Cameco's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.10.14 | About: Cameco Corporation (CCJ)

Cameco Corporation (NYSE:USA) (NYSE:CCJ)

Q4 2013 Earnings Conference Call

February 10, 2014 1:00 pm ET

Executives

Tim Gitzel - President and Chief Executive Officer

Grant Isaac - Senior Vice President and Chief Financial Officer

Ken Seitz - Senior Vice President and Chief Commercial Officer

Robert Steane - Senior Vice President and Chief Operating Officer

Rachelle Girard - Director, Investor Relations

Analysts

Ben Isaacson - Scotia Capital

David A. Talbot - Dundee Capital Markets

Steve Bristol - RBC Capital Markets

Oscar Cabrera - Bank of America Merrill Lynch

Greg Barnes - TD Newcrest

Tyler Langton - J.P. Morgan

Brian MacArthur - UBS

Ralph Profiti - Credit Suisse

John Tumazos - John Tumazos Very Independent Research

Emily Meredith - Nuclear Intelligence Weekly

Operator

Good day, ladies and gentlemen, and welcome to the Cameco Corporation Fourth Quarter Results Conference Call. I would now like to turn the meeting over to Ms. Rachelle Girard, Director, Investor Relations. Please go ahead.

Rachelle Girard

Thank you, Dave, and good afternoon, everyone. Thanks for joining us. Welcome to Cameco's 2013 fourth quarter and year-end conference call to discuss the financial results.

With us today on the call are Tim Gitzel, President and CEO; Grant Isaac, Senior Vice President and Chief Financial Officer; Ken Seitz, Senior Vice President and Chief Commercial Officer; Bob Steane, Senior Vice President and Chief Operating Officer; and Alice Wong, Senior Vice President and Chief Corporate Officer. Tim will begin with comments on the quarter, for full year, the industry and the outlook for 2014. Grant will follow with comments on the Canada Revenue Agency tax case. 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 question-and-answer session, please limit yourselves 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 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

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

2013 was a challenging year but also a year in which Cameco again demonstrated resilience, endurance and strength. Our financial results are a clear reflection of that. Despite the difficulties in the market, we delivered strong and in some cases record results including record annual revenue of $2.4 billion, record revenue from our uranium business of $1.6 billion, both of these driven by a record annual realized uranium price of C$49.80 per pound. That helped us deliver solid adjusted net earnings of $445 million for the year, which is a $1.12 per share, a 3% increase over 2012.

We also had a very strong production year, producing a record 23.6 million pounds and a quarterly record of 7.5 million pounds. I'm sure you won't be surprised to hear that this was largely driven by our McArthur River/Key Lake operations. I often talk about how impressive these operations are, but the teams there are truly world-class, as they are across all of our operations.

This year McArthur River/Key Lake achieved 20.1 million pounds of production, which is the highest annual output from a uranium facility anywhere in the world ever. They managed this achievement safely and responsibly and while continuing to expand, continue mining areas and working to revitalize the mill. So that really was a highlight for us this year.

We also had good news at Inkai where we received government approval to increase production to 5.2 million pounds per year. And we made a lot of progress at Cigar Lake. In December, we put the jet boring system into operation, jetted in waste and in ore and have run the ore through the underground system. We are very proud of this achievement. As we announced in Q4 of 2013, we continue to expect first production from the mine in the first quarter of this year and very much look forward to beginning the ramp-up of this world-class project.

On the milling side, over at the McClean Lake mill, progress continues to be made on the modifications needed in order to process the ore from Cigar Lake and the mills will start processing ore by the end of second quarter. So we will be happy to see packaged pounds this year, although the volume will be somewhat lower than previously planned since the mill will only be packaging product in the second half of the year, and we don't expect any more delays on our end and continue to see good results as the commissioning progresses. So, some challenges but overall a strong year for our operations.

The biggest challenge in 2013 and for the last three years has been the market. Conditions continue to deteriorate as Japanese reactor restarts did not materialize and we saw some unexpected shutdowns in the United States and temporary shutdowns in South Korea. As a result, demand has continued to suffer while supply has remained stable, which leaves the industry with an inventory overhang and downward pressure on price that has lasted longer than expected.

Within this uncertain market environment, we have increased our vigilance, keeping a close eye on developments and making changes we think are needed in order to deliver the best value. The decisions we've made so far seem to be working as our results in 2013 show. But we don't believe the fog in the market, as we call it, is going to lift anytime soon. There has been little to no improvement on the issues needed to help clear the oversupply and the uncertainty the industry continues to face.

And we don't believe the answer is to sit idle and wait for improvement, which is why you see us moving away from our target to increase production to 36 million pounds by 2018. Production growth to a fixed target made sense when we had a clear line of sight to the growth in the market from the near-term through to the long-term, and while we still have that clarity for the long-term picture, we don't have it for the near-term one. In this environment, we need to be able to adapt quickly as changes occur in the market.

We're not saying we won't grow but we need to have the flexibility to adapt our production to current market conditions and not be confined by a commitment to a fixed target and a fixed timeline. The senior management team and I are aware of the challenge this poses for our investors, the 36 million pounds target provided a simple picture of our plans for the future, but this change is the best choice for the business until clarity returns to the market, as we believe it will.

As we outlined in our MD&A, you can expect us to continue focusing on our Tier 1 assets, those assets that provide the best value, and we will continue to provide an annual outlook. In 2014, we expect to produce between 23.8 million and 24.3 million pounds. Most importantly, you can expect us to respond when the market signals new production is needed.

You can also expect us to focus on our core uranium business. In line with this focus, we have sold our share in the Bruce Power Limited Partnership. This decision is a reflection of our disciplined financial approach, our focus on our core uranium business and our goal of providing the best value to shareholders. Cameco's participation in the Bruce Partnership was right for us at the time and has been a good source of cash flow, but we believe that today our best course is to continue investing in our uranium business because we know there will be a great deal of growth in uranium demand over the long-term and that new production will be needed, it's just a question of when.

And 'when' will depend on a number of things, like how long it takes for excess supply to clear the market, like the pace of Japanese reactor restarts, like how existing supply performs and what happens with new supply projects, and finally like when we'll see the long-term contracting resume in a meaningful way. These indicators will not only dictate the timing of demand for new supply but the scale of it as well.

In the near-term, these issues are certainly making life difficult for producers, but over the long-term we think they could make the outlook even brighter than it was previously. Today, supply has remained strong but the projects that were expected to provide future supply are being delayed or cancelled, Cameco's own projects included. This means less primary production at a time when we know reliance on primary supply will be greater than ever, as secondary supplies continue to diminish. While that's happening, it's also starting to look like the future level of long-term contracting could be higher than it was in the past because it's not getting done now.

In typical times, we would see utilities in the market filling their uranium requirements three to five years before they need it. We are well within that window now and the long-term contracting needed to fill those requirements is not happening. To give you some sense of that, over the past five years, annual long-term contracting averaged about 170 million pounds. In 2013, only 20 million pounds or just over 10% of reactor requirements were contracted. That's an order of magnitude less than usual. That difference will need to be made up at some point.

So the current market dynamics that are negatively affecting uranium producers could be stacking up to have a positive impact in the future, and of course that's in addition to the unprecedented growth we're seeing in new reactor construction. We're expecting more than 90 net new reactors over the next 10 years, 70 of those are under construction today. The big question is this, who has the ability and the resources to weather the near-term uncertainty? I would say that Cameco has that ability and those resources and that's why you see us making the adjustments we've made. We need to make the best, most efficient use of our resources so that we can weather today's uncertainty, continue to return value to our shareholders and be ready for future growth in the market.

So with that, I'd like to turn it over to Grant Isaac, our Chief Financial Officer, to give a brief update on the CRA issue. Grant?

Grant Isaac

Thanks Tim. We thought it would be prudent to spend just a few minutes on this issue today as we have provided some updates in our disclosure and want to put those into context. The first thing to note indeed emphasizes that this is not a new issue and there have been no changes to our view of this case since we first disclosed the dispute in 2008. While we are confident that we will be successful in our case, we have taken a cumulative tax provision of $73 million to-date to reflect the argument that our transfer price may have fallen outside of an appropriate range of pricing for 2003 to 2013.

In the meantime, while the case is in dispute, the Canadian Income Tax Act requires certain companies to pay 50% of the tax associated with disputed reassessment, including interest and penalties, at the time of the reassessment. In addition to the net amounts we disclosed previously, in December of 2013 the Canada Revenue Agency assessed a $72 million transfer price penalty for the 2007 taxation year. This is the first transfer pricing penalty we have been assessed, and as with the other reassessments, we are required to pay half, or $36 million, upfront. This penalty is not the result of anything Cameco has done differently.

In December, as expected in accordance with the five-year lag we have been facing, we also received the reassessment of our 2008 tax filing, which resulted in us paying an additional $44 million in January 2014. So to-date, we have paid a net amount of $103 million to the CRA. If we are successful in our case, as we believe we'll be, we would expect to receive the full amount back along with any other payments made while the case is in dispute.

To help you understand the overall picture, we have updated our disclosure to include the 2013 tax year using the methodology we believe that the CRA will continue to apply. I should point out that these are estimates only, since actual amounts will depend on the income reassessed in each year and the availability of elective deductions and tax loss carryovers. And I want to emphasize that we do not believe this will be the likely outcome or that the ultimate resolution of this matter will be material to our financial position, our results of operations and our cash flows in the years of resolution. Based on our view of the likely outcome of the case, we expect to recover the amounts remitted.

I hope this helps clarify the issue for you. Unfortunately, we can't tell you any more than we have today or what is in our MD&A as this is a case currently before the court and it would be inappropriate to do so. We will update you if any material changes arise, but we don't expect to have anything to report until we have a decision. The 2003 assessment is expected to go to trial in 2015 and we expect to receive a decision in 2015 or 2016.

And with that, I'll turn it back to Tim.

Tim Gitzel

Okay, thanks Grant, and with that, we'd like to open it up for questions.

Question-and-Answer Session

Operator

Questions will now be taken from investors, analysts and the media. In order to respect everyone's time on the call today, we will take your question and allow one follow-up question, and if you have further questions, please return to the queue and we will get to them after the others have had their chance. (Operator Instructions)

The first question is from Ben Isaacson with Scotia Bank. Your line is now open. Please go ahead.

Ben Isaacson - Scotia Capital

You've moved away from a fixed 36 million pound target by 2018 in order to retain some flexibility. Can you talk about how you rank your projects? In other words, as production does come on, what can we expect to see first? And then as a follow-up to that, with the Bruce Power sale, the $450 million, you talked about using that to kind of further your uranium production, but obviously given how you're moving away from this 2018 target, can you reconcile those two statements?

Tim Gitzel

I appreciate the question. Clearly we don't think that setting a 36 million pound target on the wall is a good strategy in a 35 pound market, and that's what we really wanted to go away from. That doesn't mean we're not still growing. We mentioned I think in our MD&A that we're going to focus on our Tier 1 assets, clearly Cigar Lake, ramping that up over the next years to be 18 ml pound capacity, McArthur River, you heard the results for this year, a great mine, we are looking to move that up to 22 million pounds over the next few years. So we are focusing on that and watching the market.

And we've got, as you know we've said it many times, a great [indiscernible], a great suit of projects, we've got Yeelirrie, we've got Millennium and others, and we will watch as the market improves which we believe it has to going forward, when the right time is to pull the trigger on some of those. So, that's the strategy we're going after now.

We have a solid balance sheet with the sale of Bruce. Once that's closed, it will be a couple of months I think before that's closed, we will have I think maximum financial capacity to weather what's now a fairly uncertain market, but it will give us the flexibility to move forward when we need to. So that's where we are today. I think we're in solid shape and I'm really quite pleased with the direction we're taking.

Operator

Thank you. The next question is from David Talbot with Dundee Capital Markets. Your line is open. Please go ahead.

David A. Talbot - Dundee Capital Markets

Couple of things today, just starting with Port Hope, the CNSC has recently asked you to hold conversion in Port Hope. Now, we know the conversion sales are down next year. Are these two items related or do real sales for next year reflect the softer market?

Tim Gitzel

I don't think they're – they're not related at all, and I'll get Bob just to say a few words about the instance we had at Port Hope which is now just being resolved. So it's just a softer market in the conversion business for 2014 but not related to this last incident. Bob, do you want to…

Robert Steane

[There we have seen] (ph) the [indiscernible] in Port Hope were a result of a valve control malfunction. The plant was under control, safe and sound for all of the events. Our operations stopped the plant and we're in the process of working through what had happened and rectifying it, the circumstances. The CNSC then asked us to have their approval before we restart and we're in the process of going down that path and anticipate these starts in the relative near future.

David A. Talbot - Dundee Capital Markets

Okay, so no [indiscernible] during capital issues there as well, it's something like you could just take care of out of pocket if you will?

Robert Steane

No actually, it is a maintenance item, it is no significant capital, there are no modifications to the plant required, it's some reconfiguration of the instrument control system, so it's a software reconfiguration essentially.

Operator

Thank you. The next question is from Steve Bristol with RBC Capital Markets. Your line is open. Please go ahead.

Steve Bristol - RBC Capital Markets

My question is on the costs. You had substantially higher costs in the quarter due to unfavorable purchase contracts. The cash cost purchase for uranium was C$37.26 a pound. Do these contracts still exist, and if so, how long do they run until? And just adding on to that, do they typically affect your results in Q4?

Tim Gitzel

Steve, I'm going to ask Grant Isaac to comment on that.

Grant Isaac

Steve, thank you for the question. I think I would just step back and note that our cost of sales were actually right in line with guidance that we put out at the beginning of the year and then reconfirmed again in our Q3 disclosure. We had said at that time that our average unit cost of sales would be up to 5% higher than the 2012 number and they came in 3% higher. And what was happening there is obviously we did have some purchases come in. These were some profitable back-to-back arrangements that we were able to enter into as well as some long-term supply, uranium supply agreements that just came due in that Q4 period, but ultimately the year settled out from a cost point of view precisely where we had guided, and so no surprises there.

Steve Bristol - RBC Capital Markets

So I guess this is already included in your guidance anticipated, and so I guess the question is, if a similar thing happens next year, where these contracts are sort of deferred to Q4 and that's when they are all settled?

Grant Isaac

So our guidance for the full year 2014 is actually the same guidance that we had last year, it's our average unit cost of sales up to 5% higher in this case than the 2013 end numbers, and this is based on our view of our activities in the 2014 year and that includes obviously some purchasing activity as well as the production activity.

Operator

Thank you. The next question is from Oscar Cabrera with Bank of America Merrill Lynch. Your line is open. Please go ahead.

Oscar Cabrera - Bank of America Merrill Lynch

Just interested in hearing what changed from Q3 of last year to now, like what was the main thing that you saw different in the market to change your views from having a target in 2019? I mean focusing what happened in March 2011 and I think a number of chorus of uncertainties, so was there any specific reason you changed your target?

Tim Gitzel

Oscar, I'm not sure there was any one thing, there's probably a series of things, and I think the Japan – we watch Japan every day here, including the election on the weekend in Tokyo, and in Tokyo which is probably maybe a better news piece, but clearly you'll recall, if you wanted to ask just one year ago what we said about restarts in Japan, we said there would be some back on, we were wrong about that and we quit predicting on that because we just don't know. So taking longer in Japan, even though we see it moving forward, NRA in place, Tanaka [indiscernible] is in charge and there's a bunch of units lined up to come on.

But Japan taking longer, I think the U.S., we're watching that pretty close as well and we're in close contact, we saw some not very positive news at Exelon I think on Friday or last week, just the competition with gas and the markets are a bit goofy if you like down there and they could be under pressure to maybe close down some more units.

And so it's just a year on the supply side, significant supply, it seems to hang in there if you keep supplying into a $35 market. So there's probably the combination of a number of things like that that just said, you know what, we like the long-term fundamentals of this market and when you see today consumption at about 170 million pounds going to 240 million I think is our estimate over the next 10 years, that is good growth I can tell you. We are excited about that. It's just that there's near to medium term is still foggy and we've got to just, we're going to fight our way through it, but I'll tell you we'll be in good shape when the market does turn.

Oscar Cabrera - Bank of America Merrill Lynch

All right. And then for follow-up, just on Cigar Lake, can you tell us what the remaining CapEx that you have to spend there, and you still confident you can bring commercial production out of the mill there in the second quarter?

Tim Gitzel

So I'll speak to the second part while Grant is looking for a number for the first, but yes, we are confident. The mining piece is going well for us, we were happy to cut that first cavity of ore in December of last year and that continues and we've been working with AREVA closely on the mill and the word there is that Q2 2014 for first production from the mill, so no change there. And I'm just looking at Grant to see if he has a number.

Grant Isaac

Oscar, we spent to-date $1.1 million in capital at Cigar Lake and we have a remaining – $1.3 billion, sorry, rounding down of course, and we're looking at about $1.3 billion our share. So we do have some remaining CapEx to spend for 2014. We estimate our share of CapEx to be about $130 million and that includes some work on the McClean Lake mill, so obviously coming to the end of this project. These are capital spends that really have to do with kind of surface installations remaining at Cigar Lake as opposed to the underground facility. So, essentially the construction program is complete underground.

Operator

Thank you. The next question is from Greg Barnes with TD Securities. Your line is open. Please go ahead.

Greg Barnes - TD Newcrest

Tim, the production targets, when I add up roughly 24 million pounds this year Cigar, your share will go to 9 million pounds over the next two or three years, the cost of expansion of your share roughly 3 million pounds I think, I guess you're into the 34 million pound figure range in three or four years anyway. Is it not?

Tim Gitzel

Yes, if everything remains as, Greg, that's where we would get to but we want to maintain the flexibility on that to see what the market is going to require from us. So yes, that's our plan as to ramp those up, McArthur and Cigar as you say. I think our share, if we go from about 18.7 at McArthur to 22, I think our share is a little bit less, but yes, we – if the market calls for it, we'll move to those numbers.

Greg Barnes - TD Newcrest

Okay, and the decision to drop that target, is that a message that's focused more on the utilities kind of the idea, if you're not going to support the price, then we're not going to produce the pounds, so you better do something about the price, or is it really your view that price will stay lower for longer?

Tim Gitzel

I guess people can read into it what they like. Like I said, I just didn't think that we don't think having a 36 million pounds hard target by a certain date in a $35 market was a good strategy, and quite frankly and you see others it's tough, $35 is not a price that even existing producers a lot of them can hit, never mind to incentivize new production. So we just came to the conclusion here that we want max flexibility. We think we've got great world-class assets, Tier 1, both operating and in the [indiscernible] and that we'll watch what the market does and then we'll respond accordingly.

Operator

Thank you. The next question is from Tyler Langton with J.P. Morgan. Your line is open. Please go ahead.

Tyler Langton - J.P. Morgan

I think you guided the 2014 production was 24 million pounds but then you gave sales on guidance as 31 to 33, can you just talk about I guess where that additional supply would come from, what the cost associated with look like and then on sort of the selling price if it's tied to anything?

Tim Gitzel

We've done that for quite a while I think had the sales target tied in our production targets, and as you know in the past, the big makeup piece for us was the HU obviously which has gone now. So as we said before, we still have some of those problems I think from last year to still this year, we have some purchase agreements in place, we have the ability to flex our inventory a bit. And so all those – I'm looking at Ken Seitz to see if he's any additional comments to that. Ken, do you want to add anything to that?

Ken Seitz

No, I think that's it Tim. We're just watching how Cigar Lake ramps up this year in terms of when the moving parts bringing more production into our portfolio, but then leaving ourselves some room for market opportunities as well. We always say that we're in and out of the markets, buying and selling when we see opportunities to do so, and so we expect we'll do some of that this year, and so you add that up with discretionary use of inventories, production and opportunities, compare that to commitments on the books and it puts us in that range.

Tyler Langton - J.P. Morgan

All right, great. And then just I think with Cigar Lake, the ultimate cash cost at full production [ROE] (ph) $18 to $19 range, could you just kind of give any thoughts on what the cost would look like for the first couple of years in the initial stages, how much higher they might be?

Tim Gitzel

So Grant, you're going to comment on the last piece. I think we left sort of a piece of…

Grant Isaac

Tyler, just reflecting on the cost part of your question, I think you can refer to the guidance, the outlook for 2014 on our average unit cost of sales, because remember we use that single bucket inventory approach, and so all our sources, both purchased and produced go into the same bucket. So when we guide that our average unit cost of sales up to 5% higher than our 2013 number, that's also reflecting the purchases that we have going on site too. So just wanted to jump in there and answer that cost question.

Tyler Langton - J.P. Morgan

Cigar Lake cost?

Grant Isaac

Yes, with respect to Cigar Lake cost, really what will happen ultimately is the decision to declare commercial production that will be done when the asset is running in accordance with the mine plan, using the mine methodology that we have in place, and once that reliable declaration is there, we will see Cigar Lake pounds coming into our financials from a P&L point of view and obviously it's going to be over a small denominator. I mean we're guiding [1 million to 3 million] (ph) pounds for 2014, so the first pounds that appear will be higher cost, no doubt about it, as we ramp up to that full production. What exactly that's going to be, I don't know. I think our technical report that you were referencing suggest somewhere around $60 a pound for those initial pounds to come in, but as you say and as you note from the technical report, it does ramp up to like the mine operating cost of $18.60 a pound, so very exciting ramp up that's coming at Cigar Lake.

Operator

Thank you. (Operator Instructions) The next question is from Michael [indiscernible]. Your line is open. Please go ahead.

Unidentified Analyst

A little bit of a follow-up question, once again concerning the 4.4 million purchased pounds during the quarter. Could you just provide any additional color on how the purchase is done, if you have any breakdown between what percentage was bought and what percentage was contracted out for the previous quarter and if you could provide any clarity on a go forward basis as well?

Tim Gitzel

I'm going to ask Ken Seitz to comment on that.

Ken Seitz

So with respect to what percentage is bought and what percentage not, I mean we essentially are looking at opportunistic purchases within the quarter, they would be all at the prices at the time in the quarter, so you're going to assume that we're buying some materials at sort of December prices or November prices. With respect to committed purchases, we have very few that are market related committed purchases, so in other words the bulk of them would have been pre-renegotiated fixed price or base-escalated prices. And so that's the breakdown. If we look at 2014 and how it might evolve over 2014, again we could see some positive opportunity in a $35 market and we will obviously seize those opportunities when we see them, but really very few market related purchase contracts quite simply because we often find an opportunity to back-to-back them with the sales contract.

Operator

Thank you. The next question is from [indiscernible] Please go ahead.

Unidentified Analyst

Maybe for Bob Steane if I could, Bob, a little detailed question on the reserves here and you may not have the numbers at hand but I'll sort of ask it anyway, on McArthur River, and this is 100% numbers, there was about 100,000 in tons that moved from probable into proven, it looks like – and 43 million pounds went out of probable but only 25 reported to proven, can you give us a little color on what works were done to make that upgrade to proven and where in the mine that occurred?

Robert Steane

I don't have all the moving note in front of me but that was really from some of the drilling we've done and some of the expansions with some of the changes in mine planning in the existing Zone 2 and the fringes and Zone 4 coming in.

Unidentified Analyst

Okay, I appreciate that and I'll look closely when the AIF comes out. Last question on Inkai, there was some pretty big I don't know drops in tons but I won't say losses, but drops in both proven and probable that were sort of 800,000 tons that went away, there was only 1.5 million pounds, but then in probable there was about 3.3 million tons for almost 5 million pounds. What's going on there at Inkai, I know sometimes the mills don't behave like you would expect to, just give us some color?

Robert Steane

That's more the license terms and license – as we're approaching, we see opportunities and expect to increase our expansions but at the moment that's really the driving thing as we're approaching the lease extensions combined with our production by the [indiscernible] of numbers coming out.

Operator

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

Brian MacArthur - UBS

Two questions, just following up on Greg's question about the growth profile, you mentioned Cigar and McArthur but how does Inkai fit into this and how much flexibility do you have to pull back from that expansion there with all the agreements for potentially putting in a conversion plant? And the second question just for Grant, just on this tax thing, you keep mentioning 50% cash taxes. Does that continue both for transfer pricing issues as well as tax issues and does that go on for like a number of years so if this get pushed out you can continue to differ half of it so that the cash component remains at 50%?

Tim Gitzel

I will let Grant prepare himself for the tax question but just on the Inkai and the growth profile piece, I can tell you in 2013 we were delighted to both get approval and be able to produce at 2,000 ton level that we've been looking for, for some time and that mine just keeps getting better, and as they learn how those wellfields operate, that's going to be a good one for a long time for us. We are in constant contact with the Kazakhs about the future, about expansion, so I can tell you they like everyone else don't really have a big appetite at the moment for expansion in this market. They held pretty firm, they had some production increase I think at about 1,500 tons year-over-year increase in production but compared to what they've done over the last 10 years, that was almost a rounding error. So they are holding pretty tight. We are talking to them all the time about what the deal might look like regarding refinery or conversion, but right now it's not moving very quickly. So I'll say that and then I'll ask Grant to talk to the CRA piece.

Grant Isaac

Sure. The CRA disputes now really covers the years 2003 to 2008. Now it is important to emphasize we haven't been reassessed for subsequent years officially. And when we think about those years that we have been reassessed, we are required, even though it's in dispute, we are required when we receive that reassessment to pay 50% of that reassessment upfront. Up until 2013, we were able to not pay cash taxes by basically using dedications and tax loss carryforwards. In 2013 we started remitting cash to the CRA to make those 50% payment. Those 50% payments apply to the reassessed income, they also apply to in this case the transfer pricing penalty that came for the 2007 year, and any instalment or interest payments that we have to make.

So you are right in thinking that while this in this dispute, as they send reassessments, as they send penalties as in the case of 2007, we are required to pay half of that and we're just expecting that we'll be using cash to do that going forward, we will be exercising as many deductions as we can but those were – we've drafted a lot of those out of the 2013 period. So I hope that helps, Brian.

Operator

Thank you. The next question is from Ralph Profiti with Credit Suisse. Your line is open. Please go ahead.

Ralph Profiti - Credit Suisse

The McArthur River request to go to 21 million pounds this year has been left out of the 2014 guidance. Can we assume that you're expecting that approval sort of later on in the year and therefore won't be reflected this year and is it possible that we should factor in this type of rolling forward 21 million pounds every year until you get that license approval to go to 22 million pounds?

Tim Gitzel

It's hard to predict, Ralph. Thanks for the question but we – the regulatory process is what it is, we have to go through it. We think we are in good shape as far as that goes but we will wait to see what the regulator has to say about that. In the meantime, we've been using up that what we call flexed production ability that we've had at both McArthur and Key Lake and we are running into the end of that, so we'll see. We've put our number out, we'll see how the regulatory process goes and whether we'll get approval but I don't think you can assume it will be 21 million pounds. We wouldn't make that assumption until we see regulatory approval and we are also looking to over at Key Lake get approval, environmental assessment approval and then licensing approval on an expansion to 25 million pounds and that's in the works as well. So couple of pieces in the regulatory [hopper] (ph) if you like and we'll just wait to see how they play out.

Ralph Profiti - Credit Suisse

Okay, and are you any more confident in the timing of the approval now that it seems like the Canadian Nuclear Safety Council has sort of switched or changed the assessment process in terms of which department it goes through?

Tim Gitzel

We just continue to try and comply with all of the requirements that we have. We were delighted I tell you, one thing that got a bit overlooked in 2013 is that we received through a good work of Alice Wong and her team on the shack side and then the operations just through the good operations, there are ten-year licenses for McArthur River/Key Lake, Rabbit Lake, we got an eight year license for Cigar Lake, that is huge, and I think that's a testament to how safely and environmentally responsibly the operations have been going. So, we think we are in good shape with the regulator, we never, never take it for granted, not for one minute, and we'll go through the process as we have to on both McArthur and on Key Lake and we hope it will turn out positively.

Operator

Thank you. The next question is from John Tumazos with John Tumazos Very Independent Research. Your line is open. Please go ahead.

John Tumazos - John Tumazos Very Independent Research

Did the 20 million pounds of contracts in the past year roughly resemble your normal geographic mix, just the one-tenth of normal, or were there particular regions that signed and didn't sign? I'm wondering whether we should interpret that some utilities are worried they're going to operate or worried about the price thinking the contract price might converge to the spot?

Tim Gitzel

It's Tim. Thanks for that question. That was very [straightened] (ph) for us, that number. The amount or lack of amount if you like of long-term contracting in 2013, just the numbered was striking. Ken, I'm not sure we've dug into where it came from, I'm not sure we know exactly where it came from, but it must've been just about across the board that contracting was down, but Ken, I'll ask you to speak for that.

Ken Seitz

Yes, absolutely. And so John, Tim said the number was so small in 2013 that it's hard to imagine it represented a sample of our customers from across the world sort of fitting into that number. In fact it was really just a few contracts and so it is certainly not the case that in terms of proportion and where we would see demand coming in a normal year while that was not 2013. Obviously Japanese are not buying and so that's one region that certainly is not in the market, but for the rest of the world it's just too small a number to say that there would have been a representative sample there.

Operator

Thank you. The next question is from David Talbot with Dundee Capital Markets. Please go ahead.

David A. Talbot - Dundee Capital Markets

Cameco is ready to take advantage of some of these opportunities as they present themselves. Amongst other things you sort of have a choice between uranium purchases and uranium project M&A, the latter perhaps having a longer time horizon and maybe being a little bit harder to value, but how do you guys prioritize between these two items? Knowing you guys don't really need pounds on the ground right now, what might meet your M&A criteria?

Tim Gitzel

I'd say on the other side, uranium purchase, we're always in [indiscernible] of the market, Ken and his group are looking for pounds and so we watch that very closely. On the M&A side, we're very pleased with the deals we've made over the past couple of years getting that chunk of Millennium from AREVA that moves us up to about 70% control. We really like that project, that's going to be a good one. Yeelirrie is going to be a wonderful project for us going forward. So we're in pretty good shape.

You see our reserves and resources each of them just around the 0.5 billion pound mark, add them together and we're in pretty good shape there. So I think we are happy where we're at today. What we want to see is the market improve, that would be the best thing for us, so we could bring on some of these projects that we have in the wings.

David A. Talbot - Dundee Capital Markets

Okay, so should we read through that perhaps incremental production you necessarily wouldn't be interested in as long as you've got that cash sitting on the balance sheet doing what it needs to do at this point?

Tim Gitzel

Yes, we're just focused as we said on our existing operations, trying to make them as lean as we can, as productive as we can. We've got a little bit of swing movement with McArthur, Cigar obviously a big, big focus. I can tell you everyone around this table is absolutely focused in on Cigar and making sure we commission that one safely and get that ramp-up going. For now that's where our focus is. If the market improves, we will have to make some decisions on other projects, but for now that's our focus.

Operator

Thank you. The next question is from [Michael Wasserman] with [indiscernible]. Your line is open. Please go ahead.

Unidentified Analyst

I'm trying to understand where you as the company and the industry might stand hypothetically under a very negative scenario, three or four years from now, for example if there were no progress in Japan, if the price of natural gas stayed under $4.50 and if the price of uranium stayed under $35, where do you think things would be and what do you think your mindset and balance sheet would look like at that point?

Tim Gitzel

We're in really good shape. You know we have a contract portfolio that we are quite happy with now that sees us, saw us last year at least closing on $50 a pound in a market that's showing about $35 on the spot market and we are in good shape. If you follow the table through in our MD&A, you will see we're under pretty good cover for the next several years. So we're happy with that. We're also happy with the fact that we have Tier 1 assets. You talk about assets I think at McArthur, I think of Cigar and Inkai, all under $20 pound operating costs at full production. So we think we're in pretty good shape to weather a storm.

We don't see that storm, but we have to be ready for it as you say. We see it the other way. Chinese today are about 20 reactors in operation, 30 under construction. They say they'll have 60 by the end of the decade with another 30 under construction at that time. That sounds pretty good to us. That fits in our 93 net new reactors over the next 10 years. So we hope for the best and plan for the worst I guess and that's where we're at today.

Unidentified Analyst

But where do you think the rest of the industry would stand at that point under that hypothetically negative unlikely scenario?

Tim Gitzel

You have to check with them and see – we really concern ourselves with Cameco and what we will look like under numerous scenarios and I think we're in pretty good shape under any of those scenarios, Michael.

Operator

Thank you. The next question is from Emily Meredith with Nuclear Intelligence Weekly. Your line is open. Please go ahead.

Emily Meredith - Nuclear Intelligence Weekly

I just have a question on the Bruce Power sale announcement. You all say that the sale will help you focus on the core uranium business, are you looking at acquisitions in other aspects of the [same] (ph) cycle or is this really uranium mining that you [are actually well] (ph)?

Tim Gitzel

I think as we said, we're really focusing on uranium. We like the supply demand fundamentals that we are seeing lining up even though it's taking a bit longer than we had thought and hoped the response might be a bit sharper, and so we are teeing up with that, we think we've got some great assets that I've mentioned, McArthur, Cigar, Inkai, our Rabbit Lake and the U.S. operations are producing well for us this year, and then we've got Millennium, we've got Yeelirrie in the wing. So I think we're lined up well for that and we are just waiting for the go signal on those.

Emily Meredith - Nuclear Intelligence Weekly

And then can you just quickly clarify the earlier response to the question on Inkai reserves and explain was it by license extension that's causing some of those reserve numbers to drop out?

Tim Gitzel

I'm going to let Bob again, but you have to – in cases like that where we have a fixed term, a lease agreement to a fixed date, and you have a production rate approval at a certain rate, you can only count as reserves and resources the number that fit within that. So you may have way more resources than that but you have to do the math on your approved production rate and your lease term. And so I think that's what Bob was referring to.

Operator

Thank you. The next question is from [Rudy Miller] (ph) with [indiscernible] Asset Management. Your line is open. Please go ahead.

Unidentified Analyst

I have a question on HU down-lending and I'm just wondering is any still occurring in Russia or the U.S. or perhaps another country?

Tim Gitzel

We saw the end of the agreement, we were over in Canada and we were over in St. Petersburg in November of last year, watched the last boatload of HU sail for the U.S. and we were at the port of Baltimore to see it arrive in December and celebrated the arrival of that. It's a happy-sad piece for Cameco. We've done quite well off of that, yet it's also brought 24 million pounds a year onto the market, that is now going to have to be replaced with fresh production. So are they going to do more? They've told us they are not and we believe them, we haven't seen any indication that they will. There is no agreement and I quite frankly maybe underestimated the complexity of the agreement we were operating under, that thing was highly negotiated over probably five or six years, backstopped by the Russian and U.S. government, and so that one is over. So if they are doing it, we are not aware of it and we haven't been advised of any plans for them to do that.

Operator

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

Oscar Cabrera - Bank of America Merrill Lynch

Thanks for taking my follow-up. Just want to concentrate now on the royalties in Saskatchewan, significant changes and wanted to hear your side [indiscernible] how should we think about the reduction on capital cost, is that all of the capital you're spending on your mines or is that just developmental capital, can you comment on that?

Tim Gitzel

I'm going to ask Grant to comment on the royalty side.

Grant Isaac

So, brand-new as you note Oscar, the royalties were announced in the March provincial budget in 2013 and finally came into effect in January of 2014. So because they are new, I can't speak with absolute certainty over what the profile looks like but I would say that there is a broader range of eligible spending that is allowed in this profit-based royalty system, and so it does include a broader range of CapEx that applies obviously to growth sustaining or replacement capital as well as CapEx that we spend in order to install infrastructure in Northern Saskatchewan that others can leverage off as well as spending as it applies to our exploration program. So the royalty program is very good news from an investment point of view in Saskatchewan over the long run here, I think it's a 15 year period that's it in place for. So, we're very excited about it and it's a good news for Saskatchewan.

Oscar Cabrera - Bank of America Merrill Lynch

And then if I may just follow it with another question, the 50% that you kind of dealt for the next couple of years, how does that work thereafter, is it you just apply around the number or is there like a fixed percentage that you can – just trying to figure out how we can model that going forward?

Grant Isaac

That's a great question. Obviously as we understand that pattern better, we'll certainly disclose it. It wouldn't surprise you that in coming up with a transition plan from an investment unfriendly regime to an investment friendly regime, it was important for the province to try to find a bit of neutrality from a royalty point of view. So for the next couple of years there are some deferrals, that 50% is eligible to come back in 2016, we'll apply that in the most efficient way, but we're not there yet so we haven't seen how that will actually work, but something that obviously when we have a better line of sight on it, we'll certainly disclose that.

Operator

(Operator Instructions) The next question is from Parker [indiscernible] with [indiscernible] Capital Management. Please go ahead.

Unidentified Analyst

I want to revisit the question that was asked I think a little bit differently earlier, which is the mismatch of the orders of product from utilities versus their annual consumption. The question that was asked before if there was a regional component to that, I'll just kind of ask more generally, what do you think accounts for that, is it that the utilities think that they can source their inventories from other utilities that are shutting down or is it they are considering maybe not producing in the future or are they trying to be clever about timing, I mean at the end of the day what do you think accounts for such a dramatic mismatch of purchasing versus consumption?

Tim Gitzel

I'm going to ask Ken Seitz to comment on that.

Ken Seitz

Certainly. So, I would say we're all trying to be clever about timing and that would be true for our customers as well. I would just go back to the fact that today like Cameco well covered through that 2016 period, again utilities have done a lot of contracting in previous years to be fairly well covered in this timeframe. So demand continues to be somewhat discretionary as evidenced with 20 million pounds last year. And so in this discretionary demand environment and in a low-price environment, I think our buyers are looking at their own inventories, looking around the markets and there is no shortage of material in the spot market, should I need some I can certainly go to that market and pick some up, and wait and see how the market unfolds, at the moment being rewarded for watching these things out of the market and watching the uranium price drop.

And so until there is movement on one side or the other of the equation, on the demand side or the supply side, indeed we're seeing some movement on the supply side and Cameco is participating in that, but until we experience some tightness there, I would say then – and as long as demand is somewhat discretionary, we have this little bit of a [hand-off] (ph) between producers and customers recognizing that of course utilities will need to step back into the market at some point here, we can't play this forever, but that's what we saw happening in 2013.

Unidentified Analyst

So if I could just kind of clarify a follow-up on that, so what you're saying is you believe it's them just trying to optimize the price that they pay and moving their timing on the edges to do so, it's not maybe a harbinger of utilities thinking there's a likelihood of not producing in the future and therefore tailoring back their inventory builds?

Ken Seitz

I think what we all can agree on is that we're in an environment where the demand line is upwards and sloping to the right, and so, no, I don't think it's a case that looking at inventories thinking that those are going to be growing, I think it's more as you say optimizing the timing of purchases just looking at their own inventories, inventory policy, how that might be flexed, their view of the market and their own balance sheets and saying when makes the most sense to buy some uranium, and it wasn't 2013, we'll see how 2014 evolves.

Operator

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

Tim Gitzel

Thank you, operator, and thank you to everyone who has joined us on the call today. In closing, I'd just like to emphasize that providing value has always been and continues to be at the core of our strategy and that is what drives our decision-making and we continue to do what we have always done, and that is putting our experience, knowledge and drive to work to position the Company for continued success. That means watching the market closely, delivering strong production safely and responsibly, and always looking for ways to be more efficient. I have to say I'm very pleased with the progress we made in these areas in 2013 and I'm confident we will continue to deliver on our goals in 2014. So again, thank you for joining us today and have a great day.

Operator

Thank you. The Cameco Corporation fourth 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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