Cameco's (CCJ) CEO Tim Gitzel on Q1 2016 Results - Earnings Call Transcript

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Cameco Corporation (NYSE:CCJ)

Q1 2016 Earnings Conference Call

April 28, 2016 01:00 PM ET

Executives

Rachelle Girard - Director, IR

Tim Gitzel - President and CEO

Grant Isaac - SVP and CFO

Robert Steane - SVP and COO

Sean Quinn - SVP, Chief Legal Officer and Corporate Secretary

Analysts

Orest Wowkodaw - Scotia Bank

Greg Barnes - TD Securities

David Wang - Morningstar

Edward Sterck - BMO

Chelsea Laskowski - MBC Radio

Graham Tanaka - Tanaka Capital Management

Andrew Quail - Goldman Sachs

Operator

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

Rachelle Girard

Thank you, John and good afternoon, everyone. Thanks for joining us. Welcome to Cameco's first quarter conference call to discuss the financial results.

With us today on the call are Tim Gitzel, President and CEO; Grant Isaac, Senior Vice President and Chief Financial Officer; 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, then we'll open it up for your questions.

If you join the conference call through our website 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 conference call 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, 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 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 first quarter results. We appreciate you taking the time to join us.

The most significant news this quarter is the announcement we made last week that we are suspending production at our Rabbit Lake operation and that Cameco resources is differing further well field development in the U.S. these were difficult decisions to make because of the impact on people and on their communities. But they were necessary to maintain long-term health of the company in today’s challenging market. It’s no secret to anyone that times are tough for uranium producers today. The market has been depressed for over five years now with low uranium prices, very little long-term contracting and more supply then the market needs.

In the year following Fukushima, we had anticipated that things will get better sooner. For a variety of reasons that didn’t happen and we are yet to see recovery in uranium prices. And although we continue to believe there is break long-term future for nuclear we have to prepare for a market that could remain low for even longer. So far Cameco has remained somewhat insulated from the effects of low market prices thanks to our solid portfolio contracts.

But over the next few years in the world where the timing of recovery in the Uranium market continues to be uncertain and where there is global financial uncertainty, we have to conservative to maintain the strong balance sheet and focus our resources where they will add the most value. We believe the decisions we have made are the best way to do that. We expect these changes to help us to continue to control cost and to stay competitive in a market that could remain low for longer. The operational changes at Rabbit Lake and in the U.S. will also not surprisingly result in decreased production for the year.

However the McArthur Key Lake operation is also contributing to the decrease. There we decided to reduce our 2016 production target from 20 million pounds to 18 million equivalent to 12.6 million pounds our share. We will put the additional downtime at the mill to good use. We planned to do work needed to eventually increase production capacity so that we'll be ready when the market signals more supply as needed. This includes changes to the solvent extraction circuit bringing work on the crystallization circuit forward from 2017 and transitioning to the new [indiscernible].

Overall, our total production outlook is decreased from 30 million pounds to 25.7 million pounds for the year. For the quarter, our results were reflective of a very quiet quarter in the market and the variability in our delivery schedule. Production volume was higher than the same period last year which is due to the continued ramp up at Cigar Lake.

We're very pleased with the continued strong performance at Cigar Lake which we will continue to ramp up over the coming months with the expectation of achieving of full annual production of 18 million pounds in 2017. Our sales volumes were down somewhat from this time last year which is common for us. You've heard us say before that our quarterly deliveries are often what we called lumpy throughout the year. Customers decide when in the year they want their material and as it is often the case their requirements are generally more heavily weighted to the later part of the year. So we're seeing that again, but we are on track with the annual delivery guidance released last quarter.

We recorded an adjusted net loss for the first quarter compared to adjusted net earnings in the first quarter of last year. As probably to do with foreign exchange continuing to have an effect as well as lower gross profit from our uranium and NUKEM segments tight in part to the lower deliveries. When it comes to NUKEM, we had much lower sales volumes than in the same period last year. That is purely the result of the lack of good opportunities in today's market.

Overall, market activity in general was extremely light during the first quarter of this year. We simply didn't see the kind of profitable opportunities that meet our requirements and until we do we won't be selling those pounds.

Putting it all together what we're seeing is a difficult market that has been low for longer than anyone expected and could remain that way for some time yet. We have to prepare for that possibility and we have. We've refined our strategy to focus on assets that return the most value while remaining flexible so we can stay competitive in any market conditions. And we've put that flexibility into practice to focus on our tier one asset.

Of course over the long-term, we believe 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. We know there is going to be growth in uranium demand as these new reactors come online over the next number 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 canceled and existing supply is being curtailed.

So over the long-term we remain optimistic. I think with that I'll stop and we would happy to answer any questions you might have.

Question-and-Answer Session

Operator

Thank you. We will now take questions from investors, analysts and media. [Operator Instructions] Our first question is from Orest Wowkodaw from Scotia Bank. Please go ahead.

Orest Wowkodaw

Hi, good morning. I was wondering if we get little bit more color in terms of there, it seems there is a big change in your tone in regards to the near to medium term outlook for uranium. Just sort of curious in your view what's changed in the last three months to kind of formulate that view.

Tim Gitzel

Where I said, I don't think there has been really, it sounded like that it might have to do with the difficult decisions we have to take last week that was tough for us for all of us. Anything that involves our people is a tough thing to do. But I don't think our view is changed, we still see tight in the short to medium-term longer-term. Looks good we're watching the usual things Japan, China, I was just over there couple of weeks ago, really nice story over there, good growth. I think there is about 32 reactors operating now which is up from last time 22 under construction.

And so Japan is still slower than we'd hope, to our waiting for our return to a long-term contracting that's probably the biggest story over the last couple of years. So I don't think there is a change in our tone just that last week maybe it was tougher week for us and one that we had to do.

Orest Wowkodaw

And with your Japanese customers, I mean since they're setting up a lot of inventory. Are you seeing them to take a pause from re-contracting as those current contracts run off, is that fair?

Tim Gitzel

Yeah clearly. Whereas they've been setting it out, we've been seeing them continue to respect the contracts that were signed in the past which is good. But nothing new coming out of Japan.

Orest Wowkodaw

I see. And are you still expecting to buy 9 million pounds this year from purchase perspective or is that I mean I guess it is 5 million in Q1 alone. It's possible that number claim be higher than that?

Tim Gitzel

I think we've talked about nine and there is no change from that Orest.

Orest Wowkodaw

Okay. Thank you very much.

Tim Gitzel

Thank you.

Operator

Thank you. The next question is from Greg Barnes of TD Securities. Please go ahead.

Greg Barnes

Thank you. Tim or Grant, can you put the production curtailments you've announced and to some of kind of context relative to where the oversupply sits in the market currently?

Tim Gitzel

Well Greg I just see that this going to take us a few months. We stopped the mining activities at Rabbit. Their plans were to produce around 4 million pounds there. In US it's a little bit of different story. We have to gradually win that off. And so when you're talking about taking 4 million or 5 million pounds of production steady reliable production out of the market.

We'll see what effect that has. It was just the right decision for chemical. We with the ramp up of Cigar Lake, McArthur is running well, our Kazak operation is running well. We had access to pounds there low cost pounds and in connection with the inventories we're carrying and some of the purchase pounds we can fill our supply requirements with those pounds. And so that's the move we made, we'll see what happens going forward, but it was the right call for chemical.

Greg Barnes

So the various industry consultants seem to suggest that the oversupply annually right now was somewhere around 25 million to 30 million pounds. So your curtailments of 7 million pounds of total capacity still as a long way away from enabling the market to rebound. Does that fair?

Tim Gitzel

It's something that as I say yes and you can probably do your analysis on that and what you'd have to count and there is the growing demand as well. If demand is going up, we see it going from around 165 million to 170 million pounds today to 220. So that's going up by 2% 3% a year. The supply has been flat. We've made a move now that was the right move for chemicals.

So we'll see where things go there, we know there is pent up demand in the system. And so.... but we just don't know the timing of when that's going to come forward. So we like the supply demand fundamentals overtime, but right now yeah it's still an oversupplied market and they were preparing for the low for longer scenario. If it's not as long then good for us, we'll do it very well.

Greg Barnes

Okay thanks.

Operator

Thank you. The next question is from David Wang of Morningstar. Please go ahead.

David Wang

Hi. Thank you for taking my question. Just the question on the cost. So you're taking out some of what we would consider to be maybe higher cost tonnage from the U.S. and the other operation. But you haven't changed your guidance for average unit cost to sales for Uranium unit. Is there something that's offsetting those higher cost tonnes coming offline. Or it's something else going on?

Tim Gitzel

David, I'll let Grant to speak to that.

Grant Issac

Yeah, it’s a great question and obviously overtime replacing higher cost accounts versus lower cost accounts will have positive effect. Right now you see our average unit cost to sales guidance for the year remains where it was. The key driver there is, yes, will be replacing some pounds from those tier two production types. But we have purchase material in there as well. It’s not just produced material that gets into that average unit cost to sale and that overall inventory cost that we have therefore.

So on balance not enough to shift that cost to sales profile. But to the extent that the market remains soft and to the extent we continue to produce committed volumes, but produce exclusively from tier one assets, then you would see a positive effect there.

David Wang

Great and what sort of pricing environment you see before you think about bringing back like in the U.S. operations to where they were before, we'll be just have to get back to what we saw last year or what things even better?

Tim Gitzel

David, it’s Tim again. We said, I think the word we used significantly and you can start that was a capital S, significantly higher prices then you are seeing certainly on the spot market today even on the term market. We have seen others speculate that you are going to need the price that starts with the seven in there and we saw was that some of our Australian assets a few years ago, whether $67 price as I say as a few years ago. So you are talking in that range we wouldn’t equal with any of those numbers. It has to be significantly higher than this today.

David Wang

Alright great thank you.

Tim Gitzel

Thank you.

Operator

[Operator Instruction] The next question is from Edward Sterck of BMO. Please go ahead.

Edward Sterck

Thanks very much. So I will start with.... just ask some question. The CRA dispute has been in terms against course being delayed by month. Can you provide little color on that?

Tim Gitzel

Ed, it’s Tim. I am going to pass that over to Sean maybe he can just give bit an update as on where the CRA pieces at litigation.

Sean Quinn

Sure. There was a modest delay audit by the court and when the trial is heard. And I think we might September 26th the first 4 week in October. So, it’s not a full month by any drag. The trial is still scheduled to run throughout the fall with closing arguments now schedule for March of next year. So, no significant changes in the trial schedule overall and just as an addendum to that we continue to prepare for trial and that’s where our efforts are concentrated right now.

Edward Sterck

Thanks very much and then just a follow up question on the CRA dispute. Can you give us an indication of how the timeline turns out between now and then going to court, in terms of events and then I guess it's fairly open ask that but possibly how long things will take often?

Tim Gitzel

Sean?

Sean Quinn

Sure. As I mentioned already, we continue to work to prepare for trial, significant efforts require with that in connection with getting expert reports and testimony and all the other stuff that goes along with that, trial will run as I said already from October to March of next year and then we await the court decision. And it's a [indiscernible] that we are getting anywhere 6 to 18 months for court decision. But we really have no control over that.

Edward Sterck

Okay. Thank you.

Tim Gitzel

Thanks Ed.

Operator

Thank you the next question is from Chelsea Laskowski of MBC Radio. Please go ahead.

Chelsea Laskowski

Hi. Alright. First questions is two parts. First of all. I talk to as a prior the trucking company that works with chemical rabbit lake, like your other mines of the area earlier and they had said that you usually do five months shut down with this time of year. Can you confirm that?

Tim Gitzel

Chelsea, its Tim. We have four different sites that we operate in Northern Saskatchewan and each one of them takes different maintenance shut down. So wouldn’t be unusual for us to have a shutdown at one of the sites during this time period. So that would be normal.

Chelsea Laskowski

Okay and I guess just as a follow up to that with that in mind do you see that rabbit lake closure making a big change in the next quarter?

Tim Gitzel

Well, it’s going to take us a while at Rabbit Lake to wind things down. We think over the next several months that the we want to put the assets into safe care and maintenance mode. We are going to need our people to help us do that, I was up there last week Thursday talking with them and just explaining what the process look like going forward. So, that will take us some months to do.

Chelsea Laskowski

Okay. Thank you very much.

Tim Gitzel

Thank you very much.

Operator

Thank you. [Operator Instructions] Next question from Graham Tanaka of Tanaka Capital Management. Please go ahead.

Graham Tanaka

Hello, a couple of questions. First off, I just want to try to get a bit of lead fix for next year. So, with the wind down the operations it appears that the cost of pound would be going down. Is that correct? And roughly by how much?

Tim Gitzel

Grant, do you want to answer that?

Grant Isaac

Well, we don’t have any guidance for the cost for next year. We’ll put out guidance for next year in our average unit cost to sales one of our look table. But yeah, we haven’t put anything out there for the 2017 period.

Graham Tanaka

The other thing which is also related to that is the maintenance cost to keep [indiscernible] operations for Rabbit Lake and I mean in the U.S. What is that annual, I saw a number of $40 million. Is it cost that much to maintain the operation while not producing?

Grant Issac

Yeah, Graham, that's our estimate at rabbit. Right now, I think we said $45 million. We’ll see if we are going to need thinking about150 people. Obviously we will try to reduce those to the extent we can while keeping the assets as I said in a safe care and maintenance mode. So we will do what we can do reduce those cost.

Graham Tanaka

I guess I was wondering if with the contracts the long-term contracts and then with a lower cost tier one assets being producing if that benefit of lower cost per pound being produced is going to be more than absorbed by the more than offset by the maintenance cost with no associate to revenues. In other words everything being equal next year assuming no price change would possibly roughly be flat.

Grant Isaac

Graham, it's Grant. Sorry to be abrasive on this. We don’t have guidance out of 2017, which is in part the problem not being able to answer this question. I mean when you step back and think about our flex strategy what we are up to here with focusing on the Tier-I assets and being able to replace Tier-II cost with Tier-I cost. It was to focus on that gross margin and try to improve that. Obviously taking assets off is not cost less, if it was you would see probably more production come off and right around the commodity space. But it does cost to do that, so you have to careful analysis obviously have to go into that when it comes time to put out our 2017 guidance we absolutely will, but at the moment we just don’t have any numbers out there for you.

Graham Tanaka

Thank you.

Grant Isaac

Thanks, Graham.

Operator

Thank you. The next question is from Orest Wowkodaw of Scotia Bank. Please go ahead.

Orest Wowkodaw

Hi, thanks for taking my follow-up. Just curious on your guidance here for the CRA the 1.5 billion to 1.7 billion liability. Just curious why the bottom end of the guidance actually decreased and can you give any color that we would appreciate it.

Tim Gitzel

Just a bit of context that we know are just a reminder I guess. In order to arrive at that number we have a lot of voluntary disclosure out there because we have actually only been reassessed for O3 to 2010 with O4 sitting in a bit of procedural limbo and then what we have done to arrive at that number is make assumptions about '11, '12, '13, '14 and '15 and it's just going through the process trying to make sure those assumptions are accurate and figuring out best estimates on what we think the CRA may or may not do would effect that in number and it does move around a little bit as we change our assumption. So it's nothing substantive I would say it does not represent the fundamental change in what we think the CRA is doing from reassessment point of view. But just perhaps a bit of reduced financial exposure in those 7 years.

Orest Wowkodaw

Okay. And just following on that, I think you previously mentioned there could be an option of non-binding arbitration. Is that, can you remind me if who has the right to trigger that and whether that is something you are considering? Thank you.

Tim Gitzel

Sean you want to answer that?

Sean Quinn

Sure, I’d love to. I don’t think we mentioned the non-binding arbitration. There is a provision under the tax court rules whereas if you would being heard where are the priority the crown for CRA can in both of course mediated not arbitrated but mediated settlement discussion before a judge who would be other than the judge to hearing the case.

So that's kind of a formal mediation process before the judge who listens to both sides and then make suggestions. It’s become mandatory and arbitrary request that it’s not imposed on the parties otherwise we haven’t requested that both today and obviously the crown handle [ph] and so that processes there but they hasn’t been [indiscernible] to-date.

Graham Tanaka

Thank you very much.

Tim Gitzel

Thanks Orest.

Operator

Thank you. The next question is from Edward Sterck of BMO. Please go ahead. Mr. Sterck your line is open sir.

Tim Gitzel

Yeah. It’s Ed Sterck, are you there Ed?

Edward Sterck

I am sorry. I must be on mute. Can you hear me now?

Tim Gitzel

Yeah we can hear you Ed yeah.

Edward Sterck

Okay, great. So firstly with NUKEM. Obviously the quarter was quite different to previous one. Is there any change to the market conditions or business model where they making it more challenging than in the past?

Tim Gitzel

No, Ed, you know that we think of NUKEM it’s been an opportunistic player in the spot market. So in order to be that there have to be opportunities and Q1 was just very quiet. We just didn’t see the right opportunities for NUKEM and therefore didn’t pursue them and as a consequence. Their quarter ended up very quiet. You will see though that the annual guidance for their sale has remained. In other words we think we still see some demand opportunities in the remainder of the year and therefore we haven’t changed that overall annual guidance. Just reinforced that the opportunities weren’t there for NUKEM.

Edward Sterck

Okay, thank you. And just in terms of the follow up question. Should market conditions are low, how quick you can rather like make if we start within U.S. some operations be ramped up again and between potential future points. Should we expect any again DNA and between about potential future points should we expect any increase in D&A from U.S. sale operations or possibly downs to Rabbit Lake?

Tim Gitzel

So I’ll take the first part and then I’ll pass over Grant. When we ramp down and put things in safe care and maintenance it takes us a while that we would estimate looking at off scene 12 to 18 months probably to bring those assets back in the production something like that. So it’s not this wasn’t a decision we took lightly for sure. We look long and hard at this and then we will put them in safe care maintenance. But it would take us about long to bring back Grant you want to talk a little bit…

Graham Tanaka

Yeah absolutely. So obviously the announcements on those assets are subsequent in advance to Q1. So that gives us some work to do in Q2 here to look at the carrying value of those assets. And with respect to rabbit we actually have taken a few impairment charges one on the mind, one on the mill in the past so we’ll do the work necessary to find out if there’s any further impairments there. So similarly for the U.S. we’ll have to look at the carrying value and assess the resources that are available and the productive capacity that’s available against the market expectations and determine if impairment charges wanted so we’ll continue to do that work and that will be revealed in Q2.

Edward Sterck

Great. Thank you very.

Tim Gitzel

Thanks Ed.

Operator

Thank you [Operator Instructions] The next question is from Andrew Quail of Goldman Sachs. Please go ahead sir.

Andrew Quail

Good afternoon, guys. Thanks for taking my question. Really careful, I mean I think the action taking out which was prudent and necessary I think is the broad decision for shareholders. If we say that you are in process in overseas stability dose. What do you guys think you can do next in terms of capacity cut if it came to that?

Tim Gitzel

We’re not looking at that at the moment I think as Grant just outlined we’re pretty content to where we are at as we move to production from our Tier 1 assets. These assets some of the lowest cost in the business with those and the pounds we have, we’re able to fill our contractual commitments and so that puts us in really good space.

I would just say I think we are where we want to be, we’re filling our sales commitments from Tier 1 assets. We see demand growing, production being curtailed in some spots, secondary supply hopefully diminishing. We’re on path as Sean talked about to resolving the CRA case and the company is still strong and healthy in the weak uranium market. So we are where we're at we'll continue every day to watch the markets, where things are [ph] in a pretty stable place at the moment.

Andrew Quail

So no more cats…

Tim Gitzel

Not at the moment. We had as I said tough week last week we brought off the production but we had more we probably would attend at last week. So we're comfortable where we're at thanks.

Andrew Quail

Okay. And next one is on M&A, I saw that you was obviously to be play and you mentioned that at the start of the call you've been added and what be any other piece. Do you sort to say this dam market as an opportunity maybe to take advantage of any external opportunities that are more presented so?

Tim Gitzel

Well we're not aggressive on that Andrew at the moment. I think we've got a great suite of the assets. We're focusing on our tier 1 we've got some room to ramp those up when the time is right and we're preparing for that. So we like the space we're in and quite frankly there is nothing out there that really what our appetite is at the moment. So we're holding steady to where we're at.

Grant Isaac

Yeah, I would just add to that as well Andrew. I mean you've watched chemical quietly acquire some material in the market in the last couple of years. And those are pounds that have come and cheaper than the cost of tier 2 production, cheaper pounds than anything we could have brought at the asset level. And carrying now operating risk with them and are there to deploy when we think the market is going to reward us for those pounds.

So in some way that has been our approach there. Those have been very attractive opportunity to specially to relative to anything that might have been available in the M&A space.

Andrew Quail

Okay. Thanks guys.

Grant Issac

Thanks, Andrew.

Operator

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

Unidentified Analyst

Hi, so aspire here. I was just wondering about your foreign exchange hedging strategy. It looks like you've hedged up most of the exposure through this year. Does that beyond 2016 or just wondering where how the strategy work?

Tim Gitzel

If I let Grant to talk about our long-term hedging strategy.

Grant Isaac

Yeah I certain can and I know I don't want to launch into a huge lecture. But you're asking about the strategy, let me start from that kind of the top point, which is we hedged for cash flow certainly. And but obviously one of the challenges we have is trying to tell a cash flow story through an earnings lens. And the reason we take this approach obviously as the US dollar denominated revenues in mostly Canadian dollar cost and we want to build the certainty around our spending activities on an annual basis not because short because of foreign exchange fluctuations on those spending plans.

So as a result from a strategic point of view we employee a smoothing and trailing approach to our FX, which the vast majority of the time serves us very well. But in times of rapid changes in FX values like we've seen over the last 12 months. There is obviously a divergent and it takes time and it catch backup to that diversions which then result in an IFRS treatment which is simply mark-to-market. You just take that entire derivative book and you pretend that it's going to wind up today and you say what's your exposure is it gain or loss.

Of course we don't think that really captures the core performance of that hedging strategy. So we have a few adjustments build in there. So what we do is not explicit hedge accounting, but we proxy for it. So in true hedge accounting we would match up every single FX contract with the specific uranium sales contract. We don't do that instead of us kind of proxy or designate a certain amount of those FX contracts for the current period. So the current period reflects both the cash settlements of the contracts in that period plus what we would consider realized that we designated to this period and we push the rest out overtime and then as you say we layer them on overtime out as far as 3 year parts through years.

In this designation we do it on a percentage basis. And every current period not only captures the realized for this period but it also have to capture the designations we've made in the past for this period. And so there is this constant roll forward. So if there is a strategy it's one of cash flow certainty. And if there is the challenge it's telling this cash story through an earnings lens. And that's where we find ourselves.

Unidentified Analyst

Okay great. So that explains why they once that change has a different impact on the cash flow versus the earnings in?

Tim Gitzel

Absolutely yeah.

Unidentified Analyst

Okay, thank you.

Tim Gitzel

Thanks.

Operator

Thank you the next question is from Greg Barnes of TD Securities.

Greg Barnes

Thank you. Grant, your response to Andrew's question about M&A and acquiring pounds in the market is interesting. Does that mean that you’ve build up more inventory than you'd normally carry over the last couple of years.

Grant Isaac

We have not made purchases that would be beyond what is normal. If you look at the purchases we've committed to in the last several years and look at that over the past five years. There is nothing unusual about it. What is bit different obviously is that the ATU material was coming in before and we have sales volumes well above our produced volumes. But with the performance of Cigar Lake for example, our produced volumes have gone up.

Now with the decision we've taken on our tier 2 volumes. We have the opportunity to replace our term commitments our contract commitments with produce materials from a lower cost to asset like Cigar Lake but also to replace it from pounds we acquired in the market that are cheaper than what our tier 2 cost would have been. So for us, it's been a good opportunity to acquire what we think is real value in the market with the only cash cost no non-cash cost and no operating risk attached to that as well.

Greg Barnes

So you've normally carried about six months of inventory on hand. Is that still a level that you're working with now?

Grant Isaac

We're above that right now as we've taken advantage of some of these good opportunities. But of course our inventory is also subject to the lumpiness that we have in our normal markets. When sales are below production and purchases our inventory goes up and it's working its way through overtime. Of course acquiring NUKEM has also added inventory to our balance sheet that we wouldn't have had in the past. So we still have that target of kind of that six months forward inventory. We've seen a few good opportunities to add to that, but now that we've made a curtailment decision. We see a way to replace some of those pounds under the contract commitment.

Greg Barnes

Okay. Thank you.

Tim Gitzel

Thanks Greg.

Operator

Thank you. The next question is from Graham Tanaka, Tanaka Capital Management. Please go ahead.

Graham Tanaka

Yeah just wondering if you could elaborate a little bit on your outlook from the reactors coming on stream. And whether there was a change in your outlook for how fast the China and India reactors come on. And whether US shutdowns are happening any differently as well as the Japan restarts. I know there is a lot there, But I wondering if those three things effected your decision, thanks.

Grant Isaac

Yeah. Not much change Graham in that regard. The number is changed because there is been new reactors startups. I think our number show about 441 the operable reactors today, 61 under construction. So once going up the other ones come down a bit. Yeah as I said I was just in China couple of weeks ago and good news there are 32 operating 22 under construction. And the important part was we talked to the big utilities and they're still on track for their 58 units or gigawatt if you like by the end of the decade by 2020 with another 30 under construction. That's the good news story. And so we were just sitting the other day calculating the uranium requirements in China.

If you want to you want to go those numbers and have severally we're not true what their inventory policy is. But first quarters plus inventory and you keep building bringing 6 to 8 per year on in China, they are going to need some inventory and it's going to be obviously a really important place to play. So we're talking a lot let me say at that way with the Chinese. Japan has been slow. They got the first Sandai Unit going last August 2015. Two of them now and then had some more units approved and come on and now have back them off there are some legal challenges.

So that's just going slower one. We know there is I think 26 reactors in the queue to come on that, those are good numbers. Overtime that many come back we think even a few more that will be a good new story for Japan. But it's just taking a long time. And the last piece I think you said was US flat. We see a flat 99 reactors today. A lot of them getting 20 year of life extension and in fact just about all of them. A few at risk in merchant markets competing with gas is tough in those markets.

But also some being built, some big new units being built down in the Southeast Corner of the country. And so we say the US is flat right now. So overall, not much change to our picture it's a growth story. It's a good story that growth requires more uranium. At a time when value saw some curtailment you see them a bit in the past and not a whole a lot of capital going into new project. So we like those fundamentals going forward.

Graham Tanaka

Thank you.

Tim Gitzel

Thank you.

Operator

Thank you [Operator Instructions] The next question is from Orest Wowkodaw of Scotia Bank. Please go ahead.

Orest Wowkodaw

Hi, thanks for taking so many questions today. Just a little bit more clarity on the term maintenance cost of rabbit of 40 to 45 million. What happens if rabbits on term maintenance for several years. Can you give us a sense of how those maintenance cost trail off overtime or do you think they’re going to stay at that level and definitely until this thing restarts?

Tim Gitzel

I'm going to ask Bob Steane, Bob is with us and to answer that question, Bob?

Robert Steane

First, as of today is we’re going through the shutdown this year get into that term maintenance state and see what the costs are. They are not familiar which are the stable and the reason that the state of the mine and what the state of the Rabbit like operation is keeping it there’s always water. So water treatment capability has to keep operating. So always be pumping and treating water. So fortunately the mill is running which is treating the water, keeping the mine dewatered. We are not flooding the mind. So we’ve got water being pumped from the mines, we also need that ventilation running in the mine to keep the mine so it’s accessible.

So those are the kind of the leaders and what drives the care maintenance cost is to keeping our mine dewatered than later than available and then treating all the water and so on. So unlike while we think for [indiscernible]. We shut something down and all we’re doing is walking around watching this thing happening. So once we reached that stable phase is it 45 is it 35 we need to work that through but when I get there it would stay at that level.

Orest Wowkodaw

So are you suggesting it might stay at the 40 million level indefinitely?

Robert Steane

Until we make another decision.

Orest Wowkodaw

Okay, fair enough. Thank you very much.

Tim Gitzel

Thanks Orest.

Operator

Thank you the next question is from Edward Sterck of BMO. Please go ahead.

Edward Sterck

Thanks very much. I know that Orest put his third question in before me but I think I'm [indiscernible].

Tim Gitzel

Good one

Edward Sterck

So I was just asking, I'm just interesting a bit more information on the term market. We might be hearing that price discovery is somewhat limited and I know in terms of transactions when they occur, the information there, some of the challenges there. All of this data and evidence is that transaction volumes are declining or of no use in the term market but I was just curious is to whether Cameco is still signing 10 contracts right now and I know you put regular price indication that long term prices $44 is that sort of where things are really happening?

Tim Gitzel

So Ed, Grant’s spend a lot of time on the market side over the last nine months. So Grant do you want to talk about the share market?

Grant Issac

Yeah, the term market has been quiet. I mean you referenced that and it is a fact over the last three years there’s just been enormous amount of deferred demand that would normally have been in the term space over 450 million pounds of uranium consumed in that period and only about 35% of that replaced in the term market.

It’s just it’s really a function of a strong price off sentiment that fuel buyers continue to have. They look at some of the factors that came outlined and they see some of the short term challenges to the market which for them are opportunities obviously they’re looking at the other end of the telescope and they don’t feel like there’s a need to kick start the term market yet. So we’ve seen this deferred demand be pushed out into the future and we’ve seen a very quiet market. You asked about price discovery, are their deals getting done at that price we can’t point to a lot.

Certainly none by us is the only term business that we did of any significance was the announcement with the Indians last year. And that was on market related terms it wasn’t on fixed price terms because we said consistently to our customers these are not prices that we think are indicative of uranium going forward and so we’re not willing to part with our uranium and as long as we have our contract portfolio protection and we don’t have to chase the market down and that I think is reflected in Tim’s point that we’re where we want to be meeting our current commitments with Tier 1 production and not being forced to chase this market down.

Edward Sterck

Thank you and so I guess my follow up question now would be if we think about those legacy higher price contract. When should we think about those getting more often and then I guess all the producers making some of the decisions in terms of shutting production as they don’t have the high price contracts to deliver into any more.

Tim Gitzel

And I think our price stable gives a bit of an indication where we are at. I think we are well covered through 2018 and 2019. So you know we got a few years in front of years and we are watching that closely and we think in that period of time we see some better days ahead. So that's as I say recovered certainly through the 2018 period?

Edward Sterck

Okay. Thanks very much.

Tim Gitzel

Thanks, Ed.

Operator

Thank you. The next question is from David Wang of Morningstar. Please go ahead.

David Wang

Hi. Thank you for taking my follow-up. I just want to ask another question related to the markets. So, what's the decline in prices? Have you seen any indication from other producers that they are going to delay or put off projects that would add supply in future. I am just not going to get a gage of when you see the sort of surplus leaving the market and assume with lower prices you are pulling up the only one that is concerning taking some volumes out and how that impacts market balance in the out years?

Tim Gitzel

Yeah, David. Obviously we'll have to check with them to see what their plans are going forward. We took decisions that we through were in the best interest of Cameco and those are tough decisions when you are a in a company with a lot of people and those in fact people were though decisions. So we took those what other producers will do we may want to check in with them.

David Wang

All right, thank you.

Tim Gitzel

Yes, thank you.

Operator

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

Tim Gitzel

Well, thank you very much operator. I would just close by acknowledging again that times continue to be tough for our industry. These challenges are real and at Cameco we are and we have to remain proactive to remain competitive and we’ll do that. We also think that the positive outlook over the longer term is also real and in some of each passing year makes that long-term story even more positive.

The longer we think investment in new uranium projects suffers, the less supply there is going to be to compete with the likes of McArthur River and other projects in rising market. So that's what, gets this up and keeps us excited about this business. So we will carry on and. I want to say each of you thank you for your continued interest in Cameco and have a good day. Thank you.

Operator

Thank you. The Cameco Corporation 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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