Cameco Corp (CCJ) 2018 Q3 法說會逐字稿

Thank you for standing by.

This is the conference operator.

Welcome to the Cameco Corporation Third Quarter 2018 Conference Call.

(Operator Instructions) I would now like to turn the conference over to Rachelle Girard, Vice President, Investor Relations.

Please go ahead, Ms. Girard.

Thank you, operator, and good day, everyone.

Thanks for joining us.

Welcome to Cameco's conference call to discuss our third quarter financial results.

With us today on the call are Tim Gitzel, President and CEO; Grant Isaac, Senior Vice President and CFO; Brian Reilly, 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 some comments, then we will 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 2 questions and then return to the queue.

Please note that this conference call will include forward-looking information, which is based on a number of assumptions, and actual results could differ materially.

Please refer to our annual information form and MD&A for more information about the factors that could cause these different results and the assumptions we have made.

With that, I will turn it over to Tim.

Well, thank you, Rachelle, and welcome to everyone on the call today.

We appreciate you taking the time to join us.

I want to start the call today by highlighting a few important items from the third quarter.

First, our results were as expected, and reflect the strategic actions we have taken.

Second, there were some changes to our 2018 outlook, most of which were positive and point to a strong finish in the fourth quarter.

Third, and I want to emphasize this, there is the unequivocal win in our tax case with the CRA.

And finally, we saw the resuscitation of the spot market, in contrast to the tentative nature of the term market.

I will spend most of my time on the last 2 items, but before I do that, I want to just highlight a few of the changes to our outlook.

Exchange rates, higher uranium prices and additional sales opportunities have increased our outlook for delivery volumes, revenue and the average realized uranium price for 2018.

And our expected tax recovery has increased as a result of the decision in our CRA case.

Our outlook for cash from operations is unchanged for 2018.

We continue to expect it will be in the range of $715 million to $775 million.

As a result, you will see our board approved an annual dividend of $0.08 per share.

I will get into more detail a bit later about how putting our strategy into action has impacted the rest of our outlook.

Right now, I am going to move into a discussion of our CRA tax case.

Saying this never gets old for me.

Our win in the Tax Court of Canada was unequivocal for the 3 years at stake.

We complied with the tax laws of Canada.

As a result of the tax court's endorsement of our marketing and trading structure and our transfer pricing methodology, you will see that we've reversed the provision on our balance sheet of $61 million.

We no longer believe there is any basis for the provision.

This is the reason the expected tax recovery, that I noted earlier, has increased.

And in accordance with the ruling, we'll be making an application to the court to recover the significant costs we incurred over the course of defending this case.

I would note the actual cost award is at the discretion of the Tax Court.

Unfortunately, although the ruling was clear and decisive, the CRA has filed a notice of appeal with the Federal Court of Appeal.

We are obviously disappointed with this decision, as we see no basis for an appeal.

However, we are pleased that the CRA has not appealed the Tax Court's finding that our marketing and trading structure was not a sham.

That was an argument, I have to tell you, we found offensive.

The CRA's appeal appears, in general, to be focused on the judge's interpretation and application of the transfer pricing provisions in the Income Tax Act.

However, until we receive the CRA's complete written submissions, we won't know exactly what aspect of the Tax Court's findings it is challenging.

We understand, it could take well into 2019 before we have any insight in that regard.

So more to come on this.

We anticipate it will take about 2 years to receive a ruling from the Federal Court of Appeal.

Given the thorough and meticulous analysis of the facts and of the law by Mr. Justice Owen, we firmly believe the decision will be upheld at the Federal Court of Appeal.

And furthermore, we also believe the decision should apply in principle to subsequent tax years.

Therefore, we are prepared to have a reasoned discussion with the CRA to see if we can reach a resolution for all years on a basis that we would consider acceptable in light of the findings in the ruling.

Those findings being, that our intercompany purchase and sale agreements were commercially normal; that the prices agreed to were representative of the market at that time and were what a third party would have agreed to; and furthermore, as Mr. Justice Owen noted, reliance on hindsight and a subjective view of the market as opposed to objective benchmarks introduces intolerable uncertainty into the transfer pricing rules.

We believe the ruling in our case makes it clear, we are obligated to comply with existing laws, not on what the CRA thinks the law ought to be.

The CRA's attempt to retroactively change the law through the courts is unacceptable.

If the CRA is unhappy with the outcome based on the current laws, we encourage it to do the necessary work to get the laws changed through parliament.

And I can assure you, we will comply with those laws, once changed.

The ruling made it clear, we paid all of the Canadian taxes we owed.

Therefore, we are entitled to a refund of the remittances we have made.

However, you will notice in our MD&A that we have not changed our disclosure with respect to the potential exposure and any payments we might have to make.

That is because, we don't know what the CRA intends to do next.

It is certainly not our view of the likely outcome, nor do we believe there is any basis for the CRA to continue pursuing this matter, but it is the reality of the process.

This is particularly frustrating for us because of the impact it will continue to have on our financial capacity at a tenuous time in our market when we most need the resolve it provides us.

So let's talk about the market for a bit.

There is no question that uranium spot market is showing a significant improvement compared to a year ago, but make no mistake, it has a long way to go.

Let me explain both of these statements.

What do I mean by significant improvement?

The current spot price is up almost 40% from a year ago, while the long-term price is up about 6%.

The improvement has been driven by meaningful production cuts, reductions in producer inventories and an increase in demand for uranium in the spot market from producers and financial players.

These actions have helped remove excess material from the spot market, with the uranium spot price reaching a 2-year high in October.

We at Cameco have played a big role in the spot market cleanup, a point I will come back to later in my remarks.

Contributing to the improvement on the demand side, we have finally reached the point where on an annual basis, consumption has returned to pre-2011 levels.

We have filled in the pothole of lost demand, and that demand continues to grow, not at rocketship rate, but with 55 reactors under construction, there is steady growth.

That all sounds exciting, and don't get me wrong, it is, but then you might ask, why do you say there is a long way to go.

Well, I can tell you, the fact that we have the world's best mine and mill shutdown indefinitely is certainly not because the market is in great shape.

Remember last quarter, when we announced the extended shutdown at McArthur River/Key Lake, we said that the conditions for restart would be met when we were able to capture acceptable long-term business in our market, business that allows us to commit those pounds under long-term contracts.

Contracts that provide an acceptable rate of return on these assets for our owners, rewarding them for their continued patience and support of our strategy to build long-term value.

While we are seeing some positive developments, we have not yet seen the type of response needed from the uranium market.

Unfortunately, today's prices are still nowhere near, not even close, to the levels needed.

And with about 58 million pounds placed under long-term contracts industry-wide so far this year, or about 1/3 of what will be consumed in reactors, there are still not enough acceptable long-term contracting opportunities.

So if prices are too low to incent existing idled Tier 1 capacity to restart, they certainly do not support the investment needed to expand those assets.

And they are not even close to what is needed to trigger the restart of the idled Tier 2 capacity and its expansion capability.

Then you have to consider what price incents the material sitting with financial players to come back to the market, because that material isn't gone forever and it needs to be factored into any supply investment decisions.

So when you think about it in this context, we are 5 or 6 steps away from needing any new greenfield investment.

That is why, until you see our existing Tier 1 assets restarted and/or expanded, and a potential home for all of the other nearer-term sources I just listed, investment in new growth makes 0 sense.

Even the promise of new investment would create a headwind and erase any possibility for robust investment returns.

We believe our assets are among the best in the world, and we will continue to show the type of leadership needed to position the company to add significant value over the long term.

So despite some signs of green shoots, today we find ourselves in a market where there is still a lack of acceptable long-term contracting opportunities.

However, the reason for this lack of contracting has changed from a year ago.

As I talked about last quarter against a backdrop of growing demand over the long term and shrinking supply, there are a lot of moving parts in our market.

And those moving parts have shifted the sentiment from one of complacency and discretion to one of uncertainty and concern, which has led to paralysis.

You might say there is an unprecedented level of noise in the market.

And a lot of that noise, like in many other commodities today, centers on market access and trade policy issues.

These issues are a large factor in why our market tends to be sentiment-driven rather than purely driven by fundamentals.

It is both the origin disconnect in our industry, the gap between where supply is produced and where it is needed and it is the role of state-owned enterprises that raise concerns about security of supply.

With McArthur River/Key Lake production indefinitely suspended, nearly 70% of primary production is in the hands of state-owned enterprises, about 40% from Kazakhstan alone.

It is why, from a security of supply perspective, origin matters in a world where geopolitics are creating trade distortions.

And of course, the most significant trade issue today is the investigation under Section 232 of the Trade Expansion Act in the U.S. The investigation has no immediate impact on our existing contracts with deliveries continuing as usual.

Meanwhile, you can be certain we are heavily involved in the investigation process.

Remember, we were the largest producer in the U.S. before we put those assets on care and maintenance.

If the U.S. is looking for more domestic production, our assets would be among the best and quickest to start producing.

Until the investigation is complete and the potential impact, positive or negative, can be determined, it is a moving piece that contributes to the uncertainty I talked about earlier.

I highlighted many of the other issues affecting the market last quarter, so I won't repeat them, but there are a couple of recent developments I want to draw your attention to.

First, there is the role of financial players.

In addition to the initial public offering of Yellow Cake, a new uranium fund announced earlier this year, there is now the launch of an IPO for a second uranium fund, Uranium Trading Corp.

In total, these funds have purchased or are planning to purchase more than 10 million pounds of uranium on the spot market, sequestering it in investment vehicles.

And in the case of Yellow Cake, there is the option to purchase even more uranium over the next 9 years.

Also, we know there are plenty of other financial players getting involved or kicking the tires.

The other item is KazAtomProm's initial public offering.

KazAtomProm announced its intent to proceed with an initial public offering on the Astana International Exchange and the London Stock Exchange for securities representing up to 25% of its issued share capital.

In its documents, it states that it has transitioned to a market-centric production and sales strategy, shifting away from a focus on volume to a focus on value, which is welcome news indeed.

All this makes for interesting times in our industry.

So what can you expect from Cameco in this environment?

As I highlighted last quarter, we will continue to adjust our actions, using a marketing framework that we believe supports our strategy to build long-term shareholder value.

First and foremost, we will not produce from our Tier 1 assets to sell into an oversupplied market.

Second, we do not intend to buildup an inventory of excess uranium.

Third, in addition to our current committed sales, Cameco will capture demand in the market where we think we can obtain value.

And fourth, once we capture demand, we will decide how best to source material to satisfy that demand.

Finally, over a rolling 12-month period, our leverage to higher market prices in our sales portfolio is expected to exceed any exposure we have in our sources of supply.

In addition, our contracting decisions always factor in who the customer is, our desire for regional diversification, the product form and logistical factors.

So let's review where things were at when we announced the extended shutdown of McArthur River/Key Lake, and just where they sit now, starting with the full calendar year for 2018.

In our uranium segment, we now have commitments to deliver between 35 million and 36 million pounds of uranium, leaving 12.5 million to 13.5 million pounds for delivery in the fourth quarter.

In addition, we have agreed to provide our partners at Orano up to 5.4 million pounds of uranium this year, the majority of which we have delivered.

There are deliveries of less than 1 million pounds remaining, which we expect to make in Q4.

We remain on track to produce about 9 million pounds of uranium this year.

Since the end of July, we've secured about 2.9 million pounds through off-market activity and through request for proposals in the spot market.

As a result, our purchase commitments for 2018 are now between 11 million and 12 million pounds, including our share of Inkai production.

In addition, given the increase in delivery commitments for both 2018 and 2019, which I will speak to in a minute, we expect we may still need to purchase an additional 1 million to 3 million pounds in the spot market for delivery in 2018 to meet our commitments and maintain our desired inventory.

Looking at 2019, we've been successful in capturing additional demand.

We are now committed to deliver between 27 million and 29 million pounds, an increase of about 2 million pounds from last quarter.

To fulfill these commitments, we now have only 2 levers we can pull, production and purchases.

We won't have any excess inventory in 2019.

We expect to produce 9 million pounds at Cigar Lake, and we have long-term purchase commitments, which will require us to take delivery of between 5 million and 6 million pounds, including Inkai purchases.

So that means for 2019, we now need to purchase between 10 million and 12 million pounds to meet our delivery commitments and maintain our desired inventory levels, and we have already started entering spot transactions to secure this material for delivery in 2019.

In addition to the spot purchasing we have done, we have also been successful in securing long-term purchase arrangements for future delivery of more than 7 million pounds of uranium concentrates.

The delivery under these arrangements are heavily weighted to the years 2025 through 2028.

You might ask why we are purchasing material for delivery in the future when we need material, while McArthur River production is suspended.

Let me explain.

As we have reported, we have long-term commitments to deliver about 150 million pounds of uranium concentrates.

Securing material today for delivery in the future provides us with added flexibility in making future sourcing decisions to fulfill our delivery commitments without the need to build inventory today.

Inventory only serves to create an overhang in the market and ties up our cash.

These purchase commitments also allow us to defer capital investment decisions, while still meeting demand in the market.

And we can lock in pounds today and take advantage of current low prices, with the price escalation based on today's low interest rates.

However, we do not have to pay until delivery is made, and therefore, our cash isn't tied up.

In the meantime, these pounds are removed from the spot market and are held by intermediaries for our account.

And finally, they are another form of risk mitigation.

In the event we are unable to find material we need to meet our committed sales while McArthur River is shutdown or if the market price rises rapidly, we believe we can advance the timing of delivery under these arrangements.

Before I move on, I want to provide a bit of color on what we are seeing in the market based on our spot activity.

Although it's too early to determine if any trends are emerging, in general, the volume of material on offer has not been surprising, and appears to be decreasing.

In terms of pricing, we have seen some offers with aggressive discounting and others with premium pricing.

However, we're starting to see a bias now for premium pricing.

Our goal is to responsibly manage our supply by preserving the value of our Tier 1 assets and protecting and extending the value of our contract portfolio on terms that recognize the value of our assets and are consistent with our marketing framework.

I mentioned risk mitigation a moment ago, and it's an important perspective to examine.

Let me explain.

We ask ourselves, what happens if the market doesn't transition.

The answer, of course, is that, it means there is a lot of cleanup needed in the market, and we are buying a lot of cheap uranium.

In this scenario, extending the shutdown of McArthur River/Key Lake and preserving its value was the right thing to do.

Then we ask ourselves, what happens if the price runs away from us and we are unable to find enough cheap pounds to satisfy our commitments.

That is actually a bit of a Hollywood problem.

Let me explain.

I already talked about our ability to advance delivery under our long-term purchase commitments.

Then you need to keep in mind that our 4.5-month inventory target is just that, a target.

We may decide to hold higher inventories or temporary lower them depending on what we see in the market.

Also remember, uranium has to be stored at a licensed facility.

As a result, our licensed facilities hold a lot of material for others who may not have any immediate consumption requirements and product loans are not uncommon in our industry.

And if we have to pay $50 or $60 to purchase material, those higher prices are also probably allowing us to layer in new long-term commitments, which means we have now met the conditions necessary to restart McArthur River/Key Lake.

The restart would probably take us a number of months depending how long we are down for, but there will be ample delivery lead time in the new contracts being signed.

In addition, given the significant higher leverage to market prices in our committed sales portfolio, the higher prices are floating the value of the portfolio more than compensating us for the purchase of a few expensive pounds.

So in either case, the decision to extend the shutdown was the right one.

But rest assured, none of this activity will change or jeopardize our financial navigation points.

There are 3 principles we will follow in allocating our capital.

First, we will continue to navigate by our investment grade rating.

Second, our decisions will be based on the run rate of our business, not onetime events.

And finally, we are not the savings account of our owners.

Our capital allocation decisions will continue to pivot on what the market is providing us with.

So while we are beginning to get more clarity on some of our litigation risks and the market appears to be moving in the right direction, it is too soon to change course.

In today's noisy market, we believe we can distinguish ourselves from other uranium producers and are well positioned to respond to changing market dynamics.

We're a commercially motivated supplier with a diversified portfolio of assets, including a Tier 1 production portfolio that is among the best in the world.

And we have the ability to restart and expand these assets should we see the right signals.

Keep in mind, these would be among the first and lowest cost pounds in the market.

We believe we have the best global exploration and advanced exploration portfolio, and are the only producer in Canada with licensing, permitting and operating experience and a proven community development track record.

Our decisions are deliberate, driven by the goal of increasing long-term shareholder value.

We can't control the timing of a market recovery, but we are taking action on the things we can control.

Ultimately, our goal is to remain competitive and position the company to maintain exposure to the rewards that will come from having uncommitted low-cost supply to deliver into a strengthening market.

So thanks for joining us today.

And with that, we would be pleased to take your questions.

(Operator Instructions) The first question comes from Ralph Profiti with Eight Capital.

This is the second consecutive quarter that we've seen upward revisions to committed sales, right, for both 2018 and 2019?

And from your comments, it doesn't seem like this is new contracting, but I'm guessing it's more customers bringing deliveries forward?

Would you say this is something that you expected when you went with the indefinite shutdown on McArthur River?

And how much more flexibility do these existing contracts have?

And maybe could this be sort of an added pinch point in the market as opposed to thinking about contracting in terms of uncovered requirements?

Well, thanks for the question, it's a bit complicated.

I'm Looking at Grant to chip in here.

But -- I mean, this is really normal business for us.

We are always in the market.

We've always said that we'll be in the market when it makes sense to do so.

I would say we have a preference for term demand with utilities on market-related terms with floors in the contracts, and so that's what we would look for in these contracts.

These are not out of the ordinary.

There is a few more players in the market now looking for some material, I think of the intermediaries and financial players and some producers.

So pretty normal business for us.

Grant, I don't know if you have anything to add to that.

Well, just to the question, Ralph, about the flex up under existing contracts, it's really not that.

We are not seeing dramatic flex up that's accounting for the revisions upward of our committed sales portfolio.

You remember, back in Q2, and again just reinforced with the comments at the outset, that our marketing framework, one of the elements of it is, we will step in and grab the demand in the market that makes sense for us.

Now as Tim said, our preference is for term demand that's market related.

But we will grab spot and midterm demand if it makes sense for us.

And then we will choose how to source that demand.

So this is reflecting us looking at our portfolio, looking at the customers that are in the market, looking how it lines up with the other factors we talked about, regional diversification, who the customer is, the product form, and we will make sales decisions at that time.

And then, we will figure out how to source.

And all of that has just added to the leverage we've had in the market in terms of grabbing some demand and also then having to go and get the material to satisfy it either from production, from inventory or from purchases.

So really, what it reflects is us just taking a bigger chunk of the market, Ralph.

Okay, okay.

As a follow up, I have a question on 232.

If recent history is any indication, we could be looking at some type of remedial action now.

From chemical standpoint, is there a more manageable, least desirable outcome between tariffs versus quotas?

Ralph, good question.

We've been -- let me back up a little bit because when this first came forward, I think it was in July, we looked at it and said, it makes no sense, especially the remedies being proposed.

If you look at what the U.S. production capability is, to get 25% of U.S. utility demand out of U.S. assets is not going to happen.

And so we said, it doesn't make any sense.

If you go the tariff route, you're looking at probably somewhere between 150% and 400% tariff, that didn't make a bunch of sense.

Quotas, we're not sure.

So we said all that, and then we said, but let's look at some other sectors, the aluminum sector, the steel industry, automobiles.

We're not taking this lightly, I would say it that way.

You've seen our submission probably into the Department of Commerce, along with the 834 others that put submissions in.

We're very active down in Washington.

We don't know which way they will go, but we're, I would say, working hard to come up with -- plan A would be, make the whole thing go way.

Just make it go away and let's carry on and trade and -- but we need to have a plan B. And so what that looks like, we don't know.

There has been talk of a Buy America solution, where the government might step in and buy.

Because what we don't want to do is put utilities in any more jeopardy than they already are and add to their issues in the U.S. of keeping their plants open.

So long winded answer, just to say, we don't know what the solution will be, but we're not taking this lightly, nor is anyone else.

We think we could very well see a quota, tariff type solution.

We want to make sure we've had full input into that and try and help guide the DoC along.

The next question comes from Andrew Wong with RBC Capital Markets.

So just regarding the roughly $300 million that's being held in restricted cash for the CRA disputes.

And I -- you mentioned this on the prepared remarks but is there anything you can give us on the time line on recovering that cash?

I mean, does it get tied up with the appeals process?

Could you just help us understand that?

Andrew, thanks for the question.

I think the answer is, we don't know yet.

We -- I would just say, first, we're still delighted with the decision that we got, which was very clear on all of the points.

And I'm looking at Sean Quinn, and the work that he and his team did with our external counsel was outstanding.

And so we're in a period now where we know a week ago they've launched an appeal.

We haven't heard anything yet on that.

It was very sparse what we did see.

So it's going to be some months before we're going to see what the guts of their appeal looks like.

In the meantime, we're going to be submitting within the next 3 weeks from today our application for costs.

And so that piece will run through.

And in the meantime, we will see what happens, whether there is any conversations or not.

So we don't know on that $303 million of cash for now.

It's still in their bank account.

And as soon as we find out anything further, we'll certainly let you know.

Okay, that's fair.

Maybe just, talking about something else, regarding the conversion prices in the market, we have seen a pretty big uptick there.

How does that affect your field services segment?

And maybe if you could just help us try to think about that longer term.

I know some of those are fixed contracts and maybe not necessary conversion services, but other field services.

Just maybe help us out there.

Well, I mean, that's been an interesting segment of the business of the nuclear fuel cycle.

For the last 10 or 15 years, it's been uranium, big section of the fuel cycle, a little bit of conversion, then you jump to enrichment, and you almost forgot about conversion on the way through.

But -- and we've seen historically low prices.

I mean, the prices was -- the price of a kg was touching $5 not long ago.

And here we go, it's over $10 now and moving up.

So it certainly got everybody's attention.

Why?

Well, you saw a few months ago ConverDyn take their facilities writeoff, and so that was a big supplier.

Comurhex -- over in France, Comurhex deux, as they call it, is just ramping up now, and it's going to take some time.

SFL is off.

So lots of pieces coming off, not many suppliers left out there at the moment to put some pressure on the conversion price.

And so yes, I can tell you, it certainly put some spring in the step of our folks out at Port Hope.

And so we'll see -- if we can fill our contract book up there at decent prices going forward, that will be helpful to us as well.

The next question comes from Orest Wowkodaw with Scotiabank.

Couple of questions from me.

First of all, Grant, I'm having a bit of trouble reconciling the inventory numbers in the uranium segment.

And there -- if I'm reading the statements correct, I think your uranium inventory went down 10 million pounds quarter-over-quarter.

And you exited Q3 with only 9.5 million pounds.

Based on the guidance you have given kind of for the implied Q4, my math would suggest your inventory is going to potentially fall all the way to 3 million or 4 million pounds at the end of the year.

Is that right?

So Orest, let me just a step back a bit and provide a bit of a higher-level explanation.

And also just the general comment that I'm not going to reconcile backwards.

Because when you look at what we're up to from a strategic point of view, and you think about our committed sales portfolio, and we already began with a question from Ralph Profiti about how committed sales are going up.

And you remember that we satisfied committed sales from 3 sources: production, purchasing and inventory, that's a very simple equation; committed sales on one side and production, purchases, inventory on the other.

But it would be incorrect to think of any of those as constants.

So think about it as committed sales going up.

Our current commitments go up.

We have new demand that we need to fulfill, and as a function, well, then our target inventory will go up as well because we told you it was 4.5 months of committed sales.

So if committed sales are going up, then our run rate inventory level is going up, so that won't be a constant.

If our production remains largely on target, then our purchases must increase then.

So we're in a situation where if our inventory is going up as a function of our committed sales going up, we're going to have to purchase more.

But in addition then, that guidance on inventory might be a little bit out the window because if purchases are proving harder to obtain, product form, location, timing, then actually we might have a bit more of a precautionary inventory that we would like to build and which will require even further purchasing, which is probably a bit counterintuitive.

So all of that to say, we are going to commit to always looking through the windshield and providing that guidance like Tim did on where we are with our committed sales, where we are with our production, our purchases and our inventory.

But because they're all moving, you kind of have to keep pace with where they're going, rather than where they've been.

So in terms of the math, it's laid out in the slides that accompany the presentation and the comments that Tim gave, and those are the ones we're at at the moment.

So if committed sales change, if we discover that purchases are harder to come by and decide that we need a bit more of a precautionary inventory, all of those are variables yet to come, all part of the general strategy that we're trying to deliver on, which is not one of value, it's one of volume.

And we're focusing on saying if this is a market where the price doesn't incent our production, we'll leave it in the ground and choose to buy.

So I'm not sure what numbers you're calculating, and I'm happy to get on the phone afterwards and try to figure it out, but now wouldn't be the time.

Okay.

Well, we can take that off-line.

And then just as a follow-up, your -- it looks like your standby costs for McArthur River increased, I think from $5 million to $6 million a month to $7 million to $9 million.

Can you give us -- how much of that $7 million to $9 million is noncash?

Yes.

So the -- when you have an asset like McArthur River/Key Lake curtailed, and really probably the higher level comment here is, you don't see a lot of mining companies taking the kind of decisions we're taking because they're complicated and they're difficult decisions.

McArthur/Key is obviously coming back.

It's not an impaired asset.

And so there are a number of line items on the physical capital side that you just have straight-line depreciation.

So the only factor there is time.

It doesn't matter whether it's operating or not.

So all we've done is added the noncash piece to the standby care and maintenance costs.

Those are being driven by straight-line depreciation.

The cash costs, they haven't changed.

Same guidance that we gave out when we made the decision and announced it to indefinitely shut down McArthur River/Key Lake.

So that would be the explanation there.

The next question comes from Greg Barnes with TD Securities.

Grant, if I'm reading the trade press right, it sounds like Cameco was in the market again last week buying 500,000 pounds.

Can you give us a sense of what the conditions were like?

I think last time you said, when you're in the market it was only 2x oversubscribed.

How is it this time?

And you said earlier that there's a bias toward premium pricing.

Can you give us some more color around how things went last week?

Yes, Greg, thank you for the question.

So when we go to purchase material to fulfill our committed sales portfolio, we'll do that on market, we'll do off market, and we'll do it through RFPs.

And the RFPs give us very interesting information because they really help take a supply-demand point being reflected in a reported price and start to get a sense of what the curves are on the supply and demand side that create that point.

And there's 3 variables that are really important to us with those RFPs: one is, how much material is on offer; two is, at what prices; and three is, who's selling.

And when we look at those, I would say that as we're now 3 RFPs into the market, things are looking positive.

Number one, the material on offer is not as robust as you would think.

The market appears to be tighter.

We don't get offered 5x oversubscribed.

That's not occurring anymore.

Secondly, with respect to price, we initially saw some pretty desperate selling, which I guess was to be expected given how difficult conditions are for many of the participants in the uranium space.

So there was some desperate selling that we were encountering.

We're not seeing that as much anymore.

In fact, as Tim noted in his comments, on the pricing side, a bias towards premium pricing.

Perhaps people are stepping back and they're looking at our disclosures, and they're concluding Cameco has come to the market to buy.

And so why offer them a discount when they have to be in a position to buy?

So that's possibly good news.

And then the third is who's selling?

There's been this myth kicking around the market of all of these pounds held by utilities that will just come flooding into the market if there's any sort of price recovery.

And I guess, happy to report, we're not seeing any of that material.

That's not being offered to us.

And so on those 3 data points, is that enough to make a trend?

No.

But to the extent you want to draw some conclusions, the market appears to not have the depth that some would have been suggesting in the past.

And so we'll continue working through this purchase program, and we'll continue updating you and others on what we see.

Great.

Just a follow-up question on the CRA notice of appeal.

If they're appealing the sham, just focused on the transfer of pricing provisions, I'm having trouble understanding what the appeal then is based on.

I know you don't have a lot of information, but if it's not a sham, how can they then appeal on the transfer pricing provisions?

Yes, Greg, good question.

And we're a bit in the dark as to where they're going with that as well.

And it will be important to see their documents when they get them out.

I think they have 90 days, Sean, to get them out, if they don't get an extension, which they normally do.

So Sean, do you have any comment on Greg's...

Well, just simply that they're going to focus the appeal -- giving up on sham means they have to focus the appeal on Section 247 of the Act, which is the transfer pricing provisions.

And they will have to pursue, probably, a very legalistic analysis of those sections to try and come up with what they're going to attack.

But we won't -- we really won't know more until we see their appeal books in due course.

Greg, the important thing is that there's no retrial at the Court of Appeal.

There's no following new evidence, and that's a pretty important piece.

They go off the material that's provided in front of them.

And so we went through a 16-week trial with innumerable witnesses and experts, and that doesn't happen again.

They go off of Mr. Justice Owen's decision.

So we'll see.

It's a bit of a road to go yet, but I could tell you we're still feeling pretty good about it.

Our next question comes from Oscar Cabrera with CIBC.

Just getting back to the questions you've been getting on the behavior in the spot market.

You -- as you closed McArthur, or announced that you were closing it for an extended period of time, have you seen any changes in the recycling part of the business, i.e.

underfeeding, has that slowed down?

Is it just a material that people are keeping from the spot market, so -- in order to increase the spot price?

Yes, Oscar, thanks for the question.

No change that we're seeing on the underfeeding.

I think it still continues.

Our view is that it's going to diminish over time as the market continues to improve.

But it's pretty soon still.

We're a couple of months out from our decision that we took in July.

We've seen certainly an improvement in spot price.

And so no real change on any of that yet, Oscar, that we've seen.

Okay.

And then I also noticed that you lowered your care and maintenance cost for your operations in the U.S. and Rabbit Lake.

Can you perhaps provide a little color around that?

What are you looking to do?

Yes, thanks.

I'm going to ask Brian Reilly to comment on that.

Yes, look, we -- we're in a restoration stage primarily.

So really nothing has changed, Oscar, in terms of the operations.

It's just how we allocate our care and maintenance costs.

So it's -- by and large, it's been business as usual in the U.S., Oscar.

The next question comes from Alexander Pearce with BMO Capital Markets.

So just given we're getting towards the end of the current agreement with Orano, I just wondered whether you -- perhaps you could comment on, first of all, the timing, if there was any kind of potential extension of it?

And maybe if Orano was keen, what's your appetite for providing more material to them, and given it would probably increase your purchases next year?

No.

Thanks for the question.

Our agreement with Orano continues as expected.

I think we've delivered about 4.1 million pounds out of 5.4 million pounds, in that range.

We'll continue to follow the terms of the agreement, so we'll probably top that up by the end of the year.

Repayment out by 2023.

And so no change there.

It's working very well.

Listen, the hypothetical, I better not to go there.

If they need more material, they'll have to get it somewhere, I guess, but we haven't got any request in that regard.

The next question comes from Fai Lee with Odlum Brown.

Tim, China's National Nuclear Corp.

was recently -- made some comments about investing in overseas uranium mines, tell me a leading uranium company maybe taking partnerships or acquiring other companies.

I guess, there's 2 ways to look at those type of comments.

One is, it's either a risk to Cameco or an opportunity, and just wanted to get your take on that.

Yes, Fai, thanks for the question.

That's a good one.

I was over there about a month ago with the Premier of Saskatchewan.

We actually met with them.

And I can tell you that China continues to go.

There steaming towards their 58 reactors by 2020, probably won't hit exactly that, but that has not stopped them at all.

They've got now a couple of AP1000s going, which they were hoping to do.

They got an EPR up and going.

So China continues unabated.

And I saw some news report the other day that they need to quicken the pace if they're going to have any chance of meeting any climate change and all of that stuff.

So they're very aggressive.

They're going to need lots of uranium going forward.

And they've always said that they will be buyers in the market for a percentage.

They'll be domestic producers.

That won't be very much, because they don't have very much.

And then they want to produce internationally and bring it back.

And we've been in discussions with them.

Well, of course, they're a big customer of ours as well.

But I can tell you, they'd be very interested in our Saskatchewan assets or any other assets we have.

And so they're very aggressive, very aggressive.

And so we'll see.

We haven't got anything to announce with them at the moment.

But you'll see them because their build-out is so rapid and large over time, their needs just continue to grow.

And so we see them.

We're kind of watching them in Namibia, that's the -- their colleague CGN, but with the Husab project, it's been pretty radio silent on that one.

We assume they're having the same start-up problems that everybody else has and will have with a new project, new country, new owners.

It's tough and it's not getting any easier, I can tell you.

So yes, I'd say both of the Chinese players, CGN and CNNC, are aggressive internationally.

And you'll see -- I mean, they have some investments in Saskatchewan already, and you'll see them looking for more.

Okay.

And in terms of the CRA, I'm just wondering in terms of -- obviously, you're trying to deal with appeal process that's -- right now, but I'm just wondering, looking beyond that in terms of -- I guess, it's still the subsequent years to deal with.

And will the transfer pricing in those subsequent years, is -- has it -- was that -- is that pricing -- the transfer prices, were they -- would they have all been determined years before?

Or is there a possibility that in terms of this current appeal, that they're just maybe trying to set it up for this -- the subsequent trial to get themselves into better position?

I certainly hope the subsequent trials are with somebody else and not us, but we're not sure what their motivation is on the appeal.

As we said and as I said opening the thing up, that we're very happy to see the sham piece disappear.

That was a big ticket.

If the whole structure went down, then that wouldn't have been a good day.

In fact, it didn't.

And in fact, they dropped that piece.

And not only was there a financial burden on that one, there was the reputational piece that I didn't like very much because I didn't like that they were attacking our house and our people.

And so for that to go away is important.

We don't know how -- we think Mr. Justice Owen's decision should apply to subsequent years.

We haven't changed anything going forward.

From the years '03, '05 and '06, we haven't changed our structure.

And so we're waiting to see and hoping it will apply to those years as well.

The next question comes from Lawson Winder with Merrill Lynch.

The first question would be, what would a time line be to the start of some sort of settlement discussion with the CRA?

And then I'll give you my follow-up right now, which would just be, looking at the current situation that you guys are in with the CRA, in terms of having such an overwhelming ruling from Justice Owen and then having it appealed, are there any relevant precedent cases that you can point to that might hint at how things might go here?

Thanks, Lawson.

We don't use the word "settlement" anymore.

We talk about a possible resolution of future years.

And I can tell you those discussions have not started.

We're pretty fresh into this.

Like I say, they just filed their appeal a week ago.

And so the next, at least, legal move is for us to file our application for cost.

So Sean and his team are busy putting that together, and we'll put that in front of Mr. Justice Owen within the time lines required.

And so that's the next piece.

Look, we're just kind of waiting to see how things play out over time.

We don't really know what the process is going forward.

We haven't heard a lot from them, and we haven't made any efforts to do so, at least not yet.

Sean, do you want to add anything?

Sorry, I'm just...

In terms of -- I think there was a question in there about -- do we have precedence --

Oh, right.

Sorry.

Thank you.

-- that would come to play on this.

And we -- I would just come back to saying that we believe Justice Owen's decision was very strong, very sound, very well-reasoned, and would expect it to be upheld by the Federal Court of Appeal.

The next question comes from Orest Wowkodaw with Scotiabank.

I just wanted to ask a bit more about the CRA because I'm just a bit confused in how things move -- go on from here.

I mean, how do we -- or when do you expect to find out whether you need to keep making these installment payments as potentially laid out over the next couple of years?

I understand also the $300-plus million sitting in cash, but do you have to keep making these payments through the whole appeal process?

Or, I guess, what's the expected time line to figure out if a -- when the refund's coming but also the payments?

Yes, thanks, Orest.

I'm going to turn it over to Grant because predecision, he was the person that was in touch with the CRA from our point of view.

He and Sean were talking to them.

We haven't had a whole lot of conversations since.

But Grant, you want to talk about our financial capacity and cash?

Yes, happy to do that.

So Orest, these are great questions, and they're not easy, so just bear with me a little bit.

Remember the decision pertains to '03, '05 and '06.

So when we talk about applying for cost, it was the cost of taking those years to trial.

And when we talk about expecting a refund, it's for what we've remitted for those years.

And then there's the other years.

As you point out 2007 to 2012, which they've reassessed us for, and we have financial capacity tied up for those years as well.

And then there's the years beyond and what they do with '13, '14.

And really, we just don't know.

We would expect, and I think it's reasonable to be -- to expect the CRA on the receiving end of such a clear judgment wouldn't take subsequent action.

They would stop their reassessments.

They would stop pursuing any transfer pricing penalties because they would recognize the decision said that Cameco complied with the law.

You would -- that would be a reasonable position to take, Orest, but I'm not sure I can assume that right now.

So we just don't know.

And of course, if they take further steps on the subsequent years, we'll disclose that.

We'll explain it to you as best as we can.

But at the moment, it is one of those things, that is just uncertain.

We certainly would think they shouldn't, but ultimately, it's quite distinct from the years '03, '05 and '06, and the decision around it.

So let me just finish by saying, hopefully, while we're in appeal, there's an armistice, if you will, to use Sean's word, but we just don't know.

And I would say that the behavior in the past would suggest, we probably will be dealing with subsequent years being reassessed.

Which would require you to keep making payments until there's some resolution then?

That would be the requirement.

And then, of course, we would look into all our options in the face of that appeal.

The next question comes from [Patrick Sujecki], a private investor.

So you mentioned some insights from kind of an inventory perspective owning the licensed storage facility.

I was curious, given some of your relationships with some of the enrichment players globally like Tenex or URENCO, or the fact that you guys own quite a significant chunk of global conversion capacity at Port Hope, can you comment at all on, like, SWU pricing or conversion pricing going forward and its potential effects on the underfeeding assay?

Yes, Patrick, thanks.

We don't...

So kind of a loaded -- it's kind of a loaded question, sorry.

Yes, and I don't know if I'll unload it for you.

But SWU pricing is outside of our expertise.

But Grant, maybe you have a comment?

Yes.

I think that the high-level comment on SWU pricing is that it's -- that remains a market that is -- has a lot of excess capacity.

And there would have to be a lot more uranium demand that would come to the market to tie up that excess capacity.

And it's that excess capacity which has led to the ability to underfeed and see that material instead of being deployed for enriched uranium being put into the uranium market.

So I think that the green shoots that you're seeing in uranium, you're not quite seeing in SWU yet.

But of course, we know that momentum goes hand-in-hand.

If we begin to see meaningful term demand occur in the uranium space, it will also carry with it term demand in conversion, and it will also carry with it term demand in SWU.

So there could be a -- kind of a rising tide, floating all boats, but at the moment, the SWU market does have a lot of excess capacity.

When it comes to conversion, in particular, it's important to remember Tim's words, and that is, conversion like uranium is right now undergoing some price appreciation because of curtailed supply.

So you've got ConverDyn down, you've got the Springfield facility in the U.K. has been down for a couple of years.

You had our production back to certainly not optimal levels.

And you had Orano going through a transition from an old facility to a new facility.

So all of that to say conversion price is not driven by a scarcity due to supply destruction, it's being driven by supply discipline.

So right now, conversion's doing well, but there is capacity, and it's idle, but could come back to the market.

So that should temper any view that conversion's on its way to a $30 or $40 a kgU, that's just not going to happen because that will bring back idled capacity.

But it is indicative of the fact that as we come out from under significant secondary supplies, significant secondary supplies that have historically showed up as UF6 and we replace it with uranium concentrates, they then have to be converted, and so that is buoying for the conversion segment of the industry.

So those would be the high-level observations on SWU and conversion.

The next question comes from [Ismu Rusen] with Radiant.

Quick question on Kazakhstan.

I know you have some production there.

So the production curtailment that were announced by the government in -- to clean up the excess supply.

How is that conveyed?

I believe half of that comes from the government-owned mines, half of it comes from private.

How does that affect -- how is that translated through to the private players?

And what's the progress been on that front?

[Ismu], thank you for the question.

You're right, it is.

The reductions that they've put in place do come from all parties because they're joint venture partners with all of us, whether it's the French or us or the Russian partners.

And so they, at the state level, can make a decision as to what the production level should be, and that translates through to Kazatomprom.

This year, they're holding it down, we've heard 21,600 tons for this year, which is down.

It's down from previous years.

It's certainly down from where they could be producing.

And so that just gets translated through to the joint ventures, including ours.

And so our production levels will be coherent and consistent with that.

And the

(technical difficulty)

so the government versus the private, how does that -- how is that proportioned out?

And what's the -- and who's been doing more on the workforce as the others?

Yes.

Well, it's really proportioned out through the joint venture, so it depends what you're equity interest in the joint venture is.

And it's across the board.

So I don't know exactly what the proportion of, as you say, government and private interests are in Kazakh joint ventures.

Not a lot of private-private, as in the sense of publicly traded like us.

But it's across-the-board for all of the joint ventures that they have, and so they're all reduced proportionately.

Got it.

And in your sense was that production is actually going down because the last I heard, it was actually not.

Well, you have to understand, we were in the process of increasing our production through agreements we've made, a deal we made with the Kazakhs about 1 year ago, 1.5 years ago.

Sean?

And so we're not getting to the levels we should be at because of the decision in Kazakhstan to reduce all production proportionately, so we're hit by that as well.

The next question comes from John Tumazos with John Tumazos Very Independent Research.

Excuse my question, I'm not fully familiar with the uranium practice.

Whenever a customer shuts down, such as the Belgium decided to phase out their nuclear reactors in the past year or FirstEnergy shut a reactor in South Jersey a few weeks ago and plans to phase out Shippingport, PA, and 2 in Ohio.

In other industries, there's take-back agreements, like titanium suppliers or high nickel alloy suppliers might take back the high-value scrap or unsold product.

How are the inventories of a departed customer typically liquidated?

Absolutely, on a commercial basis.

I mean, we expect them to honor the contracts we have with them.

They've usually planned that out in advance as to how much they need.

And any kind of a solution would have to be on a commercial basis.

There's no real rule for that, but -- and we haven't seen a whole lot of that, but it's dealt with commercially.

Do you retain the right to buyback at market the inventories of one of these shutting down entities?

Yes.

In some cases, we do.

And in some cases, others that we don't have dealings with might come to us to see what we might do, but it's not a -- I mean, it's a such a minor amount, it's -- it wouldn't even hit the radar screen for us.

The next question comes from Jim Ostroff with Platts.

I'm hoping you can provide a little bit of clarification here.

You had issued an estimate that Cameco this year, hopefully, from hereon will need to buy 1 million pounds to 3 million pounds of material.

Reference was made a little earlier in the -- in this conversation here about the 0.5 million pound RFP.

Can I ask -- could you say whether that has closed?

Yes, that has closed.

Jim, yes.

Okay.

And so just then to clarify, the lead to buy 1 million pounds to 3 million pounds is -- it takes that into account?

Yes.

Sorry.

Yes, Jim, it does.

We need 1 million pounds to 3 million pounds in addition to that.

And so we're just looking through that one now.

And as Grant was pointing out, they provided us some really good information on who's out there, who might be selling one of the quantities and what's the price spread.

And we're certainly seeing that tighten up.

So that one is in.

And we still have a 1 million pounds to 3 million pounds to purchase this year.

Okay.

And if I could, one other very brief thing.

In the full presentation here, there was a statement, obviously, here that over time financial interests -- maybe that's some of the targets.

We believe some of the material currently sequestered in these funds will make its way back into the market, potentially temporarily oversupplying the spot market, including a downward -- including downward pressure on prices.

I would appreciate if you could provide any additional information as to how significant a potential risk this may be.

Well, Jim, you and I have both been in the industry a long time.

We've seen that happen in the past.

You remember in the '06, '07, '08, '09 time period, the financial players were like a lighter fluid on a market that was moving up.

They really moved it up fast.

And then when things started to move, they went the other way and liquidated.

I don't think it's a big risk at the moment.

I think there's a lot of interest.

We see a lot of interest from financial players, some of them you know and others that you might be surprised to know that are looking at the uranium space now, see the supply-demand fundamentals.

And so there's always that risk.

Most of these funds -- I think Yellow Cake and some of the others that are -- UPC that have put their funds together are buy and hold.

They plan to hold for a long time and play the commodity over time.

So -- but there is always that risk at some point they could put some back into the market, but we certainly see it going the other way at the moment.

Okay.

At -- then therefore, at the moment you see them buying?

Yes, absolutely.

I think Yellow Cake was the biggest ticket.

I think they've got 8.441 million pounds now in wealth with us, actually, the -- in their control.

And so -- and we know there's others out looking.

So yes, it's going the other way at the moment.

This concludes the question-and-answer session.

I would like to turn the conference back over to Tim Gitzel for any closing remarks.

Well, thank you, [Shenay].

With that, I just want to say, thanks to everybody who has been on the call with us today.

We always appreciate your interest and support.

And I just say that we're managing this company through this noisy market.

And we will always make the decisions necessary to keep Cameco strong and viable for the long term.

So thanks for joining us today.

Have a great day, and a great weekend.

Thank you.

This concludes today's conference call.

You may disconnect your lines.

Thank you for participating, and have a pleasant day.