SASKATOON Nov 3, 2015 (Thomson StreetEvents) -- Edited Transcript of Cameco Corp earnings conference call or presentation Monday, November 2, 2015 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Rachelle Girard Cameco Corporation - Director IR * Tim Gitzel Cameco Corporation - President, CEO * Grant Isaac Cameco Corporation - SVP, CFO * Bob Steane Cameco Corporation - SVP, COO * Sean Quinn Cameco Corporation - SVP, Chief Legal Officer ================================================================================ Conference Call Participants ================================================================================ * Andrew Quail Goldman Sachs - Analyst * Orest Wowkodaw Scotiabank - Analyst * Steve Bristo RBC Capital Markets - Analyst * Edward Sterck BMO Capital Markets - Analyst * Greg Barnes TD Securities - Analyst * Oscar Cabrera BofA Merrill Lynch - Analyst * Daniel Rohr Morningstar - Analyst * Chelsea Laskowski Missinipi Broadcasting Corporation - Media * Fai Lee Odlum Brown Limited - Analyst * David Snow Energy Equities - Analyst * Graham Tanaka Tanaka Capital Management, Inc. - Analyst * John Tumazos John Tumazos Very Independent Research, LLC - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the Cameco Corporation third-quarter results conference call. I would now like to turn the meeting over to Ms. Rachelle Girard, Director, Investor Relations. Please go ahead, Ms. Girard. -------------------------------------------------------------------------------- Rachelle Girard, Cameco Corporation - Director IR [2] -------------------------------------------------------------------------------- Thank you, Melanie, and good morning, everyone. Thanks for joining us. Welcome to Cameco's 2015 third-quarter conference call to discuss the financial results. With us on the call today are Tim Gitzel, President and CEO; Grant Isaac, Senior Vice President and Chief Financial Officer; Alice Wong, Senior Vice President and Chief Corporate Officer; and Sean Quinn, Senior Vice President, Chief Legal Officer, and Corporate Secretary. Tim and Grant will begin with comments on our financial results, the updates to our CRA case and the industry; then we'll open it up for your questions. Today's conference call is open to all members of the investment community, including the media. During the Q&A session, please limit yourself to two questions and then return to the queue. Please note that this conference call will include forward-looking information, which is based on a number of assumptions, and that actual results could differ materially. Please refer to our Annual Information Form and MD&A for more information about the factors that could cause these different results and the assumptions we have made. With that, I will turn it over to Tim. -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [3] -------------------------------------------------------------------------------- Thank you, Rachelle, and welcome to everyone who has joined us on the call today to discuss Cameco's third-quarter results. We appreciate you taking the time to join us today. I think the most important news for Cameco this quarter is just how well Cigar Lake is performing. As you all know, this is a project that was a long time in the making, and the challenges to bringing it on have been significant. We also know that the challenges don't end with start-up. Since beginning production in 2014, we've had to continue learning and adjusting and, most of all, proving that our mine plan and mining technology work. I think we can now say with confidence that they do. This quarter and year to date, the operation has performed even better than expected. As of the end of October, the operation has produced over 8 million pounds of packaged uranium, which was the upper end of our annual forecast. We have revised our target upward as a result of this success and now expect 10 million packaged pounds from the McClean Lake mill and possibly more if current production rates continue. Half of this is our share, and overall we remain firmly on track to achieve 18 million pounds by 2018. The rest of our operations have also performed well in the third quarter and throughout the year. The Carson River, Key Lake, Rabbit Lake, and Inkai were up compared to last year, and our US operations have continued to produce according to their mine plans. I'm going to take a pause here for a moment to turn things over to Grant to give you a brief update on the CRA case. Grant? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [4] -------------------------------------------------------------------------------- Yes, thanks, Tim. I just wanted to make a few brief remarks about the updated disclosure on our CRA tax case this quarter. First of all, a court date has been set for our 2003, 2005, and 2006 tax reassessments, and we expect the trial will start the week of September 26, 2016. We expect it will last about four months, with a decision six to 18 months after the trial is complete. Why not 2004, you may ask? Or what about 2007, 2008, and 2009? Well, 2004 is not included as the CRA has not responded to our Notice of Objection for that year, and therefore the appeal with the tax court has not been filed. In other words, this year is not before the court at this time. For taxation years 2007 to 2009, we have not yet filed an appeal with the Tax Court. We expect that the decision for the 2003, 2005, and 2006 years will apply to subsequent years. The other development this quarter is the notice we received from the CRA that they are disallowing the use of tax loss carry-backs for any transfer pricing adjustments starting with the 2008 tax year. This does not change the amount we expect to remit to the CRA while in dispute. To remind you, that is 50% of the reassessed amount. However, it does shift the timing of payments. As a result, we have provided an updated schedule of potential payments in our third-quarter MD&A. To some extent, this schedule is dependent on receiving the 2010 reassessment in the fourth quarter, which we fully expect will be the case. You will see that we expect to remit these amounts sooner than previously anticipated. However, you will note that we now expect to be able to use letters of credit to secure a portion of the 50% we are required to remit while in dispute, which diminishes the cash we will have to put on account with the CRA. If we are successful in our case, as we believe we will be, we expect to recover all amounts remitted to the CRA on account of this case. It is important to note that there have been no changes to our view of the case since we first disclosed the issue in 2008. I should also point out that the expected payments and timing are estimates only, since actual amounts will depend on the income reassessed in each year; the availability of elective deductions; our ability to use letters of credit, as anticipated; and the timing of reassessment. We remain confident that we will be successful in our case, but have taken a cumulative tax provision of CAD92 million for 2003 to September 30, 2015. I want to emphasize that we do not believe the ultimate resolution of this matter will be material to our financial position, results of operations, and cash flows in the years of resolution. And with that, I will turn it back to Tim. -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [5] -------------------------------------------------------------------------------- Thanks, Grant. So overall, we continue to focus on executing our strategy to remain a competitive, low-cost producer. We are on track to deliver on our sales guidance for the year. And thanks to the better-than-expected ramp-up of Cigar, our overall production guidance is higher as well. However, it's still a challenging time for any uranium producer today. The market has continued to be flat through the first nine months of the year. If we look to the catalysts we are watching for, there has not been a lot of movement. Uranium prices continue to remain flat and we believe fuel buyers' requirements remain generally well covered for the moment. Following on from that, there's not been a significant return to long-term contracting, and supply continues to perform well. The one piece we have been watching that has returned some good news is reactor restarts in Japan. Kyushu's two Sendai reactors started up in the second half of the year, which was a milestone that we were very happy to see. And another reactor is expected to start up in early 2016, Shikoku's Ikata 3 reactor. Of course, there needs to be more restarts to move sentiment in the market, so we haven't seen the needle move much in reaction to those events. But another three units have made it through the nuclear regulatory agency's safety review, and 20 more reactors have applied for restart. The utilities who own those reactors have invested billions of dollars in the safety upgrades required to get their reactors restarted, so we are confident we will see many of Japan's reactors back online, though the process continues to be slow. And we know, of course, that the long-term outlook for nuclear and uranium remains strong as the world population continues to rise, as energy demand continues to increase, as more nuclear reactors come online, and as uranium demand increases at a time when supply will be diminishing. So we continue to plan with that impending positive future in mind. And we have a lot of advantages going for us -- some of the best uranium assets in the world, a solid contract portfolio, strong long-term relationships with customers, and a strategy that sees us focusing on our Tier 1 properties. Ramping up Cigar Lake is key to that strategy so when the market does turn, we expect to be more than just a price play. We have positioned ourselves to have strong operating leverage and we plan to meet rising prices when they happen with increasing production from our best-margin assets -- Cigar Lake, McArthur River, and Inkai. So with that, I am happy -- we are happy as a team to answer any questions you might have. And I am going to turn it back over to Melanie. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). Andrew Quail, Goldman Sachs. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [2] -------------------------------------------------------------------------------- Thanks very much for the update. Just got a couple of questions. First on the cash balance, obviously it fell to around CAD60 million this quarter. And I understand it's due to timing issues with sales versus production. Is there a -- you know, an increase in working capital. Is there a level of cash that you guys are comfortable with operating the business? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [3] -------------------------------------------------------------------------------- Andrew, let me flip that over to Grant to comment. Grant, do you want to comment (multiple speakers) -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [4] -------------------------------------------------------------------------------- Yes. It's a great question, Andrew, and you did see it fall and accurately diagnosed the challenge, and that is our customers determine when they would like deliveries, and we have seen, I think, four years in a row now that deliveries have been more weighted to the fourth quarter. And so, as we've been spending on capital programs and everything through the summer months in northern Saskatchewan, but not having the corresponding sales under the contract portfolio, we have drawn down that cash balance. We do expect it to recover as we fulfill those Q4 deliveries. Of course, that cash follows about a quarter behind when those deliveries come in. So we do expect it to build back up. In terms of a run rate cash amount, you know, we look at -- the main feature being the lumpiness of deliveries. We look at the working capital swings that we would have. You know, I would say that there are times where you can have too much cash, but there are times where you can have too little sitting on the balance sheet. And I think a couple hundred million dollars is a comfortable number. You know, I look at it from the point of view that as long as the Treasurer is getting a good night's sleep four nights out of seven, that's probably a good cash balance. If he's sleeping sound seven nights of the week, then we are probably running a little too heavy. So CAD63 million is not where we would want it to be, but because of just the delivery pattern, we are not concerned. And as I said earlier, it's four years in a row now we've seen this kind of back-end weighting. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [5] -------------------------------------------------------------------------------- Okay. Thanks. And then I suppose, obviously, the highlight was Cigar Lake and the ramp-up looks better than expected. And you are on track for this year, or you have raised guidance. When we look forward to the ultimate goal of what you guys have said -- to target 18 million pounds by 2018, do you think that as we head into 2016 that sort of target could be pulled forward? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [6] -------------------------------------------------------------------------------- Andrew, it's Tim. You know, we are trying to be prudent on this. We are obviously delighted with the way Cigar Lake has performed this year, 2015, but I don't have to go back very far -- in fact, 2014, when I think our total production for the year was 400,000 pounds. And we took some pauses during the year to fix some tanks underground. The mill had some additional equipment that had to be put on it. We were really testing the mining machine at that time. So to go from 400,000 pounds last year to -- we're at 8 million pounds this year, looking toward 10 million, we are quite delighted with that. So it's a bit of a game changer for us, the partners of Cigar Lake, in the fact that, you know, we had budgeted 6 million to 8 million pounds this year. And that 3 million to 4 million -- our share, it's going to be more than that. I can tell you, we will take pounds from those -- that Tier 1 app? That's like Cigar Lake every day because every incremental pound that comes out of there is a good pound for Cameco and our partners. So are we going to be more aggressive going forward? I think we will, at the end of this year, take a look at where we end up. Our goal -- stated goal is still 18 by 18, 18 million pounds by 2018. And if we can move that long, we will. But right now, I'd say we're just going to get through 2015. We will take stock of how things are performing, the mine, the mill, the jet pouring machines. And then, you will hear from us probably next quarter with an estimate for 2016. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [7] -------------------------------------------------------------------------------- Great. And quick -- just last one, I don't want to waste time for others. Really good improvement at Rabbit Lake. Is that a production rate we can expect going forward? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [8] -------------------------------------------------------------------------------- I'll tell you that we give a lot of credit to the other facilities, the big ones -- McArthur, Key, the Cigars. The actual hard-core miners are those folks at Rabbit that don't have the grades and the ore bodies, if you like. So they've done a good job. I think they are running at a rate, I think -- I can't remember what our number is for the year. It's 3.9 million or something like that pounds for this year. They are on track for that and having a good year this year. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [9] -------------------------------------------------------------------------------- Thanks, guys. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [11] -------------------------------------------------------------------------------- A question for Grant, just back to the CRA payments. When do you expect to find out whether you will be able to use letters of credit to post, rather than cash, in lieu of some of these payments? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [12] -------------------------------------------------------------------------------- Yes. Great question. Sorry for not being a little more clear on that. We have to wait for the 2010 reassessment to actually arrive and then put the letter of credit against that reassessment. So that's the process that we are waiting on. We don't anticipate any difficulties, but obviously we have to have that reassessment in our hands before we can then proceed with putting a letter of credit against some elements of it. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [13] -------------------------------------------------------------------------------- And if that doesn't arrive by the end of the year, do I understand correctly that you'd have to post -- you know, you've only posted CAD17 million in cash this year versus your guidance here, updated at kind of CAD295 million to CAD320 million, that you'd have to post something in the order of kind of CAD280 million to CAD300 million in cash in the fourth quarter if this letter of assessment doesn't come through? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [14] -------------------------------------------------------------------------------- So we do expect a letter of assessment to come through, because if it doesn't, there would be a statute barring to go back. I mean, they only have five years. So we do fully expect it. So I don't want to speculate on it not arriving because that is absolutely not my expectation. So what we've done in the liquidity table is try to give you an idea, assuming the 2010 reassessment comes in, just how it would play out between cash and the letters of credit. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [15] -------------------------------------------------------------------------------- So in terms of your confidence level, then, if you expect the assessment, what's your confidence level that you're actually able to use the letters of credit? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [16] -------------------------------------------------------------------------------- Well, it is a -- we are allowed to, under the rules. We have followed those rules, and so we just think it should just be a procedural step here. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [17] -------------------------------------------------------------------------------- Okay. Thank you very much. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Steve Bristo, RBC Capital Markets. -------------------------------------------------------------------------------- Steve Bristo, RBC Capital Markets - Analyst [19] -------------------------------------------------------------------------------- Just had a couple here. First, are your CAD1 billion letters of credit part of the CAD2.4 billion lines of credit, reducing the total available amount on the lines of credit? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [20] -------------------------------------------------------------------------------- Yes (multiple speakers). Well, I will start with that one, Steve. The CAD2.4 billion includes all of our letters of credit, which also includes the amounts that are put against decommissioning, for example. The one we often highlight is the revolving credit facility, which we just renewed for CAD1.25 billion. It has the accordion feature to go up to CAD1.75 billion. That one is undrawn. -------------------------------------------------------------------------------- Steve Bristo, RBC Capital Markets - Analyst [21] -------------------------------------------------------------------------------- So how much do you actually have available under all your letters of credit -- sorry, lines of credit right now? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [22] -------------------------------------------------------------------------------- Well, probably the one you want to think about is the CAD1.25 billion undrawn revolving credit facility because, as I mentioned, the other letters of credit pertain to decommissioning obligations. -------------------------------------------------------------------------------- Steve Bristo, RBC Capital Markets - Analyst [23] -------------------------------------------------------------------------------- Okay. And would it be possible to share the covenants you have on those credit lines? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [24] -------------------------------------------------------------------------------- Yes, but we can follow up on that. I mean, there's a lot of detail in there. Nothing surprising, actually, but rather than take the time here, why don't we follow up on that, Steve? -------------------------------------------------------------------------------- Steve Bristo, RBC Capital Markets - Analyst [25] -------------------------------------------------------------------------------- Okay. And then, just on the CRA payments, why for 2016 and 2017 are those not all using letters of credit? You still have some cash in those years. -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [26] -------------------------------------------------------------------------------- Yes, because the letters of credit only apply to the income tax reassessment, as well as the interest payments. The transfer pricing penalties you cannot secure with a letter of credit. That's just a function of the rules. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Edward Sterck, BMO. -------------------------------------------------------------------------------- Edward Sterck, BMO Capital Markets - Analyst [28] -------------------------------------------------------------------------------- A couple of questions. Firstly, on Cigar Lake, was the -- is the performance -- the better-than-expected performance driven more by the sort of mine-level operations? Or is it the mill that's exceeding expectations here? And can you comment on the grade reconciliation to the reserve model? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [29] -------------------------------------------------------------------------------- So, Ed, I would say the performance is very good at both the mine -- I know you've visited and others have visited. You've seen the jet boring machines. With some modifications that have been going on throughout the year, they are just performing better and better, so easily able to keep up with the mill that itself has been performing extremely well. So I think last month we had about 1.5 million month at the mill, mine easily able to keep up. So good performance from both. Grade reconciliation, I'm not sure I have that right now. We will certainly in the next quarter, at the end of the year, be putting that information out to show how we made out for 2015. Like I say, it's a bit of a game-changer, Ed, for us, going from relatively few pounds in 2014 to I think we'll be somewhere around the 10 million mark. So, yes, we will do that reconciliation and put it out. -------------------------------------------------------------------------------- Edward Sterck, BMO Capital Markets - Analyst [30] -------------------------------------------------------------------------------- Okay. Thank you. And then just a follow-up question, I'm sorry, going back to the CRA again. How long after receiving the 2010 reassessments do you have to make the payments (multiple speakers) -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [31] -------------------------------------------------------------------------------- You know, Ed, sorry. I should have the detail. Is it 10 days? Is it 20 days? It is something like that. It's a quick turnaround time. I'm sorry. I can get the exact number and get back to you. Suffice it to say we are prepared, obviously, whatever that window is. -------------------------------------------------------------------------------- Edward Sterck, BMO Capital Markets - Analyst [32] -------------------------------------------------------------------------------- Okay. No, that's great. That's all I needed. Thank you. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Greg Barnes, TD Securities. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [34] -------------------------------------------------------------------------------- Yes, thank you. I guess, Tim, with the mine coming as well as it is and the mill, are costs at Cigar Lake tracking where you'd expect them to be at this point? Operating costs and CapEx? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [35] -------------------------------------------------------------------------------- Yes, they are. And with each incremental pound we produce, it just gets better. So those big Tier 1 assets like that, you want to run them at full speed. You have seen our technical report that set out some time ago what we thought we could do at full production under CAD20 cash unit costs. And we think we can get there. So that's -- yes, it's tracking to what we thought, Greg. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [36] -------------------------------------------------------------------------------- Okay. Good. Secondly, on the CRA, Grant, given you now have a date for the court hearing, is there any suggestion or any discussions underway about settling ahead of that? Or do you think that can even happen? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [37] -------------------------------------------------------------------------------- Well, not at the moment, Greg. You know, one of the challenges -- and I think we've been really clear about this from day one -- is that we just reject this view that there's something wrong with our overall governance structure, our overall intercompany structure. So we just challenge that notion. And as long as we are facing that kind of argument, it just -- it makes it difficult to figure out where there might be a saw-off. If we see a softening of that argument, if we see a migration over to more of a classic transfer pricing challenge, like the IRS has presented to us, then I think it increases the chances we can have that kind of constructive conversation. But right now, it just looks like a difficult prospect. And we believe in our case and we think our case is very strong. We would obviously welcome an opportunity to have that kind of conversation, but we just don't see it before us at the moment. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [38] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Oscar Cabrera, Bank of America Merrill Lynch. -------------------------------------------------------------------------------- Oscar Cabrera, BofA Merrill Lynch - Analyst [40] -------------------------------------------------------------------------------- I wonder if the change in federal government has any possibility of impact on the CRA and I'm not going to ask you any question on that. (laughter). I was curious on your -- -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [41] -------------------------------------------------------------------------------- Thanks, Oscar. (laughter) -------------------------------------------------------------------------------- Oscar Cabrera, BofA Merrill Lynch - Analyst [42] -------------------------------------------------------------------------------- On your CapEx disclosure for this quarter, reducing from CAD405 million to CAD385 million, this comments here that some of it has to do with timing. Can you provide more color on that? Because when we were at Cigar Lake, there were comments about there is still spending to be done at McClean Lake. And just wondering how should we think about the capital expenditures going forward for that and for McArthur. -------------------------------------------------------------------------------- Bob Steane, Cameco Corporation - SVP, COO [43] -------------------------------------------------------------------------------- Oscar, with respect to McClean Lake, you know, we've been talking about -- I think since Q2 -- the requirement for a bit more capital to be spent at McClean Lake in 2016 to complete the mill. But what's interesting is a point that Tim made earlier, that the run rate for McClean Lake in October was 1.5 million pounds in that month. So that's an 18 million pound production rate on an annualized basis. So, obviously, the good folks at Areva are doing the work to figure out exactly what capital would be required for 2016, because the mill is performing very well. So, you know, I hate to put it in such a context, but we are just still waiting for them to do that evaluation, given the great performance of the mill. The timing issues as they pertain to McArthur -- just around some of the work that's going on there for a surface freeze plant, for example; hitting milestones, everything's working to our plan. It's just we are now at a phase now where some of that work can flip to an indoor mode. We've got the -- the shell of the building is ready to go, and so some of that activity is just going to flip into the next year. But it's not critical path or anything, just part of the overall spend at McArthur. So no real notable pieces in there in that CapEx change, other than it's just come off a bit. -------------------------------------------------------------------------------- Oscar Cabrera, BofA Merrill Lynch - Analyst [44] -------------------------------------------------------------------------------- Okay, great. Thank you. And then, could you provide color on the long-term contracting market for uranium after the start-up of the first nuclear reactor in Japan? Have you seen any changes in behavior from utilities? Are we still looking at a wait-and-see from their part? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [45] -------------------------------------------------------------------------------- Still a bit early, obviously, as we said -- as I said in the opening comments, when I look back a year or even six months, we've talked about Japan restarting their reactors since -- probably since they went down in 2012 -- 2011, 2012. And so to have the first Sendai unit come on, and then the second, it was good news. But I think we need to see more. We've got another one coming, it looks like, just in the new year, a couple more approved that are in legal morass right now. And hopefully, we'll get out 20 more lined up after that going through the NRA process. So that's going to take some time. So we didn't see a big needle move, if you like, after that. But that's just one piece of it. We needed that to happen. We need utilities to get a little bit less comfortable with the supply that's out there and just paying kind of bottom prices for near-term pounds, and start thinking about the longer term. Because I can tell you when you start looking at that, it's a bit of a different story, bit of a different movie. We know there are 64, 65 reactors under construction today that are going to be coming on at a regular pace over the next years, in addition to what's going now. On the supply side, I still think that's the story and it's going to be going forward, is that, yes, Husab, the Chinese are moving that ahead. But after that, not a whole lot. So we look out into the future and see 10 years from now needs for 230 million pounds a year. Maybe we're wrong. Maybe it's 220 million, 210 million, maybe it's a little bit more. I don't know. But that's more than today. And I can tell you not all the producing properties that are producing today are going to be producing then. So that's what gets us up -- I think as Grant says, that's what gets us up in the morning and brings us in here, saying we can see the supply/demand fundamentals of this business are good. Going out a ways, yes, they are tight now, but they look pretty good going forward. -------------------------------------------------------------------------------- Oscar Cabrera, BofA Merrill Lynch - Analyst [46] -------------------------------------------------------------------------------- Thank you, guys. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Daniel Rohr, Morningstar. -------------------------------------------------------------------------------- Daniel Rohr, Morningstar - Analyst [48] -------------------------------------------------------------------------------- How do you expect the uranium segment's purchased volumes to trend over the next several years? Should we expect any trend? Or would it be wholly dependent on sort of what market opportunities might present themselves to you? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [49] -------------------------------------------------------------------------------- Maybe I'll ask Grant to answer that. Grant, do you want to (multiple speakers) -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [50] -------------------------------------------------------------------------------- Yes. It's really your latter point. We are very opportunistic with any purchase opportunities. We like to sell uranium when the price is high. We like to actually buy a little uranium when the price is low. When you can look at a uranium price such that -- you know, material that has already been explored for already mined, already mailed, sitting in a can somewhere in the mid-$30s, that's quite attractive. It's quite attractive relative to Tier 2 and Tier 3 costs of production. But we always look at it opportunistically. We look at it in the context of our sales commitments. So to say that there's a forecast number out there, I wouldn't go that far. Obviously, having Cigar Lake performing so well -- you know, 6 million to 8 million pounds was our guidance at the outset of the year. And it's 10 million -- at 10 million now. And so, that's a change for us as well. You replace purchases, perhaps, with those Tier 1 pounds. So that's very attractive for us, so we're just going to watch that. And it's just all part of this Tier 1 strategy that we have to bring pounds from the best-margin assets. -------------------------------------------------------------------------------- Daniel Rohr, Morningstar - Analyst [51] -------------------------------------------------------------------------------- Great. And then, can you refresh us a bit on your free cash flow priorities over the medium term? So as we see Cigar Lake ramp and as, hopefully, we see some recovery in the uranium price, what are the priorities for cash? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [52] -------------------------------------------------------------------------------- Yes, the priorities are kind of set out in that opening strategy statement that we have at the beginning of every MD&A. I mean, we talk about ensuring our continued reliable low-cost production from McArthur River/Key Lake. And keep in mind, we have the ability now to take McArthur River up to 25 million pounds a year on a 100% basis. So, of course, that remains an investing priority for us when we think about our free cash flow. We also want to ensure our continued reliable production at Inkai. Not so much from the point of view of pushing that Kazakh asset for higher production, but making sure it's positioned for when the Kazakhs themselves recognize that there's new production that needs to come to the market and being part of that game. Obviously, the ramp-up at Cigar Lake will still consume some of our time, some of our attention, and probably some of our investment to optimize -- to make sure that that mine is really producing as well as it could be. Then after that, we are very patient with our capital. We have parked a number of our projects in what we call the bullpen. We are waiting for market signals to tell us that it's time to invest. It has kept us in a mode where we are living within our means; we are being very disciplined trying on one hand to be prudent, to make it through this fog of Fukushima, as we've called it; but on the other hand, position ourselves for the operating leverage that Tim was describing. And we just look at it very simply as that operating leverage is best coming from leveraging our brownfield infrastructure and those are those Tier 1 assets. And those are our priorities. -------------------------------------------------------------------------------- Daniel Rohr, Morningstar - Analyst [53] -------------------------------------------------------------------------------- Yes, yes. I am familiar with the language at the front of the MD&A. Those are largely, as I read them, investing priorities. Is there anything you could offer on disbursement priorities, say to shareholders? Anything along those lines? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [54] -------------------------------------------------------------------------------- Yes. So you know the capital allocation approach we have taken for the last few years has been to say, you know, our contract portfolio gives us really good line of sight to our revenues. That line of sight to our revenues, as long as we're managing our costs, gives us a pretty good idea of where those cash from operations are going to be. We then back out a couple of items. We've got a dividend commitment to our shareholders and we have some interest that gets paid on our long-term debt. That leaves us with a residual amount of investable capital. What I was describing is the priorities for that investable capital. To date, you've seen that those priorities have really consumed that amount. If we found ourselves in the position where focusing on those Tier 1 projects didn't consume that investable residual capital, then we would be having a conversation about what to do with it. Because let's face it -- those types of excess funds can only go in one of two directions. They can go into investing in our portfolio or back to our owners. We have frameworks that we have for the Board to look at the best way to disperse. We haven't had to invoke them yet, obviously. But it would require an analysis to talk about an increase to a dividend, perhaps, or what that sustainable dividend increase might look like, or whether you go down the path of a special one-time dividend, or whether you actually turn a bit more and do a shareholder buyback, all of that up for negotiation when we find ourselves at that point. But right now, we are convinced that investing in our Tier 1 assets has been a very good, wise decision for us. And quite frankly, we are starting to see it pay off. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- Chelsea Laskowski, Missinipi Broadcast (sic - see Web page - "Missinipi Broadcasting"). -------------------------------------------------------------------------------- Chelsea Laskowski, Missinipi Broadcasting Corporation - Media [56] -------------------------------------------------------------------------------- I am wondering on the effect of wildfires. I saw that in the last quarter it was not seen as, I guess, a big impact on the operations. I'm just wondering if there's anything that has come up in the time since kind of residual that has affected anything at your mines in the northern Saskatchewan area? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [57] -------------------------------------------------------------------------------- Hi, Chelsea. Nice to hear from you. Yes, you were there. You know what we went through -- and I say we as a province here, especially the north. And companies through the end of June and almost to the end of July, I can tell you, with those fires we were having in here at our office -- right in this room, in fact -- emergency response meetings every day, 9 AM, 3 PM, to deal with it. So, just a great effort with the Government of Saskatchewan, with the northern leaders. So, nothing new since then. We are through it, obviously, now. Obviously, there were some costs to us, but certainly costs that we needed to incur. What was more important was the way the community came together. Our employees were -- of course, you know, 50% of our employees are from northern communities, most of which were evacuated. So they were all over the place. And to be able to get them to work and keep the mines running -- roads blocked because there were fires on both sides of the road; couldn't get trucks up. We had convoys of 20 trucks sitting, just waiting for a green light to go through the fires. It was quite the production here. But no, we are through it now and we are very grateful that it wasn't even worse. It was bad, but it could've been worse. Communities could have been taken down. So there's some rebuilding to do, but we are through it and we are grateful for the great cooperation here in Saskatchewan. -------------------------------------------------------------------------------- Chelsea Laskowski, Missinipi Broadcasting Corporation - Media [58] -------------------------------------------------------------------------------- I am wondering with the wildfire review that the Province is doing, how much of a stake do you guys have in that? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [59] -------------------------------------------------------------------------------- Well, we certainly have people involved, but it's being driven by the Province. So I'm sure they will be consulting with us and we will provide whatever added value we can to the process. -------------------------------------------------------------------------------- Chelsea Laskowski, Missinipi Broadcasting Corporation - Media [60] -------------------------------------------------------------------------------- I just have one follow-up on that. With the -- I guess what, as a Company, would you want to see the Province possibly change to make things more effective on your end? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [61] -------------------------------------------------------------------------------- You know, the Province responded very well for us. We were in contact every day with them, whether it was the highways department, whether it was the northern affairs group, just to -- you know, we were fortunate in the sense that our mining facilities weren't as directly affected -- directly affected by the fires as the northern communities. The fires were quite some distance, most times, from our assets. So, it was more the northern communities. So it is what it is in northern Saskatchewan. There are fires. I thought the Province responded very well, cooperated well. You know, I'm sure the communities would have some input into how that went. But from our point of view, the Province responded well. And we would tell them that, given the chance. -------------------------------------------------------------------------------- Chelsea Laskowski, Missinipi Broadcasting Corporation - Media [62] -------------------------------------------------------------------------------- All right. Thank you very much. -------------------------------------------------------------------------------- Operator [63] -------------------------------------------------------------------------------- Fai Lee, Odlum Brown. -------------------------------------------------------------------------------- Fai Lee, Odlum Brown Limited - Analyst [64] -------------------------------------------------------------------------------- Regarding the inventories and the increase this quarter, I'm just wondering how should we view it in terms of whether it will be -- some of that increase will be reversing in the fourth quarter? Or how much of it is related to the ramp-up of Cigar Lake? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [65] -------------------------------------------------------------------------------- Grant, you want to say something? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [66] -------------------------------------------------------------------------------- Yes, well, the inventory has built and I think you've hit on some good reasons. Production has been solid. Cigar Lake has been a theme this morning that we've talked about, and certainly that contributes to it. The other thing about the inventory, too, is remember that it's measured in Canadian dollars. And so when we made some purchases in US dollars, value it, and this is a value of the inventory, you see that FX effect. But we do have a busy fourth quarter coming up. We have a lot of deliveries to fulfill. As we deliver into those contracts, we do expect the inventory to come back down to a more typical level that you've become accustomed to with Cameco. So a bit of a bulge, but I think what makes it a bit notable this quarter is that, you know, there's an FX effect layering on. As I said a bit earlier, having deliveries heavily weighted to the fourth quarter has been common for four years in a row now. But this time we are also seeing an FX effect on top of that, a bit more production coming in from Cigar Lake, as we have discussed. -------------------------------------------------------------------------------- Fai Lee, Odlum Brown Limited - Analyst [67] -------------------------------------------------------------------------------- Okay. Just as a follow-up, Grant, your commentary about 2004, I didn't quite catch what was going on there. Can you maybe just explain again? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [68] -------------------------------------------------------------------------------- With respect to the CRA dispute? -------------------------------------------------------------------------------- Fai Lee, Odlum Brown Limited - Analyst [69] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [70] -------------------------------------------------------------------------------- Yes. Well, you know, I wouldn't be the expert. I'm going to look across the table to our Chief Legal Officer, Sean Quinn, on that. Just the point I made was that there was a notice of objection that needed to be filed by us. We have done that. We typically wait for a response from the CRA; we didn't receive that. And I would just say that 2004 sits in a bit of a legal limbo. I'm just going to ask Sean to add a bit more color to that. -------------------------------------------------------------------------------- Sean Quinn, Cameco Corporation - SVP, Chief Legal Officer [71] -------------------------------------------------------------------------------- Sure. And I really don't have too much color to add. We did file our notice of objection. We're waiting for a response. It is held up in a couple of procedural issues within the CRA. So that year is simply not before the courts right now. -------------------------------------------------------------------------------- Fai Lee, Odlum Brown Limited - Analyst [72] -------------------------------------------------------------------------------- So is there, like, a drop-dead date before they have to respond? Or is it possible they may not even -- yes, where they can't pursue you anymore? -------------------------------------------------------------------------------- Sean Quinn, Cameco Corporation - SVP, Chief Legal Officer [73] -------------------------------------------------------------------------------- That possibility is out there, but we expect that ultimately the Crown will [cure] its position on that. -------------------------------------------------------------------------------- Fai Lee, Odlum Brown Limited - Analyst [74] -------------------------------------------------------------------------------- Okay. Great. Thanks. -------------------------------------------------------------------------------- Operator [75] -------------------------------------------------------------------------------- David Snow, Energy Equity Inc. -------------------------------------------------------------------------------- David Snow, Energy Equities - Analyst [76] -------------------------------------------------------------------------------- You had, I think, said that supplies are holding up well, but that they will be coming down over time. And I am wondering, ballpark, how many million pounds would they be down in 10 years if you saw the current price structure continue for the duration? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [77] -------------------------------------------------------------------------------- It's Grant. We have some disclosure out there. We do provide a bit of a 10-year market balance view. Our view is that, you know, with the demand that it's actually quite certain and actually quite predictable right now. You've got reactors under construction. Of course, that is part of today's problem; under construction they are not consuming uranium. But they will be. 65 of them under construction. They will be commissioning and firing up through this 10-year period. We see annual consumption going to about 230 million pounds. We see production a lot differently. As Tim mentioned earlier, we are in an environment where today's prices are not incenting future production. So we simply look at the production that's going on around the world; we say if it continues to face only sustaining capital and we continue to see a lack of replacement or growth capital, we see production actually trailing off -- not hitting 230 million pounds a year, but actually trailing off to around 140 million pounds a year. It's quite a big deficit. That's -- you know, 10 years out, 90 million pounds of uranium. And we have talked a lot about Cigar Lake. So let's think about it in Cigar Lake terms. The world would need to explore for, discover, ramp up to full production 4.5 new Cigar Lakes. So we ask ourselves, where's that work being done? Who is making those investments? And we look around and we don't see that happening. And that's part of what, as Tim said earlier, gets us really excited. We see a difficult spot market; we see a challenging midterm market. But we see a fundamental that's really favorable and really encourages us to focus on these Tier 1 assets like we've been doing. -------------------------------------------------------------------------------- David Snow, Energy Equities - Analyst [78] -------------------------------------------------------------------------------- Well, some of that 140 million pounds versus 230 million is supplied by secondary sources. What is the production now versus the 140 million you just referenced? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [79] -------------------------------------------------------------------------------- That graph that we have in there is just primary production. Absolutely, there will be secondary supplies, but of course, one thing about the nature of secondary supplies is they are finite. They only come to the market once. And what we've actually seen over the years is a drawdown of those big volumes. So, for example, we no longer have the HEU material in the market. That -- when we think about it in mine terms, mine life was up in 2013. We do have material, we know, coming out of strategic inventories -- for example, the US Department of Energy. But they're working through what are their more fungible materials that come to the market. And their secondary supplies beyond that really require them to either downblend some highly enriched uranium, so additional processing, or to re-enrich tail, so additional reprocessing. So we see some challenges to those secondary supplies. They really come down to, at what price do you think they will be in the market? So certainly, we model secondary supplies going forward. You have seen that in our investor presentations. But we still have a gap. There is still a gap there beyond primary production, add in some secondary supplies that we think will be there. You still have a gap that we just don't see being filled today because of today's price environment. -------------------------------------------------------------------------------- David Snow, Energy Equities - Analyst [80] -------------------------------------------------------------------------------- Okay. Those charts are in your investor presentation? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [81] -------------------------------------------------------------------------------- They are, yes. -------------------------------------------------------------------------------- David Snow, Energy Equities - Analyst [82] -------------------------------------------------------------------------------- Yes. Okay, thanks. -------------------------------------------------------------------------------- Operator [83] -------------------------------------------------------------------------------- Graham Tanaka, Tanaka Capital. -------------------------------------------------------------------------------- Graham Tanaka, Tanaka Capital Management, Inc. - Analyst [84] -------------------------------------------------------------------------------- Thank you. I was wondering what your estimates are on the Japan overhang. That seemed to be a lingering problem, especially with some of the delayed restarts. How many millions of pounds are really out there? We can't seem to get a good answer. Thanks. -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [85] -------------------------------------------------------------------------------- Thanks, Graham. You know, it is hard to tell, because we don't have the exact number. They keep that pretty close. But you know, we knew -- we have been dealing with the Japanese for a long time, and when things were good there, back before March of 2011, they would hold probably three to four years of inventory. At an annual consumption rate of 20 million pounds, it would be the 60 million to 80 million pound range. We think since then they've probably added a couple years. They kept taking deliveries even through the post-Fukushima years. Now, those would be diminishing. Obviously, we weren't signing any new contracts with them. But they keep taking deliveries. So if you said somewhere in the neighborhood of 100 million pounds, something like that, it probably wouldn't be far off. The good news is we haven't seen those pounds come back to the market. And we've said on previous calls and when we have talked to you that the Japanese are clearly behaving like they are going to bring the units back on. And now we see solid evidence of that. We see two units, a couple more coming. They have spent billions, tens of billions, getting the fleet ready to come back on. There's 20-plus slides, so 25 in the queue. I guess 23 in the queue for restart now. So, yes, there's a healthy inventory there. I don't think they'll be coming back to the market anytime too soon, but the restart -- if you can just take the question, the big overhang, if you like, over the last few years has been, will the Japanese put inventory on the market? And so far, they haven't. -------------------------------------------------------------------------------- Graham Tanaka, Tanaka Capital Management, Inc. - Analyst [86] -------------------------------------------------------------------------------- The other thing that we've been trying to estimate, and it's hard to do -- you, of course, have much better resources on that, is the cheap, incremental production coming from Kazakhstan, in situ methods, etc. What do you think that that supply is and how long can they keep it up at the kind of cheap production? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [87] -------------------------------------------------------------------------------- Well, you know, they've -- of course, their build-up of production has been astounding over the last 10 years, 10 to 12 years, going from basically nothing to -- you know, they are in the 22,000-ton range now. That's certainly capable of incremental production. We think they could get to 25,000 tons maybe by -- in the next couple years, 2016, 2017. But then, it's not obvious that they can double that. First, you've got depleting resources at some of the better ore bodies. We are in a good one. Our other friends, French and Japanese and Chinese and others, are -- they're in other ones. It's a continuous drilling program. And so, technically, I think the better ore bodies are already being worked. And so, can they increase production? I think they can, to some extent. But it's not obvious that it would be a dramatic increase. So we see that -- and the other piece is that they're very savvy. We just met with them last week. Very savvy marketers on the market now have 10, 15 years of experience in the market. And so, they've held their production at the 22,000-, 23,000-ton range. And I don't have any reason to think they wouldn't do that going forward. -------------------------------------------------------------------------------- Graham Tanaka, Tanaka Capital Management, Inc. - Analyst [88] -------------------------------------------------------------------------------- Just curious why mechanical increased purchasing and it looked like at an incremental cost of CAD47 a ton. Is that likely to continue at that purchasing level? And -- in terms of volume and at price? Because it seems to be above market. Thanks. -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [89] -------------------------------------------------------------------------------- It's Grant. Just with respect, first of all, to the volume, you know, our purchase program was set out driven by, obviously, opportunity. We thought we were seeing a market that actually had some pretty cheap pounds in it, but also at a time when we were guiding on a 100% basis 6 million to 8 million pounds from Cigar Lake. So with that in mind, we set out on some purchases, and of course Cigar Lake is performing very well, which will offset our need to make purchases. But also, there's a bit of a hold problem, if you will, when you think about those purchases. We make those purchases in US dollars, we hold them in Canadian dollars, and we're going to sell them in US dollars. But what you're seeing is the Canadian dollar value of those purchases. It's just an FX effect; we're not buying at CAD10, CAD12 above the market, I can assure you of that (laughter). -------------------------------------------------------------------------------- Operator [90] -------------------------------------------------------------------------------- John Tumazos, John Tumazos Very Independent Research. -------------------------------------------------------------------------------- John Tumazos, John Tumazos Very Independent Research, LLC - Analyst [91] -------------------------------------------------------------------------------- Do you anticipate changing your long-run uranium-price assumptions that you might use for discount rates in evaluating projects or in terms of reserves, your balance sheet? It's notable in the last quarter or so, here in New Jersey, the federal government auctioned 343,000 acres for a 3,400-megawatt wind farm on the south Jersey shore, 7 miles offshore. In west Texas, there's a 1,200-megawatt wind farm of First Solar near Fort Stockton, over 400,000 panels by one company, with three or four or five other companies studying it. And three weeks ago, Toyota proposed phasing out their gasoline engines prior to 2050, where there's all these renewable climate-change environmental actions, even though natural gas is almost $2.00, coal is almost free, etc. Difficult time to plan with all this climate-change philosophic stuff, even though it should play into nuclear, these other forms of energy, the sun and wind gain, etc. -------------------------------------------------------------------------------- Unidentified Company Representative [92] -------------------------------------------------------------------------------- Yes, John, thanks for the question, and it's a real good one because that is something we watch closely. Clearly in the US, I'd say gas is probably the biggest competitor to nuclear. $2, $3 gas is -- you can bring on electricity production in less time, less upfront capital, for sure. So we've seen over the last year or two lots of electricity-generating facilities based on gas being built, a little bit cleaner than coal, doesn't emit quite as much CO2. And of course, everyone is on the solar and wind search, upgrade, if you like. That is intermittent power that operates normally at about 30% of the time, which you can't run a hospital or a school, as we've said, on that. So you've got to have backup power for that. And in the US, that seems to be gas and coal and others. For us, going forward, the US remains a big customer. I think they have 99 or 100 plants still operating there. Looking at closures of maybe five or six, but also five big new ones under construction and coming on. So it's pretty flat right now in the US. The game for us and the game for the nuclear industry is certainly over in the Middle East and the Far East, now China, India, South Korea, the United Arab Emirates. Massive population growth, massive need for electricity, not sure they can answer that with some of the renewables, wind and solar, so turning to nuclear. We see in China, a country 10 years ago had basically no nuclear; today, 50 plants either operating or under construction and lots more to come. And so, yes, it's really -- it's dependent on your situation. If you've got lots of options like America -- I say America, including us here in Canada, have now, you can make choices like that. Other countries don't have the suite of choices and opportunity that North America might have. We saw [20 dollar million] gas in Japan not long ago, and in Asia, so that's a little trickier economics on that. So our focus and you see where the reactors are being built -- countries, like I say, with large, growing populations; they all want bridges and air conditioning and stoves and iPads and iPods like the rest have and that requires a lot of power, and governments have to provide that. And that's where we see the market being, going forward. -------------------------------------------------------------------------------- John Tumazos, John Tumazos Very Independent Research, LLC - Analyst [93] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Operator [94] -------------------------------------------------------------------------------- Steve Bristo, RBC Capital Markets. -------------------------------------------------------------------------------- Steve Bristo, RBC Capital Markets - Analyst [95] -------------------------------------------------------------------------------- Yes, thanks for taking my follow-up question. Just on the Cigar Lake target of 18 million pounds by 2018, should we look for production in the year 2018 to be that full 18 million pounds or is that like a run rate that's going to be reached by the end of 2018? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [96] -------------------------------------------------------------------------------- I think the plan would be 18 million pounds produced during the calendar-year 2018; so yes, you can put that on your books, yes. -------------------------------------------------------------------------------- Steve Bristo, RBC Capital Markets - Analyst [97] -------------------------------------------------------------------------------- Okay, and then just a quick follow-up on costs. The top end of your guidance in the uranium segment points to costs of CAD38.10 a pound, Canadian. You're currently running at CAD39 a pound with costs in the last two quarters being in the CAD40s, due to Cigar Lake. Are you still comfortable with that annual guidance, which will require substantially lower costs in Q4? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [98] -------------------------------------------------------------------------------- Yes, we are, yes. -------------------------------------------------------------------------------- Steve Bristo, RBC Capital Markets - Analyst [99] -------------------------------------------------------------------------------- Okay, that's it for me. Thank you. -------------------------------------------------------------------------------- Operator [100] -------------------------------------------------------------------------------- Orest Wowkodaw, Scotia Bank. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [101] -------------------------------------------------------------------------------- Thanks for taking my follow-up as well. Just given your comments on focusing on your big assets, has there been any thought about curtailing some of your smaller assets -- say, the ones in the US that would not benefit from currency devaluation -- to kind of support the uranium market, just given -- it's great that Cigar Lake is ramping up ahead of schedule, but the last thing the market needs short term is more uranium pounds. Just curious on your thoughts. -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [102] -------------------------------------------------------------------------------- Yes, Orest, obviously this management team that I am looking at sitting around the table a couple years ago said we need to have flexibility in our operations. Flexibility can mean up or down. And so, 2015 has been a bit of a game-changer for us in the sense that, as I said, one year ago if we were sitting at this time, we had almost no production out of Cigar Lake and didn't know what the future looked like. Today, we have 8 million pounds, half our share, looking at 10 million. And so, when you have a contract portfolio in place that looks at 31 million to 33 million pounds in sales a year and your production is 25 million or 24 million or whatever our number was this year, prior to revising it, then you know you need production from a lot of sources. And you need some of these pounds purchased that we're talking about today. We're reevaluating almost daily or weekly now. As Cigar continues to ramp up, we want those pounds in our portfolio. We want, obviously, the Inkai and the McArthur pounds, the low-priced pounds. We need Rabbit, we need the US at this point, but it's something we evaluate clearly on a continuous basis and, as I say, we need that flexibility up and down. We're watching the market to see when the improvement is coming, when the return to long-term contracting is coming, and then we will make decisions on our assets. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [103] -------------------------------------------------------------------------------- Just as a follow-up, are all the mines free cash flow breakeven or better at today's price and currency environment? Including sustaining capital? -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [104] -------------------------------------------------------------------------------- Yes, Orest, it's Grant. Keep in mind, we would do that analysis from our average realized price, not today's market prices. And when we do that analysis, we still see good performance. We still see room for those pounds, but as Tim was saying, with Cigar Lake performing so well there's a bit of a displacement opportunity there. And it accelerates the conversation [and analysis] around flexibility, and I think Tim used the term game-changer earlier, and I don't think it's an understatement. I think the focus on the Tier 1 strategy is really starting to pay off for Cameco. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [105] -------------------------------------------------------------------------------- Thanks very much. -------------------------------------------------------------------------------- Operator [106] -------------------------------------------------------------------------------- Greg Barnes, TD Securities. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [107] -------------------------------------------------------------------------------- Thank you. Is your view on when uncovered requirements about to become more pressing for the utilities? I know it's always been like a three-year rolling view. Is that beginning to stretch out? Because some numbers out recently, I guess from the UX, about the inventories held at the utility levels, they seem to be expanding quite significantly. -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [108] -------------------------------------------------------------------------------- You know, Greg, I guess there's been a few factors. I know you get the sense that it's rolling out; I think we have that sense, too, and the reason for it, I think, is Japan. We probably overestimated how quickly Japan -- or underestimated how long it would take to bring the Japanese units back on. I guess one benchmark that we use, and I think we've talked to you and others before about it, is our own portfolio of contracts that we have in place, where we say we are heavily committed through 2018, but then it opens up after that. We see that as a bit of a proxy, that the utilities would be, and since we were involved with most of them, would be in similar shape in that there's some uncovered requirements out in the 2017-2018 and going-forward period. And so, that's where we see it now. You know, we continue to read the tea leaves or watch Japan. As I say, if we can kind of freeze that situation and move it aside, there's some good construction going on, new reactors coming on monthly or quarterly at least that are going to be requiring uranium in addition to the existing fleet. So we see demand going up, and so at some point I think there's going to be a switch from discomfort in the short-term market for spot, or even the midterm market, to where utilities that want to run their machinery for the next 20 or 30 years are saying, you know what? We better start looking at security of supply going forward, because if Cameco is right and 2024 and the consumption is 240 million pounds and there's only something significantly less than that coming on, we better lock up some pounds. So we wait for that day to come. I wish I knew when that day was, but I think it's not too far out in the future. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [109] -------------------------------------------------------------------------------- Okay. [It looks like] it's only a number. The EU utilities hold 41 months of inventory, according to these numbers, and that's well above the 24 to 30 months they've previously held. The US holds 30 months, above the 12 to 18 they normally hold. So are those numbers that you would agree with? -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [110] -------------------------------------------------------------------------------- Grant, do you want to speak to that (multiple speakers) -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [111] -------------------------------------------------------------------------------- Yes, Greg, we obviously look at that a lot. Really, it's consistent with the message that we've been giving for some time now, which is it's a discretionary market. We have an opportunity -- utilities have an opportunity here. They feel well covered over the next couple years, they go into the spot market when they think they see cheap uranium and they buy a bit, and if it starts to put some price pressure on, they back out of the market -- -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [112] -------------------------------------------------------------------------------- Right. -------------------------------------------------------------------------------- Grant Isaac, Cameco Corporation - SVP, CFO [113] -------------------------------------------------------------------------------- -- and all along, they are just tucking a little bit more of that finite spot material. But really, what matters for us is where that run-rate volume is coming from. Not that inventory number, but where is your annual supply of uranium coming from? That's what's derived from the uncommitted requirements line that UX Consulting and others put out. We think that that really starts to open up. In the 2020 window, you should have a world that's consuming somewhere between 180 million and 200 million pounds of uranium, and only about 60% of that is currently contracted for, according to UX's own numbers. Those are big volumes, and they're not going to be satisfied by a couple million pounds here and there that you've tucked into your inventory. And it's that look that gets us pretty excited. We look at our contract portfolio and we say, we can wait it out. We can wait for that return to turn fundamental turn contracting at a real replacement rate. I mean, we haven't seen that since Fukushima, and so the spot market is just consistent with that message we've been delivering that it's near to term. It's a buyer's market, it's a discretionary market, and we just see that continuing. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [114] -------------------------------------------------------------------------------- Okay, good. Thanks very much. -------------------------------------------------------------------------------- Operator [115] -------------------------------------------------------------------------------- Thank you. This will conclude the questions from the telephone lines. I would like to turn the meeting back over to Mr. Tim Gitzel for his closing remarks. -------------------------------------------------------------------------------- Tim Gitzel, Cameco Corporation - President, CEO [116] -------------------------------------------------------------------------------- Thank you, Operator. I have to say that as excited as we are to see the good progress being made at Cigar Lake, we're also excited to see dates for the CRA litigation being fixed now so that we have some perhaps end in sight. I'm looking at Sean Quinn, and the CRA litigation, we'd love to put that behind us. So thank you, Operator. I'll just close by noting that we are patiently waiting for the industry to recover, but that doesn't mean that we're being complacent. We remain focused on keeping our costs down and running our operation safely and efficiently in order to maintain the flexibility needed to respond quickly when the market improves. Our strong production and continued success are indicative of our ability to continue to achieve those goals. So with that, I'll say thank you to all of you for your continued interest in Cameco, and have a great day. -------------------------------------------------------------------------------- Operator [117] -------------------------------------------------------------------------------- Thank you. The Cameco Corporation third-quarter results conference call has now ended. Please disconnect your lines at this time. We thank you for your participation and have a great day.
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