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Cameco Corporation (NYSE:CCJ)

Q1 2007 Earnings Call

April 30, 2007 12:00 pm ET

Executives

Bob Lillie - Director of Investor Relations

Gerry Grandey - President and CEO

Kim Goheen - SVP and CFO

George Assie - SVP, Marketing and Business Development

Tim Gitzel - SVP and COO

Alice Wong - VP of Investor, Corporate and Government Relations

Analysts

Fadi Shadid - Friedman, Billings

Brian MacArthur - UBS

Orest Wowkodaw - Canaccord Adams

Raymond Goldie - Salman Partners

Greg Barnes - TD Newcrest

Joel Franks - Private Investor

John Redstone - Desjardins Securities

Borden Putnam - Eastbourne Capital

Bernard Picchi - Wall Street Access

Ian Howat - National Bank Financial

Terence Ortslan - TSO and Associates

Murray Lyons - Saskatoon Star Phoenix

Presentation

Operator

All participants please stand-by, your meeting is about to begin. Good morning ladies and gentlemen. Welcome to the Cameco Corporation's First Quarter Results Conference Call.

I would now like to turn the meeting over to Mr. Bob Lillie, Director, Investor Relations. Please go ahead, Mr. Lillie.

Bob Lillie

Thank you, operator. Good morning everyone. Welcome to Cameco's first quarter conference call to discuss the financial results. Thanks for joining us. We're pleased to have four of Cameco's senior executives with us today.

They are Gerry Grandey, President and Chief Executive Officer; Kim Goheen, the Senior Vice President and CFO; George Assie, our Senior Vice President, Marketing and Business Development and Tim Gitzel, Senior Vice President and Chief Operating Officer. Also, with us today is our colleague, Alice Wong, Vice President of Investor, Corporate and Government Relations.

Each of the speakers will touch on their highlights of the quarter and then we'll get right to your questions. Today's conference call is open to all members of the investment community and the media. Please note during the QA session, we would ask that you ask one question only, receive a response from management, and then you may ask one follow-up question. If you have additional questions, please return to the queue until others have had an opportunity to participate.

Please note that the statements made during this conference call by the Company regarding its objectives, projections, estimates, expectations or predictions maybe forward-looking statements within the meaning of applicable securities laws and regulations. The Company cautions that such statements involve risk and uncertainty and that actual results may differ from those expressed or implied. Important risk factors are outlined in the Company's annual information form, dated March 30. 2007.

With that, I will turn it over to Gerry.

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Gerry Grandey

Okay Bob. Thank you and I'll add my welcome to everybody. We've now issued our financial results for the first quarter of 2007 and for those of you who are new to Cameco or have not followed us closely, you might be a little bit surprised with these results appear to be somewhat inconsistent with the record setting financial performance of last year. But for those of you who have followed Cameco closely you would know that our quarterly results vary significantly and are certainly not a good indicator of our annual results.

So in order to give you some perspective of what we see for 2007, we've indicated in the quarterly report that we expect consolidated revenue to be 50% higher than in 2006. I'll leave it to Kim to discuss these results in more detail. Cameco is engaged in a growing and an exciting industry on which to focus our efforts. The nuclear industry is strong now with a promising future. New developments continue to be announced daily and people really around the globe are becoming much more confident that the potential for nuclear energy is now great. Recently the U.S. Nuclear Regulatory Commission awarded a second early site permit for a new reactor. These early site permits certify that a site is safe and environmentally suitable for a new nuclear unit. There are now a total of 33 new units in the U.S. that are under consideration for future build.

In India, one reactor began operations in February, and another is nearing completion. The country is also including in its construction plans, six large 1,650 megawatt reactors. In this month, the New York Mercantile Exchange created a little buzz in the industry, with plans to introduce an opportunity for future's trading in uranium, a commodity that is now in great demand. And that demand, really amidst tight supply has pushed up uranium prices. Shattering almost on a monthly basis if not weekly previous records and sending out a strong call for more production centers.

The market is responding. Five new uranium lines started production in 2006, more are scheduled in 2007. We estimate that in 2007, production will be approximately 13% higher than last year. And of course we've got a very much reinvigorated exploration program throughout the industry that continues to pursue new discoveries new ore bodies.

These developments and many others are pushed along by the increasing interest and demand for sources of electricity that do not pollute and do not contribute to global warming.

As uranium prices have risen, we continue to build an ever stronger contract portfolio. Our long-term orientation that combines floor prices and upside potential is building a powerful base that will handsomely reward Cameco's stakeholders for many year's into the future.

The strength of these contracts is more than matched by the diverse and large sources of supply at our disposal. Our two existing operations in northern Saskatchewan are complemented by two U.S. production centers and of course our development projects at Cigar Lake and Inkai will add when they come into production to this diversity. We also have purchase agreements for at least 7 million pounds annually through 2013 primarily from recycled Russian weapons material.

Our future is secured with more than 500 million pounds of proven and probable reserves, with several 100 million pounds of resources in some of the world's best locations that are awaiting further definition. This year we will spend about $45 million to get worldwide exploration to add to our asset base.

Before I move on from our uranium assets, I should note that the efforts to move Cigar Lake into production are progressing according to the schedule we provided in the technical report. Kim will be providing some detail on our progress. After independent expert review of the water inflow at Cigar Lake, we are now finalizing the reports that will go to our regulators in early May. We will advice you when the reports are filed and provide the opportunity to discuss the reports and Cameco's corrective actions in a conference call.

At that time, we will be able to tell you what we have learned and about our plans to make improvements. We look forward to production from the Cigar Lake mine, which will service our customers for many years to come.

And, while my remarks are focused on the uranium mining, our fuel processing plants are adding significant value to Cameco and to our customers. I'm pleased to note that our conversion and fuel manufacturing plants recently received five-year operating licenses from the Canadian Nuclear Safety Commission.

As you would expect, a strong company like Cameco operating in a rejuvenated market is building on a position of financial strength. Our conservative balance sheet and strong cash flows provide us with a financial ability and backing to pursue disciplined growth. When the right opportunities arise at the right value, we are poised and ready to build on our assets, and if the right opportunities are slow in coming, we will return cash to our shareholders.

With that I will now ask Kim to comment on our financial results, Kim?

Kim Goheen

Thanks Gerry and good morning to you all. Today, I will review our first quarter financial result and our outlook for the second quarter and year as a whole.

First quarter this year compares with an exceptionally strong first quarter in 2006, when Uranium deliveries were concentrated earlier in the year than usual. On a consolidated basis, revenue of $409 million in the first quarter of 2007 was 25% lower than a year ago. Net earnings of $59 million were 47% lower than in 2006.

Turning to our business segment, revenue from uranium business decreased by $101 million to $183 million, compared with a year ago and earnings before taxes were down 51% to $44 million. Lower revenue reflects that 48% decline in reported sales volumes due to the timing of deliveries which more than offset a 23% increase in the realized selling price. Reported sales volumes continue to be effected by the standby product loan agreement, that were put in place during the second quarter of 2006 resulting and the deferral of an additional $35 million of revenue in the first quarter.

Looking at Fuel Services, revenue and earnings before taxes were unchanged from the first quarter last year. In Nuclear generation, our pre-tax earnings from Bruce Power were $11 million in the first quarter of 2007, compared with $47 million a year ago. The decrease was a result of lower generation and higher operating cost, relating to the planned outage of the B6 reactor, they return to service April 10. Finally, turning to our Gold segment, Centerra's revenue decreased 10% from a year ago to $96 million. Lower production more than offset higher realized gold prices.

Looking to the second quarter, we expect consolidated revenue to be about 50% higher than in Q1, resulting from increased sales volumes for uranium, conversion and electricity as well as an increase in chemicals realized price for Uranium. This projection also includes recognition of $47 million in deferred revenue, as a result of the termination of two of the three product loan agreements, where 2007 as a whole, we expect consolidated revenue to be nearly 50% higher than in 2006, due to projected higher revenue from all four of our business segments with the largest increase seen in the uranium business.

Sales volumes in our uranium business are expected to be 12 million pounds in the second quarter, including recognition of 3 million pounds from terminating two product loan agreements. For the full year, we are projecting reported uranium revenues to be 90% greater than in 2006 based on the March 31 spot prices of $95 US per pound and a 6% increase in reported sales volumes.

Our average realized price will improve as a result of higher expected prices under current contracts relative to 2006. In addition, approximately 4 million pounds of uranium deliveries under legacy contracts have been deferred from 2007 to later years, thereby making available an equivalent quantity for sale this year. About one half of those pounds have already been committed to new contracts but it does not assure that the balance would be contracted for delivery this year. Our average realized price will increase on the strength of current market prices.

As we have previously discussed in 2007, we will begin paying provincial tiered royalties on sales of Saskatchewan produced uranium. We expect to pay about $15 million this year and have provided an example of the royalty calculation in our MD&A.

For the second quarter, fuel services revenue is projected to be 50% higher than in the first quarter as a result from expected increase in deliveries. At Bruce Power, there are no additional outages planned for the second quarter and unit costs are expected to be lower than in Q1 or revenues is forecasted to be 20% higher.

For the full year, our forecast remains unchanged with an expected 18% increase in revenue based on higher realized prices and a capacity factor in the low 90% range similar to 2006. For the year, we expect gold revenue to increase by 20% to 25% over 2006, based on increased production and higher prices.

In summary, the first quarter will be our weakest quarter in 2007. We anticipate a stronger second quarter and much higher revenue for the year as a whole.

I will now turn it over to Tim.

Tim Gitzel

Thank you Kim, and good morning everyone. This morning I'll make a few comments on our mining operations, our mine development projects at Cigar Lake and Inkai, the fuel services business and then close with the look at the year ahead.

First, to uranium mining. In the quarter, uranium production was 4.5 million pounds, slightly ahead of last year's first quarter and all operating sites met or exceeded the output levels achieved a year ago. At Key Lake, during January and February, there was an issue with excessive concrete dilution in ore fed, which led to poor quality effluent. This issue first cropped up in 2006 and at that time we installed sand filters, but they haven't been as effective as we have hoped. So last month, we added a hydrogen peroxide circuit and from early results we are optimistic this will improve the quality of the effluent to the standard necessary for discharge to the environment.

Also at Key Lake and after many months of discussion with the regulator, we have an action plan to further reduce molybdenum and selenium in mill effluent. The first phase of the plan is underway and is expected to be completed by the end of the year. Progress on this front is expected help advance the environmental assessment we submitted, to increase the annual license production limit to 22 million pounds at McArthur River and at Key lake.

Including the preparatory work across the ramp period, we're still a few years away from producing above our current license limit. At Rabbit Lake we're doing further drilling in the vicinity of the Eagle Point mine to test for additional resources. Earlier this year, we announced an extension to Rabbit Lake reserves, which will provide [mill fed] through 2011, but we think there is good potential to add more.

Turning now to our mining development projects, as many of you know, we filed the technical report on the Cigar Lake project in late March, on how we intend to rehabilitate the mine. A few highlights from the report include.

First, a five stage remediation plan expected to culminate in production in 2010, about two and half years later than we had originally planned. This timetable is subject to timely remediation of the underground workings and of course, we'll only be able to access their condition once the mine is dewatered and we get back underground. The dewatering is expected to be complete by the end of the third quarter subject to regulatory approvals.

Second, an increase in our share of the capital cost to $508 million. This increase is due primarily to higher construction and labor costs, increased energy costs and scope additions, such as increasing the pumping capacity and more underground freezing in areas such as, access tunnels to the production levels.

During the underground remediation program, we will continue to work on the remaining planned surface facilities including the administrative services building and the installation of mine ventilation plans, as well as facilities required as a result of the remediation such as, additional dewatering pipelines and brine lines for ground freezing. These activities represent the capital cost until construction resumes in 2008.

Lastly, it's worth noting that the classification of reserves is essentially unchanged as a result of the technical report with 226 million pounds remaining as proven reserves.

In terms of the status of the remediation work today at Cigar Lake, we've decided to drill a fifteenth hole in the reinforcement area to pour additional concrete and this drilling is now underway. When this work is completed over the next two to three weeks we will finish pouring concrete into the ramp reinforcement area and we are currently awaiting regulatory approval to begin pouring concrete into the inflow area.

In the mean time we have begun to drill four dewatering holes down to the lowest point of the mine workings near the main shaft. Once these holes are complete we will lower submersible pumps each with capacity to move 250 cubic meters of water per hour. However the required approvals for this stage of the work are not yet in place. At Inkai in Kazakhstan the project continues to progress steadily towards production with commissioning expected late this year and commercial production in 2008.

Over to fuel services the Blind River refinery, Port Hope conversion plants in Zircatec, all received new five year operating licenses form the CNSC during the quarter. Fuel services production in the quarter was 3.9 million kilograms up from the 3.2 million kilograms produced last year in the quarter.

At Blind River the plant is in a transition phase in terms of the volume of customer material stored on site. As we noted in the quarterly report this volume has been declining over the past few years and is reflecting the fact that customers have less inventory and they are delivering it to Blind River almost on a just-in-time basis. This means we have to match the plant operating schedule more closely to the supply of Uranium feed on-hand. This may lead to intermittent shutdowns at the refinery and as a result we have reduced our 2007 forecast production of U03 to 15.4 million kilograms of U down from 16 million kilograms of U. However, we have adequate inventories to keep the Port Hope and Springfields plants running on normal operating schedules. Looking forward through the year, we remain on-track to meet our 2007 original production targets with the exception of Blind River, which has been revised down about 4%.

So, with that I will pass things over to George.

George Assie

Thanks, Tim, and good morning everyone. Spot market activity in the first quarter amounted to about 6 million pounds, with about 60% of that volume considered discretionary, so, really maintaining the trend that we saw last year. It is expected that demand will remain strong through the remainder of the year; total spot volume is forecast to be in the 30 million pound range similar to the 2006 level of about 33 million pounds. Industry average spot price at quarter end was $95, which was up more than 30% from the end of the fourth quarter and more than double from a year ago. Since quarter end, the spot prices increased further to $113.

Moving to the long-term market, the average long-term price indicator at the end of the first quarter was $85 up almost 20% from year-end 2006 and also more than double from a year ago.

The current market remains active with the current estimate for long-term contracting in 2007 being about 200 million pounds. Cameco maintains the mix of both market related and fixed pricing, which is a base price escalated by inflation.

Our portfolio has traditionally reflected a 60/40 mix of market and fix-priced contracts. Rates of the last two year's 2005 and 2006, new contract volumes signed for deliveries in the future were weighted more to market related pricing with approximately 70% being market related and the remaining 30% fixed price.

Our quarterly release provides guidance on the anticipated increase on our average realized uranium prices for 2007. We had expected to update the 10-year schedule of expected realized prices at mid year. But with the dramatic move in prices to-date in 2007, we decided to provide an update in the Q1 reports.

As noted in the report, we now expect that about 4 million pounds of Uranium that have been planned for delivery under legacy contracts in 2007, will be deferred for delivery for several year's and some as late as 2014. These deferrals will allow us to place as much as 4 million pounds for delivery in 2007 at prevailing market prices. The consequence of this is that our average realized price in 2007 based on the quarter end $95 spot price is now expected to increase to about $37 almost 80% higher than the 2006 price. These prices are in U.S. dollars the percentage increase in Canadian dollars is more like 75% after taking into account changes and exchange rates.

Approximately, half of this amount has been committed for delivery in 2007. If for some reason all or some portion of the remaining volume is not delivered in 2007 then the average realized price for this year will be lower than our forecast.

I would like to note that our customers have been very understanding and cooperative in working through the impact of supply interruption and the deferrals of 2007 delivery commitments to later years. As a result of that cooperation, the increase in revenue resulted from these deferrals will help mitigate to some extent, the financial impact of the water inflow incident at Cigar Lake.

Looking to next year, other than for this Cigar Lake baseload contracts, at this time we do not anticipate any deferrals of 2008 uranium deliveries resulting from the application of the supply interruption provisions in our legacy contracts. The primary reason for this is that the decrease of production related to the Cigar Lake event has been offset by the additional reserves and production expected at Rabbit Lake for the most part preserving our overall supply capability for 2008.

Relatively a recent market event was the announcement that NYMEX and Ux Consulting have partnered to offer uranium futures contracts starting in early May. The contracts are to be financially settled based on spot prices published by Ux Consulting. These futures contracts are financial tools and do not involve physical material. At this time NYMEX estimates the contracts will be for 250 pounds of uranium and will be listed for 36 consecutive months. Ux Consulting will provide market information including prices and education while NYMEX provides electronic platform for trading on two exchanges CME Globex, a part of the Chicago Mercantile Exchange, and NYMEX ClearPort.

Market reaction to this announcement is mixed but it is early in further education of commercial market participants including ourselves is still taking place. There appears to be significant interest by financial parties while commercial parties are more wary. Some nuclear market participants are of the view that the uranium market is too small to earn futures trading but most of our hoping, it will bring price transparency.

Turning now to the UF6 Conversion market, the North American spot conversion price held firm through the quarter at 11.63 and the European spot conversion price also held firm at 11.15. In the long-term market, industry average price for North American conversion stayed steady at 12.25 and in the European market it decreased at $13 at quarter end.

And that concludes my remarks and with that I'll turn things back to Gerry.

Gerry Grandey

Okay, George, thank you very much. Now operator we will turn to questions.

Question-and-Answer Session

Operator

Thank you. We will now take questions from investors, analyst and media.

(Operator Instruction). Our first question is from Fadi Shadid from Friedman, Billings. Please go ahead.

Fadi Shadid - Friedman, Billings

Hi, guys. Question on the cost side, the new update talks about 25% year-over-year rise, the last update was 20%. Could you break that down for us, how much of that rise is the royalties and what else is in that number?

Gerry Grandey

Hey, Fadi, I'll ask Kim to go ahead and respond to that. It isn't production cost, so you'll see it's really acquisition cost of purchase pounds and royalties and these kinds of things. Kim.

Kim Goheen

Yes, Fadi, we don't actually break that information down. But Gerry's comment is correct. Production cost changes is very minimal there, it is slightly higher cost of material purchased, higher royalties based on basic royalties, the higher the price, the more your basic royalty is and inclusion for the first time of a small inclusion for tiered royalties, but it does not illustrate cash production cost, that's a small piece of the rise.

Fadi Shadid - Friedman, Billings

Of that 25%, how much do you think is just the royalties? Is that…

Kim Goheen

We just don't break that down.

Fadi Shadid - Friedman, Billings

Okay, fair enough. Thanks.

Gerry Grandey

Thank you, Fadi.

Operator

Our next question Brian MacArthur from UBS. Please go ahead.

Brian MacArthur - UBS

Good morning, I was just trying clarity on all the caveats for the new chart that you have given for realized prices, I was wondering there that says for 2008 to 2012, baseload contracts for Cigar Lake material or impacted and deliveries are deferred to the end of those contracts? Have we pushed out under supply, you just finished talking, but how you didn't have to change anything in 2008 and if we push out in this chart the assumption of when that material is going into this chart?

Gerry Grandey

George, can you respond to that?

George Assie

Yes. On the Cigar Lake baseload contract Brian, there was no change. They were immediately pushed out to the ending period. So, I don't think there is any further change that occurs in the chart as the consequence of that. And supply interruption for 2008, had not been included and it's premature for us to add in any for impacts for supply interruption in '09 and '10. So, the only year for which you are seeing supply interruption is 2007 and for Cigar Lake baseload contracts, those are pushed out to the later years.

Brian MacArthur - UBS

Right, so for 2009 and 2010 we're still running through quote the legacy lower price assuming there is going to sale by something else. Is that correct?

George Assie

That's correct.

Brian MacArthur - UBS

And then, basically what's actually being pushed out and to the backend of those contracts, what's actually being pushed out?

George Assie

Well, it's only the '07 volumes that have been pushed out.

Brian MacArthur - UBS

Okay

George Assie

For the supply interruption legacy contract.

Brian MacArthur - UBS

Right, so nothing is being pushed out in '08 to 2012 basically?

George Assie

Other than the Cigar Lake baseload contract. Those are different.

Brian MacArthur - UBS

Right.

George Assie

Those have been pushed out to the end of their term. But for supply interruption only the 2007 volumes have been adjusted.

Brian MacArthur - UBS

But then, those baseload have supply interruption that you could have pushed out?

George Assie

The baseload contracts have been pushed out. They are done. They are moved out.

Alice Wong

There are two different kinds of contracts that we are just trying to distinguish between. The kind is the baseload contracts that are, that specifically referred as Cigar's.

Brian MacArthur - UBS

Right.

Alice Wong

Those contracts have been adjusted and pushed out in the chart.

Brian MacArthur - UBS

Right.

Alice Wong

The other contracts that were protected by supply interruption we have made no adjustments.

Brian MacArthur - UBS

But effectively I thought the baseload contract had, if you want to call it "supply interruption" as well and those are and you effectively use that to push those out now?

Alice Wong

We did, yes.

Brian MacArthur - UBS

Okay.

Alice Wong

In this Cigar Lake, one that referred to Cigar Lake specifically.

Brian MacArthur - UBS

Right.

Alice Wong

Right.

Brian MacArthur - UBS

Okay. Thank very much.

Operator

Our next question is from Orest Wowkodaw from Canaccord Adams, please go ahead.

Orest Wowkodaw - Canaccord Adams

Yes, good morning. Question about your realize sensitivity chart. If I look back at Q3 last time you issued it at $100 uranium for '07 you had a realized price of $39.50. Today you are talking about deferring 4 million pounds and selling those under better market terms, but your realization only shows an increase of $0.25. I am wondering if you could reconcile that?

Gerry Grandey

Well, George can you handle that one or Kim.

Kim Goheen

Yes.

Gerry Grandey

There are so many contracts by the time you get it all digested, I am not sure you can point to any one thing but Kim give it a try.

Kim Goheen

Yeah. All right I will speak. One of the key elements of course is that back in the earlier version, we were looking at the higher sales volume. So, you had more pounds backed in being sold at a higher selling price. We are now looking at 2 million less pounds being delivered under this forecast and so you have lesser of that pick up. You also have the unfortunate impact of the sales deferrals under the product loans, where deferrals from 2006 have been taken into income this year at lower price. So, those are two of the factors which are causing us to come out at this result.

Orest Wowkodaw - Canaccord Adams

Okay, thank you. And as a follow-up, in terms of your revenue guidance for Q2, I am also having trouble reconciling that. If you are guiding to 50% or 100% increase in Uranium deliveries in Q2. Why is revenue only going to be up 50% on an overall basis, what's offsetting that?

Gerry Grandey

Kim?

Kim Goheen

Yes, we are moving in there is we have the 3 million pounds of deferrals coming forth and the cancellation of the two products going forward and that's again kind of mixing things up a little bit to produce the results its there.

Orest Wowkodaw - Canaccord Adams

Okay, thanks.

Operator

Our next question is from Raymond Goldie from Salman Partners. Please go ahead.

Raymond Goldie - Salman Partners

Thank you good morning. My first question was in the press release it suggested tiered royalties will amount about $10 million this year and I heard in the presentation just now $15 million. I wondered if you could give us an idea which is the correct number?

Kim Goheen

They are both correct.

Gerry Grandey

Okay, go ahead Kim.

Kim Goheen

Yeah, the $15 million is the payment, the $10 is the earnings impact.

Raymond Goldie - Salman Partners

Thank you, and second question I think that this one has been answered by your responses to Mr. MacArthur, you would say that all your contracts contained kind of force majeure language and the baseload contracts put in place to support Cigar Lake also contains some other provisions. But what about non-baseload Cigar Lake contracts, I am trying to distinguish between them as you were trying to do as well. If Cigar Lake were delayed for the year, how much uranium would you have to acquire to meet your contracts. I think from what you are saying, the answer is none. Is that correct?

George Assie

That's correct. The Cigar Lake baseload contracts were specific to Cigar Lake products. So to the extent there is no Cigar Lake production or it's cut back or whatever we are able to reduce the volumes under those contracts by an equable amount. Under the rest of our contracts, so if you ignore those Cigar Lake baseload contracts about 75% of the rest of our contracts also contain supply interruption, which provides protection as well. So, there is I can't think of a scenario where we are required to go purchase product to make up for further delay in Cigar Lake.

Raymond Goldie - Salman Partners

I guess I am still having trouble with understanding the difference between saying the 75% of contracts that can be interrupted in and then all contracts and then another statement all contracts contain force majeure language.

George Assie

Well, the force majeure language is just a standard language that you have in all contracts. In addition to that Ray, back in 2003 we introduced it into our contracts, into new contracts, the contracts at that time, supply interruption language, so, it goes beyond force majeure. What it says is these are our intended sources of production to the extent that, that planned production does not materialize we have the right to reduce pro-rata our delivery commitments under our contracts. So, the standard force majeure protection, but the supply interruption goes well beyond the standard force majeure protection.

Raymond Goldie - Salman Partners

Okay.

George Assie

So, all contracts have force majeure, 75% of contracts also have supply interruption protection.

Raymond Goldie - Salman Partners

Okay, thank you. I have a third question, so I will get back in line.

Gerry Grandey

Okay, thanks.

Operator

Our next question is from Greg Barnes from TD Newcrest. Please go ahead.

Greg Barnes - TD Newcrest

Yes, thank you. George it does appear that your affective sales guidance for the year has come down by at least 2 million pounds. I was just wondering why that has happened?

George Assie

In part Greg, it's because when we go into a year we are also looking to be fairly active in the market in procuring material. In this year in light of where the market sat etcetera, we don't expect to procure as much as we had planned and to some degree that's moderated our sales targets accordingly.

Greg Barnes - TD Newcrest

Is that because it's not available or you just think it's too expensive?

George Assie

Well, frankly it's not all that readily available and it's 2 million pounds so rather than continue to give guidance on something that we think is a long shot we thought we would go with our targets back.

Greg Barnes - TD Newcrest

Okay and just a quick follow-up. In the development, possibly a press release about uranium, you have mentioned feasibility activities on the Millennium deposit. I might have completely missed that, but I don't even know what the Millennium deposit is?

Gerry Grandey

I think Millennium is a discovery chemical, I think it has about 43%-44% that we have been sort of bringing along for a number of years, it's not too far from the Key Lake mill and we have been engaged in kind of pre-feasibility work. Tim, you want to elaborate on that a little bit?

Tim Gitzel

Yeah, so that's exactly what we are at. It's a project internally that we have, operate our ship of with a minority interest and we are just in the pre-feasibility stage of it. We are putting a team together internally to work on it. So it's something that will continue to work on the feasibility of and then move into the environmental approval process, which is a complicated and a lengthy process, we'll hopefully start moving that way in the near future.

Greg Barnes - TD Newcrest

Okay. Thank you.

Operator

Our next question is from [Joel Franks] a Private Investor. Please go ahead.

Joel Franks - Private Investor

Hi. Just a brief question Li, the value of the dollar Canadian and American is down to almost $11 and now because you talked about $15. How is that going to affect things?

Gerry Grandey

Kim?

Kim Goheen

Yes, when the Canadian dollar rallies like that much of our sales are denominated in U.S. dollars, so our earnings and revenues as such will decline when the Canadian dollar rallies. To the extent that we haven't got it fully hedged, we do our currency hedging program to try and smooth that the impact of currency fluctuation is out and but it doesn't cover all of the impact.

Borden Putnam - Eastbourne Capital

Well, I guess the question is that just this is almost immediate or are you're not surprised but since I was surprised it was $1.18 a little while ago now it is down to the $1.11?

Kim Goheen

Well, it is quite volatile and it'll move and down fairly clearly within wide swing. So, no, I'm not really surprised by it. No.

Borden Putnam - Eastbourne Capital

Alright, well thank you.

Operator

Our next question is from John Redstone from Desjardins Securities. Please go ahead.

John Redstone - Desjardins Securities

Yes, gentlemen. Just a quick clarification, when the NYMEX, contract starts trading over a week today going forward will that indeed be your term of reference price for your market related contracts?

Gerry Grandey

George.

George Assie

No, it will not. We'll be looking to the extent that, Ux is providing that spot price and that forward look but our contracts reference the market price at the time of delivery when we get there, which might be different than the through your look ahead put out by NYMEX today. So I think the answer is, no.

John Redstone - Desjardins Securities

Now I'm completely confused. Now Ux is involved in the setting of that price, right?

George Assie

Ux will be consulting with them, but what you are talking about is Ux, today giving them guidance on what they think the spot price might look like three years hence. But of course that's the future's market, that's the financial market. We are talking about the physical market, three years hence from now, if we get three years from now, the spot market at that day might look a lot different than what Ux thought it might look like in May of 2007. That's all I'm saying and our contract will reference the spot price published at the time of delivery in three years, not the spot price that was published in May of 2007 for delivery three year hence.

John Redstone - Desjardins Securities

Okay.

Kim Goheen

The one piece that we don't make a provision for someone like NYMEX setting these spot price at the time of delivery. Those contracts would have been written well before NYMEX started down this road, what future contracts use as their reference points will depend on how well the commodity takes off their future's markets for uranium progress.

John Redstone - Desjardins Securities

Okay. Well that should be interesting, thanks.

Gerry Grandey

Yeah.

Operator

Our next question is from Borden Putnam from Eastbourne Capital. Pleas go ahead.

Borden Putnam - Eastbourne Capital

Good morning. From my first question, I would like to go to the centre square to Tim Gitzel if I could with your approval, Gerry. Talking about the remediation plan for Key Lake, the submittal you gave to CNSC in December talks about us. There is a ground chart in that and that shows a three year timeline, and this really a three phased program up there as I understand it. And Phase I is going on now and you said that would be done at the end of this year. But then, you need approval from the commission again before proceeding with Phase II and again, there is another report that has to be written for approval to go to Phase III. So this could be a bit protracted process, and I wonder if you could share with us what might be involved in those follow up reviews by CNSC staff for commission before you'll get the Phase II and III approval Tim?

Tim Gitzel

Borden, let me distinguish, maybe we use the word remediation quite freely. You're talking about the effluent remediation plan and is that the one that's going on and we are indeed were in front of the commission on. We also talk about remediation at Key Lake in a larger sense, which is kind of a revitalization of the assets that would be also ongoing and we are doing some scoping on that.

Now, let me go back to your question, indeed, we got approval, we got a license condition and put into our license in the quarter for Key Lake to carry on with or go ahead with the three phase program. Phase I of which is already being implemented and that involves installation of some equipment at Key Lake. And the Key Lake mill clarifier and some solids handling, which will when running will reduce significantly the moly and selenium that we were putting in the effluents, so that's underway. That construction should be complete by about the third quarter of this year.

And then your right, Phase II, we have approval to do that, although we have to go back first. I think what we will do is go back once the Phase I equipment is up and working give them the status report on how it's going, what effect its having on our effluent and then move to Phase II. And Phase II just in simple terms it involves reducing some of the flow through the mill effluent treatment circuit at the mill. So, yes it is a phased approach, our goal obviously is to reduce the moly and selenium as much as reasonably achievable and we are spending some considerable capital and time to do that.

Borden Putnam - Eastbourne Capital

Yes okay. Before I ask my follow-up, so is the mine going to be ready and prepared at the end of the three phases so that you can go right into an expanded case or then would you start the development only after the three phases have been approved and sanctioned?

Tim Gitzel

Yes, it's a little bit more complicated than that because that's kind of the table stage. We have to get that part right--

Borden Putnam - Eastbourne Capital

Right.

Tim Gitzel

Before we start thinking about increasing production. In the meantime, we are moving in the mine up at McArthur to new mining areas, new zones and so there is a lot of work to do there as well to increase the production there that would then be sent down to Key Lake. So, we are couple years, couple of good couple of years away on both fronts, I think McArthur and Key to moving up the ramp on production.

Borden Putnam - Eastbourne Capital

Okay, I appreciate that. My follow-up question is about the emulsions, I read about an isodecanol emulsion that's in the effluent coming out of Key Lake the mill that relates to the processing of the concrete that's in the backfield ERA force and this is a normal consequence of your mining because ERA's force overlap previously backfield areas like get that. But looking at my understanding of the [mine site] going forward at McArthur River there is, in the next year or so as things progress normally there is three zones that are going to become dominant to provide or that's zone to qualify for your breakthrough in 2003. Three is zone#4 lower, but there is also a things that has been called zone#2 remnants, where it looks like you go back into zone#2 areas that had from Phase I mining if you allow zone#2 and you are going to go back and get the remnant for Wollaston. There could be even more concrete going through the mill at that time and I wonder first part of second question is what you have been recycling this effluent to get rid of the isodecanol or you are retreating us, how much mill capacity do you lose when you have to recycle or retreat?

George Assie

You got a question, that I don't have the answer in front of me to that, give you bang on in your analysis of the mining plan and that is an issue that can continue to be an issue it was first quarter '06, we thought we had it kind of sold for first quarter '07 we don't yet, but we are getting close or so. I can't speak exactly to your question but it will continue to be something effluent work on going forward.

Borden Putnam - Eastbourne Capital

Okay, thank you.

Operator

Our next question is from Bernard Picchi from Wall Street Access. Please go ahead.

Bernard Picchi - Wall Street Access

Yes, good morning. Just a quick question and change your pace a little bit toward gold and Kyrgyz Republic could you give us an update on what is happening there with the political turmoil in the country as it relates to the control mine and how that in turn might affect sort of operating costs going forward. And also any longer term your plan ultimately to spin-off the remaining 54%, 55% of the shares to Cameco stockholders.

Gerry Grandey

Bernard, really the mines been unaffected by all of this. We, obviously watch it carefully but throughout all the demonstrations that occurred in April, which is pretty typical when you do it annually in April. The mine has been unaffected and is operating fairly well. Everything now seems to have quieted down in the capital city, the protests were disbanded about a week and a half ago. And we are sort of getting ready now to kind of reengage the Kyrgyz government in the discussions that have been ongoing for quite a while that's post intern ourselves. And we continue to look for Centerra to grow and that is what we've been looking forward to do for quite a while both organically which has done a great job doing and perhaps through acquisitions and mergers. We have no plans no definite schedule yet for divestiture and when we do it will be really timed looking at growth and looking at other opportunities that Cameco is looking at. So, with that Kim happens to be a little bit closer to it if you got anything to add Kim go ahead.

Kim Goheen

Well, thank you Gerry. That's pretty well sums up where we are, it's the political situation that continues to evolve, I think that's settled down and we just keep watching it.

Bernard Picchi - Wall Street Access

Okay. Thanks very much.

Operator

Our next question is from Ian Howat from National Bank Financial. Please go ahead.

Ian Howat - National Bank Financial

Yeah, good morning. Just following up on the Inkai and the excess impact tax. If you would explain that further and sort of agree that your effective marginal tax rate will be, sort of approaching 60% within two or three years of startup?

Kim Goheen

No, I can't confirm that. So, I think we're just -- I'll have to come back to you in separate scenario but I can't come to that number.

Ian Howat - National Bank Financial

Okay, but there's the first tax-rate is 30%, this one would be, if you get your IRR above, the certain rate you get to another 30%. Is there also a 15% withholding for potential dividends? And research in the last, sort of hour and half since I've read that was is this sort of a walked in tax situation under your agreement or is this the most recent taxation brought in by the Kazakhstan government?

Kim Goheen

Alright, I'll answer the last question but I really won't get into the specifics with you. The rates are those published by the Kazak governments and as they applied to all projects, not specifically Inkai. But to your specific addition with Gerry and I'm sorry I am not going to try it today.

Ian Howat - National Bank Financial

Okay, thank you.

Operator

Our next question is from Terence Ortslan from TSO and Associates. Please go ahead.

Terence Ortslan - TSO and Associates

Thanks. I just wanted to keep toeing your toes. As the commodity becomes more scarce and prices go up, there seems to be a tendency historically that the market has stopped paying for pounds and ounces and tons in the ground. Do you think that the chemical strategy should be reporting more reserves and resources in the ground and adjust to that effect and get a highest price possible and what that price should be? And two, chemical, as being very proud of being able to go through agencies, because the industry has a barrier of entry to permitting, which is quite substantially significant and complicated. Do you think you still have that competitive advantage whereby that was a bar for amount of people entering the industry easily? Thanks.

Gerry Grandey

Terry sort of the second question, first because I'm not sure I got the first one or all of it. There is a rather, in almost every country I guess this is the better way to phrase it. In almost every country there is a specific regulator for nuclear activities and the rigor that you have to go through for your environmental protection, safety as well is considerable. That's true from all the way from exploration through the generation of electricity and ultimately waste disposal. And those do present barriers, now it's much easier to sort of tackle the exploration and discovery part of it, but once you've found an ore body. Then you've got to sort of enter into the environmental and mine design and safety aspects that come with being in this industry.

It's a long learning curve, we know that and we don't even pretend ourselves to having learned it all and we are I think always learning additional things and trying to get better and practice what we call continual improvement. So there's much less on the exploration discovery side and as you move up the chain and that it's true in virtually every country that has an active uranium production program.

Terence Ortslan - TSO and Associates

But you gave an hedge whereby it would be very difficult for a lot of the juniors in combination of all the market cap that it exceeds Cameco's that they all deemed to be able to come into production, because they do have the resources or capability although it's a risk that this may develop into a far more [similar] approach of permitting. So, does Cameco agree that there is still a laborious process ahead for a lot the juniors coming in to production?

Gerry Grandey

It highlights the importance of having existing facilities and all of our production centers, because with that with the expertise that we've maintained and built up over the years, we hope that we can holdout being a partner of choice, but people don't want to get to those barriers a little bit earlier.

Terence Ortslan - TSO and Associates

And we are going to see that partner of choice if you are right. And the pounds in the grant, market adjustment, your junior and mid cap company has today got far bigger dollars in the for reserves as well as in grant than you have?

Gerry Grandey

I think if you look at what we've talked about in MD&A this year and some of the statements made, we've got just an incredible reserve position coupled with the purchases we'll be making at least through 2013. We haven't really talked a whole lot about our resource position, which also is considerable. I think we'll now do that a little bit more together with as I had indicated in my comments earlier, a rather robust global exploration programs. So, people can get a sense of the magnitude of the reserves and resources that we hold. We've tended not to talk about them because they still require further definition as I indicated earlier. But, we also through the global exploration program hope to be adding considerably to the asset base, both in the best hunting ground in the world, which is the Athabasca Basin, but elsewhere around the globe.

Terence Ortslan - TSO and Associates

Anything new about the Russian JV development?

Gerry Grandey

George you want to make a comment?

George Assie

Nothing new at this stage. Really, as per the most recent announcements, so we'll continue to meet with the Russians to work out the definitive agreement. The exploration areas have been agreed upon and so it's just a case of finalizing the agreements before we go forward.

Terence Ortslan - TSO and Associates

Thank you.

Operator

Thank you. Our next question is from Murray Lyons from Saskatoon Star Phoenix. Please go ahead.

Murray Lyons - Saskatoon Star Phoenix

Yes. Mr. Grandey one of the read between the lines interpretations that seems to have come out of the lengthy April 20th Bloomberg news focus on the Cigar Lake incident was that CNSC has lost confidence in the Cameco's ability to manage the deposit or at the very least has lost patience with the Company. And I am just wondering what can you tell us or what is your reaction to that perhaps interpretation?

Gerry Grandey

Well, all of this will be in the investigation reports, which are just in the process of being finalized. I think when you have an episode of the size of Cigar Lake virtually everybody involved will lose some confidence including the Company itself and it takes a while to restore that. I've indicated in the Bloomberg interview and subsequent to that there is no doubt that we are going to find there were a number of human factors, the human errors that were sort of encountered along the way that contributed to the water inflow of that and it wasn't just geology. And when that happens, you go back and look at why it happened and try to implement lessons learned. We'll certainly not shy away from that and stand up and say these are the things we've learned and this is what we need to implement to make sure it doesn't happen again.

Murray Lyons - Saskatoon Star Phoenix

If I can follow up, one of the puzzling things to me, since I was given a tour in McArthur River along with several other journalists about a month before the Cigar Lake incident, and it's struck me that the mine people at McArthur were showing us boring machines that they said had replaced drill and blast and yet on the very day of the Cigar Lake incident I think some executive during a conference call and I am sorry I can't remember, which one, said they refer to a development tunnel at Cigar Lake that had been created through the drill and blast technique, I am puzzled as why and if you had dropped such a technique in the McArthur River why you still maintained it in Cigar Lake?

Gerry Grandey

We do a combination at all other mines including McArthur River, but in the high risk areas and this is true Cigar Lake as well we got tunnel boring machines with reinforcement that comes along with the tunnel boring so it really is an assessment of risk, which we readily admit now at Cigar we didn't appreciate the full extent of the risk where the inflow occurred but in all other mine plants in the higher risk areas we have employed, and always plan to employ tunnel boring machines.

Murray Lyons - Saskatoon Star Phoenix

Thank you.

Operator

(Operator Instructions). Our next question is from Borden Putnam from Eastbourne Capital. Please go ahead.

Borden Putnam - Eastbourne Capital

Yes, I have a follow-up if I could or second round of questions. I was going to go to upper square to George, but I have re-flipped the coin and I am going to go back to Tim if I could center square. At Cigar Lake Tim the 43101, which is really interesting report that has a diagram on page 105 that shows rock classification that's called MRMR Modified Rock Mass Rating. And the area beneath the deposit is class seven ground and I am trying which is entitled extremely potty good and report says the majority of future mine development will occur directly below the orebody in this class seven ground wherein rock strength does impart very weak vary inconsiderably over distances as short as one meter. And this gets worse as you get closer to the orebody and to the on conformity both vertically and horizontally. So, it looks like this ground is going to be sort of the nature of things going forward at Cigar. Were you in class seven when the rock fall occurred or were you still in the adjacent ground which is a little greater strength?

George Assie

I can't confirm whether we were or weren't in the class seven we were certainly in ground that we though was confident for the mining method we were using. We were using a jumbo to drive that drift along. So, I can tell you we are looking again and we will look again at the mining methods we are using and freezing we are using, we will be re-looking at several of those things, but as Gerry said we were going there confidently, if we could go back could we change the method, yeah probably we could. But we are doing what we thought was right. And so we'll look at that again, that 465 level and you will see some more freezing from us and you will probably see some changes to our method of supporting in that area. So those are changes we will make.

Gerry Grandey

And just one follow-up to that, it wasn't class seven ground where we were and kind of relating back to that previous question that Murray had that's why tunnel boring was the method of choice when you approach the orebody and go under it. And then of course the remediation or the method of mining anticipator always has been to freeze all of that and get the structural integrity that allows development of the mine to proceed under the orebodies.

Borden Putnam - Eastbourne Capital

Okay, so you weren't yet in class seven ground.

Gerry Grandey

No.

Borden Putnam - Eastbourne Capital

Have you done any development even for the freezing drifts in class seven ground yet or is that still future experience?

Gerry Grandey

We were in the process of doing that freezing when the inflow of that occurred.

Borden Putnam - Eastbourne Capital

Okay, last follow-up question on this, thanks Gerry, you mentioned that there is 2,200 cubic meters of concrete that's been put into the reinforcement area. What the estimate is needed there and you've mentioned there is an additional hole that you are going to drill there to assist this. What's that based on?

Gerry Grandey

Kim?

Kim Goheen

Yeah we've put the, you are talking about the ramp area.

Borden Putnam - Eastbourne Capital

Yes.

Kim Goheen

It's just a little bit few meters below in to the east of where the inflow was. You are right we've put the four holes and we have poured the concrete in with a little over 2,200 cubic meters. We are going back in with another hole, a fifth hole because we think there might be a void when you pressure up with the concrete it will run back up in to the hole and between holes I think there might be a void. So we are just going to fill that in, make sure that's absolutely competent before we pull out of that area. So that's what we are up to now.

Gerry Grandey

Look at it Borden it's two hills from adjacent placement of concrete. We think there might be a little valley.

Borden Putnam - Eastbourne Capital

Okay.

Gerry Grandey

We are not sure. But again being cautious we want to go back in and see if we can get a little bit more concrete in there. No big deal, but it won't be a lot, it will just be a little valley.

Borden Putnam - Eastbourne Capital

Yes okay. And on the volume, what's the volume expectation you have that's needed of concrete to fill that? You said you have 2,200 meters, what you believe is needed for that?

Gerry Grandey

It's insignificant.

Borden Putnam - Eastbourne Capital.

Okay. And I was just wondering, you are going to drill four big dewatering holes and in order of this to find out if the plug is holding. Why don't you just core the plug and see what its durability is, see how it's set up?

Gerry Grandey

Well, the plug will be fine, the issue is, is it sealed adequately between the plug itself to concrete mass and the walls of the tunnel. You know that concrete shrinks when it sets up. So, we'll go back and pressure grout and make sure that all of that's done. And coring the plug will tell you it's a mass of concrete, it won't tell you whether the water is leaking around the mass itself or indeed even to the rock outside of the tunnel. So all indications are from the rate of movement in the shaft as we place concrete that we are getting an [effective seal' just with the concrete ground we are putting in to drill the holes, but we won't be able tell ultimately until we do some pump testing.

Borden Putnam - Eastbourne Capital

Okay. The [McLean Lake] JV mill, has a tolling arrangement with some standby charges that say if the phase one mill modifications are complete and the mill is ready but the phase one ore is not delivered that it might incur standby charges and I don't know what these might amount to and what the exceptions might be allowed with the situation you've got at the mine, can you--

Bob Lillie

Borden it's true, I think its way too early right now, McLean has ore that will keep that mill running at least for good bit of time. They are obviously looking around for more so, I think its way too early to speculate and what those might be Cameco will just be a share of it in any of them, so.

Borden Putnam - Eastbourne Capital.

All right, thanks.

Gerry Grandey

Operator, are there any further questions, before we entertain any more from Borden.

Operator

Our next question is from Raymond Goldie from Salman Partners. Please go ahead.

Raymond Goldie - Salman Partners

Thank you very much, apologies to Mr. Putnam. I am just wondering if the average world nuclear reactive were to pay $120 a pounds for its uranium, have you worked out what the cost per kilowatt are of nuclear fuel purchases would be and just probably to make it easier exclude conversion refining and fabrication prices.

Gerry Grandey

George

George Assie

At a $100 where you would be is about just being at their front-end fuel cost, as they go back front-end fuel cost represent about 25% of that total O&M and at a $100 the uranium component would be about two-thirds of that, it would rise to two-thirds.

Raymond Goldie - Salman Partners

So, at $100 that would be 25%, is that what you said?

Tim Gitzel

Fuel costs are generally 25% of total operating and maintenance costs at the nuclear plant. And with uranium at $100 a pound, it's risen to the point of being about two-thirds of that.

Raymond Goldie - Salman Partners

Oh, got you. Okay, thank you very much.

Operator

Our next question is from Murray Lyons from Saskatoon Star Phoenix. Please go ahead.

Murray Lyons - Saskatoon Star Phoenix

Yes, gentlemen, this sounds like a strange outdated technology question, because I am asking it from a newspaper point of view, which publishes only once a day. But I'm being increasingly puzzled over the time as to how late in the evening, you folks, put out your quarterly reports. And I think last Friday, was an example almost ten hours after the market closes, and ahead of just after mid-night, according to the e-mail I've got that you've put out the Q1 results, which means I guess that for all of Saturday the only place you can find them is on the internet. And I am just wondering why so late in the day do your results go out?

Gerry Grandey

Well, I'll ask Alice in a minute. But if you understood the process you need to go through, then I think you will understand. We need to get obviously, Bruce Power, Centerra and Cameco results all coordinated, then get it through the Audit Committee, the Board of Directors and on and on and on and that takes up most of the day and the day before. So, then once you get everybody's comments and questions and laying of the answer it tends to be a late night exercise in order to be as timely as we can possibly get it out. It has nothing to do with trying to keep it out of the hands of the media. Alice, you've got any thing else to add to that?

Alice Wong

All right. Sometime go through with you in excruciating details what happens when we send it to the wire service. And we'll go greatly appreciate, basically they reverse, they strip out everything that we put in, so that can go over the wire and that means for a 40 page document plus the financial statements, which bring it up to about 80 pages. They strip out all the formatting, which means we then have to go through and proof all of that and that takes hours, it takes some several hours before even get it proofed back.

Murray Lyons - Saskatoon Star Phoenix

I just feel sorry for all these financial analysts that had to work on the weekend.

Alice Wong

I do too.

Murray Lyons - Saskatoon Star Phoenix

We do too. All right thank you.

Gerry Grandey

All right thank you. Operator I think we are probably drawing to a close here, so what I'll do is just simply thank everybody for joining us today and wish everybody a good and productive day and we'll look forward to talking to you in the future. Thank you.

Operator

Thank you. The Cameco Corporation's first 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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Source: Cameco Q1 2007 Earnings Call Transcript
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