Paladin Energy Ltd. (OTCPK:PALAF) Q4 2014 Earnings Conference Call August 28, 2014 6:30 PM ET
John Borshoff - Managing Director and Chief Executive Officer
Craig Barnes - Chief Financial Officer
Mark Chalmers - Executive General Manager, Production
Dustin Garrow - Head of Marketing
Stefan Hansen - Morgan Stanley
Amit Prakash - CIMB
Ken Tham - RBC
Glyn Lawcock - UBS
Andrew Shearer - PAC Partners
Ladies and gentlemen, thank you for standing by. Welcome to Paladin Energy Limited's Fourth Quarter 2014 Conference Call and Investor Update. At this time, all participants are in a listen-only mode. (Operator Instructions) Please be advised that this conference is being recorded today, Friday, August 29, 2014.
I would now like to hand the conference over to your speaker today, Mr. John Borshoff, Managing Director and CEO. Please go ahead.
Thank you and good morning from Australia. I welcome you to this conference call to update you on our annual financial report for FY '14 and the June quarter results. With me I have on the line our CFO, Craig Barnes, who will update you on the company financials and related matters; Mark Chalmers, our EGM, Production, who will update you on our operations; and Dustin Garrow, Head of Marketing; and Andrew Mirco, GM, Treasury and Corporate Development are also upon the line. All of us will be available to answer any questions you may have at the end of this presentation.
This presentation includes certain statements that may be regarded as forward-looking and investors are cautioned that such statements are not guarantees of future performance.
Our presentation outline is as shown and we'll follow our usual format. We have had another big year at Paladin. All of us in the uranium industry have been working with a falling uranium price situation, reaching a low of $28 at the end of FY '14. I believe the achievements made by Paladin against this rather bleak backdrop with further improvement on the operational front, a second cost review undertaken and production optimization gains have been considerable. And in this harsh environment, we completed a sale at Langer Heinrich at a fair price to help us maneuver toward our goal of reducing debt and strengthening our balance sheet.
Our key achievements are summarized on this next Slide 3. I will leave it to my colleagues to go into the details; however, our strong production has been a feature and we met the upper range of our stated guidance for the year. Putting Kayelekera on care and maintenance was also a successful outcome for the company. Recognizing the importance of Kayelekera also to Malawi, this transition needed to be conducted with a great deal of sensitivity considering not only the economic factors, but also political and social. I'm glad to say we achieved it successfully.
With the operational improvements we have already announced, this project is now available for potential restock when incentive price is sufficient. And in all this, we have created a significant value from an asset once considered a burden.
The sale of the 25% of Langer Heinrich to CNNC has been a critical and highly successful development, introducing a solid partner and clearing the way to now embark on other monetizing initiatives that we have. Refinancing of Langer Heinrich facility has also contributed to reducing cash outflow. The Michelin resource upgrade we announced is seen as a positive development with both grade in measured and indicated resources improved significantly.
Our achievements are referenced in Slide 4 against four key pillars that define our progress. These pillars are achieving strong operational performance, deleveraging our balance sheet, establishing sustainability in lowering price environment, and maintaining our strategic value and positioning to take best advantage of the uranium price resurgence.
As you can see, the six clear achievements noted on this slide have contributed considerably into all these four categories. In making these significant gains, we have in the process also partnered with two of the most significant nuclear activities in the world in CNNC and EdF who now definitely have keen interest in the company's wellbeing.
I think it's worthwhile to set out in the start what we plan in forthcoming FY '15. With Kayelekera now offline, our production will rely solely on Langer Heinrich for which we've set out guidance between 5.4 million pounds and 5.8 million pounds. Our objection operationally is to continue cost production and improve production performance where we have set clear targets for ourselves.
Safety remains a key concern for us and we recognize that improvement is required and we are putting special effort to reduce Lost Time Injury in our workplaces. Importantly, we have now completed Langer Heinrich sale and our prime focus will be to proceed on all the options we have available to reduce our debt and strengthen our balance sheet. And we expect this to occur in the remaining part of 2014.
Before we go to the financial, I'd just to like to give you an update of where our feeling is on the uranium outlook. As you can see at the bottom, two tables on Slide 7, it shows reactor demand remained strong post-Fukushima with a little over 500 reactors expected to be in operation by 2020. In terms of new reactor builds, China recently gave us a glimpse of its nuclear electrification targets going from 60 gigawatts by 2020 to 150 gigawatts to 200 gigawatts by 2030 and then rising significantly beyond into the 2030s.
These are staggering numbers by any score coming from just one country and an enormous amount of uranium is going to be required to feed that expansion alone, never mind for the Middle East, India and other growing nuclear economies.
The small spot price increase has been experienced in August moving from $28 to now about $32, has been explained due to political issues and the possible strikes. Although this may be the case, I believe there could be other underlying influences at play, suggesting some supply fragility even at this stage.
Slide 8 show that again in Japan, the NRA has granted a preliminary approval of the two reactors earned by Kyushu Electric and leading to what is expected to be a major reactor restock program. The Kyushu reactors are expected to reach that for the Japanese winter. This could ultimately result in as much as two-thirds of Japan's capacity reentering commercial operation over the next few years. Elsewhere, 72 reactors are under construction today.
On the flip side, this demand optimism produces response to severely depressed prices has been predictable. Paladin had the Kayelekera mine on care and maintenance as did uranium 1 Honeymoon in South Australia and Rossing production is down significantly.
In the United States, operations on production are sufficient only to deliver into the few term contracts they hold. At these low uranium prices, there can no sustainable future for explorers, miners and for that matter the industry as a whole. With only half of the present production able to operate with some profit at current spot price, it is clear no one will invest in replacing existing capacity as it runs down, never mind investing in growth of supply.
You should note that in the last 12 months, by our estimation, almost 11 million pounds have either been cut from annual production or deflected into markets. And we expect the impact of this to be felt strongly by the stock market in the next 12 months. This will severely constrain certain players as product dries up for those working in this market. If these depressed uranium prices continued, I feel there will be more production cuts to come.
Slide 9 show the term contracting of uranium and I can say that it is behind schedule basically in the US thanks to uncertainties due to Fukushima. The volumes contracted in 2013 for future delivery totaled only 20 million pounds when typically this should be about 150 million pounds per annum. To mid-2014, term volume has picked up and reported at 60 million pounds. The US utilities now need to act fast to fill these term contracts for the 2016 to 2021 period.
As I have mentioned before, it is normally done 24 months beforehand, meaning that price reacts well before a period of actual shortage. And in this current situation, we would expect a positive price reaction in the next six to 12 months. So far, the utilities have been restricted to the 2015-2017 period with limited term contracts extending beyond 2018. Few producers are participating in the term market, because they're reluctant to participate below cost of replacement and create severe legacy contracts going forward. We expect increasing long-term contract to be beyond the reach of the traded in the next 12 months with a tender uranium price increase.
Now just to summarize in the next Slide 10 our outlook on supply, we've just completed our fourth annual supply/demand analysis, which is very much derived from a supply side expertise. And the summary of this is shown on Slide 10. This by the way broadly aligns with Cameco's findings. And where we differ is in the timing of recovery. We say six to 12 months. They say 12 to 18 months. Not much difference really. Both say there's significant supply shortfall for 2020 and beyond. And our study shows a widening supply starting 2016.
From the onset, our uranium supply/demand studies have used as a foundational component in incentive pricing as a fundamental requisite in establishing the capability of the industry to increase supply and not what is theoretically possible. This is in addition to other key constraining considerations accounting for risks associated with deposit quality, the approvals processes, metallurgical issues, geopolitical masses, cost of production, CapEx and financing limitations.
Our key findings when observed and evaluated from a strong supply perspective are that true supply/demand situation is obscured by the current short-term market oversupply. The paradox is with the low uranium price that this current situation has created is resulting in a total lack of incentive to initiate supply growth for the 2017 to 2025 period. This is a highly volatile state of affairs. There is simply no opportunity to increase supply beyond what is currently been constructed, which is limited to Cigar Lake and the Husab Project, which in itself may suffer some delays.
So the price has conflated not only to support current supply, but also to support the mid-term lack of sufficient supply, a true paradox. Our 2014 study indicates that this supply stagnation will lead to a shortfall of about 35 million pounds per annum by 2020 or put in another way a cumulative shortfall of about 190 million pounds by that time. And on this basis, we expect to start a positive price reaction occur in late 2014, early 2015 just to incentivize the much needed supply growth.
Every uranium miner is saying they need substantial uranium price of at least $65 to $75 to start to think about the large amount of capital to build new greenfield uranium mines. The market is blinded from this supply deficit by the temporary uranium surplus caused by Fukushima and supplemented by the enrichment facility operations. Some organizations are forecasting a near decade long surplus markets, staying uranium price will stay sub-$45 to $50 in the next six years. The uranium industry is saying no new greenfield expansion will happen unless uranium price reaches $65 to $75, for which decisions need to happen in a very, very short term.
Am I something here or does someone really think serious mining companies or developers are going to invest just to lock in long-term financial losses? I think not. As one very imminent producer has been quoted as saying recently, as existing long-term contracts expire, further production curtailments and closures are expected to occur. These are valid points.
And on this, I will pass on to Craig for the financial review.
Thank you, John. Good morning. Slide 12 is a breakdown of Paladin's profit and loss for the 2014 financial year. Revenue from the sale of uranium for 2014 decreased by 19% as a result of a 23% decrease in realized uranium sales price to $37.9 a pound. The realized sale price exceeded the average unit C spot price for the year of $33.9 a pound.
Sales volumes increased by 5% to 8.6 million pounds and partially offset the impact of the lower uranium price. The lower sales revenue for the year resulted in a growth in loss from operations of $3.4 million before taking into account any inventory and payments. Unit C1 costs for Langer Heinrich decreased by 4% to $28.8 a pound in 2014 and Kayelekera C1 costs decreased by 16% to $35.9 a pound for the year.
In addition to the impairments of $255.7 million after tax already recognized in the December half year results, which primarily are related to the impairment of the Queensland exploration assets, further impairments of $40.6 million were recognized at the year-end.
Due to the decrease in the uranium price, at the year-end, we recognized an impairment of $1.5 million of the Kayelekera's finished goods, an impairment of $21 million of Langer Heinrich's finished goods. In addition, Kayelekera's stores and consumables were written by $14.5 million because of Kayelekera's placement to care and maintenance.
Admin, marketing and non-production costs for the year decreased 45% due to cost reduction initiatives, which included a $7.3 million reduction in corporate and marketing cost, senior management pay reductions and pay freeze, the decision to place Kayelekera on care and maintenance and the ending of Langer Heinrich's Stage 4 expansion study and other R&D projects. Further cost reductions are planned for the next financial year.
The cost reduction initiatives during the year also meant that exploration expenditure was more than halved to $8.1 million. Finance cost of $59.7 million decreased by $4.1 million from the previous year primarily as a result of $68.8 million reduction in the project finance stake during the year.
Slide 13 summarizes the company's cash position and cash flows for the year. You'll see that our cash and cash equivalents at year-end were $88.8 million. If you exclude the $20 million deposit which we received in April on the 25% minority interest sale in Langer Heinrich, the cash and cash equivalents effectively decreased by $34.5 million from $133.3 million in March 2014. The decrease was as a result of the semi-annual convertible bond interest payments in April and May totaling $13.7 million, which will only occur again in the December quarter.
The Langer Heinrich's project finance facility payment of $9.2 million in June, this semi-annual payment has now been reduced to $4.5 million and the next payment will be in the December quarter as well. Corporate and exploration expenditure for the quarter was $4.8 million. And Langer Heinrich's net cash outflow for the quarter was $6.8 million.
In July, the company's cash position was significantly strengthened with the receipt of $170 million from CNNC on the sale of 25% minority interest in Langer Heinrich. Furthermore, the Langer Heinrich's project finance facility was successfully refinanced and $30.8 million was repaid in July.
During the year, there was a net cash inflow from operating activities of $10.1 million. This was lower than the previous year, which included product fees of $200 million from the EdF offtake agreement.
The operations generated positive cash before working capital for the year of $32.2 million and $29.4 million was generated from working capital. The reduction in debt during the year resulted in a decrease in interest payments on borrowings to $33 million from $42.4 million in the previous year.
The CapEx and exploration expenditures during the year meant that the cash outflow from investing activities decreased to $25.3 million from $46.2 million in the previous year. CapEx of $20.3 million for the year included sustaining CapEx, expenditure on the new tailing facility at Langer Heinrich and the acid recovery plant at Kayelekera. Cash outflows for exploration expenditure were significantly reduced from $16.5 million in the previous year to $5.8 million in 2014.
During the year, there was a cash inflow from financing activities of $26.3 million compared to a cash outflow $181.5 million in the prior year. The cash inflow is comprised of net proceeds of $78.2 million from the share placement completed in August 2013, $68.8 million repaid on the project finance facilities during the year and deposit of $20 million received from the sale of the 25% minority interest in Langer Heinrich.
Slide 14 provides a snapshot of our capital structure. As you can see from the debt maturity profile, the recent refinancing of both the Kayelekera and Langer Heinrich project financing facilities has a material positive impact on reducing the cash drove from site. The Langer Heinrich principal repayment has reduced from $18.3 million per annum to $9.1 million per annum up to 2017 and then increase to $19 million per annum in calendar years '18 and '19, by which time the uranium price is expected to be corrected.
Since 30 June 2013, we have reduced our outstanding project debt significantly by $100 million. As you can see from the table in the top-right of the slide, Paladin's debt portfolio announcement of the new $70 million Langer Heinrich facility, $300 million convertible bond maturing November 2015 and $274 million convertible bond maturing in April 2017. Both convertible bonds still are some time away from maturity. Importantly, Paladin remains focused on deleveraging the balance sheet.
You'll note that that table excludes a loan from CNNC of $96 million, which you'll note is included on our balance sheet. We recognize the disposal of the 25% minority interest in Langer Heinrich in the current financial year, because all the conditions precedent was met. And from an accounting perspective, the criteria was satisfied for recognizing the transaction. And as part of that transaction, CNNC acquired as well as 25% of the equity, also 25% of intercompany loans owing by Langer Heinrich to Paladin. So you should really see that as part of the minority shareholders' interest in Langer Heinrich and not part of the date when you're analyzing obviously the debt on our balance sheet.
With regards to the $300 million convertible bond, we have been proactively working on a number of alternatives in parallel and believe there are number of levers available to address the maturity, activities for which could only be started post completion of the Langer Heinrich's joint venture in late July. First, the existing cash and proceeds from the recent minority sale will be utilized to assist with the repayment of the convertible bond.
We're also investigating a number of financing alternatives, including increasing leverage against Langer Heinrich, issuing a new smaller sized convertible bond or other capital market solutions. We're also working on a number of strategic alternatives that will look to monetize Paladin's existing unique strategic position.
Paladin is looking to maximize shareholder value, whilst maintain an adequate cash balance. We are aiming to deal with the repayments or refinance of the $300 million convertible bond in the second half of calendar year 2014.
Mark Chalmers will now take you through the operations update.
Thank you, Craig, and good day, everybody. And just again a quick update on the projects. Some of this has already been covered, but I'll go into a bit more detail. I'll start off with Langer Heinrich.
As John mentioned, very solid operational results with record production of 5.6 million pounds. For the year, that was up 5.7% from last year. And also as John commented, we met our FY '14 guidance very close to 8 million pounds through the combination of both Langer Heinrich and Kayelekera. Guidance for this year, the 5.4 million pounds to 5.8 million pounds will be with Langer only.
We continue to focus on dropping feed grades and we've done that successfully over the last couple of years and that will continue to trend downwards. The project continues to be of a low quartile producer. Our C1 costs in the June quarter were up slightly to $31.20. That was mainly due to aged resin, which is currently being replaced. For the year, the average costs were $28.80 per pound. And that was down 4% from last year.
We have a long-term target of reducing cost at Langer into the low $20 per pound. And we plan to get there through a combination of optimization, innovation and that is critical to get to those lower levels. And that can happen really in a number of different ways and different areas.
One way to drop cost is just to increase units of production when it's appropriate. Also, improving beneficiation and we plan to do that within a number of areas, but primarily with the hydrosort, improving IX performance and I mentioned the resin replacement. We're now going to do that on a periodic basis, which has not been done previously. Looking at things like improvements in precipitation and washing and at Langer, one of the key opportunities is reduction in reagent consumption. And that is mainly going to be done this year or into FY '15 through the application of the nano-filtration process which was similar to what was done at Kayelekera successfully.
And in addition to that, there is a number of other areas that we'll continue to focus on anywhere where we can get material benefits, but things like improved resin loadings will also help us in that regard and the periodic resin replacement will aid greatly in that area.
Now I'd like to just talk a bit about Kayelekera project. Again, similar to Langer, had solid operational results. Production was at 2.35 million pounds and that was down, as expected, and that was because of placing the project into care and maintenance and stopping the feed into the project in early May. The recoveries for the year were very solid at 86.2%. C1 costs dropped more than anticipated at Kayelekera and that's something we're very proud of. Costs for the year were under $26 a pound, which was down 16% from the previous year. And if you look later in the year as we were operating, the costs actually dropped substantially below that.
The largest reason for reduction in costs at Kayelekera was really asset independence and it was a combination of blend management and application of nano-filtration technology which now will be imported into Langer for one of the same reasons. We do expect that the project will restart in the low $30s with the addition of grid power. But as I said earlier, the average costs towards the end of the project operation were down in low $30s. So the project is on care and maintenance and that was a well-managed process. Unfortunately, it resulted in the reduction of over 700 employees and contractors, but that has now been completed. The plant is cleaned out.
And I'd like to make a few noteworthy comments that the operational performance has been proven and that project, as John mentioned, people thought that it would never get there. Well, it did get there. Approximately 50% of the resources are remaining. There still is exploration potential. We will be maintain the project for a quick restart when prices reach in that circa $75 a pound range. And I'd also like to say that Kayelekera is very strategic for Paladin. It provides us with swing production when required.
Now just a few comments on our key pipeline projects. These projects we have been progressing, but at reduced expenditure to be very prudent with how we add value to those projects. The first project I'll talk about is Manyingee in Western Australia. It is a fairly small project, approximately 25 million pounds of resources. We plan to use the low-cost ISR method for extraction. Plant production is 2 million pound per annum. Paladin has extensive expertise to develop a project like Manyingee, even though we haven't done ISR project previously as a company.
The grades at Manyingee are around 850 PPM and the depths are favorable for ISR, which are both important. It is on an existing mining lease. We are currently preparing a draft field leach trial document as we speak. And we plan to have a FLT trial in 2015 or '16 to further add value to that deposit. Production could be as soon as 2018, but that would be price-dependent. There is also a belief we believe that there's substantial room for resource expansion of circa 40 million pounds in the region. So again, Manyingee is in the pipeline and we are advancing it.
Now lastly, I just want to talk shortly on the Michelin Project in Canada. John mentioned that we have had a substantial upgrade of the resource by about 25% at the Michelin orebody and that was a result of the latest winter drill campaign over 100 million pounds of measured and indicated around 1,000 PPM. The higher Michelin Project area resources, which there are deposits in the Michelin orebody itself, is around 140 million pounds. And we're targeting 200 million pounds or greater within our tenements.
Again, similar to Manyingee and as John mentioned, all these developments for production are price-dependent. And we believe we could have Michelin online post-2020, 2021 or so. And Paladin believes that Michelin Project will be a significant future producer.
So that really concludes my comments on the projects. And I'd now like to turn back to John.
Thanks, Mark. So just finally going to Slide 20, just to reiterate how we positioned ourselves for the future, the long-term underpinning with the two strong reputable nuclear utilities should not be underestimated. These groups have with CNNC put in almost $200 million at EdF on the contract with the prepayment of another $200 million, certainly make these groups important cornerstones in Paladin.
Being a proven builder and operator, it has begun to become very important in the forthcoming period to build more capacity, which is essential. And we are the only company that have successfully developed to conventional operations I think is important in terms of how we represent in that producer landscape.
I have demonstrated ability to reduce cost and increase production are important. Just in the brownfield production area, we can increase with incentive pricing to 5 million pounds essentially at de-risked base. And of course we are continuing on with our corporate cost reduction.
The positioning for this next phase of growth is important. And we are in a strong position to achieve strategic alliances and partnerships with key participants. And we do have a staged development schedule up to 2025, which as mentioned is price-dependent.
So to close off quickly again, our guidance is in that sort of 5.4 million pounds to 5.8 million pounds. FY '15 priorities are cost rationalization, operations and corporate, strong operational performance, which we're confident we'll achieve, and the deleveraging of our balance sheet, and importantly remaining positioned to take advantage of the optimistic outlook on uranium market.
We are fully committed to preserving Paladin's strategic position and we're also committed to realizing value for the shareholders. And importantly, this is capitalizing on the very high unique strategic value of the company.
And finally, Paladin is the only significant independent uranium company in the world. It has currently capacity to produce 5% of global supply and is positioning itself to take advantage of the emerging positive outlook for uranium. In the last 18 months, we have achieved some significant milestones, which have themselves showed that some sort of realistic nuclear utilities are positioning themselves within what is really a limited field to ensure their future fuel needs.
And I'll close and be available for any questions. Thank you.
(Operator Instructions) Your first question comes from the line of Stefan Hansen of Morgan Stanley.
Stefan Hansen - Morgan Stanley
On Kayelekera, I completely understand the $75 a pound incentive price for greenfield projects, because you've got that upfront capital hurdle to get through first. But why do you think that number for the restart of Kayelekera, particularly when you've proven that costs can be $35 or sub-$35 a pound getting towards Langer Heinrich levels? Just wondering why you've got that level.
This is really predicated on what our analysis is of supply/demand. And we expect that after all this commitment, after all this risk taking that we want to get into super-profit areas. And the whole thing is that we believe that when price reacting starts to occur, it will occur in a very subtle way. This is not something that will just happen. And we're saying that what happened in the iron ore industry when iron ore was $140, we believe that we'll take advantage of this. So we don't have to be an early bird, but I believe we're just protecting shareholder interest.
Stefan Hansen - Morgan Stanley
So is it getting to $55, you'd be starting to make positive cash flow from the operations then?
The Board will always consider that option. But we think the events will just go past this in terms of uranium price.
The other thing is that the resource at Kayelekera is smaller than it is at Langer. And as John said, we want to get to full value for that. So we want to recover our investment on Kayelekera. And so it can generate substantial cash and we want to turn it when we get that substantial cash back.
Stefan Hansen - Morgan Stanley
In terms of your expected CapEx outflows for fiscal '15, just wondering what we can expect for sustaining at Langer sort of the $8 million mark? And then in terms of exploration, what can we expect?
From a sustaining CapEx point of view, it's between $10 million and $11 million for Langer. And then the project that we're busy with at the moment, the buyback of recovery project at Langer upgrades to the current plan and that's going to be about $8.9 million. And exploration has been about $7 million.
Stefan Hansen - Morgan Stanley
Did you mention that you're planning on dealing with that November 2015 CBs in this half?
Your next question comes from the line of Amit Prakash of CIMB.
Amit Prakash - CIMB
As I explained when I was in the presentation, that $96 million is really part of recognizing that transaction. And it effectively represents the portion of the intercompany loans that we're owing to Paladin, 25% of those loans were assigned to them. So they do have a right to receive payments on those loans. However, it's linked to what happens at Langer Heinrich if they generate excessive cash. Obviously every $75 will go to Paladin and $25 will then flow to CNNC. They repayments that are disclosed in the financials are really just assumptions, because we have to disclose that. Any repayment on that loan will only be triggered by repayments from Paladin.
Amit Prakash - CIMB
And just secondly, your fuel target at Lander Heinrich is (question inaudible). What's changed in that time period?
As I said in my presentation, we're looking at these different optimization and innovation projects and whatnot to go ahead and recover reagents and whatnot. It's not really so much pushed out, but it does take time to get all these things implemented. And as I said, we're targeting in that low 20s as I mentioned.
And it's also a part of new look of John Borshoff where we're being a little bit conservative and FY '16 takes us out into the mid of that calendar year and FY '14 we believe we'll achieve in the later part of 2016.
Your next question comes from the line of Ken Tham of RBC.
Ken Tham - RBC
One of those mentioned was various strategic alternatives. I was wondering if you could talk through that in a bit more detail.
We won't say anything more than two weeks. Craig explained that we have tested that option and we wouldn't be saying if we didn't have them. So I'd like to leave it at that and then advise on delivery.
Your next question comes from the line of Glyn Lawcock of UBS.
Glyn Lawcock - UBS
Firstly, with all the rationalization that's gone on, Kayelekera being closed, could you just give us an update a little bit of what your contract book looks like now? Of the guidance you've given, how much of that now is under contract of varying pricing mechanisms versus how much is still pure spot sales? And then if you in the interim could just give some sort of guidance or help us if all else being equal, spot stays at $32, last year you got about $4 to $5 premium, how should I think about what you're going to achieve going forward this year?
Just looking at the Michelin deposit and the big resource upgrade, how are you going in discussions with EdF? Is that something that's ongoing and can we expect that to be a favorable outcome for us as shareholders?
Just in terms of your supply/demand analysis, what sort of assumptions are you making on the Japanese reactors? In that Slide 10, are you assuming a full start over time to get to that sort of 2020 picture of 35 million pound deficit or is that you're being a little conservative in your Japanese assumptions?
We are just saying that once the Japanese reactors come on, those inventories are safe in the safe haven. And I will wait then to participate in the longer term. In terms of the supply/demand, the spot pricing of contracting, what I'll do is I get Dustin to respond on that.
Taking a look at forward commitments, we are basically done for calendar '14. And through the end of next year calendar '15, we've probably got about 20% at this point uncommitted or planned production. Starting in '16, we kind of drop down to 60%. And then '17 and '18, it's a bit below 50%. Now keep in mind, we intend to address that issue predominantly with term contracts, as you say, of various pricing mechanisms. And if you assume we try to get terms agreements with defined prices of around 30%, maybe a bit higher, and the rest would be exposed to the market.
Now keep in mind we have not really gotten many contracts there where we've agreed over ceiling prices. So we'll have a lot of upside exposure. But yeah, if you assume we will get certainly in calendar year '15, we'd probably have 15% of deliveries above 60%. And then most of the rest of them will be related to the spot price. So that's kind of the leverage at this point. But then going beyond that, that remains to be seen. We're developing the strategy right now on how to commit those terms on an optimized basis.
Glyn Lawcock - UBS
Maybe on an all-in basis if $32 is spot for fiscal '15, can we assume sort of similar premium that we saw in fiscal '14 or slightly better, given you don't have as much spot exposure given you've now shut down Kayelekera.
We expect to maintain that premium. And in fact, we expect to with selective terming in the shorter term to enhance that. And that's one of the aspects that Dustin was talking about in terms of this strategy. We have limited our pounds completely. We're going to start those spot price people. And as I say, this will have a self-correcting element to pricing.
In terms of Michelin, just to finish, look we believe we've really brought with all that metal in the open pit area and the grade that's been improved upon the project financing at right price, that becomes a really good option where everything is in the open pit and anything on the ground we're almost sort of amortized.
With EdF then, naturally we are in discussion and we will come back to them and say that that value has improved. But certainly, I am very happy with the development in that and that project is advancing.
Japanese restarts, we think that ultimately about two-thirds of that capacity will come back online. We also say that in actual fact, they'll probably align at about 20% of their electricity coming from nuclear. You have to get to a sort of scale of economics. We have that technology contribute to the overall sort of strategy of producing electricity.
Glyn Lawcock - UBS
If you are able to gt Michelin down on the 60%, does that have a fifth option of deleveraging strategy about maybe more forward sales as well or is that something you wouldn't considering?
No, we wouldn't consider that.
Your next question comes from the line of Andrew Shearer of PAC Partners.
Andrew Shearer - PAC Partners
You mentioned that current surplus is a short-term issue and you say the surplus coming from Fukushima. But you also mentioned that the enrichment side of things is adding into the surplus. I'm just wondering if you could give a bit more color on that and why you say this is short term.
On the whole area of enrichment under feeding, our estimates based upon discussions with the enrichers come out quite a bit lower than some that have been published. We think it's around $4 million a year in the market. Now they have been laying that off under long-term contracts. And we think it'll even be a smaller volume, because once the enrichment market turns, the enrichers want to sell commercial enrichment. They're not in the business of basically under-feeding. So yes, it's a factor. It's been a bit higher recently because of Fukushima and some of the deferrals of enrichment deliveries. But when you look at the volumes, we don't see it as a major contributor. And they've already been making commitments out to 2020. So going forward, utilities will more and more be dealing with the primary producers on longer-term contracts.
There are no further questions from the telephone lines. I would now like to hand back to your presenters for closing remarks.
Thank you very much for attending our investor call. And if there are any other follow-ups, most of you know, you can give a call in and we'll follow through. And with that, thank you very much and until next time bye.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.
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