Cameco Corp (CCJ) 2016 Q3 法說會逐字稿

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

Thank you, Wayne, and good afternoon, everyone. Thanks 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, Senior Vice President and Chief Financial Officer; Bob Stein, Senior Vice President and Chief Operating Officer; Alice Wong, Senior Vice President and Chief Corporate Officer; and Sean Quinn, Senior Vice President, Chief Legal Officer and Corporate Secretary.

Tim will begin with comments on our results and the industry, followed by Grant, who will discuss in more detail the financial results for the quarter and first nine months. Then we'll open it up for your questions.

If you joined the call conference call through our website event page, you will notice there will be slides discussed during the remarks portion of this call. These slides are also available for download in a PDF file called Conference Call Slides through the conference call link at Cameco.com.

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

Please note that this conference call will include forward-looking information, which is based on a number of assumptions, and that 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 on the call today.

I will start today with some brief remarks, and then I'm going to turn it over to our Chief Financial Officer, Grant Isaac, for some additional details on our financial results. After that, we'd of course be happy to take your questions.

These are not easy days in the uranium business. Yet at Cameco, we remain optimistic. We see growth in reactor construction and consequently uranium consumption. And this growth results in the important fact that over 500 million pounds of uranium has not yet been purchased for reactor requirements over the next 10 years. We know that this demand at some point has to come to the market, and we know that some of this demand is coming to Cameco, as utilities pursue safe, reliable supply from long-lived Tier 1 uranium assets.

We believe no other producer is better placed to seize this demand then Cameco. However, this demand has not emerged yet. As a result, current uranium market conditions are some of the most challenging we have ever faced. Prices, both spot and term, have fallen to levels that are neither rational nor sustainable. And we believe that these prices are failing to incent the investment decisions required to ensure reliable supplies available to meet the 500 million pounds of requirement over the next 10 years.

The weak current market, as we see it, is due to an adverse combination of two things: on the demand side, a buyers' strike; on the supply side, sellers' panic.

The buyers' strike is driven by two main factors. First, utilities continue to have a price-off bias. They see an oversupplied spot market putting downward pressure on the spot price. Ultimately, they want this to drag the term price lower as well.

Second, fuel buyers are part of significant cost-cutting programs among major utilities -- programs that translate into restrictions upon tying up financial capacity in long-term purchase agreements.

On the supply side, since Fukushima, we've seen motivated spot-market sellers, including primary producers, enrichers, and some traders. And recently, we've seen some traders and intermediaries who have taken long positions in uranium, unwinding their positions as prices have gone lower.

The volumes aren't large, and these actions are not driven by the fundamentals of the industry, but by panicked reactions to a uranium price that has continued to fall for longer than anyone expected.

The relative results for now are uranium prices at levels we haven't seen in more than a decade. Today, the spot price sits below $19, which is almost a 50% decline this year alone, and this spot price fall has pulled the term price down to the mid-$30s. And since Fukushima, the spot price for uranium is down over 70%, and the term price is down 45%.

You can think of the current market dynamic as this: We have today an oversupplied spot market satisfying modest, near-term uranium demand and effectively allowing utilities to defer and delay term contracting until there is more clarity on important demand questions like the pace of Japanese restarts and the pace of reactor construction programs.

And I think it's important to stress that the spot market is not a fundamentals-driven market. It is not where utilities acquire their run-rate material. Instead, the spot market is typically used for discretionary purchases only and is very thinly traded, moving on very small volumes.

Moreover, Cameco is not a spot-market seller. We do not sell our Tier 1 production into the spot market, preferring instead to sell it into our contract portfolio.

Looking ahead, obviously a turnaround in the uranium market requires the return of significant long-term contracting. But this will only occur once the oversupply in the spot market is reduced, which requires either supply discipline from those who continue to sell into that market, or good news on the demand front, such as a clear pathway to the restart of the Japanese reactor fleet.

While we are optimistic that demand must return to the market, I assure you we are not being complacent. We have taken and we will continue to take action to remain competitive in today's market and position the Company to benefit when the market improves. We have refocused our strategy away from definite production growth and towards flexible production that can respond to market conditions.

And we have focused on our Tier 1 assets, those that are the lowest cost and provide us with the most value. In focusing on these assets, we have also demonstrated supply discipline by curtailing production in an oversupplied market and pulling back pounds from our highest-cost operations at Rabbit Lake and in the US, and reducing production from our MacArthur/Key Lake operations. These decisions, as you will know, did not remove pounds from the spot market as all of our primary production is sold into our contract portfolio.

The strength of our Tier 1 strategy gives us the ability to make these changes to remain competitive in today's challenging market. And that same strategy is what will allow us to benefit when market conditions improve, providing a strong basis for future growth.

But production management is not the only area where we've taken action. We've also fought to protect the value of our contract portfolio and, where possible, extend the value of that portfolio. That's why today, our average realized price continues to outperform market prices. We've always said that one of the benefits of our contracting strategy is that it gives us a good measure of protection when the market is low, and we continue to see the truth of that.

So we've looked at our production, we've looked at our contracts, and we have really looked at every nook and cranny of the business to see where we could find efficiencies, streamline, and be leaner. Added up, the results of our actions have, in my opinion, been strong. Over the last five years, we've pulled our cash production costs back to 2011 levels. We've reduced our CapEx by about 50%, and we've reduced our exploration spend by about 50%, while at the same time bringing on the world's second-largest Tier 1 uranium mine, Cigar Lake.

We've also performed well on our other measures of success, which include a safe, healthy, and rewarding workplace, clean environment, and supportive communities. And we have maintained our investment-grade rating and been consistent in delivering on our annual sales guidance. These areas, along with our G&A costs, are where we continue to focus our efforts to right-size the Company in the current market environment.

Ultimately, we are staying competitive and have positioned the Company for price and operating leverage, and I think that shows in our results. As is often the case for us, the second half of the year is when most of our deliveries occur, and this year is no different.

As a result, in the third quarter, we had stronger results from our uranium segment, which had a positive effect on our net earnings. Net earnings were also positively affected by two contract cancellations. Grant will talk more about these in a moment, but I want to emphasize that we do not view the cancellations as a negative development or a trend. We saw an opportunity to take contracts with uncertain future value and convert them to certain present value and, at the same time, improve our near-term cash flow and earnings profile. It's really part of our strategy to optimize the value of our contract portfolio.

You may have noticed that our administrative costs are higher than this time last year, and I want to explain that. This is as a result of costs required to implement the broader cost-saving strategies that we are putting into place. We expect these actions to have a positive effect on our administrative costs over time as the one-time charges roll off.

At our operations, we see continued strong results, both in terms of safety, production, and protection of the environment. So in our opinion, we are weathering the current market and are well positioned for a future with strong fundamentals.

So, with that, I'm going to turn it over to Grant. Grant?

Thank you. As Tim mentioned, market activity was light, and uranium prices continued to face downward pressure. However, despite the market price pressure, our adjusted net earnings in the quarter were up 51% over 2015, driven largely by our uranium segment, which is our core. And we are on track to deliver on our outlook for the year.

With respect to sales, as we have guided, the pattern of our deliveries under long-term contracts is more heavily weighted to the second half of the year. We delivered 9 million pounds in the third quarter and have obligations to deliver between 10 million and 12 million pounds in the fourth quarter. This is not material that we have yet to sell. It is material we already have under contract and material that we will deliver in accordance with those contracts.

This pattern is not unusual for us. Our uranium deliveries have followed a similar pattern for at least the last five years. Why is this the case? As Tim mentioned, since Fukushima, we have seen a strong price-off bias among our customers, which translates into a preference to defer their market-related contracts to later in a given year in order to take advantage of falling prices that they perceive to occur.

Each year, in our Q4 report, we provide guidance as to how we think deliveries will be distributed during the upcoming year. But keep in mind two things: First, this guidance is based on customer requests, which we don't necessarily have at the beginning of each year; and second, deliveries can on occasion slip over a quarter or even over a year end. We update this guidance in each of our quarterly MD&As based on deliveries made and customer requests to that point in time.

The key point here is that simply taking our annual contract sales guidance and dividing by 4 to arrive at quarterly estimates for sales will not work and, as we have seen this year, can result in unnecessary alarm. Instead, if you follow our disclosure, we will provide guidance on how we expect the deliveries to be distributed quarterly.

Looking at our average realized price, while some of the market-related contracts we delivered into during the quarter were affected by the weaker uranium market prices, overall, our contract portfolio continued to provide good protection for us, delivering an average realized price in US dollar terms almost 45% higher than the average spot price in the quarter.

And while we're talking about our contract portfolio, I want to spend a moment discussing the contract settlements. We disclosed a contract settlement as a subsequent event last quarter, and it raised some concern, which surprised us, because for us it speaks to the strength of our contract portfolio and the value we can expect to extract from it. However, we acknowledge that we should have provided more information to help you see it from our view, especially since we reported another, smaller contract cancellation that arose in Q3.

Today under our contract portfolio, many of our customers are paying higher than market prices for our products, which, given their own cost pressures, they are not particularly happy about. Some of them have come to us looking for relief under their contracts, but they also understand the strength of our contracts following the successful arbitration process we went through in 2014.

When we consider a contract cancellation, it is driven by our uncertainty about the long-term uranium demand of that customer and their long-term value to our contract portfolio. This uncertainty can be caused by several factors, including policy changes in an operating jurisdiction unsupportive of continued nuclear operation, or it can be driven by economic uncertainties resulting from competition with cheaper sources of energy, with subsidized renewables, or resulting from higher regulatory costs.

We view these circumstances as an opportunity to convert uncertain future value into certain present value and thereby improve our near-term cash flow and earnings profile without jeopardizing our long-term growth prospects.

In other cases, where our customer's future uranium needs are more certain, we are willing to entertain a conversation that offers some relief in the near term in exchange for an extension to the existing terms of their agreement, thereby extending the protection under our contract portfolio. So we want to provide some reassurance that, despite the weak markets, we are confident in our ability to extract the value under our contract portfolio, and this has been tested and proven to be true.

From a reporting perspective, we did not adjust out the contract settlements because, quite frankly, they are not accidental. They are not an extraordinary event. Negotiating strong contract has been and will continue to be part of our strategy. And in accordance with SEC guidelines, we do not adjust out items that impact cash.

The conversion of uncertain future value into certain present value simply changes the timing of when we receive payment from the customer. Moreover, these cancellations have had no discernible impact upon our contract portfolio, as they have not provoked a change in our guidance for our price sensitivity table.

Turning now to our costs, we saw a 7% decrease in cash production costs this quarter compared to last year, and for the year they are down 23%. The improvement can be attributed to our strategy to focus on our lowest-cost operations, which saw us curtail production at our higher-cost operations in the second quarter. And of course, the continued progress of Cigar Lake is again a significant contributor to the reductions.

However, the reduction in production costs will not be readily distinguishable in our results this year, as our decision to curtail production at Rabbit Lake and at our US operations does carry with it some costs, which get expensed directly through the cost of sales. We had to charge about CAD20 million in care and maintenance and severance costs directly to cost of sales in the quarter, and almost CAD59 million in total to the end of the third quarter. And again, in accordance with SEC guidelines, we do not adjust these items out because they do impact cash.

So, once we work our way through these restructuring activities, the stability of our core business will be more apparent. Our focus on our Tier 1 assets will see us producing from our lowest-cost, best-margin assets. And our contract portfolio, which will see us deliver an average of 27 million pounds per year through the end of 2020, will continue to provide price protection in a weak market and allow us to benefit when prices rise.

So I want to touch quickly on NUKEM. NUKEM's business should be thought of as opportunistic and in support of our long-term contract portfolio, no different than what we did in our uranium segment prior to acquiring NUKEM, but they have enhanced the breadth and depth of our market reach. Like our uranium segment, NUKEM's sales are affected by the same variability in customer requirements. In addition, the ongoing weakness in the uranium market has meant fewer profitable opportunities available to NUKEM, and in some cases we have required them not to participate in opportunities that make more sense for our contract portfolio.

As a result, NUKEM's revenue and gross profit through the end of September are lower than a year ago, reflective of the weaker market and the fewer opportunities we see in 2016. This has led us to reduce our revenue guidance in that segment for the year.

If we look at NUKEM's gross margin, cost of product sold is up for a couple of reasons. As we sell inventory acquired when we purchased NUKEM in 2012, we had to allocate a portion of the premium we paid to acquire those pounds to cost of sales. There is no cash impact from this, but it does impact the reported margin in the quarter.

The other item affecting the cost of sales was the write-down of NUKEM's inventory, simply the result of the weakening uranium price. We don't adjust for these items, because as a trading segment, NUKEM is subject to these adjustments as price changes, and as such, these are not considered to be one-time items in accordance with SEC guidelines.

The final item I want to cover falls under the Other category. Admin costs were down for the quarter, but up for the nine-month period, for several reasons. First, as Tim noted, we have taken steps to reduce our costs that will benefit our performance over time, but those strategic decisions come with upfront costs, for example, restructuring charges, that are impacting our 2016 results.

Second, in 2016 we signed a collaboration agreement which builds upon long-standing, successful partnerships in the development and operation of our assets with the aboriginal communities closest to our operations. This is a prudent, strategic collaboration that underpins our Tier 1 strategy.

And third, defending our position in our dispute with the Canada Revenue Agency has also increased our administration costs significantly in 2016.

At a high level, the financial objective of our strategy during this period of low-term demand is to maximize cash flow while maintaining our investment-grade rating so we have the tools to self-manage risks, risks like a market that remains low for longer, tax litigation risk, and refinancing risks. Therefore, we will continue to evaluate all opportunities for further cost savings to ensure we preserve and build value for our shareholders.

And finally, before we turn it over to questions, I will quickly touch on our CRA case. The trial has now begun, with opening statements and first witnesses called in October. There are a number of scheduled court dates over the next several months where additional witnesses will be called and testimony heard. We now expect final arguments to be in the second half of 2017.

Our view of the case has not changed. We continue to be confident that we will be successful. We are often asked, how will we manage an adverse decision in this court dispute?

It is important to note that such a decision would only pertain to 2003, 2005 and 2006, as these are the years currently before the courts, which effectively means that any amounts immediately owing would only pertain to those years, and those amounts are modest and could be covered by the cash we currently have sitting with the CRA.

In other words, there is no scenario where the ruling would result in us having to immediately pay the CAD1.5 billion to CAD1.7 billion cash impact that we have voluntarily disclosed, because this amount includes years not before the courts and includes years that are not even reassessed at the moment.

And with that, I will turn it back to Tim.

Well, thanks very much, Grant.

Operator, with that, we are delighted to take questions.

(Operator Instructions) Orest Wowkodaw, Scotiabank.

A couple of questions. First one, I appreciate your highlighting that you are focused on maintaining your investment grade rating. I'm just curious if you could share with us what you believe the criteria is to maintain that rating.

Thanks, Orest. This is Tim. I'm going to ask Grant to answer that one.

Yes, if we thought about it in really general terms, Orest, we currently sit at BBB+ with S&P. That's a comfortable 2 times net debt to EBITDA. That would be a metric you would want to keep your eye on.

I think if we were BBB, you'd be looking at 2.5 times net debt to EBITDA, BBB-, 3 times net debt to EBITDA. But of course, it's not just the metric alone that drives the ratings consideration; it's also what is the Company's plan to return to the ideal capital structure or the strategic capital structure.

We like our credit rating being at BBB+, and we do factor that in when we make capital allocation decisions.

Okay. And given the low price environment we're in and your required CRA payments, your free cash flow generation is fairly, I would characterize it as small in the current environment. Is there any thought, or at what point would the management and the Board relook at the dividend? I mean, that's costing you CAD160 million a year, and I'm curious kind of where your head might be at in regards to maintaining a dividend that high. Thank you.

Yes, Orest, this is Tim. Obviously that's a piece that comes up at our Board meetings and on the quarters. As Grant has explained I think several times, we see that as a commitment to our shareholders our dividend. And to review that would require a fact change of some sort in our business. And today we don't have that. As I say, it's something that the Board looks, at and right now there's no change on that.

So, Grant, do you have anything else to add to that?

Yes, probably the only elaboration is what would we consider to be a fact change? Certainly the rollover that we've seen in the uranium market; are we there right now? It is a spot market effect. You see that it's not having a huge impact on our average realized price. But it is something we are paying attention to, this market dynamic.

Other fact changes that we've listed to the negative, suppose for example a Japanese decision to say, we're giving up, we're not going to try to restart these reactors, that would be a fact change for our industry. That would obviously trigger a review.

A positive fact change would be something like, suppose we had one of our joint venture partners in one of our Tier 1 assets say they are interested in selling; well, that would be a positive fact change for us.

So, I just highlight those as examples of what we would be looking for in order to trigger that kind of review, Orest.

But in regards to any potential shortfall between free cash flow and the dividend, are you prepared to, I guess, lean on your line of credit to fund any difference?

Well, as we look ahead, Orest, and when we see a ripening of our Tier 1 strategy and the benefit of having that average unit cost of sales driven by production coming in from the Tier 1 assets, we've come off purchasing programs, so we don't have -- we'll lose the purchase cost coming in to that analysis. We look at different scenarios, including low-for-longer, and we just continue to see cash flow generation to be supportive of our current dividend commitment. And so for us, it's about watching for fact changes that would require a triggering review.

Okay, and then just a final question for me: How much uranium do you still have left under your purchase commitments for the fourth quarter?

Do you have that number, Grant?

Yes, for 2016, I think we have taken delivery of virtually all our purchase commitments for this year. I'll just have to --

We're looking that up.

Maybe I'll follow up with you offline on that one.

Ralph Profiti, Credit Suisse.

Thanks for taking my question. Just one from me. Tim and Greg, you've discussed very well the short-term relief to contract tenure exchange, and it seems like this is only with respect to timing. Have you been open to a change in the pricing mix to which these contracts are structured? And could we see that going forward?

Ralph, that's not something that we're looking at. We have contracts in place, as you know, many -- several hundred all together -- over the next, for deliveries over the next 10 years. And the two pieces we talked about this morning or this afternoon are unique. And so that's not something that we are looking at at this point.

Right, okay, great. Okay, thank you.

Greg Barnes, TD Securities.

Grant and Tim, I acknowledge that bringing the cash forward from these contract terminations is a good thing for you, but I'm just wondering how you're interpreting this in terms of the condition of the overall market, because to me, it suggests that the portfolio of the contract market is more challenging. And obviously utilities are trying to get out of these contracts somehow.

Greg, I don't know -- there's no surprise behind these. These are, the two that we're talking about are utilities that perhaps don't have a longer-term future. And it won't be a surprise; they are reported every day as to who they are.

And so as I say, they are a couple of one-offs. We're still excited about the future of the industry, for all of the reasons that we go back to all the time: the China/India/South Korea pieces; 37 reactors out of the 60 under construction are in Asia.

And so this is -- we were talking this morning about the good old days when the price of uranium was at CAD100, and some of our contracts were at much (technical difficulty) than that, if you'll recall those days, and we would like to get out of those as well. And we didn't. We stepped up to every one of them and delivered on them.

So, no surprise that utilities that have some higher-priced contracts are looking to perhaps renegotiate, but that's not happening. We've seen two unique cases; we've seen another one that's gone to arbitration, and we've been successful in all of them.

So, we don't see any long-term trend. We're satisfied that we have a very strong portfolio that's going to really help this Company over the next years as we work through this difficult market.

So, the next question, then, as there are obviously a lot of reactors being built in Asia -- Korea, Japan, China -- well, China, not Japan, obviously. Are they approaching you, some of these utilities, about putting in place long-term contracts and having those discussions with you? Because clearly they're going to need uranium, or are they just delaying and hoping that the price continues to go down?

You know, that is an absolute continuous process with us, Greg. We never stop talking to them, including the Japanese. We are heading over on a trip at the end of the week to Asia, and we'll be talking to all of our customers.

We're always looking at the future. I can tell you, especially the Chinese, the Indians -- I was in South Korea a few weeks ago -- they are not thinking this year/next year/two years from now. I mean, their reactors are going to run for 60 years, and some that haven't even been built yet. And so they are looking farther into the future.

So we're going through a rough patch, no question. Five-and-a-half years now, post-Fukushima, it hasn't been easy, but I think Cameco has come out of it all right. We are doing what we can in this tough market. We've got some portfolio protection. We're looking internally to do what we can. And that hasn't been a lot of fun; I say that every call, because that is not fun, but we know we have to do it, and we will.

And so, we're talking to our customers -- to your question -- all the time, India especially, China especially, South Korea. And we're always looking to extend or enhance our relationship with them.

But they don't want to enter into a long-term contract to supply these new reactors yet?

Well, I wouldn't say that. There are some utilities that are looking at longer-term -- Korean utility right now is out for a long-term contract. So, yes, no, there are some real RFPs out there.

Okay.

David Wang, Morningstar.

Thank you for taking my question. I guess first is, what would you think that when you see in the uranium markets for this downturn to sort of turn the other way? I mean, has it been that Japanese restarts have been slower than everyone was expecting? Are there supply cuts from the producers? Are those some of the things that you're looking out for?

Yes, David, absolutely. You know, the first one -- and we sound like a broken record on this one, but the Japanese situation where, had you asked us, me especially, three years ago, I'd have said there would be a dozen, 15, 16, 18 reactors on by now. There are two operating today.

Now, there's five approved, two in court, one down for a few months and two operating. So, clearly, that process has taken much longer than anyone, including the Japanese utilities and their agents, thought. So we are really watching. And as I said, we will be heading over just to see if there's a clear path forward in Japan.

The government is saying the right things. They want 20% to 22% of their electricity supply to be from nuclear. That equates to over 30 plants by 2030. They'd actually have to build some more, I think, to get there. They've made big commitments, like many other countries, to the climate change, the COP 21 piece. Utility rates are up 20% domestic, 30% industrial. So, Japan, big piece, watching where that goes.

China continues to go; it's impressive. I think they have 34 or 35 now, this week, reactors operating, another 20 or so under construction, and we were over there not long ago. And very aggressive build continues there.

India is really coming to the fore now. And we're over there a fair bit, have an aggressive program planned. We'll see how they can deliver on that. But they've certainly got an interesting approach where they've got the Russians and the French and the Americans all at different sites, and planning to build at the same time. So there's a lot of pieces there.

I think the return to long-term contracting that we talked about in our opening comments, there is a backlog of pounds that need to be procured over the next 10 years. And the question is when the utilities are going to start coming back, and will they be crowding through the door on that one?

And I would just tell you in talking about supply here, supply has been a bit undisciplined. We haven't seen a whole lot come off in this period. But you can look forward as well, and Bob Stein is sitting here beside me here, would tell you, when are we going to start looking at new mines? Because if we're going to deliver these pounds out 10 years from now, we should be thinking about that, and we're not. We're not, we're not in this period at all, nor is anyone else thinking about that.

So, excess supply needs to clear the market. We need to see some improvement in Japan, China, India, South Korea. Asia has to keep going. Those are the milestones or the markers we're watching.

All right, great. And then, what with uranium prices so low, a lot of the junior miners and other miners in the industry have been hit pretty hard with their valuations down. Do you think this is an opportunity to scoop up a nice, low-cost asset at sort of cross-valuations, if you're expecting a uranium price rebound in the future?

Not really. We're happy with the portfolio we have. We'd love to get some of our assets that are a bit more advanced in the pipeline and in progress, and I'm looking at Bob especially; we've got a couple of nice ones.

So, we're not particularly interested or aggressive at all on any new projects.

Jim Ostroff, Platts.

I wanted to ask whether there's any consideration for further production constraints at existing facilities. You had outlined some of these before, but the question has to be asked as to whether you've even considered additional reductions, constraints.

Well, Jim, thanks for the question. We're still working through the moves that we made in 2016 -- Rabbit Lake. Those take some time to work through, and you see the costs coming through. Now we have to give several months' notice to regulators and employees and the like, so that's coming through.

The US, the same thing. And McArthur, we've pulled that back. We think we've been the leader in this regard, quite frankly. And so do we have more room? We could; that's something we consider all the time. We call it flexibility -- flexibility up, flexibility down. And so it's something that's always on our mind, Jim.

Fai Lee, Odlum Brown.

Tim, in the press release it mentioned that you're going to continue to look for opportunities to enhance the value of the Company for shareholders, including strengthening the balance sheet. Is that primarily in reference to looking for cost savings that Grant referred to? Or are there other levers that you would possibly consider?

Yes, thanks, Fai. And we're going to get the operator to say your pronunciation, because we go through this every time, so we apologize for that.

No, it's absolutely the cost-cutting measures we're talking about: leaning up the Company, looking for ways to save on our CapEx, OpEx, G&A, and putting that to the balance sheet. So, you're on the right track.

Okay. And with the spot price, it seems to be sliding, and it seems to be heading closer and closer to your cash costs of production. I'm just wondering, are there any restrictions or any contemplation of possibly just saying, well, it's gone so low, maybe we'll just buy the spot volumes instead of producing?

And on the restriction side, I was wondering if, given it's a thinly traded market, if you do that, I guess it could possibly have an impact on the spot price. I'm just wondering if there are any restrictions on that.

Yes, I'm going to ask Grant to answer that.

It's a great question, but obviously there would be a number of factors we'd have to consider in solving the math for that one. I mean, simply just having a spot price that hits the cash cost of production isn't enough, because if we curtail the production, well, there would be some costs to that. So it would have to be a delta to account for that.

If not, and there isn't a spot market response for us curtailing, then we disproportionately shift the cost of cleaning up the market on to our owners, and that doesn't seem like a very good idea.

Right now, our best value proposition is to produce from our Tier 1 assets and put that into our contract portfolio, and then take all the measures that Tim has already described in order to weather this market and position ourselves for a demand shift that we think needs to occur.

Okay, great. Thanks.

Daniel Horner, Nuclear Intelligence.

Thank you for taking my question. First of all, earlier in the year, there were some discussion of the possibility of selling the US assets. Could you update us on the status of those assets and any developments, either tending toward or against selling them? Thanks. I have a second question as well.

Yes, thanks, Daniel; we have nothing to report on that at this time, no.

Okay. And the second question, with regard to the contract cancellations, you said these are one-offs and it's not a trend. So does that mean you are not anticipating any further contract cancellations, or is there a possibility there will be other ones in the future? Can you give us a sense of the possibilities and the numbers we're talking about here? Thanks.

Yes, thanks, Daniel. As I said, those were one-offs. We're not anticipating any at this time. That doesn't mean it couldn't arise in the future, but right now we have our contract portfolio. You see we are delivering into, I think we said we had 30 million to 32 million pounds to deliver this year. We're on track for that to have a healthy exercise in the fourth quarter to do that. But we're not anticipating anything at this time, Daniel.

(Operator Instructions) Paul Luther, Bank of America-Merrill Lynch.

Thank you for taking my questions. I wonder if I could get a little bit more perspective from you on Japan, if you've seen any sort of recent change in tone there. Certainly we've read some news about some governor elections that have been more anti-nuclear this year that have happened. Do you think that could increase pressure on ability to restart or not?

And then, wondering if you've noticed -- if you could give us an update maybe on, if you have a sense of inventory levels in Japan, if they've been more stable over the past year.

Thanks; you're about a week early with your question, because I'm actually heading over there on Saturday to do the tour from south to north and meet with all utilities and see where things are at.

You know, it's mixed messaging coming out of there. We watch Sendai, one of two up and running. I think one of them's down now for some maintenance, but they plan to bring that back on, even though there's one of the politicians asking them not to. They say he doesn't have any authority, so they're going to bring it back on.

Takahama, I think the units are in court. Lost at the two lowest levels, which they expected, and actually were hoping for, so they could get it to an appeal court and hopefully get a decision there, a positive decision, which would then apply more broadly. And I understand, I think I saw some notes, internal notes the other day that that's in the first quarter of 2017, they are hoping for a decision on that. So you watch for that on the Takahama, because that could be a bit of a harbinger of what's coming for some of the other units.

I think Ikata is still up and running. So, slow progress, and we watch the news daily. We have our folks that are over there more often than I and meeting with utilities.

I can tell you -- and Grant was over there not long ago, so maybe, Grant, you want to say a few words about this and about the inventory level. But clearly, and we've said this before, the behavior is that this is a real rough patch in Japan. But government policy is 20% to 22%. They're spending billions, billions, on getting these reactors up to the standards required by the nuclear regulatory agency.

Our partner at Cigar is still TEPCO. The Japanese are still spending a lot of money exploring for uranium in Saskatchewan. We just had the Japanese ambassador in our office last week wanting to do more business in Canada. So, lots of positive signs, but the time is -- it's taking a lot of time.

So, Grant, maybe I'll pass it to you.

Yes, the only thing I would add on the sentiment side is there seems to continue to be a real commitment to the nuclear power plants. But it's combined with, really, a lack of urgency. And maybe that lack of urgency is prudent. The Japanese are still dealing with the public confidence issue in the nuclear reactors, and there seems to just be an understanding that it takes time to build up the social credence required to get those nuclear reactors up and running.

So, we see the commitment. We see it financially. We see it in terms of construction programs at reactor sites to get them ready for the new regulatory infrastructure. We do have this issue that Tim mentioned about local district courts having an ability on a cautionary principle basis to get injunctions in place. So that needs to be figured out, what is the true authority of the new regulator.

But I would just say the commitment seems to be there, but not coupled with certainly an urgency that I would like to see, but the path still seems to be there.

With respect to inventories, your question is a good one. When we peer through, to the best of our ability, the financial statements of our customers, it appears that there has been some stabilization in the inventory. So what we think is going on there is probably the rolling off of some of their term contracts. It's been five-and-a-half years post-Fukushima. They either took delivery or deferred. And we just think they are probably coming to an end with some of those decisions, and that's being reflected in more of a stabilized inventory level.

Now, that's based upon value. So there could be an FX effect in there. There's obviously a price effect in there. But there does appear to be some stability. In other words, there doesn't seem to be a rapid increase in the inventory overhang in Japan.

Okay, great; that's really helpful color. Thank you for that.

I was wondering if I could get a little more perspective as well on supply. I think you talked about in your remarks about how supply globally has been relatively sticky. Do you think that this spot price that's out there could encourage some of the higher-cost supply to push to the sidelines, or do you think a lot of them are still being protected by their own contracts, and so it could continue to be sticky from here for -- at least in the near term?

A little bit of both, PT, probably. There would be some covered by some contracts. And some you see in the press that have some coverage. We do. But anybody that's kind of living off the spot market these days has got to be in tough, I can tell you. You might be selling for cash to make payroll, but it's not sustainable over time. And for sure you're not getting the return on your investment.

So I have to say we are, or I am, at least, a bit surprised by how sticky the supply has been. But that said, I say keep your eye on the supply side. We think we led in bringing off some production. We would think there might be some in Australia and Africa that would, at least in the near to medium term, in the near term be under some pressure, but medium term not only under price pressure, but running out of resources.

So, yes, that's going to be part of it going forward. And consumption has stayed pretty much the same and is growing over time. Supply has stayed pretty tight, but I think you'll see it trailing off going forward.

Great. Thanks again for the color; I appreciate the help.

Edward Sterck, BMO Capital Markets.

So I've got a couple of questions. The first may have been answered already, but I did have to jump off the call for a bit. But when we look at the credit rating, the rating agencies include the letters of credit when they measure their sort of net debt metrics.

Hi, Ed, I'll pass it to Grant.

Yes, so we have two ratings, S&P and DBRS. There is some variation in what they include on the debt part. They don't quite credit it the same way. But largely, yes, it's considered as part of the debt profile and then looked at in combination with credit for cash on hand relative to your EBITDA.

Okay, thank you. And then my following question is just with regards to the continued decline in the spot price. Of course, the biggest spot seller is Kazakhstan and Kazakh production. And it may be impolitic to answer this question, but at what point do you think that the Kazakh operations really begin to feel the pain, and we should expect to see some kind of response from them on the supply side?

Ed, I'll just say this in that regard. And I think you were there; I saw you in September in London. Mr. Zhumagaliyev, who is in charge of Kazatomprom, just talked about their production, their view of the market, and that they had planned to hold their production steady. And we thought that was an encouraging sign from the Kazakhs.

Of course, a lot of new production over the last 10 years now has come from Kazakhstan. They've done a wonderful job of raising their production profile. And people were wondering where it would stop. And I think that comment was helpful.

And so, yes, I can't go any farther on your question as to what their plans are in the spot market, but I thought those comments from Zhumagaliyev were particularly helpful.

Thank you very much.

Richard Williamson, private investor.

I recently saw a news article that there were a number -- actually, they said 30 -- new reactors planned to be built in Saudi Arabia under contract with the Russians. Is that a real thing? Do you have any information on that?

Hi, Richard, and thank you for the question. We appreciate it. I can tell you it's something we've watched very closely. That's not a new comment; they've been looking at that possibility for some time. I think it was, even a few years ago, 16 reactors by 2030.

The link-up with the Russians is a bit new, I would say. It seems to have a bit of momentum. They've created an agency there. I think it's called [KCARE]. And I can't remember what that stands for, other than it's a nuclear body that is in charge of looking at nuclear power. And it actually came up a few years ago, and I'll just take you on a little historical tour.

When oil prices were probably about $100-plus a barrel -- which they are not today -- but they said, you know, and they use a significant amount of their production to generate electricity. They burn oil. And they said, well, we're leaving a lot of money on the table burning oil at $100 a barrel to create -- to generate electricity when there might be other methods. So that's, I think, when they started looking at nuclear power. We've seen them from time to time in and out looking for information.

So, this latest piece with the Russians, I can't -- I don't know how credible or sincere it is, but it looked like it might have some momentum. So we will watch that closely going forward.

Terrific. Hey, thank you.

John Tumazos, John Tumazos Very Independent Research.

My question is, would you use cash to buy pounds of uranium in the spot market? The spot price is almost half of your nine months' total cost, including amortization. And it does seem a little odd that uranium has fallen so much this year when other energy minerals have rebounded in price and commodities in general have been rebounding.

Thanks, John. I'll ask Grant to comment on that.

Yes, on the first part of your question, at the moment our view really is, we are not the buyer of last resort in the market. The market is under pressure for all sorts of reasons.

We have our contract portfolio that is protecting us. We've got a good supply from Tier 1 production. We've entered into some purchase commitments in the past that have come in through the door. And right now we just have kind of decided to step to the side of the market and let others take the decisions to clean it up. So we don't have plans to be the buyer of last resort in the market, as I say.

Thank you.

Umang Majmudar, General American Investments.

I wanted to go back to the CAD20.1 million of care, maintenance, and severance expense in the quarter. And I just wanted to try to finish the math on that.

So that would be the equivalent of roughly CAD2 or so per pound of uranium sold in the quarter. And if I were to think of it in terms of pounds produced in the quarter, that would be something approaching CAD3.50 a pound. So if that directionally is correct, then that would suggest that the spread between the average price received by Cameco and the cost of production or the cost per unit sold is actually wider than it appears.

And then secondarily, would it be reasonable to suggest that there are still higher-cost pounds that are being produced despite the curtailment of some of the Tier 2 assets and that possibly the care and maintenance expense might decline over time, and that would further enhance the spread between price received and cost per pound, as we all try to think about what the underlying cost structure of the Company is? Thank you.

Maybe I better let our CFO tackle that one.

Yes, yes. You're raising an excellent point, and I probably should have been more deliberate. When I talk about the ripening of the Tier 1 strategy, I'm talking about exactly what you're highlighting, and that is we made some decisions to take out higher-cost pounds. We've told you, told folks that that's hitting our cost of sales. But when you do the math and figure it out, it is taking away from the underlying performance of those core Tier 1 pounds.

Now, I don't adjust those out; I don't adjust those out because I stick pretty close to the SEC rules on adjustment. You just did it. I wouldn't quarrel with your math, actually. And then I think that that's the appropriate way for people to think about how the Tier 1 strategy ripens over time.

So I would just say thank you for making the adjustments that I'm not prepared to make. But it is the right way to look at how the Company evolves over time because of this ripening Tier 1 strategy.

Okay, thank you. And then would you be able to comment or be willing to comment on the second portion of that question, which was that as investors or analysts, we should think about the pounds being produced as to the extent that there's a percentage still coming from Rabbit Lake, for instance, that that would continue to decline, and same thing with respect to some of the care and maintenance costs over time?

Yes, so certainly as -- there are Rabbit Lake pounds still in our 2016 year-to-date numbers. Rabbit Lake was operating until the decision was taken to curtail, with respect to the US, in situ recovery mining. So you don't just shut it off. So there's residual pounds coming. And of course, as the volume falls, the unit cost goes up. So that's not helpful as they flow into the overall inventory bucket or the single bucket that we calculate our cost of sales from. So we have to work through those over time, but as we do, that cost of sales will come down.

The other piece, too, in addition to the factors that you highlighted, is also the purchase commitments. We have not been on an active purchasing program. Just to reference back to my last comment, we don't view ourselves as the buyer of last resort in the market. We haven't been on an active purchasing program for over a year now, but we still have some purchasing commitments that are working their way through.

And so as we take the Tier 2 production cost out and, quite frankly, the cash costs associated with purchase over time, you'll see that reversion to Tier 1 costs, and that is really what's at the heart of our core strategy, focusing on Tier 1 assets.

Terrific, thank you.

Fraser Phillips, RBC Capital Markets.

I just had one clarifying question. Tim, I think I heard you say you had a third contract or a contract, or a discussion perhaps with a customer that's gone into arbitration.

Fraser, that's an old one. That's a couple years old. So, yes, that's gone and done. Yes, that's that one we reported a couple years ago, Fraser that --

2014.

Yes. That's the one, Fraser.

Okay, thank you, sir.

Tadeas Trojan, Powder Gate Capital.

Thanks very much for taking my question. I only have one question, actually. With regards to the Chinese project in Namibia, can you tell a little bit more where is the project currently standing and talk a little more about the market dynamics, and how would it affect your ability to win contracts in China if the mine is opened? Thank you.

It's Tim. Just to be clear, that's the Chinese that are building that project in connection with a small Namibian. The contribution, I think, nothing to do with us other than we're watching it closely to see what the progress is. And I don't have the most recent update. I heard there was going to be production in Q4 this year. I haven't seen that happen or news of that yet. So we're watching it, but don't have much more to report.

Orest Wowkodaw, Scotiabank.

Just following up on Greg's earlier question, in terms of the two contract cancellations, have there been any -- have any other utilities approached you about further cancellations at this point?

Not at this point. Grant, you're looking --

We're not in any active conversations with utilities under the same circumstances that drove those two contract cancellations. We are under active discussions with every single one of our customers who is pointing out that they are paying more for Cameco uranium than the market price. And of course, our response, Orest, is there was a time not too long ago you paid a lot less for Cameco uranium than the market price. And we don't stop talking to our customers, but in terms of specific examples similar to those two, no, we don't have one ongoing at the moment.

Okay. And in terms of your realized price guidance, your outlook to 2020 is virtually unchanged. Is that because the bigger contract, the CAD47 million, was that already reflected in your Q2 realized price, or are both contracts effectively showing a negligible impact on your outlook in the Q3 outlook?

Yes, it's the latter. Both contracts are showing a negligible impact on that price sensitivity table. If those contracts had driven a material change, we would have had to update the table either to reported prices under the various scenarios, or the volume -- the average volume under contract for the years involved. So, you just didn't see much of a change.

Okay. And the CAD59 million of settlement, what was that on an after-tax basis?

I don't have that number at hand, but I can get it to you in a follow-up.

Okay, thank you.

Greg Barnes, TD Securities.

Yes, I'd like to hear the numbers, too, Grant, if you can, so we can try and adjust for the contract terminations in this quarter.

Secondly, on the care and maintenance costs, what is the number going to be for this year? And I know you've got CAD35 million to CAD40 million a year going forward at Rabbit Lake. Are they going to be expensed as well?

Grant?

Sorry, Greg. I'll just get you to repeat the last part of that question.

Is it going to be expensed (inaudible)?

Well, they'll run through the cost of sales -- the Rabbit Lake pounds will continue. The cost of Rabbit Lake care and maintenance will continue to run through cost of sales.

So, we obviously have a plan to work down those costs as low as we can possibly get them. As you can imagine, it's an expensive option on future production and one that we're not overly satisfied with. So we will continue to work on those costs, but we will see them in the cost of sales and will continue to just leave them in and not adjust them out because we're following the SEC guidelines there, and there is a cash impact.

And what is the total cost for that similar expense this year?

Greg, for the remainder of the year, it's CAD15 million. And the rest of it will be in there already.

I'm just wondering what the total was for the year. I guess I'll go back and add it up, but --

Well, CAD39.6 million to date.

Okay.

And another CAD15 million.

Okay, fair enough. Thank you.

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

Well, thanks, Wayne. So, I just want to say thank you to everybody who's joined us today on the call. We appreciate your interest and your support. And I just want to assure you that we at Cameco are doing everything we can to really navigate through this difficult time in the market, and we will.

So, thanks again to everybody, 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.