Cameco Corp (CCJ) 2016 Q4 法說會逐字稿

Welcome to the Cameco Corporation's 2016 fourth-quarter and annual results conference call. As a reminder all participants are in a listen-only mode, and the conference is being recorded.

(Operator Instructions)

I would now like to turn the call over to Rachelle Girard, Director Investor Relations. Please go ahead, Ms. Girard.

Thank you, operator, and good morning, everyone. Thanks for joining us. Welcome to Cameco's conference call to discuss the fourth-quarter and 2016 financial results.

With us today on the call are Tim Gitzel, President and CEO; Grant Isaac, Senior Vice President and Chief Financial Officer; Bob Steane, 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 the changes made to the outlook we provided for 2017 to help investors better understand our business and improve the alignment of expectations.

Then we'll open it up for your questions. If you joined the conference call through our website event page, you will notice there will be slides displayed 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.

(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 forms 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 on the call today. As usual, we will start this morning with some brief remarks, and after that will be happy to take your questions.

We've been saying for some time that uranium prices are neither rational nor sustainable. Current prices are failing to incent the investment decisions required to ensure reliable supply is available to meet growing demand out into the future. Indeed, I would have to say that market conditions in 2016 were as tough as I have seen them in 30 years.

In response to these tough conditions, Cameco led the way in terms of supply discipline. We curtailed our Rabbit Lake and US mining operations and reduced our production at McArthur River.

Now the world's largest uranium producing country with almost 40% world supply, Kazakhstan, has announced that it intends to cut its 2017 production by 10%. In addition, ConverDyn has announced cuts to better align its UF6 production capacity with customer demand. These announcements certainly represent positive developments around the supply performance signpost that we have been watching.

They strengthen our view that the low prices are not sustainable and further bolster our optimism about the long-term fundamentals for our industry. We've seen some uptick in uranium prices with these supply announcements, as the average spot price is up over 40%, and the average term price is up about 8% since the lows of December 2016.

But let me be clear. Our optimism is best described as cautious optimism. We are far from a true incentive price for sustainable production.

In fact, we are far from declaring that even Tier-1 production is free from the pressure of further reductions. And obviously we are very far from requiring any new greenfield uranium projects. There is still a long way to go.

Ultimately it will be the return of term contracting and meaningful quantities that will signal a transition to a more positive market environment. Until that time we must manage our business as if difficult market conditions will persist. Looking back at 2016, we did what we said we would do and more.

We were the first to show real supply discipline, and in addition we took significant steps to reduce costs and streamline our business. Why? Because 2016 proved to be another difficult year for the uranium market.

At the end of December, the spot price was $20.25 per pound and the term price was $30. That is about 40% and 30% lower than the beginning of 2016 and about 70% and 60% lower than March of 2011. I think it's fair to say that no one -- including me, by the way -- expected the market would go this low and for this long, even with Fukushima taken into account.

However, despite the uranium spot price hitting a 12-year low of $18 per pound in early December, the performance of our core business uranium was solid and in line with the output outlook we provided. We delivered 31.5 million pounds of uranium at an average realized price of CAD54.46 per pound, about 60% higher than the average uranium spot price for 2016.

However, our earnings for 2016 reflect the consequences of a weak uranium market and our resolve to take the necessary steps to ensure the strength of our core business for the long-term benefit of our shareholders. These steps are expected to benefit our performance over time, but came with a number of upfront costs in 2016, which totaled about CAD120 million, with another CAD362 million in impairment charges for Rabbit Lake and Kintyre.

On the operational front, our performance was strong. Uranium production for the year was about 5% higher than expected, with all sites meeting or exceeding our expectations, particularly Cigar Lake. As a result, our unit cost of production continued to decline, evidence of our ripening Tier-1 strategy.

The financial objective of our strategy during this period of low uranium demand is to maximize cash flow while maintaining our investment-grade rating so that we have the tools to self-manage risk. Risks like a market that remains lower for longer, litigation risk related to the CRA and TEPCO disputes, and refinancing risks.

On the cash flow front, we continue to have good visibility into our cash generating capacity thanks to a combination of our contract portfolio and the restructuring and cost-cutting measures we have taken and continue to take. In terms of financial capacity, we have been getting questions about the sustainability of our dividend in this environment.

You will see that our Board approved a quarterly dividend based on the priority they place on shareholders and their confidence in the Company's ability to deliver long-term value. As they always do, the Board will continue to assess the dividend and will take the action they deem necessary based on the circumstances, including the TEPCO contract cancellation, and to ensure long-term value creation.

As I said earlier, our outlook for 2017 and beyond is cautiously optimistic. Optimistic because it appears that the pain of low prices is driving meaningful supply discipline, and this discipline is now provoking a strengthening uranium price. Cautious because market challenges continue, challenges that might frustrate recent increases in the uranium price.

As a result, we will take all necessary decisions to remain a competitive, low-cost producer in the face of continuing market challenges. At the same time, we are positioning the Company to maintain exposure to the rewards that come from having uncommitted, low-cost supply to accompany the return of meaningful term demand. We were recently reminded of one of those potential challenges that could frustrate the progress we have seen in the market.

Last week we announced our surprise and disappointment at the notice we received from TEPCO stating that they were terminating a uranium supply contract signed in 2009. We have been down this road before and have successfully defended the strength of our contracts. As such, we strongly disagree with their position, and we will vigorously pursue remedies to recover value for our shareholders.

However, until that dispute is settled, our results will be impacted. You can see this in our outlook for 2017 delivery volumes, realized price, and revenue in our uranium segment. We also know there is concern over the risk of contagion from the TEPCO announcement, but I want to be very clear.

We do not believe there is any contractual basis for TEPCO's claims, nor do we believe our other customers can make similar claims. This has been tested previously, and the strength of our contract has been validated. I want to remind you that we fulfilled contractual commitments to our customers, even when it meant we faced harsh criticism as a result of taking low prices under our contract portfolio when market prices were higher.

We expect our customers to fulfill their contracts just as we do. The contract is a contract. It is obviously early days in the process of working our way through the implications of TEPCO's actions, but I can tell you it will invoke a re-evaluation of the optimal mix of our sources of uranium supply to feed into our contract portfolio and could see us make changes to our inventory position, our production profile, or our purchasing activity.

Until that work is complete, we will move into 2017 with a plan to produce about 7% less than we did in 2016, largely due to the production changes we made last year, and we will continue to hold McArthur River production at 18 million pounds. In addition, in alignment with the announcement in January by Kazatomprom, Inkai's production is expected to be about 10% less than it was in 2016.

We know it is difficult to see beyond the market weakness that has persisted for almost six years, but as we look to the future, the bottom line is we see continued growth in reactor construction and, consequently, uranium consumption. In 2016, 10 new reactors came online, and there are 58 reactors under construction today, the majority of which are scheduled to come online over the next three years if startups occur as planned.

Many of the countries building new reactors are installing base load electricity. China represents about one-third of that growth. You only need to look at the news in January about the choking air pollution in China to understand why nuclear is so important in that country.

India and South Korea are also significant contributors to the demand outlook. Of course, more reactors means more uranium, 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 we are well-placed to seize this demand.

We have a strategy focused on our Tier-1 assets, those that are the lowest cost and provide us with the most value. The quality of our assets combined with the action we have taken over the past five years to curtail higher cost sources of production, to protect and extend the value of our contract portfolio, and reduce costs and streamline our business have allowed us to remain competitive in the challenging market.

So although we cannot control the timing of a market recovery, we can and will continue to take the tough actions we believe are necessary to ensure we are well-protected under our contract portfolio, to have the financial capacity to weather an uncertain market, and to maintain exposure to the rewards that come from having uncommitted, low-cost supply to deliver into a future market where we see demand growing. So thanks again for joining us today, and with that, I'm going to turn it over to Grant. Grant?

Thank you, Tim. I want to highlight the changes we have made in our disclosure for 2017, which, coupled with the information provided at our November workshop, we expect will improve the investment community's ability to assess our expected annual performance. If you missed the November workshop, all the materials are available on our website.

Let's start with the 2017 outlook table, and I want to emphasize that the 2017 outlook table excludes the TEPCO contract. You will notice that at the top of the table we have provided you with the percentage contribution we expect each segment to have on 2017 gross profit. We have done this to really focus you in on the core of our business, the uranium segment.

You can see that at more than 80%, it is really what drives our results. In alignment with this focus, I will start with the uranium segment. We have provided you with an expected average realized price for 2017, which is based on our delivery commitments this year, the pricing terms under those contracts, and the following assumptions.

First, we assume that current UX weekly spot and term uranium prices remain at these levels throughout the year: $26 a pound spot and $30 a pound term. And we assume that the Canadian dollar-US dollar foreign exchange rate is CAD1.30 and remains at this level for the entire year.

We will update this quarterly based on deliveries and actual pricing under contracts in the quarter and for changes in uranium prices. We realize that prices and exchange rates can fluctuate, so we also provide you with the sensitivity of our revenue, cash flow, and adjusted net earnings to a CAD5 change in both the spot and term uranium prices and a CAD0.01 change in the Canadian-US dollar exchange rate. Since we have added this more granular disclosure for 2017, you will notice we no longer include the year 2017 in our average realized price sensitivity table.

As a result of providing the expected average realized price, the revenue range provided for our uranium segment is based purely on the delivery volume range provided. We have also provided you with the expected quarterly delivery pattern for 2017, based on delivery notices received to date. This could change, but it gives you a sense for the pattern of variability in our deliveries.

The next piece we that have changed in the disclosure is the disclosure for the expected average unit cost of sales, including depreciation and amortization. We have now provided you with a dollar range instead of a percentage range for both uranium and fuel services. Keep in mind for our uranium segment this is based on our annual average costing method and includes the average of the cost of existing inventory, our expected cash and non-cash operating costs for the year, and our expected purchase costs.

In addition, it includes our expectations for royalties, care and maintenance and severance costs, and other selling costs. For our fuel services segment, the average unit cost of sales includes the cost for UF6, UO2, and fuel fabrication. As a result, this is not something you would be able to derive on your own.

We have done that math for you, and again we will review every quarter and update if necessary. Not listed in the table but found in the uranium segment information, we have also provided you with the volume of purchase commitments we have in 2017 and the expected average price of those purchases. Again based on the same uranium price and exchange rate assumptions used for the rest of our outlook.

We have also provided significant new disclosure on our hedge portfolio, starting under the section in our MD&A called foreign exchange. Along with this disclosure, we have calculated and provided in the outlook table, using the methodology discussed at our November workshop, the loss we expect to record in 2017 on the portion of the hedge portfolio that is applicable this year. This reflects the loss on adjusted net earnings, not our IFRS earnings.

This disclosure is based on the same foreign exchange assumption that we used for calculating our expected average realized price. We have also moved away from providing you with a percentage for our tax recovery, as we realized that in 2016 it only served to magnify any discrepancies in the investment community's estimates. Therefore, this year we have given you an expected dollar range for the tax recovery.

That range is based on the current expected distribution of earnings among jurisdictions, which we recognize is not possible for you to derive. Going forward as we enter new transfer pricing arrangements and our tax rate transitions to a more stable expense as we have described in our MD&A, we will reassess this approach. Those are the biggest changes, and to help you find this information we have provided a disclosure reference guide that lists where you can find all of your outlook in the MD&A.

The guide is part of the reference material on our website for this call. With that, I will turn it back to Tim.

Thank you, Grant. And with that we are happy to take any questions you might have.

We will now begin the question and answer session. In the interest of time, we ask you to limit your questions to one with one supplemental. If you have additional questions, you're welcome to rejoin the queue.

(Operator Instructions)

The first question is from Orest Wowkodaw with Scotiabank. Please go ahead.

Good morning. I guess if we could start just with the standby cost at Rabbit. Should we anticipate that's still going to be around CAD35 million going forward, and did I hear you say that is in the cost guidance on a per-pound basis?

Hello, Orest. It's Tim. I think we put CAD35 million to CAD40 million in the box for Rabbit going forward. We will keep assessing Rabbit on a year-by-year basis or even shorter terms than that to see what we are going to do with it, but that is the number we put out.

And it is included in the cost guidance that has been provided, Orest.

Okay, and what about the severance costs related to the new headcount reductions you announced a few weeks ago?

Those will be in our 2017 numbers, Orest.

So is that included in the cost guidance?

Yes, it is. Sorry. Yes, it is.

It is, okay. In terms of the investment-grade rating, which you mentioned earlier, S&P put your rating on negative watch recently. Can you just remind us again what you think your net debt to EBITDA criteria needs to be to maintain investment-grade, and then just also what are the implications to the CAD1.5 billion of letters of credit that you have outstanding if the investment-grade rating were to be in jeopardy?

Orest, I'll let Grant deal with that.

Right now, Orest, we sit at BBB plus, which of course is well into investment-grade rating. Obviously the negative watch with S&P is something that we pay particular attention to, and we'll be having a discussion with them next week as our normal follow-up coming out of year end.

I would probably -- to put it in really rough terms, when you are at two times net debt to EBITDA, that is probably a pretty comfortable BBB plus. If you are 2.5 times, that is probably BBB flat. If you are three, that is probably BBB minus. That is probably where conversation starts to happen.

Of course that conversation is not about a particular point in time. That conversation is about your outlook over the next two to three years and how things are evolving. And of course as one of the things I want to emphasize, Tim had mentioned, is we are seeing a ripening of our Tier-one strategy and improving story with respect to the core performance of our business, and that is obviously something that they will factor in.

So a conversation to be had, for sure. In terms of the impact on the LCs with respect -- I think your question might have been if investment-grade is lost or just if there is a downgrade within the investment-grade rating -- I would just ask you to clarify.

Well, if you could answer both ways, that would be helpful. Thank you.

I am not particularly concerned within the investment-grade rating those LCs [stand]. It is possible to slip outside investment-grade rating but still maintain the financial covenants that are behind those. So obviously we would deal with that if we found ourselves there. We do not find ourselves there right now and are not planning for that.

I see. Okay. Thank you very much.

Thanks, Orest.

The next question is from Greg Barnes with TD Securities. Please go ahead.

First off, thanks for all the additional disclosure. It was a huge help. One thing I couldn't find this time around in the MD&A is your views on the global supply and demand for uranium. The balance you have given in the past of mine supply and your anticipation of demand for the year end 2016 and 2017, if you could.

Greg, I do not think it has changed much from last year. I think we're in the demand side probably in the 170 million-ish pound range, supply in the 160 million. And then you got the secondary supply out there. So that's going to take some time. We're optimistic going forward with the 58 reactors that are under construction today that are I think coming on over the next three or four years, that demand line is going to go up. I know it is about a 2% increase, I think, we're looking at per year going forward.

Number seven changed too much -- obviously on the supply side we're watching that close. We pulled off 7 million pounds last year, some of it made up by Cigar and a little bit by Inkai. And then our friends at Kazatomprom, Zhumagaliye made his announcement in early January to drop production by 10%, which was a very significant move.

That's where we are. We are still watching to see what is going to happen this year, but I think we are cautiously optimistic that supply is becoming more disciplined, if you like, and there is still growth. So that is a good news story.

Taking all that into account, Tim, what do you see as a surplus this year -- or deficit, but I'm assuming surplus -- with the Cadillac announcement and (inaudible) taken into account?

Hard to say. We think there probably is still a surplus obviously with the secondary material out there could be in the range of 20 million pounds that might be excess. So, Grant and I were talking this morning, we said it could be 10 million, could be 20 million, so 15 million might be your number. But of course nobody knows because there are a few black boxes out there in storage. But I think the good news is that it is tightening up, and we see it tightening up over the next few years.

Okay, great. Thank you.

The next question is from Sam Leeds, a private investor. Please go ahead.

Hello, Sam? Sam, it's Tim Gitzel. Can you hear us? I think we'll have to move on, operator.

Sure.

Do we have another question, operator?

David, can you hear us?

Yes.

David, you're up.

I was wondering, Tim, if you can discuss your expectations for pace of Japanese restarts going forward?

I would have been really disappointed if somebody had not asked that one, David. I guess where we are today, you've got three operating, I think. That is three more than we had about a year and a half ago. I think there are about seven that have made it fully through the regulatory process, some tied up in litigation. Others need some more time. I think 10 have made it through at least the first stages. 26 total are progressing through the restart process.

I hate to guess on this. I was over in Japan just at the end of last year meeting with all the utilities. If those seven could make it through the process and through litigation and get started this year, that would be real good. If there was a few more, that would be even better. What we want to see is a steady start up pace. If those Takahama units could get through the legal process with a good decision, we think that will be helpful to a more regular rate of restart, if you like. We'll see.

Like I say, we are happy that there are 7, 8, 9, or 10 that are partially or fully through the process. We're happy that there's 26 that are going through the process. Talking to all of those utilities, they've spent billions of dollars on their units getting them ready. As we say, they are still involved in exploration, some companies in production of uranium, so they are certainly behaving like the units are coming back on. I have been wrong four or five now -- six years in a row now as to how quickly they will come back on, but we're optimistic that it might pick up a little pace in 2017.

Great, thanks. And as a follow-up, is there a way for us to get a sense of the sensitivity for 2017 average realized prices if they end up higher than the numbers that you guys have baked into the guidance?

There's a couple ways to do that. We have that price sensitivity table. Over the course for 2017, we have collapsed that down to an estimated number based upon the assumptions under that table with respect to where the price is and where FX is. And then you can see through into the sensitivity analysis from a cash flow and an earnings point of view how you might think about that with changing price assumptions. We have given you those tools to work with, and it's kind of a pick a price where you think it could go, and then it would be subject to the outlook table.

Great. Thank you.

The next question comes from Chelsea Laskowski with MBC Radio. Please go ahead.

Hello. I wanted to check with the TEPCO announcement -- that adds on top of the, I suppose, financial things that you guys need to consider for 2017, and that came after the 10% workforce decrease for Cameco. For you guys, is it on the table to potentially take that 10% and increase it in 2017?

Chelsea, thanks for the question. Obviously we're always looking at our cost structure. We will never stop doing that in this difficult market, but for now the announcement we made a couple of weeks ago is what we are planning to do. So we're working our way through that now. I think we announced some 120 positions at the northern mine sites in Saskatchewan. We have announced a proposed change -- upcoming change to our work schedule and some pickup point changes. That is what we're working on right now, and we haven't anything new to announce from that.

So when you say for now, do you mean all of 2017, or is that within a limited time period?

Chelsea, that really depends on how things are going, how the market goes going forward for us, how our production schedule goes. It is really hard to say. It has been a tough six years for us now. We are one month and one day away from six years post-Fukushima, and we have had to unfortunately make some really tough decisions in the Company.

We have done that watching what the market would do. I don't think, as I said in my comments, we ever expected that things would be so tough for so long post-Fukushima, but they are. So we will continue to make whatever decisions we have to. For now the announcement we made two weeks ago is all we have to announce on that.

All right. Thank you very much.

Thank you, Chelsea.

The next question is from Robert [Sen] with CEO.CA. Please go ahead.

Hello, guys. There is a lot of analysis that is out there now showing a turn in the market possibly two years to three years down the road as we have new reactors come online and some of the over supply is worked through. Do you see the same thing? And what risks are there to the supply maybe not being worked off as fast, and maybe that turn being moved out a bit farther, let's say three years out?

Robert, that's a big question. We go back to the fundamentals of the business that we are watching for. We talked about the supply side. I think we led the charge back in 2016 in April when we made our announcement on Rabbit Lake and then on our Wyoming and Nebraska operations, pulling back production 7 million pounds.

We pulled back 2 million pounds at McArthur River, then we saw the Kazakhs pull back their production as well in January of this year, so we are seeing that discipline being applied to the supply side. The demand side we are optimistic. 58 reactors under construction, that is a good number. You see China confirming their numbers. You see India moving forward, South Korea and other countries, so we see the supply-demand fundamentals going in the right direction.

We talked a little earlier there is still secondary supply in the market. So I think in the timeframe you mentioned, we will see a better market, and in the meantime we are preparing for the lower for longer. That is what we have to do in this industry and in this company, but we will be ready. I can tell you we will have operating leverage, and we will be ready to go when the market does improve.

And as one follow-up question regarding the situation with the Japanese utility contract dispute, does that affect the market at all in the short term? There is some speculation that now they won't sell those pounds into the spot market, and that is a positive. Is it true, or does it have any effect at all in the spot market?

Robert, those are our pounds, so we will determine what we are going to do, and that hasn't been our practice. So we will be very disciplined in the market, I can assure you.

Thank you.

Thank you.

The next question is from Daniel Horner with Nuclear Intelligence Weekly. Please go ahead.

Hello. Thank you for taking my questions. First of all I wanted to ask about your future purchase commitment. In the outlook for 2016 you had commitments to purchase 38 million pounds from 2016 to 2028, and now the commitment is 21 million pounds. And I believe you said, you purchased 8.4 million in 2016, so that leaves 8.6 million if I'm looking at this right. Can you talk about that and what accounts for that difference and explain that a little? And I have another question on a slightly different topic, but if you could go ahead with that one.

Daniel, I'm going to pass the first question over to Grant. He's got the information on that one.

There is a difference between what you are picking up in sales and purchases in the uranium segment versus what you're seeing in the purchase commitment table, which also includes Nukem. So that explains the difference between the two. Uranium segment does not include Nukem volumes.

Okay. And then earlier when you were talking about the impact of the TEPCO proceeding you said that -- prompts an evaluation of the inventory positions, production profile, or purchasing activity. Can you give a little more detail on what you are considering under those (inaudible) risks?

Those are things we always look at, and given the news from TEPCO last week, we will obviously look at our inventory position. We will look at production, where that's at and any new purchasing we might've had in mind. Those are just three levers we wanted to mention that we are constantly looking at, and we will take a re-look at in light of the TEPCO situation.

Okay. Thank you.

Thank you.

The next question is from David Snow with Energy Equities. Please go ahead.

Hello. Just doing that math, it looks like you are -- TEPCO is priced at about nearly CAD140 a pound, and is the price lower in the near term, and then it escalates higher, or is it flat, or how does that go over time?

Hello, David. You are asking for some questions that we typically do not reveal about our contract portfolio. I can confirm, because we kind of already have it, is a high-price contract, and it is one that we are really reluctant to let go of as a result. And it is probably the reason why TEPCO was interested in making the move that they made. In terms of how it is priced and the terms and conditions, we don't typically reveal that stuff. Sorry, David.

Even though this is a significant factor in the current outlook?

Right now the current outlook does not include the TEPCO contract.

Okay. Thank you.

Thanks, David.

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

Thank you. I just wanted to talk about the sales volume of 30 million to 32 million pounds. Does that include or not include the resale of the TEPCO volumes?

That does not include anything to do with TEPCO.

Okay. So if you had the TEPCO volumes, your guidance would be approximately, I guess, call it rounding up 1 million pounds higher? Is that the way to look at it?

That would be about right. I think it was 887,000 pounds, something like that.

Yes. Rounded. Now, the guidance for 2017, it's not that much different than your actual sales volumes in 2016. Has there been a bump up in sales commitments, or are you expecting increased sales somewhere versus 2016 given that TEPCO is out of the sales volume lines?

Those are committed sales that we have had in place -- probably signed those contracts some years ago. So there is no sales to be made in those numbers. Those are the sales commitments. Those need to be delivered.

Right, but are there some deliveries in some areas like China or someplace else that you've increased on a year-over-year basis based on those previous commitments?

That's possible. It might've changed. It almost changes from year to year depending on which customers are in or out. And that would be made up of, Grant, how many contracts would be involved in that 30 million to 32 million. Maybe 30 customers, so there is variation all the time. It might mean a little bit more Asian and less US. I don't have those numbers in front of me, Fai, but yes, there is a variation every year.

Okay, thanks. Just a follow-up. TEPCO a couple of years ago was talking about drawing down their inventories back to pre-Fukushima levels by, I guess, presumably re-selling some of the volumes that they had purchased from you. Did that actually happen? Do you know, or -- I'm just trying to understand the dynamics.

We have no information on that. I cannot even answer that. I don't know.

Okay. Thank you.

Thank you.

Just a reminder, in the interest of time we would ask you to limit your questions to one with one supplement. The next question comes from Greg Barnes with TD Securities. Please go ahead.

That you. I wanted to talk a little bit about Cigar Lake. You mention in the MD&A you're doing some drilling and feasibility work on Phase 2 at Cigar. I wonder if you could give us some color around that.

Thanks, Greg. We are indeed, and I'm going to -- looking to Bob Steane here to supply an answer. Bob?

Good morning, Greg. We are in an exploration phase, and last year in 2016, we built up 29,000 meters of drilling out of a 65,000-meter program. And the intent there was we had Cigar Lake Phase 2, we've known about it for a long time. But while we were busy getting it up and going, we left that. And now Cigar Phase 1 is up and going. It is associated with a very near Cigar Lake Phase 1 deposit. It's about 300 to 400 meters at the western edge of the Cigar Lake Phase 1 deposit to the Cigar Lake Phase 2 deposit.

We had limited information but now we are drilling it out to understand the deposit and to get the information and do a pre-feasibility study on can that -- can we turn that deposit -- can it turn into a mine-extending Cigar Lake (inaudible). That's what we need to know. You may note if you look at our reserve statements, what's happened this past year is we've changed some -- in the past at Cigar Lake there was 102 or 103 or somewhere in there, inferred resources at Cigar. Most of that was in Phase 2, but the drilling that we have accomplished so far we've moved roughly around the 80 million pounds of those inferred into indicated class. And as we go forward, we will carry on with the drilling program. So that is what we are about and what we are doing in Cigar Lake Phase 2.

Grade similar to Phase 1?

It varies. It's a bit early to pin a grade on it. It is a higher grade. It is good, but we have not assigned a total grade to it. It is similar but not quite as good.

Okay. Great. Thank you.

Thank you, Greg.

The next question is from PT Luther with Bank of America.

Hello, Tim and grant. How are you?

Good. How are you?

I'm good, thanks. I just wanted to talk a little bit more about the Japanese utilities and the TEPCO contract termination. I was wondering if there was more color you could share on why now. The timing of the TEPCO cancellation seemed a bit puzzling to me. And then, Tim, in your prepared comments you talked about risk of contagion out of TEPCO. I was curious if you have seen any reaction out of other Japanese utilities following TEPCO, or if there are any other new discussions taking place?

I will answer the first part, and then Grant's been working hard with his team, the marketing team, on the second part. But why now? Great question, which is why we use the words surprise and disappointment, I think, in our call and in our press release last week. We've known these folks for a long time. They have been good customers. I have known them for many, many years.

And so Fukushima happened, as I say, one month away from six years ago, and so we have been working with them all the way through that. We've had contracts with them. We've been on the other side of contracts. I heard some numbers put on this call. We were on the other side of that back in the 2007, 2008, 2009, those type of years. But we worked our way through that.

Under this contract we delivered 2014, 2015, 2016, took delivery, paid for it, so we were surprised and disappointed, as I say, to get that notice in January on this contract. I don't know their timing. I have no idea. Obviously there is a process now that we're going to launch into very soon with them, so hopefully we'll get some more information from them. But I'm going to ask Grant to comment on the other -- that contagion piece.

Just a bit of context, of course, because this isn't a new risk for us. We have been dealing with the general risk of contract non-performance due to Fukushima for nearly six years now. And if we think about that, there's three things that are notable, first that for five full delivery years, we have met our expected sales guidance. Second, when we have faced a similar challenge to a contract, we have successfully defended the contract in international arbitration. And third, we've actually settled with two other utilities on that same net pay term that really reinforces how strong our contracts are.

So we kind of view this general contract non-performance or this contagion as being as managed as well as it possibly could be. And we also believe that the further we get away from the event, the lower the risk that, that event can be legitimately used to justify contract non-performance. In some sense it is a bit of a declining risk as well.

Now, we've been talking about -- this doesn't mean our contract portfolio is risk-free. We've never said that. We've talked about how when our average realized price is substantially above the market, this does create pressure from some of our customers who want to be more in the market. But in all but this one case, with TEPCO, these are commercial negotiations about price. They are not price negotiations disguised as force majeure.

You asked the question specifically about the other Japanese utilities, and I would just say that what has happened here with TEPCO really is a departure from the successful commercial relationships we've had with the others. Including TEPCO, post-Fukushima we had worked with 8 of the 11 Japanese utilities on a number of things to help them with their circumstances, but of course always when it is beneficial to us. And all of that has generated goodwill. It's enhanced our commercial relationships, and as I say has been beneficial. There's a few utilities who we have not had to work with either because their contracts were shorter term or because they just weren't interested. They were content with the terms and conditions of their contracts.

It is certainly possible. We cannot rule out that other fuel teams will be asked to review their contracts in light of TEPCO's actions. But given the standardized nature of our contracts, we will approach any other force majeure claim in exactly the same manner, especially if it is with a customer who has a nuclear power plant approved for restart. On balance, we just think we will continue to manage this risk well, like we have in the past. We put out guidance for delivery for 2017 in our outlook table, and that is the guidance we're sticking to. Got it, thanks. That is really helpful. And one more follow-up if I could. I was curious if given the nice run-up we've seen in spot prices since the lows in December and Kazakhstan's 10% supply cut announcement, are you starting to have more dialogue with other utilities looking at contracting? Are these things that are starting to maybe create some optimism and maybe start to create some momentum? Or do you think we need to see more sustained improvements in spot prices and more proof in the pudding that Kazakhstan is going to do what they said they will do before getting more momentum on the contract discussions?

That is a good question, PT. I steal a phase that Grant has been using, and he says there is an upward lean to the market. And I think that probably adequately describes what we've seen from the, I think it was December 8, low in the uranium price were touched off CAD17-something and has moved up since then. We are still, and let me be real clear, cautiously optimistic. Cautious in the sense that there is still a lot of material floating around, especially on the secondary side. But optimistic in that there's still 58 units, demand is going up, supply is being tightened up, and that is what you want to see on your indicators, on your fundamentals.

So we'll see. Let's watch as 2017 rolls along to see what happens, but we're optimistic that we are headed toward a better market. We saw some UX numbers the other day just showing the pounds to be contracted over the next, I think, 9 or 10 years, and is in the hundreds of millions, like 700 million or 800 million pounds that have to be contracted in the next number of years. So how long the utilities will wait -- we're seeing a bit of utility activity out there, but there's a fair bit that's got to come to the market, so it is a question of when. We will be ready when it does come.

Okay. Tim, Grant, appreciate it. Thank you.

Thanks a lot.

The next question comes from Sam Leeds, a private investor. Please go ahead.

Hello, Tim. Sam here. Sorry I must have been on mute earlier. But my question is can you speak a bit on Cameco's approach to China and the rumors that they have been stockpiling uranium but also they have opened up that fairly large mine in Africa that's supposed to be producing something like 15 million, I think is their expected output. Can you speak a bit on your strategy around how you are going to penetrate that market and get Cameco more exposure to the part of the world?

Thanks, Sam, and thanks for the question. And sorry we missed you on the last round there. Obviously China has become a big deal for us, and that started when -- I'm thinking almost a decade ago now already when they started their construction program. And through the 2000s, everybody watching to see is it real, is it real. And then their big move was back in June 2010 when they came to the market, about a CAD42 market, and bought about 150 million pounds in a month and shot the market from CAD42 to CAD72 a pound, where it stayed until Fukushima. We have been dealing with them since then. They have been really good customers.

I have to say that we were nervous at the time we entered into such a big commitment to them as to how they would perform. They have been excellent customers. We have done a lot more deals with them since then, not of that magnitude. We have talked to them about going beyond a straight uranium supply deal. So we're in there.

We're I think in very good shape with our Chinese customers, really excited about their future growth plans. I think today there's about 35 reactors operating, another 20, 22, 25 -- I don't even know -- under construction. They are talking 58 gigawatts or units by the end of the decade, and then I've seen numbers like 100 by 2025, which would make them the biggest in the world. So you want to be there. You have to be there. We think we are in good shape.

Now, to the second part of your question, obviously they are very astute at business, and we've heard them say that they want to divide up how they get their uranium. They would like to produce some themselves internally, domestically inside the country. Obviously they are buying externally, and then they are producing externally. And you mentioned the Husab Project, which I think was scheduled for start up last year and saw some delays. We've read recently that the first drum of yellowcake has come out, and over time, not sure what period of time they would wrap up, but as much as 15 million pounds. That's been taken into account, I can tell you when we look at the supply/demand numbers. We've known about that mine for a long time, and that's taken into account in our supply-demand forecast. It is where they are going. Like I say, we are very close to them and plan to do a lot of business with them in the years and decades to come.

In addition to that with your investments in Australia -- and of course the government there seems to be a little bit more positive in terms of their opening up the uranium market in Australia. But Cameco also had that -- I can't remember the name of that underwater species that prevented one of our mines from being opened up there. What's your percentage of growth and focus on Australia to supply the Chinese market?

Well, Sam, we have some good news. I'm looking at Bob, two weeks ago -- you're talking about the [O'Leary] project, which we have approval on now to move ahead. The environmental review did identify some of those issues, and we were able to work with the government to convince them that we could deal with those issues. We have approval to go ahead with that now, and of course the market is not in anywhere near the shape to bring a project like that ahead, but it is an excellent project that we now have in our bullpen with the environmental and government approval to move ahead. I think we have about a 10-year period, Bob, to present a plan to go ahead. We will watch that. Obviously in this market we're not even close to where a project like that could move ahead, but it is a nice one to have in our bullpen.

Excellent. Thanks very much, Tim.

The next question is from Cody Sworn with BMO. Please go ahead.

Thank you. Good morning, gentlemen. This may be one question maybe for Grant. Actually thanks for the detailed guidance. On the taxes now you have moving into a new [trade supply] pricing agreement, so can you give us an indication on guidance toward how much is going to be -- in terms of cash taxes how much is going to be? There are some complications, for example, you can't set up some of the [CLA] payment inside that, but then without taking into consideration of the (inaudible) payments how we can look forward for the 2017, 2018 cash taxes?

It's actually quite a complicated question. Let me just take a shot at it, and this is obviously one that might benefit from a little bit of a deeper dive offline. What we have in our outlook is guidance for a tax recovery for 2017 based upon the jurisdictions in which we will sell uranium -- where we think we're going to sell uranium throughout 2017. That all consolidates up to this tax recovery position. We also have some disclosure that we have been using for a couple of years now to say that as our underlying transfer price agreements that have underpinned our company structure are renegotiated in a different market, then we will transition to an expense over time.

In terms of the cash tax, we really only have one jurisdiction where we pay cash taxes in, and that's just buried in the overall consolidated number, offset by jurisdictions where we actually have operating losses. That's about as far as I can go right now, but would welcome a chance to dive a little deeper if we could help out.

Okay, that's fine. The tax utility number that you provided in the guidance for 2017, that's actually the [P&L] tax guidance, is in that?

Yes, it is, but on an adjusted basis (Multiple speakers)

Okay, thanks.

Thank you.

The next question is from Anang Majmudar with General American Investors. Please go ahead.

Good morning. Thank you for taking my question. Given the disclosures provided, it is possible to roughly back into a cost per pound produced in 2017. And what is curious to know is are there any costs in 2017 that would be one-time in nature or would roll off exiting 2017, looking into 2018, just as we try to think about the cost structure of the company?

For instance, conversely I know there is care and maintenance with respect to Rabbit Lake. That would be ongoing. But if there is anything else related to some of the other initiatives that you have taken from a cost savings perspective that are embedded in that number but would roll off exiting the year, that would be helpful. Thank you. And then the second question I had was is the depreciation and amortization related to Cigar Lake -- is that still elevated relative to pounds produced or has that stabilized? Thank you.

Just on the first one, what comes to mind is similar a bit to 2016. We'll have some severance costs obviously in 2017, with the reductions we're making to the workforce now. And thinking of tax, looking at Sean as well, there will be some tax costs, litigation costs, that we're incurring now. Hopefully that litigation winds up sometime this summer with the final arguments in the fall, and then we will wait for a decision. I can think of those two at the moment. So those are what come to mind, and I will pass it to Grant if he has any other thoughts.

The main one to come out of the produced cost is the severances. Care and maintenance for Rabbit Lake really will carry on as long as we're are assessing Rabbit Lake in terms of its status and whether we can continue to hold it in that status, whether we move it to a different status like shutdown, whether we find a favorable market to bring it back. All of that to be seen, but in the meantime there are not insignificant costs associated with Rabbit Lake. Those are in the cost guidance as we had said earlier.

In terms of the amortization of the pounds for Cigar Lake, Cigar Lake is ramping up to full capacity that will stabilize then at that. Cigar Lake is commanding some sustaining and a bit of replacement capital as you see in our outlook guidance, but fairly modest. And now that it is stabilizing at a higher rate, we do see the stability in that contribution.

Thank you very much.

Once again, please limit your questions to one with one supplemental. The next question is from Greg Barnes with TD Securities. Please go ahead.

I am back for the third time.

Hello, Greg.

In terms of long-term contracting, if the utilities are beginning to re-engage, what kind of price levels would you even contemplate signing long-term contracts at?

Grant, do you want to take that one on?

Certainly not today's levels. You have not seen us engage in a lot of term contracting in the market in the last couple of years because we have had the contract portfolio protection; and because we've been keeping our eye on this growing wedge of uncommitted requirements. As Tim referenced earlier, some trade press folks saying that between US and non-US utilities, that is a wedge that in the next 10 years is some 800 million pounds of uranium that has not yet been bought. And that is pretty exciting to us because that's a lot of business that has to come into the market.

We look at the supply that needs to be incented in order to meet that demand. Some of it is going to be Tier-one. Some of it is going to be Tier-two. It is probably going to have to incent some of that Tier-three stuff as well. And that Tier-three stuff is expensive, so we've never quarreled with those who have talked about CAD70 uranium price to incent that Tier-three. Now, we would obviously find good entry points for capturing value in the market below that but certainly well above where it is today to be interested certainly in fixing it in.

We have an overall portfolio strategy of wanting to be balanced. We want to have some fixed prices. We also want to have some market exposure. We also want to have regional diversification in our portfolio. I think the last couple of weeks have demonstrated that not all customers are created the same, so we want to have a focus on those Tier-one customers in our portfolio. So all of that factors in, along with price, to determine when we pick our entry points. Today is not an exciting entry point, which is I think why Tim's comments began with, we are far from seeing a fundamental transition.

Grant, TradeTech picked up their long-term price to 35 from 30 last week. Is that something you are seeing as well? Is that beginning to become evident in the market, the price is moving higher?

It is always interesting for us when you see the gap that there is right now between the two main price reporters, the CAD5 gap in their term price reference. And really I think it comes down to there is a bit of sentiment in there, as these trade reporters have different access to potential demand. They do different work for different customers on what those fuel buyers are thinking about the market, and clearly I think TradeTech is seeing something with respect to the term market and what the appetite is to maybe come off the sidelines a little bit.

I think last year ended with only about 60 million pounds of term contracting, yet another year way short of replacement rates. We know there is demand piling up on the sidelines. Are we actively seeing it? Well, nothing we can immediately point to. We haven't seen a spike in RFPs in the market, but when we use the term upward lean, it is because we are seeing this momentum.

Great. Thanks, Grant.

The next question is from Orest Wowkodaw from Scotiabank. Please go ahead.

Hello. Good morning. Thanks for taking the follow-up. I believe this is the first time you have ever given us the disclosure on your quarterly sales within a calendar year. How much certainty do you have on the delivery schedule, and can that change as the year goes by?

Well, it's certainly closer in the nearer quarters. I think we've got more accuracy and can get some more delivery notice changes during the year. But Grant, do you have anything else?

We have been actually talking about the variation of our deliveries over the course of the year for quite some time now. And this is the first time we've put it into picture, so I guess we learned a lesson here about actually being a little bit more clear. It is very helpful for helping you understand the mood in the market, because those delivery notices are really a function of when fuel buyers are timing their entry points as well. So it is not uncommon that when a fuel buyer is sitting there thinking there might be some price off pressure, they would push out their market related to later in the year to maybe try to take some advantage of that.

So as you look at that picture in the disclosure, there is a familiar pattern. Whether that changes in a market that begins to have an upward lean, we don't know. The other thing to remember about it that our delivery notices are usually six months lead time, so this is our best guess. It is subject to change, but right now that is the guidance that we have for the year and how we think the business is going to unfold. So we'll have some quarters that will be low and some weighting toward the second half of the year.

Okay. And then just in terms of the contract portfolio, you disclosed that your average book is about 24 million pounds a year between 2017 and 2021, obviously higher in the upfront years. Can we assume then, if you are going to do 30 million to 32 million this year that by 2020 to 2021, that number would be below the 20 million pound mark in order to average the 24 million?

Well, it does tell you that in order to get an average of 24 million, the outer years have to be less if the earlier years are higher. Remember, that is the kind of exposure that we actually want to have. We look at a market where we see a lot of uncovered demand, a market where we think that, that demand has to come. And we think some of that is coming our way, and we want to be exposed to it rather than panic a little bit and lock in a lot of volume today at these prices, which we could do.

We would have a portfolio with a lot of volume and not a lot of value. And our goal is to always get that right balance between the two of them. So we want that exposure in those outer years looking at the uncovered requirements, but there is no doubt we're protected fairly well in the next couple years, and then it starts falling off coinciding with when we want to pick our entry points.

I see. And if the contracting market did not pick up for whatever reason, I assume you would not be taking your production levels down to sub-20 million pounds. Should we anticipate that any kind of shortfall that you might actually look at selling into the spot market or different avenues?

That is an interesting question, and of course we would have a couple of years to adjust for that. You remember in Tim's comments he talked about we look at things like the TEPCO contract cancellation. And the pounds that we thought that were going to them that are now part of our longer-term planning, and we then have to factor those plans in on a sales and sources perspective. So we have some committed sales. That is a great home for our volumes. It's a great home for our purchases. And we have an inventory as well.

So we'll just look at how to best navigate through those scenarios, one obviously where there is a low for longer, but one where there is a demand transition. And we hope to grab some operating leverage. All part of the assessment. These are early days post the TEPCO cancellation and more of the work that we have to do. But I can tell you, we really have an aversion to being in where we are producing from Tier-one assets and having to sell that material into the spot market. That is not something that we particularly lust after, so our planning will have that kind of parameter in mind.

That's great color. Thank you.

Thanks, Orest.

There are no more questions at this time. This concludes the question and answer session. I would like to turn the conference back over to the presenters for any closing remarks.

Thank you, operator. And with that, I just want to say thanks to everybody that has joined us today. We appreciate your interest and your support. We are confident here that our strategy to focus on our best margin assets are going to allow us to really manage effectively through this challenging market and position the company to benefit from a future where additional uranium is required to meet growing demand. So we are cautiously optimistic, and we will leave it at that. Thanks, everybody, and have a great day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.