Cameco's (CCJ) CEO Tim Gitzel on Q4 2015 Results - Earnings Call Transcript

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Cameco Corporation (NYSE:CCJ)

Q4 2015 Results Earnings Conference Call

February 8, 2016 11:00 a.m. ET

Executives

Tim Gitzel - President and Chief Executive Officer

Grant Isaac - Senior Vice President and Chief Financial Officer

Bob Steane - Senior Vice President and Chief Operating Officer

Alice Wong - Senior Vice President and Chief Corporate Officer

Sean Quinn - Senior Vice President, Chief Legal Officer and Corporate Secretary

Rachelle Girard - Director of Investor Relations

Analysts

Orest Wowkodaw - Scotia Bank

Greg Barnes - TD Securities

David Wang - Morningstar

Oscar Cabrera - Bank of America Merrill Lynch

Jim Ostroff - Platts

Chelsea Laskowski - MBC Radio

Graham Tanaka - Tanaka Capital Management

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, Ms. Girard.

Rachelle Girard

Thank you, Mary and good morning, everyone. Thanks for joining us. Welcome to Cameco's 2015 fourth quarter and year-end conference call to discuss the results. With us today on the call are Tim Gitzel, President and CEO; Grant Isaac, Senior Vice President and Chief Financial 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, Chief Legal Officer and Corporate Secretary. Tim will begin with comments on our financial results and the industry, followed by Grant who will comment on a few items including our tax cases. Then we'll open it up for your questions.

If you join the conference call through our Web site event page, you will notice there will be slides displayed during the remarks portion of this call. These slides are also available for download in a pdf file called webcast slides through the conference call link at Cameco.com. Today's conference call is open to all members of the investment community, including the media. During the Q&A session, please limit yourself to two questions and then return to the queue.

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

With that, I will turn it over to Tim.

Tim Gitzel

Well, thank you, Rachelle and welcome to everyone who has joined us on the call today to discuss Cameco's annual and fourth quarter results. We appreciate you taking the time to join us. Before we get started, I just want to take a moment to express our sympathy to the people of La Loche, Saskatchewan. While this kind of tragedy is sadly not uncommon in our world, it's particularly shocking because it happened in our own backyard. And what makes it hit home even more is that we have people from that community working at all of our Northern Saskatchewan sites. Our hearts certainly to the people of La Loche, the neighboring communities and to all of Northern Saskatchewan. In the months ahead, we will continue to engage with community leaders to discuss how we can best help. And I would ask you as well to keep the people of La Loche in your thoughts.

Now let's turn our attention to the business of today's quarterly conference call, our fourth quarter update. I will start with some brief remarks then turn it over to Grant to give additional detail on some of our results and an update on the CRA case. After that we will spend the majority of the call on your questions.

In our view, this is the most important reporting period for Cameco. A lot may happen during the year but the important piece is what we achieved after everything is taken into consideration. In 2015, we continued to perform well despite being in what is a very difficult industry to be in right now. In particular, we achieved record annual revenue and record revenue from our uranium business. That was largely driven by a higher average realized price in all of our business segments as a result of the weak Canadian dollar.

The performance of our NUKEM segment was also a significant contributor. There we saw higher realized prices and higher sales volumes which led to an almost 60% increase in its revenues. However, while the weakening of the Canadian dollar helped our average realized prices, it negatively affected our earnings as we incurred losses on our foreign exchange derivatives. Combined with higher unit cost and a number of one time unusual items in both 2014 and 2015, it meant earnings were down from last year.

The better news for 2015 was on the production side with the biggest headline at Cigar lake where we produced 11.3 million packaged pounds. This far exceeded our initial expectation between 6 and 8 million pounds. And the team at Cigar Lake achieved this safely and responsibly ensuring we continue to get it right at each step in the process. So we are very proud of the work being done is what is one of the world's most technically challenging mines. Having those pounds is very important for our company and provides the material we expect will be needed to meet rising demand and they will do so at a lower cost than other sources of supply. And with this exceptional performance, we now expect to achieve our target of 18 million pounds of annual production in 2017.

The rest of our operations also performed well, either meeting or beating their production targets, the only exception was McArthur Key, where unplanned maintenance outages to repair the calciner caused production to be slightly below target. The shortfall, however, was more than made up by the other operations. In fact in 2015, Cameco achieved record production of 28.4 million pounds.

Looking ahead, our plan is to continue to pursue our strategy of focusing our capital on tier one assets. This means continuing our production plans at Inkai, ramping up at Cigar Lake and preparing for expansion at McArthur River in response to market conditions. We believe this is the right strategy to ensure we are positioned to respond when the market calls for more production. It's also a great risk mitigation strategy in the event that the uncertainty persists and it could. Now almost five years post-Fukushima, I don’t think anyone expected these conditions to last this long. And there are a number of reasons for that.

First, the pace of reactor restarts in Japan has been much slower than anyone anticipated. Having to establish a new regulatory authority in process has meant that the path to restarts in Japan is first of its kind and understandably slow. However, the first restarts have now occurred. Sendai units 1 and 2 as well as Takahama unit 3 and we are expecting more to follow. We hope that the lessons learned on these initial restarts will help pave the way for others to follow more quickly.

Another factor contributing to the slow recovery of the market has been the extent to which some countries have moved away from or reduced their reactor fleets. And in some places there have been unexpected reactor closures. These have generally been in electricity markets where reactors have become less competitive as a result of de-regulation and low natural gas prices. Added to that our global events that have combined to further challenge our industry, things like the sluggish global economy, a variety of geopolitical issues and flat electricity demand.

All of these factors mean that today we are still waiting on a recovery that has been expected to come sooner. We have learned to put those expectations aside and instead focus on preparing for whatever comes our way and watching the market closely so that we are ready to respond. Because over the long term we know good things are in store for the industry. We know there is a huge amount of growth in reactor construction being led by China, India and South Korea, all of which have reactors under-construction and brought new reactors on line in 2015.

We know there is going to be growth in uranium demand as these new reactors come on line over the next numbers of years. And we know that supply will struggle to keep up as investment in new projects is just not happening. Existing projects are being deferred or cancelled and existing supply is being curtailed. So over the long-term we remain as optimistic as ever. However, navigating the current market conditions has become a more prolonged and challenging effort. But I believe we have continued to perform well and have the right strategy in place to ensure we continue to do so.

We continue to be a competitive low cost uranium producer. We continue to have one of the best asset portfolios in the world. We continue to have an impeccable track record of safety and we continue to deliver strong results. So with that, I will turn it over to Grant.

Grant Isaac

Thanks, Tim. I just wanted to make a few brief remarks on our financial results and provide an overview of the updates to our tax disclosure, including the CRA and IRS cases.

First and for the most part, our results fell in line with the outlook we provided during the year, which you could see on Slide 8. In many of the cases where we were outside of the range provided, foreign exchange played a significant role as Tim noted. On the revenue side, we saw significant benefit, however that benefit was largely offset on the expense side as a result of the foreign exchange hedging activity we undertake. I am not going to get into all of the mechanics as we do cover it quite thoroughly in our MD&A. But there are a couple of points I want to make.

First, the reason we undertake hedging activities is to provide certainty and predictability to our cash flow as we carry out our operating and capital expenditure. It's a prudent measure that generally serves us well. But in periods of rapid currency fluctuations the average exchange rate under our hedge position well lag the market. For example, the average U.S. Canadian exchange rate for our 2015 hedge position included exchange rates for periods prior to the rapid devaluation of the Canadian dollar. As a Canadian dollar reported, the gap between the average exchange rate under our contracts and the average exchange rate for 2015 caused us to report significant losses on derivates in 2015.

Over time and as we add hedges at current market rates, we expect to realize the benefit of today's weak Canadian dollar as the average exchange rate under our hedge contracts increases. To arrive at our adjusted net earnings measure, a portion of the losses reported in 2015 do not apply in the period as the hedges were put in place to protect future foreign currency exposure. The goal is to better reflect our actual underlying financial performance. In that adjustment calculation, you will see one time items that are not representative of our ongoing operations as well as adjustments to match the benefits of our hedging activity with the expected foreign currency exposure to which they apply. So that illustrates the impact our hedging activities and the rapid devaluation of the Canadian dollar had in 2015.

To help you understand how we expect fluctuations in foreign exchange rates will affect our cash flow and net earnings based on our hedge position at the end of the year, we provide with a sensitivity analysis. So those are the areas I wanted to touch on regarding foreign exchange. But I also want to quickly cover a couple of updates on our taxes. I am going to start with the outlook for our tax rate and then move into our tax cases. For the past couple of years, we have been indicating that a transition in our tax rate will begin to occur in 2016.

With this, being the year of transition we felt a bit more information was warranted. This year many of the intercompany purchase and sale arrangements we have in place expire. Meaning we need to negotiate new arrangements. We have started to replace the contracts and will continue to new arrangements in place. As with the past arrangements, they are generally reflective of third-party transactions and will reflect the market at the time they are signed.

As a result, in 2017 on an adjusted net earnings basis we expect our consolidated tax rate will transition to a modest expense and then tend toward approximately 20%. Of course, the actual rate will vary from year to year depending on the distribution of earnings among jurisdictions and the market conditions at the time transactions occur under our intercompany and third-party purchase and sale arrangements.

For 2016, on an adjusted net earnings basis we expect a tax recovery of 25% to 30%. I think that sums up the tax rate and I will move on to our tax disputes. I am not going to provide a lot of updates on the numbers as those are very clearly laid out in the MD&A. I will just run over some of the more significant changes. In terms of our CRA case, there is not much new. First, as we do every year, we have extended our analysis to include the expected impact if the CRA were to reassess our most recently concluded tax year, 2015.

Next, as expected, we received the 2010 reassessment and it put letters of credit in place to security amounts owing for cash taxes and related interest. We paid the remainder owing in cash. Finally, I want to draw your attention to the tax provision we reported at the end of the year, $50 million, which really represents the pricing uncertainty in our intercompany contracts. Unlike, most quarters where you typically have seen us increase this provision to reflect the analysis of contracts delivered into, this quarter you have seen that provision almost cut in half.

This was a result of some additional contact information that we acquired. With a larger sample of contract information, we concluded that the pricing uncertainty in our intercompany arrangements was less than originally determined and reaffirms our confidence that we will be successful in our case. As noted last quarter, a court date has been set for our 2003, 2004, 2005 and 2006 tax reassessments. We expect the trial will start in the week of September 26 of this year. We expect final arguments in April of 2017 with the decision 6 to 18 months after the trial concludes.

On the IRS side of things, we received reassessment as expected for the tax years 2010 to 2012. Like the 2009 reassessment, these challenged the transfer pricing used in some intercompany transactions for certain of our US subsidiaries. Our view has not changed, we disagree with the stance taken by IRS and continue to dispute it. While in the dispute process, you will recall we are not required to make any cash payments. And with that I will turn it back to Tim.

Tim Gitzel

Thank you very much. Grant. Operator, with that we are happy to answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Orest Wowkodaw from Scotia Bank. Please go ahead.

Orest Wowkodaw

My question really has to do around the uranium business. I'm a little surprised by the guidance for 2016 in regards to sales. Considering where you expect your production levels to be at 30 million pounds and your disclosure talks about purchase commitments of 9 million pounds. So that would imply another pretty large inventory build this year. Can you please walk us through how to think about the strategy here in terms of your volumes being materially above your sales expectations?

Tim Gitzel

Orest, this is Tim. Thanks for the question. I am just going to open with a couple of comments. Just on the purchases piece, we have always been in the market, you know, that through the [ATU] [ph] deal. For many many years we had those pounds available to us and we like $35 pounds a day that in the can. We think those are good pounds. And so overtime, we purchased some of those pounds. We haven't perhaps been doing as much selling. You see, I think our guidance is 30 million to 32 million pounds in 2016. You have heard us say before, we are not interested in locking into these prices. We have been saying that for a couple of years forward so we have. And so that’s probably why we are down a bit going forward. We will watch the market to see how it evolves in '16 but our guidance for now is 30 to 32 so we are going to hang there.

Orest Wowkodaw

And should we anticipate that your inventory levels continue to rise beyond 2016? Or like where do you get -- at some point it is obviously consuming your working capital, where do you get comfort in terms of not pushing your inventory levels too high?

Grant Isaac

Yes. Orest, I think there is just a bit of color that could be added. And if you flip back to 2015 and you think about our guidance on Cigar Lake at the outset of 2015, it was 6 million to 8 million pounds of total production. So of course, thinking about where Cigar Lake was going to end up, we saw some attractively priced pounds in the market there were below the, in many cases, the tier two costs of production. As Cigar Lake performed very well and ramped up very well, it's obviously changed our perspective and we are not very active on the purchase front now. Going forward, we will look at opportunities as they arise but we will be simply opportunistic. So, no, we are not looking to grow that inventory position in a material way.

Orest Wowkodaw

Okay, so that 9 million of purchase commitments for this year, it sounds like you are suggesting that was largely entered into before you realized how well Cigar was ramping. Is that a fair assessment?

Grant Isaac

Yes. You can think about it that way.

Tim Gitzel

Yes, that’s right.

Orest Wowkodaw

Okay. And this 9 million pound purchase, is that distorting your expected cash cost then for 2016 in terms of putting it into the inventory?

Grant Isaac

Well, it would, of course. Those pounds only carry cash costs. They don’t carry non-cash costs. Those are pounds that are priced in U.S. dollars, we hold them in Canadian dollars. We will eventually sell them in U.S. dollars but there is a moment there where you hold them and with the Canadian dollar the way it's performed, it does create, I will use your word, a distortion there that needs to be thought of. But eventually, when the opportunities arrive to place that material in the market, it will be placed again in U.S. dollars and we just think those were very attractive opportunities.

Orest Wowkodaw

And is it your expectation that all those 9 million pounds would be profitable if you had to sell them this year?

Grant Isaac

Absolutely.

Tim Gitzel

Absolutely.

Operator

The following question is from Greg Barnes from TD Securities. Please go ahead.

Greg Barnes

On the write-down on the, I guess the Rabbit Lake mill, you imply that you don't expect to have enough feed sulfurs to keep the mill full. But Eagle Point mine is going to run I think through 2021. I just want to understand what the thinking was behind the impairment.

Grant Isaac

Yes. So it's part of our year-end processes. Obviously, we look at the carrying value of our assets and I would say that as we have really homed in on this tier one strategy, there are some consequences. And one of the consequences here has been on Rabbit Lake. We wouldn’t consider it one of our tier one assets. There are resources that are available but our attention is focused on McArthur, Cigar and our Kazakh assets. We think that’s the best place to put our attention in today's price environment. And what you are seeing here is just a reflection of that lack of attention on what is a tier two asset in our portfolio. This follows on the heals obviously of the mine impairment that was in 2014. So I guess largely no surprise that there would be a mill impairment when you look at it from a carrying value point of view at year-end.

Ultimately, we are watching a market that we think needs to transition and we will make decisions accordingly going forward. But at December 31, that was the deal.

Greg Barnes

And on Crow Butte, I know you are not putting any more capital in there in oil fields. Is that expected to just wind down over the next year or so, or two years?

Grant Isaac

Well, right now we will make the investments in operating those assets but not looking to grow them. You have seen us pull back from growth expenditures there, again, as a consequence of this tier one strategy.

Greg Barnes

Okay. And just one follow-up. You've reduced your position for the tax implications of the CRA transfer pricing discussions. I assume that means the goalposts between you and where the CRA stands are very wide and there's no chance of a settlement here before you go to court?

Grant Isaac

Yes. Well, it's hard to even begin to speculate on what the changes might be. Our view has always been that the risk to the company is perhaps rests solely on the pricing that was done in those inter-company arrangements. The provision coming down just reflects or growing confidence that as we have added more contracts that are representative of the period at the time we signed those bulks sales arrangements, it really represents the actions taken. Were really indicative of the market at the time. Whether we have a prospect for a settlement would depend on a number of factors but not least of which is probably having a CRA move away from the structure argument that they are currently advancing.

Tim Gitzel

Greg, it's Tim. As we closer to the court house steps as well, there probably will be a few opportunities, process wise at least, to talk about that. So we will see where that turns out. But I think Grant's hit the nail on the head. The gap remains wide today.

Greg Barnes

What are those opportunities, Tim?

Tim Gitzel

Well, I could let Sean speak to the -- I think there is some mandatory arbitration, or not arbitration but mediation steps that need to be taken before you get to the courthouse. But, Sean, do you want to speak to that?

Sean Quinn

Yes. Very briefly, the tax court rules do have a court mediated settlement discussion process that can be invoked by either side. It hasn’t been invoked yet but I would suspect that it will be invoked at some points and that there would be some sort of formal settlement process in front of a judge sometime prior to trial.

Greg Barnes

So over the kind of, summer timeframe would be likely?

Sean Quinn

Yes.

Tim Gitzel

Or before. So probably in that range Greg.

Operator

Thank you. [Operator Instructions] Our next question is from David Wang from Morningstar. Please go ahead.

David Wang

Thank you for taking my question. My first one is on the capital expenditures guidance. It looks like you are guiding to a lower sustaining and capital replacement expenditures in 2018 versus 2017 and I was wondering what's driving that, especially with production having probably increasing between now and then.

Tim Gitzel

David, clearly as Grant pointed out earlier, our focus here now is on our tier one strategy and that’s just requiring less capital going forward. I think we have some spending to do this year related to Cigar Lake especially with respect to the McClean mill. And then after that, as I said, we are focused on our tier one strategy and that sees our capital coming down.

David Wang

Okay. But this is, just regards to the sustaining capacity replacement capital, so you expect that to be less intensive going forward or is it just there's going to be less spending on the non-tier one assets?

Tim Gitzel

I think it should be both. Less spending on -- I think it should be less intensive. It should be a new project like Cigar Lake. Once you get it up and running you would hope you get a little bit of a break on sustaining for a while. So I think it's just less intensive.

David Wang

All right, great. And I was wondering if you have any updates on the contracting level so far through 2016 and your outlook for the rest of the year. You've iterated that we've seen pretty weak contracts over the past three years. But I was wondering if you had seen any change towards that or if there are any potential catalysts that would increase contracting either this year or next.

Tim Gitzel

Yes, David, I can look at Grant who is running our contracting and sales and NUKEM piece now. But I can tell you in the month of January, we watch it very closely and there hasn’t been a whole lot of activity so far this year. We will see what the rest of the year and especially the back half of the year brings. But today it's been slow. Grant, anything to add to that?

Grant Isaac

There have been a few of the important industry conferences occur already in the first half in January. So a good opportunity for us to get in front of our customers, both current and potential. And really we just see a lot of discretion right now. A view that they don’t need to move very quickly. Perhaps more interested in the second half of the year. But certainly not in the first half of the year. This is consistent with this price of bias that we have seen from fuel buyers for a couple of years as they look at spot market that is over supplied for a couple of reasons and a spot market that has obviously a sentiment overhand that you would probably refer to as the fog of Fukushima. And quite frankly, just the fact that while there is a great reactor construction story on the planet today, those construction projects are not consuming uranium and that’s all coming together and that’s all coming together to help the fuel buyers feel like they have a bit more elbow room. And so as Tim said, we are just continuing to see a discretionary market right now.

Operator

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

Oscar Cabrera

The first question relates to Cigar Lake. In your disclosure for the outlook in 2016, you mentioned that the package production for the asset is subject to regulatory approval of McClean Lake. So when are you assuming that you will be getting this approval and can you just comment on, is that proportional to the 8 million pounds you are expecting?

Tim Gitzel

Yes. Thanks, Oscar for the question. Alice Wong is in charge of our, among many other things, the safety, health, environment licensing, and so she has been working with Areva on this. So Alice, I am going to ask you to comment on that please.

Alice Wong

Good morning, Oscar. I think that we have to be clear that it is Areva who has submitted the license increase. They did late last year submitted a commissioning report which basically talked about the performance of the McClean mill to date up to December. Then the report provides -- this report kind of provides the background for the license increase. Then last week Areva submitted a written application to the Canadian Nuclear Safety Commission to increase the license capacity. Now to provide a little background. Areva has already got the required environmental assessment approval and previous license documents have considered this increase. So that does simplify the process somewhat, but the CNSC does have a very thorough process for reviewing applications of this nature to increase licenses. And so there is a possibility of clarifications might be needed or additional information that might be asked for. So that does add some uncertainty to the timing. So that’s in their hands. We think that we expect they will have it in time for us to meet our guidance on production.

Oscar Cabrera

I'm sorry to just press you now but when do you assume that that will be received? Is the 8 million pounds assuming that they receive that in the first quarter or second quarter this year?

Alice Wong

Well, they just admitted their license application. So they don’t need to have the increase in hand because they have enough production capacity to get to 13 million pounds as approved license, so they don’t need it this early.

Tim Gitzel

Oscar, we would certainly be happy if they got it in the first half of the year but even in the back half, we have approval as Alice said, to go to 13 million pounds and we would need that in place to do the 16 million pounds that we budgeted for this year.

Oscar Cabrera

Okay. Well, that helps, Tim. Thank you very much. And then if I may, just a follow-up. On your CapEx growth capital for 2017 and 2018, obviously the levels that we've seen before, this is much lower. But just wondering where these dollars are earmarked for?

Grant Isaac

Yes. They are principally earmarked for McArthur River and Cigar Lake. Again consistent with that tier one strategy, Oscar.

Operator

Thank you. The next question is from Jim Ostroff from Platts. Please go ahead.

Jim Ostroff

I would appreciate if you could talk a little bit about Fox Lake. It' rather sort of interesting and certainly you had talked here about focusing on tier one production etcetera. But it appears to be rather large. So just any color, as they say, you could provide about Cameco's intentions for moving ahead with this asset at some point in the future?

Tim Gitzel

Yes. Jim, thanks for the question there. It is a nice of work for our exploration group who now report to Sean Quinn. So Sean, do you want to say a few words about Fox?

Sean Quinn

Sure. Just a couple of words. First it is a validation of the good work done by our exploration group. Also a validation of our continuing interest in the Athabasca Basin in Northern Saskatchewan which continues to be a prolific source of uranium for the world. It's a very encouraging find to add to our portfolio. It will be evaluated in the context of our tier one strategy and looked and in the report. There is no immediate plans to take it any further down to the [indiscernible] at present.

Jim Ostroff

Is there any timeframe at all where you all could provide about the decision on doing any sort of actual exploration and production there?

Tim Gitzel

Jim, it's Tim. We are pretty happy with what we have got going at McArthur, Key, Cigar ramping up, now Kazakhstan. We have got, we think, on our plate to for the time being, you know the fact that it's really next door to McArthur is very helpful, I would say, for the future. So we will continue to work on the property to find the projects. So it's in our longer term plans.

Operator

The following question is from Chelsea Laskowski from MBC Radio. Please go ahead.

Chelsea Laskowski

My question actually goes perfectly with the previous one. I was going to ask about Fox Lake as well and kind of on the heels of you saying that with the fog of Fukushima, it could take a while for the need to ramp up again, but it should at some point exceed what's available. So is there any comment that you can have on how that might fit into things changing in the entire marketplace. Possibly having a role in that?

Tim Gitzel

Chelsea, thanks for your interest and thanks for the question. Just let me give you, just our $0.02 on the longer-term picture. We remain very optimistic about the future. We look at the demand in uranium space. We see it growing. Significant number or reactors under construction. I think 64 reactors under construction in the world today. There is about 439 operating. We see growth on the demand side. And it's pretty transparent. We have a good sense of how much there is. On the supply side for uranium not quite as transparent. It's flat. Not a lot of new production coming on other than Cigar Lake. The question is how long can people hang on at these prices. And so if you look down the road ten years from now, we see over 200 million pounds of demand and significant less that of supply. And so something has got to happen in the meantime. So that’s what's gets us out of bed and into work in the morning knowing that a brighter future is coming in that regard.

A project like Fox Lake just plays into that. This is a long term game. We started up Cigar Lake last year, ramped up production. We are still ramping up. That’s a project that will be decades in the operation. McArthur, same thing. This is a long term game. But we always have to be thinking ahead. Reactors when built, run for 40, 60, now 80 years. And so we need to have reserves and resources in place for a long time. And so that’s what Fox Lake really does for us. It's a part of the future for us. We have got good production today as you have seen, but we need to build for tomorrow. And so the Fox Lake project will be a project that will come sometime in the future in Saskatchewan but not today.

Chelsea Laskowski

Certainly. And I guess just as a follow up, I wanted to see, you guys had mentioned that this was due to good exploration work that this found. Is this a very rare find?

Tim Gitzel

Well, I would like to say they are all very rare finds for sure. You know we have an exploration team that focuses on different areas in the world. Probably our biggest focus is right here in the Athabasca Basin in Northern Saskatchewan. And so over years of line cutting and geophysics and then drilling, you hope that you put drill hole in the right spot and this one seems to be a nice advanced exploration play. I certainly can't call it a mine today but it's a nice one and we will continue to work on it. So they are not easy to find. We spend many million and hundreds of millions of dollars as do many others looking for ore bodies and that we are happy with this discovery today at Fox Lake.

Operator

The following question is from Graham Tanaka from Tanaka Capital Management. Please go ahead.

Graham Tanaka

I appreciate your frank answers. We are also puzzled about the supply-demand situation. We are just wondering, from your vantage point and your contacts in the industry, is the extra supply really coming from the supply deliveries to Japan under the contracts not being used or is it from Kazakhstan? We are sort of puzzled where it's coming from.

Tim Gitzel

Yes, Graham, thanks for the question. That is a good question. Certainly to talk about Kazakhstan, we were talking about it this morning in a different context. And looking at the numbers and seeing that today 40% of the world production comes out of Kazakhstan which 15 years ago would be at least single digits, even if that. So Kazakhstan has played a big role. We see a little bit of production coming perhaps this year, from Husab, Namibia, the Chinese are moving ahead. Our Cigar Lake project already factored into the supply now but after that it is pretty skinny, I would say, as far new projects go. And so, yes, the supply side, if you keep your eye on supply, I have said that for a few years, I would reiterate that. There is some inventories out there that are still being watched through and so right now, I think we are in a bit of an oversupply situation but I am not sure that will continue. And I am just looking at Grant, and Grant, do you want to say anything on that?

Grant Isaac

Yes. In terms of the spot market today, I think we would identify four sources of material that comes flashing into the market. And Tim identified the first one. Primary production has actually be performing very well. These are primary production decisions that were incented kind of in the 2010 price run up when the Chinese stepped into the long-term market. And now we are seeing the consequences of those investment decisions in pretty steady primary production. Of course, primary production today, that’s only getting sustaining and replacement capital, not growth. It's going to run a depletion curve. But at the moment it's there and we see some of that in the spot market. I think the second source that we see is the enricher underfeeding probably to a greater degree than we normally would. Enricher underfeeding is something that happens when there becomes a bid difference between the SWU price and the uranium price and it makes sense for enrichers to use some of the [UF6] that’s being delivered to their facility to sell into the uranium market. That adds to the oversupply. We continue to see some strategic inventories coming into the spot market. In particular the U.S. Department of Energy inventories that they used to essentially pay some clean bills.

And probably the last source of material that we see coming into the spot market today is from early shutdowns. We have see a number of reactors in the U.S. shutdown due to economic conditions, the price of shale gas, for examples. As Tim highlighted earlier. And this has led to inventory liquidations. We are not talking big volumes, but we are talking volumes being added to an already over supplied spot market. So when you say, where are they coming from, that would be the four buckets that we look to and track very closely as we look at the spot market.

Graham Tanaka

And Grant, that's really great perspective. How many early shutdowns are we talking about, say, in the last 12 months or maybe even in the next 12 months, if possible? Just to get a feel for if it's going to meter down?

Grant Isaac

Yes. We can certainly look up this number and confirm it for you but I think that the U.S. had about six early shutdowns that were unanticipated at the beginning of the year. In terms of what might be coming, it's hard to say. Certainly there are some reactors in merchant markets in the U.S. that are under pressure but I wouldn’t dare put out a forecast on how many might be shut down.

Operator

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

It's [Fae] [ph] here. Can you tell us the long term growth fundamentals and assuming this plays out to where you think it's going to play out, I am guessing you are going to get a hockey stick recovery that’s seems to be right to your pricing history has suggested. It's [not] [ph] difficult to predicting an inflection point if you do a hockey stick recovery. How do you go about planning, for long-term planning purposes around that?

Tim Gitzel

[Fae] [ph] you could easily sit on our board because they ask us that every time they come in. And I am talking about the downside. What if things don’t improve as quickly? We are optimistic for the future. We look at the supply demand fundamentals. We can see that, as I said earlier, demand growing, supply flat at best and inventories being consumed. There has to be some reaction. But we also have to look at what if we are not right or what if it takes longer. So that’s really part of our tier one strategy, is we want it to have co-relation to the pricing and operating leverage, be able to put more pounds out when it does start to run. But we also wanted protection on the chance that if things don’t improve as quickly as they can and as Grant tells me many many times, the market will pay for tier one production and we believe that. And so we are working hard to bring our cost down, our unit cost of production down and really be operating from tier one assets so that however the market turns out, Cameco will be find. And so that’s really part of our strategy.

Operator

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

Tim Gitzel

Well, thank you very much operator. I would just like to close by acknowledging that times continue to be tough for our industry. The challenges are real and we must be proactive to remain competitive, which we, I think we have done and which we will continue to do. However, the positive outlook over the longer term is also real. The challenges we see today do not affect the, if the market will transition from being supply driven to demand driven. They only affect the when that will happen. And in some ways each passing year makes the long term story even more positive. The longer investment in new uranium projects suffers, the less supply we think there will be to compete with the likes of McArthur River, Cigar Lake and our other projects. And that’s a prospect that really keeps us excited. So with that, I will say thanks to everybody for being on the call today. Thanks for your continued interest in Cameco and have a great day. Thanks a lot.

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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