Cameco Corp (CCJ) 2013 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 of Investor Relations. Please go ahead.

Thank you, Dave. And good afternoon, everyone. Thanks for joining us. Welcome to Cameco's 2013 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 Long, Senior Vice President and Chief Corporate Officer. Tim will begin with comments on the quarter, the full year, the industry, and the outlook for 2014. Grant will follow with comments on the Canada Revenue Agency tax case. Then we'll open it up for your questions.

Today's conference call is open to all members of the investment community, including the media. During the question-and-answer session, please limit yourself to two questions and then return to the queue.

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

With that I will turn it over to Tim.

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

2013 was a challenging year but also a year in which Cameco again demonstrated resilience, endurance and strength. Our financial results are a clear reflection of that.

Despite the difficulties in the market, we delivered strong and, in some cases, record results, including record annual revenue of CAD2.4 billion, record revenue from our uranium business of CAD1.6 billion, both of these driven by a record annual realized uranium price of CAD49.80 per pound. That helped us deliver solid adjusted net earnings of CAD445 million for the year, which is CAD1.12 per share, a 3% increase over 2012.

We also had a very strong production year, producing a record 23.6 million pounds, and a quarterly record of 7.5 million pounds. I'm sure you won't be surprised to hear that this was largely driven by our McArthur River/Key Lake operations. I often talk about how impressive these operations are but the teams there are truly world class, as they are across all of our operations.

This year McArthur River/Key Lake achieved 20.1 million pounds of production, which is the highest annual output from a uranium facility anywhere in the world, ever. They managed this achievement safely and responsibly and while continuing to expand into new mining areas and working to revitalize the mill. That really was a highlight for us this year.

We also had good news at Inkai where we received government approval to increase production to 5.2 million pounds per year.

And we made a lot of progress at Cigar Lake. In December, we put the jet boring system into operation, jetted in waste and in ore, and have run the ore through the underground system. We're very proud of this achievement.

As we announced in Q4 of 2013, we continue to expect first production from the mine in the first quarter of this year. And very much look forward to beginning the ramp-up of this world-class project.

On the milling side, over at AREVA's McClean Lake mill, progress continues to be made on the modifications needed in order to process the ore from Cigar Lake. And the mill should start processing ore by the end of second quarter. So, we will be happy to see packaged pounds this year, although the volume will be somewhat lower than previously planned since the mill will only be packaging product in the second half of the year. We don't expect any more delays on our end and continue to see good results as the commissioning progresses.

So some challenges but overall a strong year for our operations.

The biggest challenge in 2013 and for the last three years has been the market. Conditions continue to deteriorate as Japanese reactor restarts did not materialize. And we saw some unexpected shutdowns in the United States and temporary shutdowns in South Korea.

As a result, demand has continued to suffer, while supply has remained stable. Which leaves the industry with an inventory overhang and downward pressure on price that has lasted longer than expected.

Within this uncertain market environment, we have increased our vigilance, keeping a close eye on developments, and making changes we think are needed in order to deliver the best value. The decisions we've made so far seem to be working as our results in 2013 show.

But we don't believe the fog in the market, as we call it, is going to lift any time soon. There's been little to no improvement on the issues needed to help clear the oversupply and uncertainty the industry continues to face. And we don't believe the answer is to sit idle and wait for improvement, which is why you see us moving away from our target to increase production to 36 million pounds by 2018.

Production growth to a fixed target made sense when we had a clear line of sight to the growth in the market from the near term through to the long term. And while we still have that clarity for the long-term picture, we don't have it for the near-term one. In this environment, we need to be able to adapt quickly as changes occur in the market.

We're not saying we won't grow. But we need to have the flexibility to adapt our production to current market conditions and not be confined by a commitment to a fixed target and a fixed time line.

The senior management team and I are aware of the challenge this poses for our investors. The 36 million pound target provided a simple picture of our plans for the future, but this change is the best choice for the business until clarity returns to the market, as we believe it will.

As we outlined in our MD&A, you can expect us to continue focusing on our Tier 1 assets, those assets that provide the best value. And we will continue to provide an annual outlook.

In 2014, we expect to produce between 23.8 million and 24.3 million pounds. Most importantly, you can expect us to respond when the market signals new production is needed.

You can also expect us to focus on our core uranium business. In line with this focus, we have sold our share in the Bruce Power limited partnership. This decision is a reflection of our disciplined financial approach, our focus on our core uranium business, and our goal of providing the best value to shareholders.

Cameco's participation in the Bruce partnership was right for us at the time, and has been a good source of cash flow. But we believe that today our best course is to continue investing in our uranium business because we know there will be a great deal of growth in uranium demand over the long term, and that new production will be needed. It's just a question of when.

And when will depend on a number of things, like how long it takes for excess supply to clear the market, like the pace of Japanese reactor restarts, like how existing supply performs and what happens with new supply projects, and finally, like when we'll see long-term contracting resume in a meaningful way. These indicators will not only dictate the timing of demand for new supply, but the scale of it, as well.

In the near term, these issues are certainly making life difficult for producers. But over the long term we think they could make the outlook even brighter than it was previously.

Today, supply has remained strong but the projects that were expected to provide future supply are being delayed or cancelled, Cameco's own projects included. This means less primary production at a time when we know reliance on primary supply will be greater than ever, as secondary supplies continue to diminish.

While that's happening it's also starting to look like the future level of long-term contracting could be higher than it was in the past because it's not getting done now. In typical times, we would see utilities in the market filling their uranium requirements three to five years before they needed. We are well within that window now and the long-term contracting needed to fill those requirements is not happening.

To give you some sense of that, over the past five years, annual long-term contracting averaged about 170 million pounds. In 2013, only 20 million pounds, or just over 10% of reactor requirements, were contracted. That's an order of magnitude less than usual.

That difference will need to be made up at some point. So the current market dynamics that are negatively affecting uranium producers could be stacking up to have a positive impact in the future.

And, of course, that's in addition to the unprecedented growth we're seeing in new reactor construction. We're expecting more than 90 net new reactors over the next 10 years. 70 of those are under construction today.

The big question is this. Who has the ability and the resources to weather the near-term uncertainty? I would say that Cameco has that ability and those resources. And that's why you see us making the adjustments we've made.

We need to make the best, most efficient use of our resources so that we can weather today's uncertainty, continue to return value to our shareholders and be ready for future growth in the market.

So with that, I'd like to turn it over to Grant Isaac, our Chief Financial Officer, to give a brief update on the CRA issue. Grant?

Thanks, Tim. We thought it would be prudent to spend just a few minutes on this issue today as we have provided some updates in our disclosure and want to put those into context.

The first thing to note, and indeed emphasize, is that this is not a new issue and there have been no changes to our view of this case since we first disclosed the dispute in 2008. While we are confident that we will be successful in our case, we have taken a cumulative tax provision of CAD73 million to date to reflect the argument that our transfer price may have fallen outside of an appropriate range of pricing for 2003 to 2013.

In the meantime, while the case is in dispute, the Canadian Income Tax Act requires certain companies to pay 50% of the tax associated with disputed reassessments, including interest and penalties, at the time of the reassessment. In addition to the net amounts we disclosed previously, in December of 2013, the Canada Revenue Agency assessed a CAD72 million transfer price penalty for the 2007 taxation year.

This is the first transfer pricing penalty we have been assessed. And, as with the other reassessments, we are required to pay half or CAD36 million upfront. This penalty is not the result of anything Cameco has done differently.

In December, as, expected in accordance with the five-year lag we have been facing, we also received a reassessment of our 2008 tax filing, which resulted in us paying an additional CAD44 million in January 2014. So, to date, we have paid a net amount of CAD103 million to the CRA. If we are successful in our case, as we believe we will be, we would expect to receive the full amount back, along with any other payments made while the case is in dispute.

To help you understand the overall picture, we have updated our disclosure to include the 2013 tax year, using the methodology we believe that the CRA will continue to apply. I should point out that these are estimates only since actual amounts will depend on the income reassessed in each year and the availability of elective deductions and tax loss carryovers.

But I want to emphasize that we do not believe this will be the likely outcome or that the ultimate resolution of this matter will be material to our financial position, our results of operations and our cash flows in the years of resolution. Based on our view of the likely outcome of the case, we expect to recover the amounts remitted.

I hope this helps clarify the issue for you. Unfortunately we can't tell you any more than we have today or what is in our MD&A, as this is a case currently before the courts, and it would be inappropriate to do so. We will update you if any material changes arise.

But we don't expect to have anything to report until we have a decision. The 2003 assessment is expected to go to trial in 2015. And we expect to receive a decision in 2015 or 2016.

And with that, I'll turn it back to Tim.

Okay. Thanks, Grant. With that, we'd like to open it up for questions.

(Operator Instructions)

Ben Isaacson with Scotiabank.

Thank you very much. You've moved away from a fixed 36 million pound target by 2018 in order to retain some flexibility. Can you talk about how you rank your projects? In other words, as production does come on, what can we expect to see first?

And then, as a follow-up to that, with the Bruce Power sale, the CAD450 million, you've talked about using that to further your uranium production. But obviously, given how you're moving away from this 2018 target, can you reconcile those two statements?

Yes, thanks, Ben, appreciate the question. Clearly we don't think that pinning a 36 million pound target on the wall is a good strategy in a 35-pound market. That's what we really wanted to go away from.

That doesn't mean we're not still growing. We mentioned, I think in our MD&A, that we're going to focus on our Tier 1 assets, clearly Cigar Lake, ramping that up over the next years to the 18 million pound capacity. McArthur River, you heard the results for this year -- great mine. We're looking to move that up to 22 million pounds over the next few years.

So, we're focusing on that and watching the market. And we've got, as you know, we've said it many times, a great bullpen, a great suite of projects. We've got Yeelirrie, we've got Millennium, and others. And we will watch as the market improves, which we believe it has to going forward, when the right time is to pull the trigger on some of those.

So, that's the strategy we're going after now. We have a solid balance sheet with the sale of Bruce. Once that's closed -- it will be a couple months I think before that's closed -- we will have, I think, maximum financial capacity to weather what's now a fairly uncertain market, but will give us the flexibility to move forward when we need to. So that's where we are today. I think we're in solid shape and I'm really quite pleased with the direction we're taking.

David Talbot with Dundee Capital Markets.

Good morning, gentlemen -- or, good afternoon, I guess. A couple things today. Just starting at Port Hope, the CNSC has recently asked you to halt conversion of Port Hope. We note the conversion sales are down next year. Are these two items related or do real sales for next year reflect the softer market?

I don't think they're -- they're not related at all. I'll get Bob just to say a few words about the incident we had at Port Hope, which is now just being resolved. Just a softer market in the conversion business for 2014 but not related to this last incident. Bob, do you want to say a few words about that?

Yes, sure. Bob Steane. The events in Port Hope were a result of a valve control malfunction. The plant was under control, safe and sound throughout the whole of the event. Our operations stopped the plant and we're in the process of working through what had happened and rectifying the circumstances.

The CNSC then asked us to have them, their approval before we restart. And we're in the process of going down that path and anticipate restart in the relative near future.

Okay. So, no lingering capital issues there, as well? It's something that you could just take care of out of pocket, if you were?

No, actually, it is a maintenance item. There's no significant capital. There's no modifications to the plant required. It's some reconfiguration of the instrument control system, a software reconfiguration essentially.

Steve Bristo with RBC Capital Markets.

Yes, thanks, guys. My question's on the cost. You had substantially higher costs in the quarter due to unfavorable purchase contracts. The cash cost to purchase uranium was CAD37.26 a pound. Do these contracts still exist? And if so, how long do they run until? And, adding onto that, do they typically affect your results in Q4?

Steve, thanks. I'm going to ask Grant Isaac to comment on that.

Yes, Steve, thank you for the question. I think I would just step back and note that our cost of sales were actually right in line with guidance that we put out at the beginning of the year, and then reconfirmed again in our Q3 disclosure. We had said at that time that our average unit cost of sales would be up to 5% higher than the 2012 number, and they came in 3% higher.

And what was happening there is obviously we did have some purchases come in. These were some profitable back-to-back arrangements that we were able to enter into, as well as some long-term uranium supply agreements that just came due in that Q4 period. But ultimately the year settled out from a cost point of view precisely where we had guided. And so no surprises there.

So this was already included in your guidance and anticipated. And so the question is, does a similar thing happen next year where these contracts are deferred to Q4 and that's when they're all settled?

Our guidance for the full year 2014, it's actually the same guidance that we had last year. Our average unit cost of sales up to 5% higher, in this case, than the 2013 end numbers. And this is based on our view of our activities in the 2014 year. And that includes obviously some purchasing activity as well as the production activity.

Oscar Cabrera with Bank of America-Merrill Lynch.

Thank you, operator. Good afternoon, everyone. Just interested in hearing what changed from Q3 of last year to now. What was the main thing that you saw different in the market to change your views on having a target in 2018? Fukushima happened in March 2011 and we have now, I think, a number of quarters of uncertainty. Was there any specific reason you changed your target?

Oscar, I'm not sure there was any one thing. There's probably a series of things. And I think of Japan. We watch Japan every day here, including the election on the weekend in Tokyo, which was probably maybe a better news piece.

But clearly you'll recall, if you wanted to ask us one year ago what we said about restarts in Japan, we said there would be some back on. And we were wrong about that. And we have quit predicting on that because we just don't know.

So, taking longer in Japan, even though we see it moving forward, NRA in place, Tanaka-san is in charge and there's a bunch of units lined up to come on. But Japan taking longer.

I think the US -- we're watching that pretty close, as well, and we're in close contact. We saw some not very positive news out of Exxon, I think on Friday or last week, just the competition with gas and the markets are a bit goofy, if you like, down there, and that they could be under pressure to maybe close down some more units.

And, yet, on the supply side, significant supply. It seems to hang in there. We keep supplying into a CAD35 market. So it was probably the combination of a number of things like that that just said -- we like the long-term fundamentals of this market.

And when you see today consumption at about 170 million pounds going to 240 million pounds, I think is our estimate, over the next 10 years, that is good growth, I can tell you. We're excited about that. It's just that this near to medium term is still foggy and we've got to just -- we're going to fight our way through it. But, I'll tell you, we'll be in good shape when the market does turn.

Great. And then a follow-up, just on Cigar Lake. Can you tell us what the remaining CapEx that you have to spend there is? And are you still confident you can bring commercial production out of the mill there in the second quarter?

I'll speak to the second part while Grant's looking for a number for the first part. Yes, we are confident. The mining piece has gone well for us. We were happy to cut that first cavity of ore in December of last year. And that continues.

We've been working with AREVA closely on the mill. And the word there is that Q2 2014 for first production from the mill. So no change there. And I'm just looking to Grant to see if he has a number.

Yes, Oscar, we spent to date CAD1.1 million in capital at Cigar Lake -- CAD1.1 billion, sorry, yes, rounding down, of course. And we're looking at about CAD1.3 billion our share. So, we do have some remaining CapEx to spend for 2014. We estimate our share of CapEx to be about CAD130 million, and that includes some work on the McLean Lake mill.

So, obviously coming to the end of this project. These are capital spends that really have to do with surface installations remaining at Cigar Lake as opposed to the underground facilities. Essentially the construction program is complete underground.

Greg Barnes with TD Securities.

Thank you. Tim, the production target, when I add up roughly 24 million pounds this year; Cigar, your share, will grow to 9 million pounds over the next two or three years; McArthur expansion, your share roughly 3 million pounds, I think, that gets you into the 34 million pound per year range in three or four years anyway. Does it not?

Yes, if everything remains as is, Greg, that's where we would get to. But we want to maintain the flexibility on that to see what the market is going to require from us. So, yes, that's our plan, is to ramp those up, McArthur and Cigar, as you say. I think our share, if we go from about 18.7 million pounds at McArthur to 22 million pounds, I think our share's a little bit less than 3 million pounds, probably 2 million-ish pounds. But, yes, if the market calls for it we'll move to those numbers.

Okay. And the decision to drop that target, is that a message that's focused more on the utilities? The idea if you're not going to support the price, then we're not going to produce the pounds so you better do something about the price? Or is it really your view that prices will stay lower for longer?

People can read into it what they like. Like I say, I just didn't think -- we don't think pinning a 36 million pound hard target by a certain date in a CAD35 market was a good strategy. And, quite frankly -- and you see others -- it's tough.

CAD35 is not a price that even existing producers, a lot of them can hit, never mind to incentivize new production. So we just came to the conclusion here that we want max flexibility. We think we've got great world-class assets, Tier 1, both operating and in the bullpen. And that we'll watch what the market does and then we'll respond accordingly.

Tyler Langton with JPMorgan.

Yes, thanks, good afternoon. I think you guided that 2014 production was 24 million pounds, but then you gave sales volume guidance of 31 million pounds to 33 million pounds. Could you just talk about where that additional supply would come from, what the costs associated would like look in terms of selling price, if it's tied to anything?

Tyler, thanks, it's Tim. We've done that for quite a while, I think, had the sales targets higher than our production targets. And, as you know, in the past the big makeup piece for us was the HEU, obviously, which is gone now.

So, as we said before, we still have some of those pounds, I think, from last year to sell this year. We have some purchase agreements in place. We have the ability to flex our inventory a bit. So all of those.

I'm looking at Ken Seitz to see if he has any additional comments to that. Ken, do you want to add anything to that?

No, I think that's it, Tim. It's just watching how Cigar Lake ramps up this year in terms of the moving parts, bringing more production into our portfolio. But then leaving ourselves some room for market opportunities, as well.

We always say that we're in and out of the market buying and selling when we see opportunities to do so. And so we expect we'll do some of that this year. And, so, you add that up with discretionary use of inventories, production and opportunities, compare that to commitments on the books, and it puts us in that range.

All right, great. And then just I think with Cigar Lake, I think ultimate cash costs at full production are in the CAD18 to CAD19 range. Could you just give us any thoughts on what the costs would look like for the first couple of years in the initial stages, how much higher they might be?

Grant, I think you were going to comment on the last piece. I think we left out a piece of the last question.

Yes, Tyler, just reflecting on the cost part of your question, I think you can refer to the guidance, the outlook for 2014 on our average unit cost of sales. Because, remember, we use that single bucket inventory approach and so all our sources, both purchased and produced, go into the same bucket. So, when we guide that our average unit cost of sales up to 5% higher than our 2013 number, that's also reflecting the purchases that we have line of sight to. So just wanted to jump in there and answer that cost question.

And Cigar Lake costs?

With respect to Cigar Lake costs, really, what will happen ultimately is a decision to declare commercial production. That will be done when the asset is running in accordance with the mine plan, using the mine methodology that we have in place. And once that reliable declaration is there, we will see Cigar Lake pounds coming into our financials from a P&L point of view.

And obviously it's going to be over a small denominator. We're guiding 1 million to 3 million pounds for 2014. So the first pounds that hit will be higher cost, no doubt about it, as we ramp up to that full production.

What exactly that's going to be, I don't know. I think our technical report that you were referencing suggests somewhere around CAD60 a pound for those initial pounds to come in. But, as you say, and as you note from the technical report, it does ramp up to life-of-mine operating costs of CAD18.60 a pound. So, very exciting ramp-up that's coming at Cigar Lake.

(Operator Instructions)

Michael Wichterle with Cantor Fitzgerald.

Thanks. Good afternoon. This is a bit of a follow-up question, once again concerning the 4.4 million purchased pounds during the quarter. If you could just provide any additional color on how the purchase was done, if you have the breakdown between what percentage was spot and what percentage was contracted out for the previous quarter. And if you could provide any clarity on a go-forward basis, as well. Thank you very much.

Thanks, Michael. I'm going to ask Ken Seitz to comment on that.

With respect to what percentage is at spot and what percentage not, we essentially, if we're looking at opportunistic purchases within the quarter, they would be all at the prices at the time in the quarter. So you can assume we're buying some material at December prices or November prices.

With respect to committed purchases, we have very few that are market-related committed purchases. So, in other words, the bulk of them would have been prenegotiated fixed price or base escalated prices. So that's the breakdown.

If we look at 2014 and how it might evolve over 2014, again, we could see some pockets of opportunity in a CAD35 market. And we will obviously seize on those opportunities when we see them. But writing very few market-related purchase contracts, quite simply because we often find an opportunity to back to back them with the sales contract.

Okay. Thanks.

Borden Putnam with Mione Capital.

Hi, Tim. Good morning. Thanks for taking my question. Maybe for Bob Steane, if I could. Bob, a little detail question on the reserves here. And you may not have the numbers at hand but I'll throw it out there anyway.

On McArthur River -- and this is the 100% numbers -- there was 100,000 tonnes that moved from probable into proven, it looks like. And 43 million pounds went out of probable, but only 25 million pounds reported to proven. Can you give us a little color on what works were done to make that upgrade to proven and where in the mine that occurred?

That's more than I -- I don't have all the moving numbers in front of me. But that was really from some of the drilling we've done in the north expansion, plus some of the changes in mine planning in the existing zone 2 and the fringes and zone 4 coming in.

Okay. I appreciate that. I'll look closer when the AIF comes out. Last question in Inkai, there was some pretty big drops in tonnes -- I won't say losses but drops in both proven and probable. There was 800,000 tonnes that went away. But it was only 1.5 million pounds. But then in probable there was about 3.3 million tonnes for almost 5 million pounds. What's going on there at Inkai? I know sometimes the wells don't behave like you would expect. Just give us some color.

Borden, that's more the license terms and license as we're approaching -- we see opportunities and expect to increase our lease extensions. Where, at the moment, that's really the driving thing, is we're approaching the lease extensions, combined with our production are the cause of numbers coming, dropping out.

Brian MacArthur with UBS.

Two questions. Just following up on Greg's question about the growth profile, you mentioned Cigar and McArthur. But how does Inkai fit into this? And how much flexibility do you have you to pull back from that expansion there with all the agreements for potentially putting in a conversion plant?

And the second question, just for Grant. Just on this tax thing, you keep mentioning 50% cash taxes. Does that continue both for transfer pricing issues as well as tax issues? And does that go on for a number of years, so if this gets pushed out you can continue to defer half of it so that the cash component remains at 50%?

Hi, Brian, it's Tim. I will let Grant prepare himself for the tax question. Just on the Inkai and the growth profile piece, I can tell you in 2013 we were delighted to both get approval and be able to produce at a 2,000-tonne level that we've been looking for for some time. That mine just keeps getting better. And, as they learn how those wellfields operate, that's going to be a good one for a long time for us.

We're in constant contact with the Kazakhs about the future about expansions. I can tell you, they, like everyone else, don't really have a big appetite at the moment for expansions in this market. They held pretty firm.

They had some production increase. I think they had about 1500-tonne year-over-year increase in production. But compared to what they've done over the last 10 years, that was almost a rounding error. So they're holding pretty tight.

We're talking to them all the time about what a deal might look like regarding a refinery or conversion. But right now it's not moving very quickly. So I'll say that and then I'll ask Grant to talk to the CRA piece.

Sure. Thanks, Brian. The CRA dispute now really covers the years 2003 to 2008. And it's important to emphasize, we haven't been reassessed for subsequent years officially.

And when we think about those years that we have been reassessed, we are required, even though it's in dispute, we are required when we receive that reassessment, to pay 50% of that reassessment upfront. Up until 2013, we were able to not pay cash taxes by basically using deductions and tax loss carry-forwards. In 2013, we started remitting cash to the CRA to make those 50% payments.

Those 50% payments apply to the reassessed income. They also apply to, in this case, a transfer pricing penalty that came for the 2007 year, and any installment or interest payments that we have to make. So you're right in thinking that while this is in dispute, as they send reassessments, as they send penalties in the case of 2007, we're required to pay half of that. And we're just expecting that that we'll be using cash to do that going forward.

We'll be exercising as many deductions as we can. But we exhausted a lot of those out until the 2013 period. So I hope that helps, Brian.

Ralph Profiti with Credit Suisse.

Good morning, thanks for taking my question. The McArthur River request to go to 21 million pounds this year has been left out of the 2014 guidance. Can we assume that you're expecting that approval later on in the year and therefore won't be reflected this year? And is it possible that we should factor in this type of rolling forward 21 million pounds every year until you get that license approval to go to 22 million pounds?

Hard to predict, Ralph. Thanks for the question. But the regulatory process is what it is. We have to go through it. We think we are in good shape as far as that goes. But we will wait to see what the regulator has to say about that.

In the meantime, we've been using up that, what we call, flex production ability that we've had at both McArthur and Key Lake. And we're running into the end of that. So we'll see.

We put our number out. We'll see how the regulatory process goes and whether we'll get approval. But I don't think you can assume it will be 21 million pounds.

We wouldn't make that assumption until we see regulatory approval. And we're also looking to, over at Key Lake, get approval, environmental assessment approval, and then licensing approval on an expansion to 25 million pounds. And that's in the works, as well. So, a couple of pieces in the regulatory hopper, if you like, and we'll just wait to see how they play out.

Okay. And are you any more confident in the timing of the approval now that it seems like the Canadian Nuclear Safety Council has switched or changed the assessment process in terms of which department it goes through?

We just continue to try and comply with all of the requirements that we have. We were delighted, I tell you. One thing that gets a bit overlooked in 2013 is that we received, through the good work of Alice Wong and her team on the SHEQ side. And then the operations just through their good operations.

10 year licenses for McArthur River/Key Lake, Rabbit Lake. We got an eight-year license for Cigar Lake. That is huge and I think that's a testament for how safely and environmentally responsibly the operations have been going.

And so we think we're in good shape with the regulator. We never take it for granted, not for one minute. We'll go through the process, as we have to, on both McArthur and on Key Lake, and we hope it will turn out positively.

John Tumazos with John Tumazos Very Independent Research.

Did the 20 million pounds of contracts in the past year roughly resemble your normal geographic mix, just the 1/10 of normal? Or were there particular regions that signed and didn't sign? I'm wondering whether we should interpret that some utilities are worried they're going to operate, or worried about the price, thinking the contract price might converge to the spot.

John, it's Tim. Thanks for that question. That was very striking for us, that number, the amount or lack of amount, if you like, of long-term contracting in 2013. Just the number was striking.

Ken, I'm not sure we've dug into where it came from. I'm not sure we know exactly where it came from the but it must have been just about across the board that contracting was done. But, Ken, I'll ask you to speak to that.

Yes, Absolutely. John, as Tim said, the number was so small in 2013 that it's hard to imagine a representative sample of our customers from across the world fitting into that number. In fact, it was really just a few contracts.

And, so, it is certainly not the case that in terms of proportion and where we would see demand coming in a normal year, while that was not 2013. Obviously the Japanese are not buying and so that's one region that certainly is not in the market. But for the rest of the world, it's just too small a number to say that there would have been a representative sample there.

Thank you.

David Talbot with Dundee Capital Markets.

Hi, guys, again. Cameco's ready to take advantage of some of these opportunities as they present themselves. Amongst other things, you have a choice between uranium purchases and uranium project M&A. The latter perhaps having a longer time horizon and maybe being a little bit harder to value. But how do you guys prioritize between these two items? Knowing you guys don't really need pounds in the ground right now, what might meet your M&A criteria?

I'd say on the other side, the uranium purchases, we're always in and out of the market. Ken and his group are looking for pounds, so we watch that very closely. On the M&A side, we're very pleased with the deals we've made over the past couple years.

Getting that chunk of Millennium from AREVA, that moved us up to 70% control. We really like that project. That's going to be a good one. Yeelirrie is going to be a wonderful project for us going forward.

So, we're in pretty good shape. You see our reserves and resources, each of them just around the 0.5 billion pound mark. Add them together and we're in pretty good shape there.

So, I think we're happy where we're at today. What we want to see is the market improve, David. That would be the best thing for us so we could bring on some of these projects that we have in the wings.

Okay. So, should we read through that perhaps incremental production you necessarily wouldn't be interested in as long as you've got that cash sitting on the balance sheet doing what it needs to do at this point?

We're just focused, as we said, on our existing operations, try to make them as lean as we can, productive as we can. We've got little bit of swing movement with McArthur. Cigar, obviously a big focus. I can tell you everyone around this table is absolutely focused in on Cigar and making sure we commission that one safely and get that ramp-up going. For now that's where our focus is. If the market improves we'll have to make some decisions on other projects but for now that's our focus.

Michael Wasserman with Moors & Cabot.

Thanks for taking my call. I'm trying to understand where you as the Company and the industry might stand hypothetically under a very negative scenario three or four years from now. For example, if there were no progress in Japan, if the price of natural gas stayed under CAD4.50, and if the price of uranium stayed under CAD35, where do you think things would be? And what do you think your mindset and balance sheet would look like at that point?

We're in, Michael, really good shape. We have a contract portfolio that we're quite happy with now, that saw us last year at least closing in on CAD50 a pound in a market that's showing about CAD35 on the spot market. And we're in good shape -- if you follow the table through in our MD&A, you'll see we're under pretty good cover for the next several years. So, we're happy with that.

We're also happy with the fact that we have Tier 1 assets. You talk about assets. I think of McArthur, I think of Cigar and Inkai, all under CAD20 a pound operating costs at full production.

So, we think we're in pretty good shape to weather a storm. We don't see that storm, though we have to be ready for it, as you say. We see it the other way.

Chinese today with about 20 reactors in operation, 30 under construction. They say they'll have 60 by the end of the decade with another 30 under construction at that time. Boy, that sounds pretty good to us. That fits in our 93 net new reactors over the next 10 years.

So, we hope for the best and plan for the worst, I guess. And that's where we're at today.

Where do you think the rest of the industry would stand at that point under that hypothetically negative unlikely scenario?

You'd have to check with them and see. We really concern ourselves with Cameco and what we will look like under numerous scenarios. And I think we're in pretty good shape under any of those scenarios, Michael.

Emily Meredith with Nuclear Intelligence Weekly.

Hi. I just have a question on the Bruce Power sale. When you all say that the sale will help you focus on the core uranium business, are you looking at acquisitions in other aspects of the fuel cycle? Or is this really uranium mining that you all are speaking about?

Thanks, Emily, for the question. I think, as we said, we're really focusing on uranium. We like the supply/demand fundamentals that we're seeing lining up, even though it's taking a bit longer than we had thought, and hoped the response might be a bit sharper. And so we're teeing up for that.

We think we've got some great assets that I mentioned at McArthur, Cigar, Inkai. Our Rabbit Lake and US operations are producing well for us this year. And then we've got Millennium. We've got Yeelirrie in the wings. So, I think we're lined up well for that and we're just waiting for the go signal on those.

And then can you just quickly clarify the earlier response to the question on Inkai reserves, and explain what was meant by license extensions causing some of those reserve numbers to drop out?

I'm going to look to Bob again. But in cases like that where we have a fixed term, a lease agreement to a fixed date, and you have a production rate approval at a certain rate, you can only count as reserves and resources the numbers that fit within that. So you may have way more resources than that but you have to do the math on your proved production rate and your lease term. And so I think that's what Bob was referring to.

Rudy Mueller with Tocqueville Asset Management.

Yes, I have a question on HEU down-blending. I'm just wondering is any still occurring in Russia or the US or perhaps in other countries?

Thanks, Rudy. We saw the end of the agreement. Ken and I were over in St. Petersburg in November of last year, watched the last boatload of HEU sail for the US. Then we were at the Port of Baltimore to see it arrive in December and celebrated the arrival of that.

It's a happy/sad piece for Cameco. We've done quite well off of that, yet it's also brought 24 million pounds a year onto the market that is now going to have to be replaced with fresh production.

So are they going to do more? They've told us they're not. We believe them. We haven't seen any indication that they will. There's no agreement. And I, quite frankly, maybe underestimated the complexity of the agreement we were operating under.

That thing was highly negotiated over probably, Ken, five or six years, back stopped by the Russian and the US governments. And so that one is over. So if they're doing it, we're not aware of it and we haven't been advised of any plans for them to do that.

Oscar Cabrera with Bank of America-Merrill Lynch.

Thank you, guys, for taking my follow-up. Just want to concentrate now on the royalties in Saskatchewan. Significant changes. And wanted to hear how you think, or how should we think about the reduction on capital cost? Is that all the capital you're spending on your mines, or is that just development capital? Can you comment on that?

Thanks, Oscar. I'm going to ask Grant to comment on the royalties.

Yes, thank you. So brand new, as you note, Oscar, the royalties were announced in the March provincial budget of 2013 and finally came into effect in January of 2014. So, because they're new, I can't speak with absolute certainly over what the profile looks like, but I would say that there is a broader range of eligible spending that is allowed in this profit-based royalty system.

And so it does include a broader range of CapEx that applied, obviously, to growth sustaining or replacement capital, as well as CapEx that we spend in order to install infrastructure in northern Saskatchewan that others can leverage off, as well as spending as it applies to our exploration programs. So, the royalty program is very good news from an investment point of view in Saskatchewan over the long run here. I think it's a 15-year period that it's in place for. So, we're very excited about it and it's good news for Saskatchewan.

And then if I may just follow up with another question. The 50% that you can deduct over the next couple years, how does that work thereafter? Do you just apply a random number? Or is there a specific percentage that you can -- just trying to figure out how we can model that going forward.

Yes, that's a great question. And, obviously, as we understand that pattern better we'll certainly disclose it. It wouldn't surprise you that in coming up with a transition plan from an investment-unfriendly regime to an investment-friendly regime, it was important for the province to try to find a bit of neutrality from a royalty point of view.

So, for the next couple years there, are some deferrals. That 50% is eligible to come back in 2016. We'll apply that in the most efficient way. But we're not there yet so we haven't seen how that will actually work. But something that obviously when we have better line of sight on it we'll certainly disclose that.

(Operator Instructions)

Parker Quillen with Bridger Capital Management.

Hi, guys. Thanks for taking the question. I want to revisit -- the question was asked maybe a little bit differently earlier, which is the mismatch of the orders of product from utilities versus their annual consumption. The question was asked before if there was a regional component to that. I'll just ask more generally, what do you think accounts for that?

Is it that the utilities think that they can source their inventories from other utilities that are shutting down, or that they are considering maybe not producing in the future, or they're trying to be clever about timing? At the end of the day, what do you think accounts for such a dramatic mismatch of purchasing versus consumption?

I'm going to ask Ken Seitz to comment on that.

Absolutely. I would say we're all trying to be clever about timing. That would be true for our customers, as well. I'd just go back to the fact that today, like Cameco, well covered through that 2016 period.

Again, utilities have done a lot of contracting in previous years to be fairly well covered in this time frame. And, so, demand continues to be, say, somewhat discretionary as evidenced with the 20 million pounds last year.

So, in a discretionary demand environment, and in a low price environment, I think our buyers are looking at their own inventories, looking around the markets saying -- there's no shortage of material in the spot market. Should I need some, I can certainly go to that market and pick some up. And wait and see how the market unfolds. At the moment, being rewarded for staying out of the market and watching the uranium price drop.

And, so, until there's movement on one side or the other of the equation on the demand side or the supply side -- indeed, you're seeing some movement on the supply side. And Cameco's participating in that. But until we experience some tightness there, I would say then, and as long as demand is somewhat discretionary, we have this little bit of a standoff between producers and customers, recognizing that, of course, utilities will need to step back into the market at some point here, and can't play this forever. But that's what we saw happen in 2013.

So, if I could just clarify and follow up on that. So, what you're saying is you believe it's them just trying to optimize the price that they pay, and moving their timing on the edges to do so. It's not maybe a harbinger of utilities thinking there's a likelihood of not producing in the future and therefore tailoring back their inventory builds.

I think what we all can agree on is that we're in an environment that the demand line is upward and sloping to the right. So, no, I don't think it's a case that looking at inventories thinking that those are going to be growing.

I think it's more, as you say optimizing the timing of purchases, just looking at their own inventories, inventory policy, how that might be flexed, their view of the market and their own balance sheets, and saying -- when makes the most sense to buy some uranium. And it wasn't 2013. We'll see how 2014 evolves.

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

Thank you, operator. And thank you to everyone who has joined us on the call today. In closing, I'd just like to emphasize that providing value has always been and continues to be at the core of our strategy. And that is what drives our decision-making.

And we continue to do what we have always done, and that is, putting our experience, knowledge and drive to work to position the Company for continued success. That means watching the market closely, delivering strong production safely and responsibly, and always looking for ways to be more efficient. I have to say, I'm very pleased with the progress we made in these areas in 2013. And I'm confident we will continue to deliver on our goals in 2014.

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

Thank you. The Cameco Corporation fourth-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.