Cameco Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: Cameco Corporation (CCJ)

Cameco (NYSE:CCJ)

Q1 2014 Earnings Call

April 29, 2014 1:00 pm ET

Executives

Rachelle Girard

Timothy S. Gitzel - Chief Executive Officer, President and Director

Grant E. Isaac - Chief Financial Officer and Senior Vice President

Kenneth A. Seitz - Chief Commercial Officer and Senior Vice-President

Analysts

Ben Isaacson - Scotiabank Global Banking and Markets, Research Division

Ralph M. Profiti - Crédit Suisse AG, Research Division

Oscar Cabrera - BofA Merrill Lynch, Research Division

Greg Barnes - TD Securities Equity Research

Edward Sterck - BMO Capital Markets Canada

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

David Snow

Operator

Good day, ladies and gentlemen. Welcome to the Cameco Corporation First 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

Thank you, Mark, and good afternoon, everyone. Thank you for joining us. Welcome to Cameco's First Quarter 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; Alice Wong, Senior Vice President and Chief Corporate Officer; and Sean Quinn, Senior Vice President and Chief Legal Officer and Corporate Secretary.

Tim will begin with comments on the quarter and the industry. Grant will comment 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. [Operator Instructions]

Please note that this conference call will include forward-looking information, which is based on a number of assumptions, and actual results could differ materially. Please refer to our annual information form and MD&A for more information about the factors that could cause these different results and assumptions we have made.

With that, I'll turn it over to Tim.

Timothy S. Gitzel

Well, thank you, Rachelle, and welcome to everyone who has joined us on the call today as we discuss Cameco's first quarter results. We appreciate you taking the time to join us. And let me add the welcome to Sean Quinn to our senior leadership team and to this call.

I'll start today by briefly discussing our results. And then before opening it up for Q&A, I've asked our Chief Financial Officer, Grant Isaac, to give an update on the Canada Revenue Agency litigation.

Let me start by saying we had a strong quarter to start 2014, driven by increased sales over the same period last year and an average realized price that continues to outperform spot price. The 35% bump in sales is a bit of a change from last year, when deliveries in the first quarter were lighter than previous years. But the cause is the same, that is that our customers decide when in the year to receive their deliveries, which makes our delivery schedule lumpy. This year, we've received more requests for delivery early in the year.

For the remainder of 2014, we expect second quarter sales to be higher than the first quarter and remain relatively balanced in the third and fourth quarters. Our results were also affected by 2 onetime events, namely the sale of our interest in the Bruce Power Limited partnership and the fee paid for the early termination of our toll conversion agreement with Springfields Fuels. That said, it is the primarily the sale of our interest in Bruce that caused such an increase in our net earnings this quarter.

On the operations side, production decreased slightly compared to the same period last year, but we are on track to meet our annual guidance. The decrease was primarily a result of lower production at Rabbit Lake, due to lower ore grades and the timing of production stopes. That was partially offset by production in McArthur River, which was 9% higher than at this time last year.

We are happy to report that during the first quarter, McArthur River was approved for a license increase to 21 million pounds, up from the current 18.7 million pounds. This is an important step in achieving our goal of increasing production at the operation in the future. However, our license increase at Key Lake is also required, and we're in the process of seeking approval for that increase and expect a decision this year.

At Cigar Lake, I am delighted to say that we announced the startup of ore production at the mine in March, and the operation has continued to run smoothly since then. The jet boring system is performing as expected, and 6 ore cavities have been mined to date. That was an historic event for the company, and we're very pleased with the excellent work being done there.

The ore, as you know, is being shipped to AREVA's McClean Lake mill, where it's being stored until the mill is ready to process it. We have been advised that the mill upgrades are progressing well, but that processing will not happen in the second quarter. Based on the plan AREVA has in place, the joint venture is still targeting between 2 million and 3 million pounds of production this year. However, that will depend upon when the mill is able to start processing ore, the ramp-up rate they're able to achieve and, of course, the continued success of our own operations at the mine. So overall, as far as operations and sales are concerned, it was a positive quarter.

With regard to the market, there was no fundamental change to the current conditions. For the near to medium term, demand remains discretionary, while supply is performing reasonably well. And utilities requirements remain well covered. As a result, uranium prices continue to suffer downward pressure, and we do not see any reason to expect improvement soon.

There was positive news out of Japan with the approval of the new energy policy, which confirmed nuclear power will remain an important part of the energy mix. And the Nuclear Regulatory Authority further clarified the process for reactor restarts.

However, even when restarts occur, there are a number of issues that will take some time to resolve, such as the clearing of excess supply, the return to long-term contracting in meaningful quantities and, on a broader scale, low wholesale power prices, the impact of shale gas and flat electricity demand in the U.S. and in parts of Europe.

But we remain confident in the long-term fundamentals, which indicate a clear progression of growth. Today, there are 70 reactors under construction around the world, representing billions of dollars of investment and significant growth in future uranium consumption. We believe that more than 90 new reactors will start up over the next 10 years and significantly more in the 10-year period after that.

Nuclear energy continues to be an integral part of the world's energy mix because it is one of the most important tools we have to combat climate change and to provide safe, clean, reliable and affordable baseload energy to rapidly expanding economies. So we remain excited about the future and are prepared as a company to meet it head on.

Today, we continue to closely monitor market developments and to make decisions we think will ensure the best, most efficient use of our resources, so that we can weather the uncertainty 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 of the CRA issue. Grant?

Grant E. Isaac

Thank you, Tim. We thought it would be prudent to spend a few minutes on this issue today, because as we disclosed in our first quarter MD&A, the CRA has indicated that it intends to accelerate the frequency of reassessments related to our transfer pricing case. And while the total of estimated payment has not changed from what we reported in February, the expected timing has. CRA has completed their audit of our 2009 tax return, and we have received proposed adjustment to 2009 taxable income. We expect the reassessment to be issued in the second quarter of 2014 rather than the fourth quarter, as was the case in previous years. In addition, we believe CRA may complete their audit of 2010 and issue the resulting reassessment this year as well.

As we have noted previously, we would have to pay 50% of both the reassessed amounts this year, as required under the Canadian Income Tax Act. We have updated the schedule of potential payments in our first quarter MD&A to reflect the acceleration in these payments. It's important to note that there have been no changes to our view of the case since we first disclosed the issue in 2008. We remain confident that we will be successful in our case but have taken a cumulative tax provision of $75 million to date.

However, based on the reassessments we have received, we have been required to pay a net amount of $117 million to the CRA. If we are successful in our case, as we believe we will be, we would expect to receive the full amount back, along with any other payments made, while this case is in dispute. I should point out that the expected payments and timing are estimates only, since actual amounts will depend upon the income reassessed in each year, the availability of elective deductions and tax loss carryovers and the timing of the reassessments.

But 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, results of operations and cash flows in the years of resolution. Based on our view of the likely outcome of the case, we expect to recover the amounts paid. We will continue to update as any material changes arise. The 2003 assessment is expected to go to trial in 2015, and we expect to receive a decision in 2016.

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

Timothy S. Gitzel

Okay. Thank you, Grant. And with that, we would be happy to answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Ben Isaacson from Scotiabank.

Ben Isaacson - Scotiabank Global Banking and Markets, Research Division

I have 2 questions. First one for Tim. You stated in the press release that you expect little improvement over the near to medium term, and I just wanted to dig into that a little bit. When you look at the spot price decline in recent weeks, can you talk about whether that surprises you? And in your own internal planning, how do you think about the sustainability of the current price against the cost curve? And then, I guess, just kind of by extension of that, what's preventing spot from really heading down to the mid-20s over the mid -- over the near term?

Timothy S. Gitzel

Well, I think, Ben, I would say we're not really surprised. I think we pointed in February to the fact that we thought we were going to see in the near to medium term, things are going to be tough, and they're tough, I can tell you. You've watched the price. You've seen our company really buckle down in 2013. And again, this year, we say we're digging deeper, we have to in this market. We think there's a lot of material still splashing around the market. That's going to have to be taken up and will be over time. We saw some numbers this morning in one of the publications, fresh production around 150 million pounds; consumption, about 10 million or 20 million pounds higher than that. But it's still -- that gap is being filled by secondary supplies, and I think that's going to last for a while yet. I think the good news story in all of this is the longer term, and we remain very excited about that. I think we've put out numbers that by 2023, demand is going to be somewhere in the 240 million pound a year range. And if supply stays where it's at today, 150 million, 160 million pound range, we've got some issues. And so that's the future we're building toward. In the meantime, the company, Cameco, is in good shape. We have our contract portfolio in place. You see our average realized price. So yes, it's tough times right now. Your second part was where do you see it going. I don't know where it will go. I guess, as long as there's a willing seller and willing buyer at a certain price, it could go anywhere. But as I say, for Cameco, we're buckling down, we're happy with our contracting position that we have today, and then we'll continue to remain as lean as we can until we see things improve.

Ben Isaacson - Scotiabank Global Banking and Markets, Research Division

That's great. And my second question is for Grant. I understand that the CRA dispute is before the courts. But when you talk about 50% of cash taxes being due at the time of reassessment, when is the other 50% due? And would that be when the 2003 assessment trial is complete in '16, assuming an unfavorable ruling for Cameco?

Grant E. Isaac

Yes, that's exactly what would happen. It would have to go to trial. This is in dispute, and we're going through the dispute settlement provisions that are part of the Tax Court. And it would be upon that tax decision that we -- the amounts paid currently would be either returned to us; or if it was an unfavorable judgment, it would go the other way.

Operator

Our next question is from Ralph Profiti from Crédit Suisse.

Ralph M. Profiti - Crédit Suisse AG, Research Division

The first one is with respect to Cameco's realized price, both in Q1 and 2014. I'm just wondering, Tim, if you can discuss with us how much of an influence the contract floor price has played or will play. And if you can maybe quantify or give us an idea of proportionality that would also be helpful.

Timothy S. Gitzel

I'm not sure I can give you a proportionality. It's certainly played a role, as you all have seen. I'm going to pass it over to Ken. Ken, can you give us an update on that?

Kenneth A. Seitz

Sure. Clearly, we are, in some of our market-related contracts, running into floors, and it is playing a significant role in our average realized price. In terms of proportionality, I don't have that exact number with me. I can tell you that about half of our deliveries for this year will be market-related contracts. And I can tell you that the bulk of those that have floors would be floors above the current price. So exact number, I just don't have it on my fingertips.

Ralph M. Profiti - Crédit Suisse AG, Research Division

Understood, though. And secondly, with respect to the McArthur River CBA, are these discussions -- would you characterize them as active and engaged? Is there a sense of urgency on both sides to get a deal done. Is a framework close? Tim, you talked about further buckling down. Does this include your approach to McArthur River?

Timothy S. Gitzel

I'd say very active, very engaged, clearly, normal bargaining process. Those are great people, and we count on them every day. And so we're in the process. We came out of a 4-year agreement, and this is exactly what has happened in the last few times it's come up for renegotiations. So we're having good discussions with them. I think the bargaining table is very civil, and we're trying to advance. So nothing unusual there, and we look forward to an agreement at the right time.

Operator

Our next question is from Oscar Cabrera from Bank of America.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Just, Tim, I'm interested in context around your comments on gas in the U.S. and Europe. Have you heard anything from your existing clients, whereby they might be looking to reach out [ph] some of the nuclear power in either of those 2 regions and use gas?

Timothy S. Gitzel

Sorry, you said the U.S. and Europe, Oscar, whether they'd be switching on nuclear for gas, was that the question?

Oscar Cabrera - BofA Merrill Lynch, Research Division

Yes, Tim, that's -- in your comments or in your remarks, you alluded to gas, and that's basically my question.

Timothy S. Gitzel

Yes. Thanks, Oscar. Clearly, in the U.S., we're watching gas. It's really an interesting piece. We've been watching it closely go from probably $2 or even under $2 in 2012 to today. I think it starts with a $4, maybe $4.50. We saw numbers double digits, high double digits at Christmas. So we've always said that about gas. It seems to me an abundant supply in the U.S., yet the price variations can be quite significant. And of course, if you're running gas-fired electricity, that goes right to your bill, to the consumer. And so gas is going to -- let me be clear, gas is going to play an important role in the U.S., especially the shale gas. And the quantities are there that people say there are is going to play a role in the U.S. Europe, it's certainly not the same pricing structure, as you're seeing in the U.S. And then questioning where it comes from -- we don't see today a whole lot of substitution in nuclear for gas there, but we'll see what the -- it's an economic calculation, see what the prices are. The other piece we're watching is Japan, and we watch that closely and you've heard us talk in the past about LNG and gas landed on Japanese shores at $19 or $20 a million BTUs, and that's tough to swallow. You see their trade balance eating that. And so I don't think in Asia, it's going to have as big an effect as it might in North America.

Oscar Cabrera - BofA Merrill Lynch, Research Division

That's helpful, Tim. And then with respect to Ken's comment on 50% of your sales hitting the floor, if prices continue to be weak and Japan takes a while to come back, have you considered shutting down some of your production?

Timothy S. Gitzel

Oscar, we look at our production all the time. Right now, as you will have seen, we have sales commitments in place. I think we've guided to 31 million to 33 million pounds in sales this year. And so we have set our production targets to meet those guidelines. And so we'll watch our production very closely going forward. So I'm just going to ask Ken...

Kenneth A. Seitz

Just one clarification, Oscar, just the earlier comment, it was 50% of our deliveries being market-related for the year, and the bulk of those deliveries that have floors, hitting floors. So you had mentioned 50% hitting floors. That wasn't -- that's not the case.

Operator

Our next question is from Greg Barnes from TD Securities.

Greg Barnes - TD Securities Equity Research

Ken, is the market, the spot market, really suffering from the banks that have moved out of trading uranium? Has the liquidity really dried up that much, and that's why we're seeing this dive in the spot price?

Kenneth A. Seitz

Greg, certainly, that is playing a role. And -- but I'd say it's among other things that are going on at the moment. Once again, we're seeing very little demand in the spot market. We have enrichers underfeeding, which given the situation in the enrichment market, we expect will continue for a little while yet. We see supply performing reasonably well. We're waiting for restarts in Japan. There have been, as you know, some other shutdowns in the world that have like to -- maybe just potential material available for sale. Exactly as you put it, there's a couple of financial players that are no longer in the market and doing the carry trade, putting current supply into the mid-tier market and I would also say some producers who are looking at -- who, in fact, are selling at these prices. And so absolutely, Greg, that's part of it, but I would say it's part of a number of things that are going on in the market at the moment.

Greg Barnes - TD Securities Equity Research

Okay. And Ken, the underfeeding issue, do you have any estimate or can you guess how much supply they are -- the enrichers are generating into the actual uranium?

Kenneth A. Seitz

I think we've said in the past, maybe 4 million or 5 million pounds is what we're seeing. It's difficult to say given what's happening in Russia, with respect to Russian enrichment capacity and, ultimately, supply coming out of Russia and feeding their own internal requirements because you do have secondary supplies, you have underfeeding and you also have fresh enrichment supply coming out of that country. So today, we look at, it's in the 4 million or 5 million pounds. Could that increase? It probably could increase a little bit. And again, we're awaiting to see if the things like Japan and the restarted reactors where not only will they be consuming uranium again, but also enrichment.

Operator

Our next question is from Edward Sterck from BMO.

Edward Sterck - BMO Capital Markets Canada

Just a couple of questions here. I'm further going back to the CRA disputes again. I was wondering if it would be possible to provide some guidance on what the possible payouts might be under the 50% type rule ahead of a judgment, when interest and installment penalties are included.

Grant E. Isaac

Yes, it's a good question. It's not information we put out there, because there actually is difficulty with us, trying to determine what those amounts should be. You'll recall, we disclosed the transfer pricing penalty that was set for 2007. That was a bit of a surprise to us, as previous years hadn't been disclosed. We need to wait until we actually see those actions taken. So what we stuck with is just the payments anticipated under the reassessment, should they continue to progress in the fashion that we've seen so far. Obviously, you'd appreciate it's very significant voluntary disclosure on our part to be out beyond what we've actually been reassessed for. And to go any further, I think it would just be too far of a stretch.

Edward Sterck - BMO Capital Markets Canada

Okay, fair enough. And just a second question on the CRA disputes. I think I'm correct in saying that the court date -- the initial court date has been pushed back a couple of times. And obviously, the CRA appears to be accelerating their reassessment activities. Is it -- am I going, perhaps, a bit too much of a falling foul with a conspiracy theory here to imagine that the CRA is trying to put pressure on Cameco to settle out of court with these sorts of actions?

Timothy S. Gitzel

You'd have to check with them on that, Ed. We're just dealing with the cards as they come in. As Grant said, we think -- earlier, we think we have a very strong position. We're doing everything necessary to defend our position. We'll see how it turns out.

Operator

Our follow-on question is from Mitesh Thakkar from FBR Capital Markets.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

My first question is just on the state of the spot markets. When you see out there, how much do you think the supply needs to get rationalized to kind of achieve that balance here a little bit? And do you think there is an opportunity for you to kind of like take the leadership and maybe turn some of your uncontracted volumes?

Timothy S. Gitzel

Yes. Well, thank you, Mitesh. We -- as I said earlier, we have supply obligations in place. We have a portfolio of contracts that we need to feed our production into. We guided for 31 million to 33 million pounds of sales this year. And so we adjust our production accordingly for that. And so I think that's -- our #1 concern is that we, always has been, we meet our delivery obligations. We always have and we always will. So other than that, we're watching the market as well. We think there's a significant material, as I said and as Ken has said, floating around still available in the market. But it's a matter of time before that gets swept up, and then you're into more of a production versus consumption arena, and we look forward to that day, I can tell you.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

And do we have kind of an estimate on how much oversupply we are currently in?

Timothy S. Gitzel

I don't have those numbers. As I said, secondary supplies, up to the end of last year, I think, were significant. Last year, with the end of the HEU agreement, that took 24 million pounds per year. We said that was one of the most reliable sources of supply in the market -- off the market. So there still are odds and sods out there, but I think those are going to diminish over time. And people are going to have to watch really closely the supply situation versus the demand. And as I said, when I look at the numbers going out to 2023, and you can do your own calculations, but just on the number of reactors we see coming on and extrapolating from that, the uranium demand going today from about 170 million pounds to 240 million pounds, supply today at about 150 million, 155 million pounds flat, and I can tell you, there's not a lot of investment in new projects when you see the prices where they are today. Something has to give on that, and that's what we're preparing the company for.

Operator

[Operator Instructions] Our next question is from David Snow from Energy Equities Inc.

David Snow

I don't want to be a radical and put any optimism on this, but it seems that when I quickly checked the compound growth rate, you're looking at a 3.5% growth in 10-year consumption. And isn't that a boost in the 1% or 2% that you've been using in the past?

Timothy S. Gitzel

David, no. I think we've actually said 4%. 3% to 4% has been our numbers. So that -- I think that's consistent with the growth that we're seeing, both 435 reactors operating -- operable in the world today, 93 net new reactors over the next 10 years, I think we've done the math on that much more, calculated the math. But that leads us to believe that the growth in uranium demand will be about 3% to 4% a year over the next 10 years.

Operator

Thank you. Ladies and gentlemen, this will conclude today's question-and-answer session. The Cameco Corporation's First Quarter Result Conference Call has now ended. Please disconnect your lines at this time. We thank all who participated, and have a great day.

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