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Executives

Rachelle Girard

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

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

Kenneth A. Seitz - Senior Vice-President of Marketing, Exploration and Corporate Development

Bob Lillie

Analysts

Ralph M. Profiti - Crédit Suisse AG, Research Division

Greg Barnes - TD Securities Equity Research

Edward Sterck - BMO Capital Markets Canada

Tyler J. Langton - JP Morgan Chase & Co, Research Division

John Hughes - Desjardins Securities Inc., Research Division

Barry D. Allan - Mackie Research Capital Corporation, Research Division

Ian T. Parkinson - CIBC World Markets Inc., Research Division

David Snow

Oscar Cabrera - BofA Merrill Lynch, Research Division

Brian MacArthur - UBS Investment Bank, Research Division

H. Fraser Phillips - RBC Capital Markets, LLC, Research Division

Cameco (CCJ) Q2 2012 Earnings Call July 27, 2012 1:00 PM ET

Operator

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

Rachelle Girard

Thank you, operator, and good morning, everyone. Welcome to Cameco's second quarter conference to discuss the financial results. Thanks for joining us. With us today are 4 of Cameco's senior management team. They are Tim Gitzel, President and CEO; Bob Steane, Senior Vice President and Chief Financial Officer; Grant Isaac, Senior Vice President and Chief Financial Officer; and Ken Seitz, Senior Vice President and Chief Commercial Officer. Tim will begin with comments on Cameco's results for the second quarter and on current industry conditions, then we'll open it up for your questions.

Today's conference call is open to all members of the investment community, including the media. [Operator Instructions] Please note that this conference call will include forward-looking information, which is based on a number of assumptions, and actual results could differ materially. Please refer to our annual information form and MD&A for more information about the factors that could cause these different results and the assumptions we have made.

With that, I will turn it over to Tim.

Timothy S. Gitzel

Well, thank you, Rachelle, and welcome to everyone who has joined us on the call today as we discuss Cameco's second quarter results. As expected, we saw lower delivery volumes this quarter, which contributed to lower revenue, gross profit and net earnings compared to the second quarter of 2011. Our results are heavily influenced by our deliveries and as is often the case, our deliveries this year are heavily weighted to the fourth quarter.

What is most important is that we remain on track with our sales, our revenue and our production guidance for the year, so I can say no change there. In Q1, we talked about most of the factors that affected us this quarter, namely higher expenditures for exploration and administration, the fact that our deliveries for the year would be lowest this quarter and the $30 million contract termination charge. That charge will be made up and more as some of the materials have already been placed into higher priced contracts, and we expect to place the remaining volumes as well.

Another factor was our average realized uranium price, which was 10% lower than Q1 of 2011. This just means that more of the deliveries this quarter were for materials in lower-priced contracts. So you can expect to see variance in our average realized price. But overall, as we move other lower price contracts that came into effect when uranium prices were lower and into higher priced uranium contracts, we expect to see a general trend upwards. The decreases we saw were partially offset by positive returns from our Electricity segment which benefited from Bruce Power, achieving a 16% increase in its generation for the quarter over Q2 2011. If we move to our operations, I'm happy to say that they performed safely and responsibly. Safety, as we always point out, is a top focus for us and is key to our success as a company. Production this quarter was down from the second quarter of 2011, which we expected. And we remain on track with our yearly guidance of 21.7 million pounds. The decrease this quarter is partly because of the length and regulatory review process at Smith Ranch-Highland we talked about in Q1, but largely because of lower production from McArthur River. This is a result of normal course fluctuations that occur throughout the year as well as some planned maintenance shutdowns.

Good news. I can report that McArthur River this quarter has to do with the risk to 2013 production we mentioned in our annual MD&A. There was a possibility that production could be affected when we transition to the upper mining area of zone 4 in 2013. However, we've made productivity improvements on cycle times and changed the sequencing of the raises in zone 2, mitigating that risk, so we're very pleased with our team's achievement in that regard.

At Cigar Lake, we continue to make solid progress. Many of the milestones that we laid out for the year have been achieved. Shaft 2 has been sunk to its final depth of 500 meters and we're now installing infrastructure. We've also lowered the main components of the jet boring machine underground and have begun assembly. Testing of the system will occur later this year. And the Seru Bay pipeline has progressed to the point where we can use it in the event of a nonroutine inflow. So I can report that progress at Cigar Lake is going very well.

We also made progress on our development projects this quarter. Our agreement with AREVA Resources to purchase their 28% interest in the Millennium project closed. And with that, our interest in the project increased to about 70%. We are very pleased with this acquisition, and we'll continue to advance the project toward a development decision.

We also completed the pre-feasibility study at Kintyre this quarter and announced those results in our MD&A. The economics of the project are not as favorable as we had hoped. As we reported for the project to be economical, we would need a $67 uranium price or 62 million pounds of package production at the current uranium price. However, we've decided to continue to move to the feasibility stage and have accelerated our exploration drilling. The aim is to improve the economics of the project by expanding the resource base and have the project ready when the market improves. So I want to emphasize that this is not a production decision but rather, the next step in our stage gate process. We are not going to develop Kintyre at any cost. As you've seen throughout our history, we are a financially disciplined company and the project must make sense economically for us to go forward with it.

One thing we did move forward with on the quarter was the acquisition of NUKEM Energy, one of the world's leading traders of nuclear fuel products. We're excited about this acquisition as it strengthens our position in nuclear fuel markets and improves our access to secondary and unconventional sources of supply. This isn't part of our Double U strategy but it is a way to enhance our business by gaining better access to another aspect of the uranium market.

If we consider the market this quarter, we didn't see a lot of movement. In terms of the uranium price, it has remained quite stable and not a lot of contracting occurred, which is often the case for the nuclear industry at this time of year. However, we are starting to see some of those catalysts occurring that we've been watching for. The biggest one, of course, was the recent restart of the Ohi reactors 3 and 4 in Japan. Though Japan's future energy mix is still being debated, we believe the Ohi reactor restarts will help pave the way for more restarts of the Japanese nuclear fleet. The government continues to put reactors through the stress-test process to ensure that they are technically safe and also passed a bill to establish a new independent nuclear regulatory body, which is expected to come into force in September. We've also seen some Japanese utilities come into the market to contract for uranium. So we believe that these restarts are just the beginning and that these restarts, along with further restarts and new reactors coming online in China, and utilities continuing to return to long-term contracting, will help move the industry away from its current near-term uncertainty.

I know the big question that, you, our investors, are trying to determine is when exactly that will be. I don't have the answer to that, but would just say that when the market does move, it tends to move quite quickly as we saw in 2007, and again, in 2010. And the long-term fundamentals are there to support positive movement in the industry. 95 net new reactors are expected by 2021 and more than 60 of those are under construction right now. That's huge growth for our industry, and we're just starting to see that new construction start to edge into the market. China started up a new reactor in Q1 of this year. And if we look at the rest of 2012 and into 2013, we expect to see at least 7 more reactors come online in China, as well as others in South Korea, Russia, Argentina, Slovakia, India and even 3 restarts here in Canada. And this is occurring as we near the end of the big secondary source of supply.

The end of the Russian highly enriched uranium commercial agreement in 2013 will remove a significant source of supply from the market, about 24 million pounds per year. This is happening at the same time as questions are being raised about new supply as we've been seeing several new projects delayed or even canceled. It's this combination of increasing demand and decreasing supply that makes us confident that our strategy to increase uranium production to 40 million pounds by 2018 remains the right strategy, and the best way to build value for our shareholders. So we continue to pursue that goal and we remain on track to achieve it.

Just before we turn to questions, I'm going to ask Grant to talk a little bit more about the $30 million contract termination fee just so that we can clear up any misunderstanding. Grant?

Grant E. Isaac

Thank you, Tim. I'd just like to discuss our treatment of the $30 million contract termination expense, which we had previously disclosed in our Q1 update. It shows up in the other income line as a consolidated statement of earnings as an expense and we did not adjust earnings for this as a one-time expense. Because we expect to recoup the charge as we deliver the material and the higher-priced contract. Based on the way the company is structured, if you were to adjust for it, it would add about $0.07 per share to our adjusted earnings. However, once again, we did not feel that was the appropriate treatment given the future benefit we expect to receive.

Timothy S. Gitzel

Very good. Thank you, Grant. And with that, we'd be pleased to answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Ralph Profiti from Crèdit Suisse.

Ralph M. Profiti - Crédit Suisse AG, Research Division

With what we're seeing in the U.S. DOE, the Kintyre economics and sort of the realized price, how are you thinking about that 60/40 contract pricing strategy? Do you think that's still the way to go for Cameco?

Timothy S. Gitzel

Yes, we do, Ralph. In the long term, we think that's our best combination. I'm just looking to Ken. Ken's been doing a lot of work on that with his team over the last few months, I would say, just on that question, because we have thought about it here. Ken, can you comment on that?

Kenneth A. Seitz

Yes, absolutely. And Tim's right, we'll look at our contract mix and what it's meant for us in terms of average realized price. The type of hedge that we have with the 40% and so on. And we think it's the right strategy for us. Your points about Kintyre and the DOE are well-taken. We're a long-term company. We take a very long-term view. And so at 40% base escalated, we have a nice hedge, but we still leave ourselves open to the upside that we see in the market with the 60% market related, of course, writing floors into those contracts to cap ourselves, limit ourselves on the downside. So for us, we continue to believe it's the right mix for us and it's the one that we'll continue to pursue

Ralph M. Profiti - Crédit Suisse AG, Research Division

Thanks for that. And just taking that further, are there any fixed-price contracts that you're realizing that when you combine them with the escalators are now at or above the spot price contracts? Is there any of that going on? And if you can compare that to, say, 6 months or a year ago.

Kenneth A. Seitz

If your question is whether we have base escalated contracts today that are above the current market, we absolutely do. We did a significant amount of contracting in the 2007 through 2010 period when we believe the prices were quite good. Of course, prices have come off since then. And so yes, we have contracts in place that are above the current market.

Operator

The next question is from Greg Barnes from TD Securities.

Greg Barnes - TD Securities Equity Research

The question is around Kintyre and your Double U strategy, if it's not making the grade now, is that going to impact your ability to get the 18 million pounds -- sorry, 40 million-pounds by 2018?

Timothy S. Gitzel

Greg, thanks. We have a suite of projects that we're moving forward right now, most significant of which, of course, is Cigar Lake. They're progressing nicely. So with our production today around 22 million pounds, cigar should bring us 9 as we ramp up. We'd be over 30 million pounds. That's going to be a combination of the suite of project that we have, including our U.S. assets, Kazakhstan, and McArthur. We are working on that and others that will get us to the 40. So I can say we're still holding our guidance on the 40 million by 2018, and we believe we can achieve that.

Greg Barnes - TD Securities Equity Research

Okay. Second question. On the core of the realized price of $42 a pound was very low versus what you've done over recent quarters. And your price guidance does suggest -- your price sensitivity table does suggest that 2012 is somewhat of a low point for you in your realized price. So are you coming off from very low-priced contracts now and they'll be done and you can move forward from here?

Timothy S. Gitzel

Ken, you want to answer that?

Kenneth A. Seitz

Sure, yes. There's a few things that work there, Greg. One, is, yes, we continue to close out lower priced contracts, and that's happening at the moment. In the last quarter we also delivered a greater number of market related deliveries and you'll see that back in the price table in that our current portfolio, the one as we look forward is a little less exposed to market-related prices. So you get into those higher prices and the price table you can see that we're off a little bit because we just have a little less exposure to the market at the moment. But you're right, I mean, if you look at the price tail when you look at future years, you can see the effect of the various price scenarios.

Greg Barnes - TD Securities Equity Research

So a little bit less than 60% market related right now?

Kenneth A. Seitz

A little bit, yes.

Greg Barnes - TD Securities Equity Research

Like 55%?

Kenneth A. Seitz

I'll just say we continue to target 60/40, and in this price environment, we'd certainly like to write some more market-related contracts.

Operator

[Operator Instructions] And the next question is from Edward Sterck from BMO Capital.

Edward Sterck - BMO Capital Markets Canada

I got 2 questions. The first is on the realized uranium price and just following on from the last question, will it be fair to assume that the deliveries that have been deferred until the end of this year with fourth quarter will be higher price deliveries relative to the ones that were called during the second quarter?

Timothy S. Gitzel

Yes, I guess that's fair to say. If you look at the price table and the outlook there, that's right.

Edward Sterck - BMO Capital Markets Canada

Okay. And then the other one is a general market related question just with respect to China. Has there been any indication yet that China's started issuing new reactor construction licenses? Or are they still on hold after Fukushima?

Timothy S. Gitzel

Yes, Edward, it's not crystal clear for us. Clearly they're continuing on with their aggressive project program right now. I think 15 units in operation, 25, 26 under construction. And then I think what's happened is they passed some safety tests and some safety landmarks that they needed for the future program. So we haven't heard a crystal-clear announcement out of them going forward, but we know their plans are to continue building going forward. So we have, I think, in our estimate 60 to 70 gigawatt by 2020. So that's the latest update we've got.

Operator

The next question is from Tyler Langton from JPMorgan.

Tyler J. Langton - JP Morgan Chase & Co, Research Division

Just had a quick question on the -- I think you said you expect 1/3 of your 2012 deliveries to be in the fourth quarter. Just wanted to see is there any chance that customers could push that back into 2013 or is that pretty firm for the fourth quarter?

Timothy S. Gitzel

I think that's pretty -- that's what we know today. The customers have some flexibility on which quarter they're taking in, but we stand by our prognosis that about 1/3 of our deliveries will be in the fourth quarter.

Tyler J. Langton - JP Morgan Chase & Co, Research Division

Okay, thanks. And then just your Chinese imports of uranium have been down pretty significantly year-to-date throughout 2012. Just wanted to see if you have any sense or seen any signs that those could sort of pick up in the second half or any increased activity on that front?

Timothy S. Gitzel

I think, and I look at Ken, but I think as far as we know, the deliveries that we are planning to make into China this year are on track. And so I haven't seen any change from our point of view. Ken [indiscernible].

Kenneth A. Seitz

Yes, that's right, Tim. There is one, I guess, the some new ones that is the Kazakh and Uzbek deliveries to China are being held up at the border at the moment and there's just some complications with import from those 2 countries into China, which are expected to clear, in fact, next month, which will allow those deliveries to flow. So I think you'll see the import numbers into China pick up into the latter part of the year.

Operator

The next question is from John Hughes from DesJardins Securities.

John Hughes - Desjardins Securities Inc., Research Division

Just 2 quick ones. Just to quantify the fourth quarter expected sales number, are we looking sort of 10.5 to 11 million pounds of sales volume in Q4?

Timothy S. Gitzel

Ken?

Kenneth A. Seitz

;.

Yes, I think we probably don't put out exact numbers, and I think we just stick with the percentages that we provided earlier. And that is if you look at the latter 2 quarters of the year, about half of our sales -- remains to be delivered. And about -- and a little more heavily weighted to the fourth quarter.

John Hughes - Desjardins Securities Inc., Research Division

All right, because I know you had a great sales number in Q4 last year, close to 14 million if I recall.

Kenneth A. Seitz

Yes, it's not quite that number this year but a little more evenly distributed between the last 2 quarters, but again, just a little heavier in the fourth quarter.

Barry D. Allan - Mackie Research Capital Corporation, Research Division

And will there be any significant change in split between produced and purchased over the second half of the year?

Kenneth A. Seitz

No.

John Hughes - Desjardins Securities Inc., Research Division

And last question, you noted the Japanese utilities that have come into the market I guess over the second quarter for uranium, are they -- can you tell, are they -- or can you tell are they the 2 reactors at Ohi or Ohi or whatever that have restarted? Or are these other reactors in Japan?

Timothy S. Gitzel

Yes, we won't say who they are. But what I will say is in general, we deal with all of the Japanese utilities and we're in constant contact with them. We have agents over there. There is optimism certainly fueled by the restart of Ohi 3 and 4 that the Japanese fleet will be brought up over time. And starting with those 2, and we expect a few more this year yet and then coming on. So I think the utilities -- and we've been working with all of them to help them manage. We've been clear on that, manage their inventories. And so there's some optimism in Japan that things will come back. I think there's a lot of work that's being done in the country, more on the political side to determine what role nuclear energy will play in the country going forward. And we'll see a lot more debate on that I think over the next months. But certainly, it was a good sign, this in July when the 2 Ohi reactors were brought on. So to your question, I guess, utilities are expecting to bring their units up at some point, and we'll need fuel and are managing their fuel in that way.

Operator

The next question is from Ian Parkinson from CIBC.

Ian T. Parkinson - CIBC World Markets Inc., Research Division

Just getting back to Kintyre, I know Greg asked a few questions already, but is the intention to go to feasibility with the existing resource or might we see a resource update prior to the completion of the feasibility study?

Timothy S. Gitzel

Yes, that's a big part of it. We've put drills on the program and now at site, we're looking to increase the resources. I think we pointed out in the quarter that you need the price or pounds, I guess, to make the project look good. And so clearly, on the pounds side, we've increased our budget to drill around the ore body to see if we can uncover some more resources there. So that's what we're doing. I think, I look at Bob, but we'll be running that program -- or Ken to the end of the year. And we would hopefully have some results there obviously as we go along but by the end of the year and into next year.

Ian T. Parkinson - CIBC World Markets Inc., Research Division

Okay, great. And on the political situation in WA, can you remind me what for a level of political support we have for uranium mining in stake?

Timothy S. Gitzel

Yes, it is, very strong. We certainly know the Minister of Mines well, and the government have been very encouraging to us to move the project forward. Very helpful to us. They've visited us here in Canada several times, and we certainly have gone over there to visit them. So today, the support is very strong.

Operator

The next question is from David Snow from Energy Equities Inc.

David Snow

Your comment about the DOE 15% instead of 10%, has that -- for how many years does that appear to be the case?

Timothy S. Gitzel

I'm not sure there was a time limit put on that, actually, David. They did a what's called a secretarial determination where they look at whether the DOE can put more pounds into the market without disrupting the whole apple cart, if you like. And I think the determination was that if they put up to 15% of U.S. nuclear reactor requirements, annual reactor requirements, on the market through the DOE, it wouldn't upset the market. Not sure we completely agree with that determination, but that's what it is. So what we do appreciate is, I guess, the clarity that if it's -- if that's what is going to be, then so be it. And let's get on with things. And so I think prior to -- the U.S. consumes about 50 million pounds a year, so 10% would be 5 million pounds and now, 15. It's a little bit more than that. So it brings us some clarity. I guess that could be about the best that could be said about it.

David Snow

And when does the increase take place?

Timothy S. Gitzel

I think it's as of now. I'm not sure we've seen the pounds yet. But I think it's now.

David Snow

And can you talk about the issues regarding increasing further in Kazakhstan to 10 million as tied to the U.S. 6 apparently? What's the likelihood of going forward on any of that?

Timothy S. Gitzel

Yes, so we continue to talk with our Kazakh partners. They were in fact -- Dr. [indiscernible] the Head of [indiscernible] Canada last week that as we were just in Canada last week and we had a chance to spend some time with him to discuss where we're headed. We continue to work toward doubling JV Inkai's production from 5.2 million pounds to 10.4 million pounds or 2,000-ton a year to 4,000 ton a year. We've been I think clear in saying that conversion was part of those negotiations. And clearly, the conversion market today is not that solid. But going forward, we think as more reactors are brought online, more conversion will be needed. So we're talking in that context. We have conversion technology that we would transfer to the Kazakhs. And we're looking at building some kind of a facility in Kazakhstan at the right time when it makes sense. So that's the discussion. Those there to the discussions we're having. And I think we're progressing well.

Operator

[Operator Instructions] And the next question is from Oscar Cabrera from Bank of America.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Tim, just would like to get your views on how do you expect Japanese nuclear reactor fleet to come back? I don't know -- happy to just get percentages or number of reactor. I'd like to hear what your views are on that.

Timothy S. Gitzel

So, yes, Oscar, we -- as I said, we are taking a day-by-day or are step-by-step when we saw you last and others last. We said we believed that the Japanese would start bringing their reactors back on sometime this summer. I think that's when their big power draw is. The heat in the summer. And so we're pleased, I guess to see Kansai bring back Ohi 3 and 4 back, 2 units up on. That's not going to put a big draw on nuclear fuel in the short term, but it certainly was a psychological step forward and a physical step forward to get to see that -- nuclear power is not off the table in Japan. It's still on, game on. And so now, we've seen both from Kansai and other utilities that they're now making requests to the government to restart their units. I don't know exactly what the process is or how long it will take, but I think gradually, they'll start coming back on. Maybe wouldn't be a surprised to see 6 or 7 units back on by the end of the year. That's just speculation on my part. But the good news is that nuclear power is still on in Japan. As I said earlier, a lot of the debate will go on in the country to determine the supply mix, energy supply mix for the country going forward. And I wish the Japanese well with the discussion. It's not an easy discussion. We've seen the huge imports of LNG and oil and coal and others to replace the nuclear. It's having an effect on their trade balance, I think. And so they got to go through all of those discussions inside the country to determine the right mix. But from what we understand, nuclear will continue to play an important role.

Oscar Cabrera - BofA Merrill Lynch, Research Division

That's great. That's helpful, thank you. And then on Kintyre, I'm not sure if I missed that. Your previous answer but when did you assume -- or what was the length of construction that you assumed? When did you assume the project started? What year?

Timothy S. Gitzel

We had assumed a startup of construction I believe in 2014. I'm just looking to Bob for confirmation on that. But is that the right...

Bob Lillie

Yes, that's the right timing with the startup. Most of the approval processes have things in place by then and start construction mid -- late 2014 and -- I'm sorry, early 2014 and production for 2016 were the assumptions.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Okay, great. And then lastly on NUKEM. I'm just trying to start putting an answer around your new business. How should we think about sales or EBITDA margins? I don't know if you're able to provide any color on that at all. And when should we think about start including that in our models?

Timothy S. Gitzel

I'll pass that to Ken lead these parts?

Kenneth A. Seitz

Sure, absolutely. NUKEM it's been an exciting acquisition for us. They've been doing trading in nuclear fuel for decades now and they've been doing it quite successfully. In terms of volumes, if you look at their history they've done anywhere between 10 and 15 million pounds per year. And a large part of that has been their participation in the HEU agreement. That said, even post-2013, we're expecting that NUKEM will continue to trade in the neighborhood of the 3,000 to 4,000 tons per year. And so significant volume, and it really sourcing secondary supplies and unconventional sources of supply and putting it in the hands of customers. In terms of EBITDA margins. I think you can -- I don't think we can say specifically today, but you can assume I at typical trading margin on several purchase and a sale in this business. And so it's really a percentage that you can assume.

Operator

[Operator Instructions] And the next question is from Brian MacArthur from UBS.

Brian MacArthur - UBS Investment Bank, Research Division

;

I just wanted to follow up on the last question. Are you going to have a separate unit for NUKEN or is it going to be blended in with purchase and resell pounds going forward?

Kenneth A. Seitz

It will absolutely be a separate unit. Again, NUKEM is a very successful trading model. And we are able to continue to do what they do as a separate group.

Brian MacArthur - UBS Investment Bank, Research Division

Are you go to report this as a separate like end of the year or will it just be just blended in purchased product in the financial statements and the uranium segment like we do with the HEU deal?

Grant E. Isaac

Brian, It's Grant Isaac. At the time of the closing, we will bring it into our statements on a segment basis so you'll see us with the uranium segment. Fuel Services, electricity and then the NUKEM segment.

Brian MacArthur - UBS Investment Bank, Research Division

Great, thanks. And back to John's question, I was very interested about the Japanese entering the market. Can you tell me, are they looking for pounds? I assume they're looking for pounds like for long-term contracts, 3 to 4 years out, not near term. That sort of the inquiries you're getting, because I assume I would that's still a fair bit of coverage in the near term and lots of inventory lying around?

Timothy S. Gitzel

Ken?

Kenneth A. Seitz

Yes. That's fair to say that it's a little further out in time. I mean, again, we don't disclose any real specifics around any of these requests. But that's correct. That's still further out in time.

Operator

It's next question is from Greg Barnes from TD securities.

Greg Barnes - TD Securities Equity Research

Tim, I was a little surprised that you said that economics on Kintyre is challenging at $67 a pound. Although it seemed to work as $60 a pound, I would assume that you use that as your base not or something in that range anyway?

Timothy S. Gitzel

Yes, I'm not sure we disclosed the number used long term. But yes with the pounds we have, I think we've put out of the pounds that are involved there and I would say WA's -- jurisdiction hot and the climate sense but also hot and a lot of activity going on over there right now. That combination and the current prices -- we put the numbers out there. So we -- if you wanted to give a little bit more clarity on what we thought not just that it wasn't economic today, but what we thought we would need to see it become economic. So that's why we provided a little bit more information than we might have. And so that's where it's at. And so as I said, some time ago I've heard others to speculate in our businesses to what price might be needed to incite new production. And I've heard others speculate that it's over $60. I think this is a case in point.

Greg Barnes - TD Securities Equity Research

Okay. And just as a follow-up, Macassa, with the work you've done in derisking 2013 production you mentioned you could use some blast hole stoping. Have you ever done that in Macassa before? Is that new?

Timothy S. Gitzel

Well, very good. Actually, it will be new, but we have done it. That's why we're now feeling that plus, that the productivity improvements with really taking or improving the cycle time on from starting to finishing a raise and getting on to the next one with the head. We've also run some tests, a test blast-hole stoping and that worked out very well. So now that we have -- we always had it in our back pocket. As a mining method, we would anticipate using at the right place in McArthur. But we've now tested it and proved it up and works quite well. So that's why we're very confident about the dip in 2013, the risk of a dip in 2013 being mitigated and won't occur.

Greg Barnes - TD Securities Equity Research

Just a further question, how much are production that fuel come from hole blast stoping as opposed to the reamer?

Timothy S. Gitzel

Great. It will be a very small part of production. So no question in going forward. Reaming will always will be the bulk of our production. It will be the 80%, 90%, 95% of the production. But the blast hole stoping, it allows us to pick up some revenues in areas that otherwise reaming would not -- would be a real challenge to get to. And so it'll be a very small portion of production.

Operator

The next question is from Fraser Phillips from RBC Capital Markets.

H. Fraser Phillips - RBC Capital Markets, LLC, Research Division

Tim, just so I'm clear, the $67 million number at Kintyre, is that the number that you -- or the price that you would require to generate whatever your target return is or is it something else?

Timothy S. Gitzel

Yes, that's correct. Absolutely correct.

Operator

The next question is from Edward Sterck from BMO Capital.

Edward Sterck - BMO Capital Markets Canada

Just returning to the conversion market. I believe I'm correct in saying that convaran [ph] is closed for potentially 12 to 18 months, possibly longer it seems to be a bit undetermined at the moment. Is that against -- in your view results in the any upward pressure to the cost of price of conversion and will there be any benefits to Cameco or is all of Cameco's conversion on long-term contracts?

Timothy S. Gitzel

There's a phrase that comes to my mind that cost of events does not dictate what happens in the future. We've seen supply disruption in the past and in fact, it hasn't had that effect on price. So we don't know what will happen. We clearly are watching closely the convaran [ph] situation. I think it was a bit surprising to us. We weren't aware of it. We weren't aware of what's going to happen at the plant that could be down in 12 to 18 -- for 12 to 18 months. So we'll watch to see. There's been this big gap between slot prices for conversion, which are quite, quite low and the longer term, which certainly looks more promising from our point of view. And so what effect that will have, I think we'll have to hear some more news from convaran [ph] as to what the plans are there. And is it really going to be down for that period of time. So we're waiting to hear a bit more information.

Operator

[Operator Instructions] And the next question is from David Snow of Energy Equities Inc.

David Snow

Any update on the laser enrichment?

Timothy S. Gitzel

Yes, David. We're working on that. We continue to work with our partners on the technology. We've got some reports recently that they're encouraging. I say very encouraging with respect to the technology. So the work continues to work moving the technology from concept and a desktop proof to know whether we can employ that industrial scale in. So I think we've got another year or so of work to do there before we will have the results. But so far, we're encouraged by what we're seeing.

Operator

Our next question is from Brian MacArthur from UBS.

Brian MacArthur - UBS Investment Bank, Research Division

Sorry to go back to Kintyre again. Can you tell me -- because as you said historically, about 60 was sort of what we looked at. Was it basically capital blowout issue or an operating cost or both that made the economic work or did the ore body actually change and looked different than what you thought?

Timothy S. Gitzel

Brian, I think probably a combination though might not use the word blowout, but I would say costs are high in WA right now with the pounds we have. It's a -- the economics are where they're at. And so we're going to have to see some increased resources there to make it to go forward. Reduce costs, we're not crossing our fingers on that too much because we see Western Australia being charged for a long time with all of the big projects that are going on there. So yes, we're looking at it. And through the feasibility work, we'll look at any optimization we can do. But given what we have today from the pre-feasibility study granted, we need to either more price or more pounds or hopefully, both.

Brian MacArthur - UBS Investment Bank, Research Division

And just going back to -- it was again the price you've talked about a little bit earlier realized this quarter was quite low. And I know there's a mix of contracts that always affects this. But there used to be, and I don't know if you can still confirm this. There used to be some very long, I think there were 10-year contracts, so that obviously would've been written a long time ago at a very low price before things changed in 2003. Are there any of those contracts still sitting around that are that low? And did they come in this quarter in a disproportionate way or something that really distorted there or was it more just -- I mean, did you have a bunch of $13 stuff weighted in there that it turned out there was a board just a timing of the later contracts that knocked down or can you even comment?

Timothy S. Gitzel

Brian, let me see what Ken can tell you on that.

Kenneth A. Seitz

Sure, and I don't -- I wouldn't say that there was an unusual or odd -- I should back up and start by saying yes, we are -- continue to deliver under legacy contracts that might be a market-related contract with a low ceiling or might be a low-base escalated contracts absolutely. And as their price stable shows, we come out from under those contracts in time. If we look at them in the quarter, I wouldn't say there was an unusual number of low price contracts. I will say that there was a little shift in market-related versus base-escalated contracts. And in this lower price environment compared to the quarter last year, you'll see an average -- a lower average realized price. So that was the only nuance in the quarter is that we just delivered into a few more market-related contracts and what is in lower spot and term price environment.

Operator

This will conclude the question is from the telephone lines. I would like to turn the meeting back over to Mr. Tim Gitzel for his closing remarks.

Timothy S. Gitzel

Well, thank you, operator, and thank you to everyone who has joined us on the call today. In closing, I would just reiterate that it is common in our business to see variance in the quarters throughout the year as we've seen in the past, and that we are still on track to deliver strong results again this year. But we're also always actively pursuing growth. And I think you can see that in the high level of activity you've seen from us recently with the deals at Cigar Lake and Millennium and with the NUKEM, we continue with our strategy to grow the company. We believe these developments in pursuit of our growth strategy, combined with the market growth we see on the horizon, will result in value returned to you, our shareholders. So again, thank you for joining us today, and have a great day. Thank you.

Operator

Thank you, Mr. Gitzel. The Cameco Corp. Second 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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