Cameco Corp (CCJ) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cameco Corporation 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, Donna, and good afternoon, everyone. Thank you for joining us. Welcome to Cameco's third quarter conference call to discuss the financial results.

With us today on the call are Tim Gitzel, our President and CEO, Grant Isaac, our Senior Vice President and Chief Financial Officer, Ken Seitz, our Senior Vice President and Chief Commercial Officer, Bob Steane, our Senior Vice President and Chief Operating Officer, Alice Wong, our Senior Vice President and Chief Corporate Officer, and Sean Quinn, our Senior Vice President, Chief Legal Officer, and Corporate Secretary.

Tim will begin with comments on the industry and the quarter. 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. (Operator 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.

Well thank you, Rachelle, and welcome to everyone who has joined us on the call today to discuss Cameco's third quarter results. We appreciate you taking the time to join us.

I will start today by briefly discussing the market and our results and then I will open it up for your questions.

Our overall message remains the same. The market is challenging, and our focus is to stay competitive and prepare for the time when more uranium production is needed. From a market perspective, there was no fundamental change in the market this quarter. Utilities remain well covered, supply continues to perform reasonably well and Japanese restarts, although progressing, have yet to materialize. We continue to believe that about two-thirds of the Japanese fleet will return to operation, and there was good news on that front recently. On Tuesday, it was reported that the host town for the two Sendai reactors gave the go-ahead for restart, so we could see those reactors starting up in the near future. Other Japanese reactors continue to edge closer to restart as well, but it's clear that this continues to be a challenging process.

Of course, Japan isn't the only factor to influence the market. Other issues can affect price, which we saw recently when the spot price rose about 25%. We believe the move was largely due to trading activity and market speculation around unforeseen events like the potential impact of Russian sanctions, possible disruption in the US Department of Energy's inventory dispositions, and the labor disruption at our own McArthur River and Key Lake operations. We will have to wait and see if the increase is sustainable, but it has remained relatively stable thus far.

Within this context, Cameco continued to achieve steady results. Consolidated revenue for the quarter and the year-to-date was comparable for the same period last year. However earnings were impacted by a write-down of our investment in Global Laser Enrichment and the higher cost of sales in our uranium segment. And some of our market-related contracts were affected by the lower uranium price compared to last year, which brought our average realized price for the quarter down slightly. However, more importantly, our year-to-date realized price results are comparable to the first nine months of last year, and continue to outperform the market by a significant margin.

Turning to production, our operations performed well and the volumes are down slightly in McArthur River and Key Lake due to the labor disruption. As you know, in July, we stopped jet boring in Cigar Lake to let certain sections of the ore body to freeze more thoroughly. We resumed mining at Cigar Lake later in the quarter and with more ground now frozen and the available for mining, we have mitigated a possible risk to productivity and compliant for more continuous ramp-up. The timing of the pause was opportune, as the McClean Lake mill was not yet ready to process the Cigar Lake order. It is now.

On October 8, we were delighted to take part in the McClean Lake mill restart celebrations where we marked the occasion of the first drums of packaged uranium from Cigar Lake. It was an important milestone and one we are all very happy to see. There is still work to be done at both the mine and mill to increase annual production capacity to 18 million pounds by 2018, and that ramp-up will continue over the next few years.

For 2014, though, we are revising our annual outlook for production as a result of the experience gained in commissioning at the Cigar Lake mine and the McClean Lake mill, and the labor related shutdown at McArthur River/Key Lake. Previously we expected to produce between 22.8 million and 23.3 million pounds, we now expect to product between 22.6 million and 22.8 million pounds.

And there are a number of changes to our outlook for the remainder of 2014. In general, they are as a result of weak market conditions that have continued to impact the entire nuclear industry. In our NUKEM segment, we've reduced our expected sales volume and revenue, as today's market does not provide a lot of motivation for more sales. That reduction is the main driver behind the expected decrease in our consolidated revenue. The good news is the outlook for sales volume and revenue in our uranium segment remains the same. And this is the core of our business.

So I hope that gives you a little more detail on where we are at this quarter and we'd certainly be happy to answer any questions you might have. And with that, I will turn it back to Donna.

(Operator Instructions). Our first question is from Ben Isaacson from Scotiabank.

Hi, it's Ben Isaacson here. Thank you for taking my questions. Two questions first, can you explain why funding was significantly reduced to GLE? And my second question is on the cash cost of purchased products, it's been jumping around a little bit, from CAD58 to CAD31 now. Can you explain why that's been happening and how should we think about it going forward?

Hi. It's Tim. You have - just on the first one, the GLE piece. I think it's a question of priorities for our partner GE-Hitachi. They have been in this business for some time, we're 24% in this joint venture and they have been funding it along and we've had made progress, but I think in their bigger world this wasn't a priority at this time. Certainly, the market is not brilliant either for uranium or for enrichment, and they just decided to do a tone-down their funding and we obviously had to do the same. So that's the GLE piece.

I'm going to look to Grant Isaac to talk about our cash cost.

Sure, happy to do that, Ben.

With respect to cash cost, I think you're probably referring to a much higher unit cost number that you saw last quarter. That was the result largely on the sales agreement that we had agreed to at a much earlier time period. So we sourced the material and sold that when the uranium price was much higher, of course reflected in those cash costs. For this quarter, we didn't have any of those kinds of legacy opportunities on the purchase side. But it will jump around, especially as our purchasing has come down relative to stored volumes under the ATU program.

So when I look over the past couple of years you have averaged about CAD28-CAD29. Is that still going forward?

Well. We don't have a forecast for that going forward. It will eventually get buried into our average unit cost of sales which is always going to be the marker we put out there to provide guidance and probably we would leave at that.

Okay. That's great. I'll jump back in the queue.

Thanks, Ben.

Thank you. Our next question is from Greg Barnes from TD Securities. Please go ahead.

Yes. Ken and Tim, just comment on your, just comments around the market, when you say supply is readily available and it sounds like it's adjusting market to surplus. Can you give us a sense how you big the surplus is by your estimate in the moment and what it looks like going forward over the next couple of years?

Well. Gregg, we think that the demand today and when we said it's often in 100 million to 170 million upon range, we think increasing 3% to 4% over the next 10 years to somewhere 230-240 range. That's good growth for us. We like that. That's the 70 units that are under construction today and more to come 90 or 91 net new units in the next 10 years. That's on the demand side.

Supply side, a little bit less than that, probably 150 to 160. We were just looking at the list this morning of some of the project deferrals now, cancellations, some of the production that has gone down, maybe not as much as we would have expected, but the list is becoming quite significant. So we'll see where things go, not easy decisions. We know to flex your production down.

I think the market is coming back. In the near future you might hang in there. I think it's longer term you might not. So it's really a tricky period of time right now, but we think the gap today is perhaps 10 million pounds or 15 million pounds and growing over time as the demand line grows. I'm not sure you see the same with the supply side. In fact, it's probably trickling off the other way.

So that's what we're looking at going forward. How much inventory is out there? That's the magic number that everyone has their own views on. I'm not sure we have the exact number there either, but I think it's diminishing over time.

Tim, do you look at flexing your production in response to that curve market and what you think are going to happen over the next couple of years anyway?

Yes, Greg. We look at all of our operations all of the time and as you know we've got some producers that are in the lower quartile, and some that aren't. So that's a consideration we take. You've got the entire management team sitting around this table, we talk about that all the time. Right now, we have sales guidance, committed sales 31 million to 33 million pounds production, something less than that. And so we need the production, but I could tell you we look very seriously at our production all of the time and when we say we want to be able to flex our production, it's both ways.

Okay. Thank you.

Thank you.

Thank you. Our next question is from Brian MacArthur from UBS. Please go ahead.

Hi, good morning. Probably it's for Grant. Can you just clarify this for the tax? You are now guiding a recovery of 40% to 45%. Is that, I mean I kind of get lost for all the ins and outs here. Is that including all of the adjustments you've had, i.e. the writedown in GLE this year, so it's like a book thing? Or is it actually what you call a 40% to 45% recovery on a true adjusted number if I want to look at that way?

Yes. Look at it the later way. It's the recovery based upon the adjusted. So you'll see that we have - as a normal course to our adjustments we adjusted, for example, the benefit of derivatives and then we also adjusted on an income tax basis, and so the same thing for our guidance with respect to our effective tax rate.

So that's increased quarter over quarter. Right? You're going to recover more than you were before?

Yes.

And that is just - can you go through exactly why that is given your mix stuff going before probably not as profitable for your purchase stuff as it used to be? So how that's actually worked?

Well. We've spent some time in the past obviously on this, but let me just take a brief second. I'm happy to discuss it more offline. Our consolidated effective tax rate, which is being reflected in that outlook number, reflects the basis we do in multiple jurisdictions. One of the jurisdictions where we do a lot of business and spend a lot of money in is Canada, and so you see a jurisdictional effect, a lot of production in Canada, a lot of spending in Canada, which carries with a balance of deductions if you will, all of the deductions available to any ratepayer in those jurisdictions. And so as that balance changes over time, and obviously we have less reliance on some foreign supplies, notably the ATU material, than you've seen in the past, that balance shifts to jurisdictions where we can probably take better advantage some of those deductions, and you're seeing that reflected in that forecast recovery.

Okay, great. Thanks Grant.

Thank you. Our next question is from Edward Sterck from BMO. Please go ahead.

Good morning, everyone. Thanks for taking my question. So I have only really got one for today, which is just with regards to the future purchase commitments. In the MD&A, they are listed as being CAD1.6 billion over 2014 through 2019 and beyond, I think, out through 2028 in fact. I was just wondering that was the mix of uranium conversion services and also enrichment services. And I was wondering what the split is between Cameco sort of in a uranium division internal uranium purchase program and then NUKEM.

Ed, I'll let the person responsible for those purchases, Ken Seitz, answer that one.

Yes. Well. With respect to our own mix of purchases between enrichment conversion and uranium, I think I would just say that you can assume that the absolute bulk of that is uranium and if you do a little bit math, you can probably see very quickly that the absolute -- just in making some assumptions about prices and so on that you can see very quickly that the absolute bulk of it is purchases of uranium. Sometimes we will identify what we believe is really attractively-priced uranium, but it's only available as UF6, and so we'll sometimes take that as converted uranium as well.

With respect to the split between Cameco purchasing and NUKEM purchasing, it becomes a question of origination for one and both groups are going out and finding their own pockets to purchase. So we don't make conscious decisions about who is doing how much of what. So we have training company that trades, buys themselves uranium, and we have Cameco that's doing purchasing out, as you see in our disclosure, over time for a lot of other reasons.

Okay. Thank you. Just to sort of narrow this down a bit then -- the 31 million pounds equivalent of natural uranium from 2014 through 2028, how much of that would be sort of within Cameco and Cameco's uranium division and how much would be attributable to NUKEM?

That is all Cameco.

So NUKEM's fuel purchase agreements or commitments are separate to that?

Yes.

Okay. Kenneth. Thank you very much indeed.

Thank you. The next question is from Fai Lee from Odlum Brown. Please go ahead.

Unidentified Analyst

Hi. It's Fai Lee here. I'm just wondering if you look back on GLE and the writedown this quarter in your investments. I'm just wondering if you reflect on this. Does it make you more cautious about investing outside your core businesses of mining uranium going forward or how do you think about this?

Not at all. I think that was an investment made probably back in 2008 or 2009, I think 2008, I'm looking across at Sean Quinn. That still has some legs in my view. We took the financial provision, and accounting provision and needed to do that. But from a strategic point of view, that technology I think the work we've done on that over the last few years we've made a lot of progress, progress to the extent that the DOE is even today talking to GE about perhaps going that sometime in the future and re-enrich tails with the DOE. So no. Do you know what? So that's life.

In this market, today in 2008 we didn't have to say foresee the Fukushima piece and the effect that would have. We're living through that now. We're 3.5+ years into that, but I can tell you what we're optimistic about the future, especially on the uranium front. And so investments in pieces like GLE, I think that these may come around again, and we'll get back to that again.

So I don't think -- we're cautious obviously. We've been about acquisitions of other sorts. We've made some ones that we're very happy with. Right now, we're not aggressive on that front, but we're always keeping an eye on the market. So, no, I don't think it has changed our view.

All right. Thank you.

(Operator Instructions). And our next question is from Ben Isaacson from Scotiabank. Please go ahead.

Thank you. Just a couple of follow-up questions. First, can you explain the CAD150 million increase in provisions? [Indiscernible]

Yes. So we had a project underway to look at the clean-up of one of our ongoing facilities, and that's our Port Hope conversion facility. And it's part of our larger Port Hope area initiative to clean up that municipality. And as we have done the work to understand with those clean-up cost will be, we then reflect that in our asset retirement's obligation. So largely what's being reflected in that increase is enhanced thinking on what the ARO is for the Port Hope conversion facility.

Okay, that's great. And then my last question is on cash outflow over the next couple of years, you had about CAD800 million in purchase commitments in 2015/2016 combined, and then potentially another CAD400 million of outflow to the CRA. Can you first give a better split on what you think could happen in 2015 versus 2016? And then part B if that is other deductions and tax loss carry-forwards that you anticipate would be available to help offset the potential outflow to the CRA?

With respect to the CRA component, of course we're in a process with them right now of dispute resolution and it's certainly something we would like to see move quicker, but it isn't moving that quick. And that actually prevents us from being able to be more clear on whether it's a 2015 or a 2016 thing. Our view continues to be that our case is strong and we don't view an adverse outcome, but we eventually have to get to court and it's the delays that we're seeing there that prevent us from giving little more clarity on like that outflow between 2015 and 2016 looks like.

Okay. And on the deductions of potential carry-forwards that could have offset some off that cash outflow?

Well, we apply those as the reassessments come in, and of course those are available after we've made in, for example, in capital deductions after we spend the money, we can access those deductions. So again it is dependent upon our economic activity and this jurisdiction in terms of what we can apply against that.

Okay, great. And then just on the split on the purchase commitment, if you have that available between 2015 and 2016?

Well, Ben, I don't have that split before me. When you think about those purchase commitments, those will be commitments for where there probably is actually a contract to deliver into as well. So we'll perhaps outline and get a little more color on what that split looks like for the purchase commitments portion.

That's great. Thank you very much.

Thanks, Ben.

Thank you. Our next question is from Oscar Cabrera from Bank of America Merrill Lynch. Please go ahead.

Thank you, operator. Good afternoon everyone. First of all, congratulations on getting the Cigar Lake project going. It's been work of lot if you want to put in certain way. So a question with regards to realized prices and you've been benefiting from your long-term contracts and there was a question with regards to -- I think it was Greg that asked it, with regards to the marketing, how much inventory there are. Can you give us an idea, or just an approximation, of how many of your competitors, or what percentage of the market has long-term prices is benefiting from this? Because it just seems like one of the things that we notice that this spot market is not quite representative of the pain that some of these smaller producers might be feeling?

Oscar, thanks. It's Tim. First let me say thanks for your comments on Cigar, lots of love in this room for Cigar. It's been, I think, 30 some years, 33 years that ore body was discovered in 1981 and it hasn't been worked on all the time, but certainly the last few years -- I look over at Bob Steane. Under Bob's leadership, we've made great progress. And so this is an important month, the eighth of October for any of us who have been involved with the project for many years. It was a good day.

And so we really look forward to the future of that project. That is a good project and it will be a great piece in the chemical portfolio for many years. So, thanks for that comment and I will ask Ken to the comment on the second part.

Yes, absolutely, Oscar. Yes, with respect to who among our competitors who would have a similar contract portfolio, I'm afraid you'd probably have to talk to them. But I think what I can say is of course we have seen some supply curtailment, and I would offer that among our competitors who have shut in some supplies because of course they are exposed to having to sell in this supply market -- so in another words without that contractual protection. And it is the case that those competitors of ours would also have a difficult time marrying on new long-term contracts that would get them the coverage that they would need in the sort of near term and so -- near to medium term I should say. So without knowing exactly what that mix looks like -- of course we have a few other competitors who have some coverage but you certainly see some in the market at that moment that don't.

Right. So if I may just add to that, in terms of your supply demand, when do you think requirements would be back to pre-Fukushima levels based on what you are seeing in the market right now and the activity?

Yeah. Of course the demand line is up and sloping to the right. I think it really becomes a question, Oscar, of inventory levels and how well-covered utilities are today. So utilities that are consuming 170 million pounds, we see that growing 4% a year. It becomes the question then of at what pace the utilities depleting inventories if they are, what does their coverage level look like. And that's where we come back to over the near to medium term with Japanese restarts and long-term contracting picking up again that we should see a price recovery, but today utilities are reasonably well-covered with respect to inventories and so demand remains somewhat discretionary.

Okay. And then if I may just add one more thing. In your comments on underfeeding and this has been over the last couple of quarters and I think it was one the industry research providers had given out estimates for the next couple of years where on looking it had come from like 3 million to 4 million pounds to over 50 million pounds. Just wondering if you can comment on that.

Yes. It's difficult to say. We have our own estimates and if you're talking about Western enrichers, they have a little more line of sight to that. But the total level of underfeeding, and I have to talk about what the Russian enrichment fleet is doing and for a fleet that has historically operated at very low [indiscernible] tells that it's already - it's difficult to say what you can classify as underfeeding in that part of the world. And so yes today we would just say that there is quite bit of enricher underfeeding going on yet, probably somewhere between 5 million and 10 million pounds a year across of all the enrichment fleets and we expect in time if Japanese reactors restart, we expect that to trail off.

Great. Thanks very much.

Oscar.

(Operator Instructions). And our next question is from Greg Barnes from TD Securities. Please go ahead.

Just some more clarifications for Grant. Could you say on your dispute resolution discussion with the CRA or is that still --

Sorry, just that we're in a dispute with them. They have issued us reassessments over the years of 2003 to 2009, and we're going through the process which is in play. That process we are through is the tax courts.

Okay. So there is no discussion underway right now settle it out of court?

I did not mean to suggest that we're having a settlement conversation with them, if that's how you interpreted it.

Okay. Good. That's been how I interpreted it, but you cleared it up.

Thanks, Greg.

Thank you. Our next question is from Edward Sterck from BMO. Please go ahead.

Thanks very much. Just a follow-up on the CRA story. Has they given any indication of when they might review the 2010 accounts?

Well. You recall that. Earlier in the year, we had talked about accelerated reassessments. In the past, we would have expected the 2009 reassessment to show off at the end of this year, but it showed up quite early with an indication that we would expect to receive 2010. That is still our thinking and it's still our guidance and our disclosure, but as of yet we haven't received it, and have no information to say whether the likelihood has gone up or down. It's just that our current disclosure is we think they're on this accelerated path, but we just haven't seen evidence of it yet.

That's great. Thank you very much indeed.

Thanks, Ed.

This concludes the questions from the telephone lines. I would like to turn the meeting back over to Mr. Tim Gitzel for his closing remarks. Please go ahead.

Well, thank you, operator. I think there is no question that the industry continues to endure some tough times and we at Cameco are not immune. But we are weathering the storm and we're trying to do that by being as flexible, adaptive, and efficient as possible.

And we remain confident in the future. There is a clear progression of growth from the 70 reactors under construction to date, even more planned by 2023 and even more outside that window. Today, we know there are billions of dollars being invested in nuclear around the world. For countries like Japan, it's vital to their economy and industries that want to remain cost-competitive. For China and other rapidly expanding economies, it's critical for meeting ever-increasing energy needs and tackling air quality issues. For the US it's important for energy security and for energy diversity. And for everyone it's one of the most important tools we have to provide safe, clean, reliable, and affordable base load energy and to combat climate change. So we at Cameco remain excited about the future and we are prepared as a company to meet it head-on. So, let me say to all of you, thank you for joining us and have a great day. Thank you.

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.