repaired those, we've put the steel plates in, tested them, they're --resolved the issues we had there.

So we've picked up from where we left off. And we are now, as we speak, getting our first full cavity in waste that's a bit below the oil. So we've drilled up below the oil body in frozen ground, and we are doing waste rock for a couple of reasons.

One is to work with waste to get all of our systems working. It is easier to make sure everything is handling the slurry when it's waste rock as opposed to uranium ore, which has a little more challenging aspects of radiation protection to work with.

So we will do the first testing with the [jay bit]. It will take us about a month, but we will work through this. We've got -- we will jet the cavity, and there are about 10 steps that go into putting in a cavity from the very first step, which is drilling the pilot hole up, and we go up about 30 meters. And then there is a whole number of pieces that happened right up to in the end it is to backfill the cavity with concrete, make sure all the backfilling system proceeds.

So we are at step 7 of a 10-step program. It sounds like a recovery program, but we're on step 7 of that. So that will carry us through for another month or so to really get all of our systems, prove up our systems in waste, and that we will move onto ore.

So we are now beginning November. So sometime in December or so, we will start looking to start the mid-December starting our ore cavities, and again that gets us into production in Q1 we should see ore out of the mine.

What do you think you will be producing in 2014?

In 2014, we are still -- that's 72, we'll see where AREVA is going with their schedule (inaudible) we talked about production being package pounds, and AREVA working, they're still on track for starting in Q1, but they are working through there.

They finished the basic engineering. They go into their detailed engineering and developing their schedule. So until we get that, I would be hesitant to put numbers on the schedule.

Yes, David. I think you asked at the start of your question, for this year we've taken production out obviously that we had in. And that we will be updating in Q1 2014 on the production for 2014.

Edward Sterck, BMO Capital Markets.

Thanks very much. Good morning, everyone. I've got two questions. Just firstly on Rabbit Lake, production for the nine months to date was, I think I'm correct in saying around 2 million pounds. Guidance is slightly over 4.2 million, or around 4.2 million pounds. Is a fair amount of ore stockpiled to go through the plants once the (inaudible) mill maintenance is complete, and do you still expect to meet your 2013 guidance there?

Yes, Ed, it is Tim. I think we are still on track there. The mining there is not simple mining, and we are -- mill can easily keep up, so. But I think we have enough stockpiled, we should be close to making our production for the year. Bob, do you have any comments?

Yes, that production, we've -- actually the Rabbit Lake mill was down for some of the mill capacity than line capacity. Mine has been operating throughout the summer. That is why production is seemingly low, but we are still on track to meet our 4.2 million pounds package for the year.

Great, thank you. And then my second question just relates to the sort of, -- and I apologize because I'm on the road at the moment and missed the introductory remarks. You might've mentioned this already. But in the commentary, the realized price this quarter benefited from some higher-priced contracts coming through. Does that mean in the fourth quarter we can expect some slightly lower-priced contracts coming true?

Ken, you want to answer that?

Yes, Ed, fair question. I think what you can still just refer to is our price table that we put out. And so you can make some assumptions about what the uranium prices will be for the balance of the year. But that table I think still reflects how we are going to perform in the year.

It's a big quarter for us in terms of deliveries, and it is going to be a mix of some market-related and -- but more fixed-price contracts. And again, it's in the table.

Oscar Cabrera, BofA Merrill Lynch.

With regards to the uranium market, interested in your comments about the UK revisiting -- not revisiting, sorry, but planning on getting a new reactors built after I believe it was the last two decades, this is the first time they're doing new reactors. So just comments on that, please, to start with. And then a follow-up, please.

Yes. Thanks, Oscar. We find that to be very good news. To see in Europe, UK sticking with nuclear, despite what some of the neighbors are doing there.

Having now found that a price with EDF, a strike price, which is a healthy price, I would say, but obviously they have done the economics on that and they need safe, clean, reliable power there are in the UK, and they have chosen to have nuclear as a big part of the mix. So that is part A.

Part B is you have EDF in there, and now the Chinese are coming in to invest heavily, I think, into the UK market. So really a bit of a sea change, I would say, but I think very positive.

Great, and then continue to get this question, and I'm pretty sure that you guys have. Just wondering if you can provide us with color or comments. As Japan continues to delay the restarts of their reactors, how should one think about the level of inventory, or how many years or months, I don't how you can put it, should we expect, that if these reactors come back in 2014, for how long would the utilities have their supply of uranium complete, without the need to increase this?

Oscar, we have talked about that in the past. And the only thing that has maybe changed from our comments in the past is that it is taking a bit longer I think for the NRA, the regulator, to review these units that are under review. I think today there is five utilities with about 14 reactors being reviewed.

We look forward to the completion of that review. I think I heard someone say that we are in month five of the reviews. So we are obviously getting closer to decisions on some of them. So, we will see.

I would say this, that prior to the Fukushima event, the country consumed about 20 million pounds a year, normally held around three, four years inventory. So that is probably up by a year, and so I think you can expect that. Wait to see what their policy on inventory is going forward when the units start restarting again.

I can tell you just something else. I'm heading over there actually on Sunday for a week. We're visiting with all of the utilities that are -- that have units in the lineup for restart. And so we will certainly get some on-the-ground information while we're there, and if there's anything interesting we will certainly update you there.

But I think that's -- they probably have four to five years inventory, which isn't way out of line with what they've kept in the past. And so the good news is we haven't seen them putting that inventory on the market.

We've worked with them. Ken and his group have worked diligently for 2.5 more years now, as have other suppliers, to help manage that inventory. And I think it's gone quite well.

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

Well, thank you operator, and thank you to everyone who has joined us today on the call. I will just close by reiterating what are, in my view, the key things to take away from today.

First, the long-term fundamentals of our industry remain strong and growth is occurring today. That said, uncertainty persists and the industry continues to feel the effects.

At Cameco we are not immune to those effects, but we have continued to succeed, as I think our results show today. We have been able to adapt to conditions in the market and continue to pursue a long-term growth plan that we believe will be needed once the current uncertainty clears and the market is driven by the real fundamentals underlying it.

I just want to say one further note before we sign off. I was in touch with the president of our partner AREVA this morning, who advised me that the AREVA hostages who had been held for over three years have been safely returned to France from Niger

This is great news, important news for all of us, as some of us know these people personally. So I'm really pleased on that account, great day for AREVA, and great for all of the mining industry. So with that, thank you again and have a great day.

Thank you. The Cameco Corporation third-quarter results conference call has now ended. Please disconnect your lines at this time. We thank you for your participation, and have a great day.