Cameco's (CCJ) CEO Tim Gitzel on Q2 2016 Results - Earnings Call Transcript

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Cameco Corporation (NYSE:CCJ) Q2 2016 Earnings Conference Call July 28, 2016 1:00 PM ET

Executives

Cory Kos - Manager, Investor Relations

Tim Gitzel - President and Chief Executive Officer

Grant Isaac - Senior Vice-President and Chief Financial Officer

Analysts

Rob Chang - Cantor Fitzgerald

Edward Sterck - BMO Capital Markets

Orest Wowkodaw - Scotia Capital

Ralph Profiti - Credit Suisse Securities

David Wang - Morningstar

Jim Ostroff - Platts Nuclear Publications

Paul Luther - Bank America Merrill Lynch

Daniel Horner - Nuclear Intelligence Weekly

Andrew Quail - Goldman, Sachs & Company

Operator

Good day, ladies and gentlemen, and welcome to the Cameco Corporation Second Quarter Results Conference Call.

I would now like to turn the meeting over to Mr. Cory Kos, Manager, Investor Relations. Please go ahead, Mr. Kos.

Cory Kos

Thank you, Valerie, and good afternoon, everyone. Thanks for joining us, and welcome to Cameco’s second quarter conference call to discuss the financial results.

With us on the call today, we have 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, and 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 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 forms 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, Cory, and welcome to everyone on the call today. We appreciate you taking the time to join us to discuss Cameco’s second quarter results. After some brief remarks, and then I’ll turn it over to our Chief Financial Officer, Grant Isaac, for additional details on our financial results. After that, we would be happy to take your questions.

I think I can say that, Q2 2016 has probably been the toughest quarter in the toughest market we’ve seen in the last decade. And our results for the quarter reflect just our challenging in the market environment where our industry continues to be. Uranium demand remains low and uranium prices depressed.

In the second quarter, the market remain quiet with with contracting volumes even lower than last year at this time. As a result, we saw both the spot and long-term uranium prices fall to new 10-year lows. In fact, the spot price for uranium has fallen 66%, since the Fukushima accident, including a 25% decrease since last year at this time. It’s not difficult to see wide, there has been no real catalyst to kick start a significant change to the current conditions.

Progress on the –restarted Japan’s reactors remain slow, as utilities work their way through the new regulatory framework and also due to the court injunctions imposed on several reactors in the final stages of their restart process.

Consequently, there has been no change in the number of operating reactors in Japan since the first quarter. And as long as the bulk of their reactors remain shutdown, uranium inventories continue to grow. This at a time, when demand is lower overall and supply continues to perform well. Add to this the announcement, so premature reactors shutdowns mainly in the United States, which is also adding extra pressure to the supply demand equation.

Within that context, we at Cameco continue to look for ways to remain competitive. Our strategy is to keep our production flexible and focus on our lowest cost assets. That strategy led to the production curtailments, we announced last quarter. The benefit of those actions will not be evident in our financials this quarter, instead as was expected, we saw an increase in our unit cost of sales and our administration cost, partly as a result of workforce restructuring and care and maintenance costs, as well we incurred a write-down in Rabbit Lake, which was one of the primary drivers of our net earning results in the second quarter.

But over time, we expect these decisions will help us remain competitive in an uncertain market, where we simply don’t know how long the weak conditions will persist. On the production side, I’m happy to say our operations continue to perform well. We had no major operational issues to report for the quarter and production volumes were all and target were slightly better. As a result, we remain on track to meet our target of 25 million pounds, 28 million pounds of production for the year.

When it comes to sales volume, our deliveries have been light for the first-half of the year, which is normal. We have contracts to deliver 30 million pounds to 32 million pounds in total this year, but just when they are delivered, it’s based on when customers call for them. As usual, those deliveries are heavily weighted to the second-half of the year.

For the rest of our outlook, we are on track with our revenue and cost guidance, although there were some changes to new NUKEM’s outlook for this quarter. We have revised our sales guidance for NUKEM down, which will, of course, affect the segment’s revenues. This combined with the write-downs in NUKEM’s inventory this quarter will impact gross profit for the year.

The reason for the adjustment is the same as we noted for NUKEM’s decreased sales volumes. Last quarter, we’re just not seeing opportunities in the market. That’s the reality of the market we’re in today. But over time, we believe that will change. China’s new build program is going strong as South Korea’s and India’s. So far this year, five new reactors have started up, including three in China, one in South Korea, and notably one in the U.S., the first new one in 20 years.

Those new reactors in the many more that are expected to come online over the next decade will drive an increasing demand for uranium. So over the long-term, we remain optimistic. We know that investments in new supply will be needed. But at today’s uranium prices, that investment is just not happening.

So, we’re continuing to focus on our strategy to deal with today’s very real challenges to sustain our business through this extended downturn and to remain flexible, so we can respond when the market improves.

So with that, I’m going to turn it over to Grant Isaac for a further discussion of our results. Grant?

Grant Isaac

Yes. Thanks, Tim. I wanted to take a moment to put our financial results into an appropriate context. And to disentangle our poor performance from some of the other notable items affecting the quarter, it might be useful to think about two types of notable items. Those that are mark-to-market driven by the fall in the uranium price, and those that are charges, resulting from strategic decisions that we have undertaken, for example, production curtailment and restructuring.

As Tim noted, this was probably the toughest quarter in the toughest market that we’ve seen in the last decade. Market activity was light and uranium prices continue to face downward pressure. Some of the market-related contracts we delivered into during the quarter were affected by the weaker uranium market prices. But overall, our contract portfolio continue to provide good protection for us, delivering an average realized price almost 60% higher than the average spot right for the quarter.

Our earnings this quarter were affected by our Uranium segment sales, but this was more a function of the timing of deliveries, which is dictated by our customers. As we had guided, our contract deliveries were low for the quarter, following the lumpy delivery pattern we expected. Our deliveries are again heavily weighted towards the end of the year and that is when we will deliver the bulk of the 30 million to 32 million pounds of uranium specified in our annual guidance. This is uranium that we have under contract to deliver. It is not uranium that we had yet to sell.

Looking at costs, we were able to lower our unit cost of inventory primarily as a result of lower production costs. The decrease in production cost be attributed to our strategy to focus on the lowest-cost operations, which saw as curtail production at our higher cost operations last quarter. Of course, the remarkable progress at Cigar Lake is also a significant contributor to the reduction in production costs.

However, the – that good news was hard to distinguish, since curtailment does carry with it some costs. Those costs are accounted for in the cost of goods sold for the quarter, which increased. We charge almost $39 million in care and maintenance and severance costs directly to cost of sales. So despite what looks like deteriorating results at the core, our Uranium segment remains solid.

Our contract commitments for the remainder of the year will see us deliver between 19.5 million pounds 21.5 million pounds of uranium. Our contract portfolio will continue to provide price protection from weak market prices, and our annual cost guidance remains intact, despite the noise in this quarter. So once we work our way through these restructuring activities, the strength of our core business will be more apparent.

I also want to touch on NUKEM’s core performance, as well as other notable items impacting the NUKEM segment in the quarter. Like our Uranium segment, NUKEM sales are affected by the variability in customer requirements. In addition, the ongoing weakness in the uranium market has met fewer profitable opportunities available to us. As a result, sales revenue and gross profit for the end of June are lower than a year ago, reflective of the weaker market conditions. This has led us to reduce our sales and revenue guidance in that segment.

If we look at NUKEM’s gross margin, cost of product sold is up for a couple of notable reasons that fall into the mark-to-market category. As we sell inventory acquired when we purchased NUKEM in 2012, we have to allocate a portion of the premium we pay to acquire those pounds to cost of sale. There is no cash impact from doing this, but it does impact the reported margin in the quarter in which those sales occur. The other item affecting cost of sale was the mark-to-market adjustment at NUKEM inventory in the quarter, as a result of the weakening uranium price.

I want to cover a number of other notable items as well. These remaining notable items are best characterized as charges that impact this quarter, as a result of strategic decisions that we have undertaken. While admin costs appeared to increase, both for the quarter and year-to-date, if we back out a number of these notable items, the actual run rate of our administration spend has decreased, as a result of the cost-cutting measures we have implemented.

The notable items are related to the signing of a collaboration agreement, which provides us with ongoing support from the communities closest to our operations, the restructuring of NUKEM, legal cost as our CRA dispute progresses towards trial, the consolidation of corporate office space, and corporate office changes resulting from the curtailment of production at Rabbit Lake and in the U.S. These decisions will benefit our costs over time, and we’re continuing to evaluate corporate office functions to look for further cost saving opportunities.

Combining our mark-to-market related notable items, with this strategic notable items results in approximately $0.25 per share of negative impacts to our earnings. As such, our quarterly performance may be thought, it was approximately a $0.11 per share of earnings, which is, in fact, a performance consistent with a quarter that saw low deliveries of 4.6 million pounds, as guided.

Finally, I’ll quickly touch on the CRA tax case. As our MD&A demonstrates, there is really not much change. We are continuing to prepare for trial starting in October. To-date, neither party has requested a court mediated settlement discussion. Although, we continue to anticipate that such discussions will take place before the trial begins. Our view of the case has not changed. We continue to be confident that we will be successful and look forward to presenting our case at trial.

And with that, I’ll turn it back to Tim.

Tim Gitzel

So, thank you, Grant, for that update. Operator, we’re delighted to take any questions that anyone might have.

Question-and-Answer Session

Operator

Thank you. We will now take questions from investors, analyst, and media. [Operator Instructions] Thank you for your patience. Our first question is from Rob Chang with Cantor Fitzgerald. Please go ahead.

Rob Chang

Good afternoon, everyone. Two questions. So, first off, details on the canceled contract, I haven’t seen many of these. And I was just wondering what the details on that are and can we – would we be expecting to see more of things of that nature?

And the second question being, could I get a little more detail on the increase in the tax recovery guidance to jump quite a bit, and I saw a small note on it. I was wondering if there could be more detail provide on that as well? Thanks.

Tim Gitzel

Rob, it’s Tim, I’ll take the first one and pass it over to Grant. So that was a customer that we had that decided they didn’t want future delivery under their contract, and I think it shows a strength of our portfolio, they came to us to crystallize it in the near-term and paid it out in cash. So a good new story for us. Grant?

Grant Isaac

On the tax recovery guidance, it really is as the note said and I don’t have much more detail other than it is. It’s just a function of where our earnings occur and within a year where we have Canadian production ramping up with Cigar Lake and in a year where we’re taking significant cost curtailing another Canadian production at Rabbit Lake. We end up with some losses if you will that we book against our Canadian filing position, and then that ends up translating into a recovery for us. So that’s what’s changing that recovery outlook Rob.

Operator

Thank you. Our next question is from Edward Sterck with BMO. Please go ahead.

Edward Sterck

Hello, Tim. So I’ve got a few questions. Just touching on the termination of contracts and the payouts from that, I’m just wondering is that revenues against your report exceptional and just considered normal course revenues? I guess in that case they paid out the full contract? And what the impacts on future delivery commitments be then, and also in terms of the utility, of the Japanese utility we’re talking about?

Tim Gitzel

Grant, do you want to answer that?

Grant Isaac

Yes, well, let me start with the last. We – as part of the settlement, we committed to not disclosing for the utility was, and so we won’t be doing that nor will the utility be. It will be reported in our Q3 earnings and the precise segment that will appear in is yet to be determined, but it will be a benefit to that segment what I mean there is whether its uranium or our fuel services division.

And at the impact on future deliveries is effectively it’s a take-or-pay and so they’re out from under the obligation to take those future volumes. But we’re okay with that given the value that we were able to get in the near-term. So yes, I will open up a bit of our contract commitments, but not materially as you’ve seen in our disclosures.

Edward Sterck

Okay, thank you. And just one also follow-up question, the unit cost of sales guidance for the uranium division for the year, which is some change. So I’m just wondering if that guidance includes the associate of $1 millions of premises cost with including cost of sales in the current quarter?

Grant Isaac

Yes, it does. Yes, so the – that’s the average unit cost of sales guidance would include care and maintenance cost. That’s one of the things they get started back about just the run rate production costs. And on an annual basis that guidance has remained. So we’re looking to that up to 5% increase over last year’s average unit cost of sales, and holding to that at this point.

Edward Sterck

Thank you very much.

Tim Gitzel

Thanks, Ed.

Operator

Thank you. Our next question is from Orest Wowkodaw with Scotia Capital. Please go ahead.

Orest Wowkodaw

Hi, good afternoon. I guess getting back to the same issue, the contract termination for $47 million, have you had – does this open up kind of Pandora’s Box now? Have you had other inquiries from your customers to try to I guess cancel these take-or-pay contracts?

And what – do the utilities have any ability to defer their deliveries beyond this year? Obviously they looks like they defer until late this year, but is there anything that allows them just defer those deliveries into next year the year after, given with the market is?

Tim Gitzel

Of course, I assume, this is a bit of a one-off. This is certainly as many pattern that we’re seeing as Grant explained. We’re able to crystallize it which work pretty well for us. We talked about it in the past on calls, the Japanese – in the early days, we did some deferrals, but we haven’t seen any thing lately in that regard, so just a bit of one-off.

Grant Isaac

Yes, there would be – it wouldn’t be unusual any uranium contract to have some flex where customers can defer a bit of the commitment out to future years. But ultimately over the end of that contract, they have to take that full volume typically and so yes, there might be some in year moment, but overall effect on our contract portfolio tends to be negligible.

It’s not a surprise that there are some utilities out there that are either delayed in construction programs or maybe early shutdowns of the reactors might find themselves in a position where they want to talk about those volumes. But I think ultimately you’re seeing the strength of our contract portfolio that it doesn’t turn into a conversation about cancellation and we would only differ if it made sense for us. If we were able to see the value for us and it made sense and in this case, it did.

Orest Wowkodaw

But just following up on that, how do you get comfortable that you can still maintain a guidance of $30 million to $32 million pounds deliveries? If there is some wiggle room in terms of contract delivery timing?

Tim Gitzel

Well, in fact you’re actually hitting on the reason why it is a range. It is a range because there is a – that wiggle room if you will on an annual basis. But as we look at what’s left in this year the $10.5 million that we delivered so far in the remainder for the rest of the year that’s under contract that guidance has been changed because we remain confident that that we will deliver those volumes in and just to emphasize the point that that to achieve that level of sales does not require us to go and felt the material is already under contract for delivery.

Orest Wowkodaw

So this guidance assumes no spot sales?

Tim Gitzel

Yes, so if we make discretionary in your sales it would be additive to that is just in a market like we see today. We’re not desperate material into it.

Orest Wowkodaw

Okay, and could you comment on what you’re seeing in terms of re-contracting? It seems like a little bit of a still made in the market right now between producers and utilities, any comments you could provide? Thank you.

Grant Isaac

Yes, it continues to be a very quiet market or as Tim had mentioned it, so far year-to-date you’re looking at about 21 million pounds contracted in the term market about 18 million pounds in the spot market. So tracking to another particularly low year and you use the term stalemated is a good one, I think we’re still facing a few buying community that really believes, there is a price off bias and quite frankly they’ve been right, if you watch the fallen the uranium price, Tim as mentioned 66% down since the Fukushima 25% just since last year.

So why we do see the sense of the price off bias, we on the other hand look at the long-term fundamentals and we say new supply have to be incented. We got a contract portfolio that protects us. We’re taking steps to ensure Cameco’s profitability through these difficult markets in the and we just are not ready to part with our uranium at today’s prices

Orest Wowkodaw

Thanks very much.

Tim Gitzel

Thanks, Orest.

Operator

Thank you. Our next question is from Paul [indiscernible] with Bank of America Merrill Lynch. Please go ahead.

Unidentified Analyst

Hi, Tim and Grant, thanks for taking my questions. You could we start a – I wanted to get a sense of uranium help in inventory, how it’s changed in the past quarter and if there’s a risk of the inventory rate down?

Grant Isaac

Yes, so when we did about inventory, obviously you see and have seen over the last a while, NUKEM’s inventory is sensitive, it’s quite sensitive to the uranium price. And so we have seen some NRV’s associated with that and of course, they get reversed when the uranium price increases. But I think – I expect you’re talking about the overall uranium bucket…

Unidentified Analyst

Yes.

Grant Isaac

We have the different accounting approach. So NUKEM has specific identification and therefore has that vulnerability to the uranium price. On the chemical side, we have single bucket inventory and so all our purchases and all our production go into the same bucket, when we focus on tier 1 production obviously we end up with some attractively cost of pounds going into that bucket helping – keeping that that level or that value in the bucket, even in a good position in today’s market. So from a risk point of view that’s not a risk that we did prepared to identify.

Unidentified Analyst

Great, thanks for explaining that. And then you should agree to cash production drop rate this year, year-over-year 40%. So I want to get a sense, is that really from Cigar Lake coming on and the mix shift in terms of where product is? Is that level, do you think sustainable?

Tim Gitzel

Yes, absolutely that Cigar ramping up to the levels that is it performing very well and taking rapid like out of the mix. The combination of those two is going to put us on a good path, and yes we believe we just sustainable going forward.

Unidentified Analyst

Great, thanks for taking my questions.

Tim Gitzel

Thanks, Paul.

Operator

Thank you. Our next question is from Ralph Profiti with Credit Suisse. Please go ahead.

Ralph Profiti

Good afternoon. Thank you. Grant, based on six months of sales and inventory as kind of the long-term goal, the carrying value that we’re seeing on the balance sheet on inventories, the revise guidance and seasonality, how long would it take for you to return those inventory levels to – what you would consider kind of long-term optimal levels?

Grant Isaac

Ralph, it’s a great question, and it absolutely tied to market evolution. I mean this is not a market where we’re interested in mobilizing those inventories. They rose from a couple of different things as you’ll recall, I mean in 2014 when we saw some attractively priced pounds in the market. That was a time when I think Cigar Lake was at about 400,000 pounds of production and of course the following year hit a 11 and then this year just excellent performance.

So we were thinking about material back in those days differently in depth and also knowing that curtailment was something to those possibly coming to Rabbit Lake in U.S. We saw pounds that we thought were price cheaper than the Tier 2 cost of production and carry no operating risk.

We acquired those pounds there, we still think they’re attractive, there are key part of operating leverage when the market starts to be demand driven and that’s exciting for us. At the moment, we have no plans to mobilize it until the market starts to incents us to do so. So when you say how long, it really is all eyes on the market, watching those factors that are going to turnaround and make as a demand driven industry.

Ralph Profiti

Grant, second question, would you ventured sort of take a – an estimate, because when we think about inventory leakage and this inventory slow back into the market, how much uranium do you think is sitting in the hands of less long-term oriented players be at traders and hedge funds were not financial players, do you have a sense of that amount?

Grant Isaac

Ralph, I wouldn’t have a good number. If I made a few general comments, they would be along the lines and you see it with NUKEM, you might have some of the intermediaries in the market actually being slightly longer than their comfortable with being and that just a reflection of folks believing that there would be a turnaround in the transition to a demand driven industry a bit sooner. But these are small amounts is in the hands of those types of groups. We’re not talking about massive inventories.

I think the sentiment if you will really point to Japan. As long as those Japanese reactors aren’t running, it’s creating a real material in the market through deferred demand and through and which we’re under feeding and then it’s creating the sentiment overhang because we know that they have a big inventory and I think folks are just wanting to know a little bit more about that restart process in a little bit more about how long it takes to get up to a reasonable run rate number and until then it looks like they’re really long on uranium. So that’s probably more of the sentiment driven peace than the intermediaries at this point in the market.

Ralph Profiti

Got it, thanks Grant.

Grant Isaac

Thanks, Ralph.

Operator

Thank you. Our next question is from David Wang with Morningstar. Please go ahead.

David Wang

Hi, thank you for taking my questions. I have a number one on the contract, so have you guys mentioned those take-or-pay, which are profits to open higher, it’s about contract was fulfilled and just trying to get a sense of – with that contract pricing with higher or lower than the average in term portfolio.

Tim Gitzel

David, that’s not something we would disclose, obviously there was a negotiation associated with it. We looked at what the value would have been added run out and we want to make sure, we retain that even we did and so that’s what we can tell you on that contract.

David Wang

Okay. And then on the secondary markets, I was wondering if you can give us a little – some details on what you’re seeing there in terms of volumes and supplies it seems like no market still deliver oversupply currently maybe in part due to the secondary volumes. Do you see that continuing that current pace going forward or do you see those volumes sort of coming down a bit in coming years?

Tim Gitzel

Well, it’s hard to say, we watched Japan again two reactors running there and I think we have anticipated quite a few more being has an operating and so that’s having a big effect. There is good news trying as a good news story and there is a good news story, so three years so.

The demand there and we see that increasing over time, supply has performed well through this period. I would say we haven’t seen a whole lot supply come off and so then you’ve got the secondary material, you got enrich our underfeeding that’s going on especially, especially Japan is down. You’ve got to the government’s putting material into the market the DOE only comes to mind.

So right now, you don’t think the – there is certainly sufficient supply to fill the demand. But we see over time that demand continues to growth. Supply I think stays flat and starts to fall up, just in natural decline. And we’re going to need some balance at sometime and today we are not investing at all in any new production. And so it takes us a long time to bring any new production online. So we do see better days ahead, but right now I’d see the markets well supplied.

David Wang

Thank you.

Operator

Thank you. Our next question is from Jim Ostroff with Platts Nuclear Publications. Please go ahead.

Jim Ostroff

Hi there, I appreciate the time here. I did have a few follow-up questions on that contracting and a settlement. Can you provide any detail as to about how many pounds were enrolled with this settlement?

Grant Isaac

No, Jim unfortunately under the terms of our agreement and settlement we’re not allowed to do that.

Jim Ostroff

Okay and let me ask if you can characterize a bit the, all right, the settlement value and that is if in any way it is tied to the amount of material that was not sold and therefore income not realized. We might say simplistically if that represented the pounds times and certainly in spot price yielding $46.7 million I’m just trying to get some idea about what that represents that that total?

Grant Isaac

Well you’re going along the right lines. The methodology for considering something like a contract cancellation it’s simply to look at the price that you would have achieved under the contract and look at it relative to if you took those pounds and diverted them into the market instead and it’s that gap that you need to crystallize that’s a pretty common methodology it’s the one we used here and as Tim said earlier that then results in a negotiations and we’re very happy with the way it resulted and I guess if the counterparties are happy with it as well. So, as we know not something that would be for, we don’t have a lot of other examples of it, but this was very specific circumstance and a got conclusion.

Jim Ostroff

Right and one other I would add you of course chemical took impairment before suspension activities rapidly. And given the outlook as you both have described here where people might ask as to whether it is likely it will be further core impairment later this year or into next year?

Grant Isaac

Well, Jim we obviously took the steps we thought we needed to or rather like facility U.S. facilities were higher cost operations, we wanted to in this low for longer scenario that we talk about focus on our Tier 1 assets with low cash cuts all of the them. McArthur River and Key Lake facility operating very well. Cigar ramping up nicely [indiscernible] outstanding. And so that’s our focus and so we have given guidance now on our production for the year and that’s what we want to meet that guidance.

Jim Ostroff

Thank you that should do it.

Grant Isaac

Thank you, Jim.

Operator

Thank you. Our next question is from Edward Sterck with BMO. Please go ahead.

Edward Sterck

Thanks very much. just a couple of follow-up questions from me. The [indiscernible] cost going forward [indiscernible] and U.S. as far as some operations, I think for the remainder of the year after closure costs you’ve guarded for around $15 million. And I’m just wondering how that might look for 2017 and beyond? And then in terms of a follow-up question the depreciation charge on new chem $54 million I’m sorry $53 million I presume that’s related specifically for material sold during the quarter, or does that also includes the $14 million inventory write-down?

Tim Gitzel

Yes, Ed I’m going to do this to you again, I’m going to start with your second question first. You’re absolutely right it is an adjustment under the purchase price allocation pertaining to the particular sale from historic – from new chem’s historic inventory and that’s what’s driving it.

The mark-to-market write down on the inventory at new chem is a separate charge and all going into that bucket of things that I added up and said are quite notable in impacting the quarter and actually distracting from what the core performance was on that.

Edward Sterck

Thank you.

Tim Gitzel

And sorry you’re going to have to remind me of the first question.

Edward Sterck

I’m sorry it was all again Tim, yes.

Tim Gitzel

Yes. Perfect, thank you. So we don’t have guidance for 2017 Rabbit Lake, the status Rabbit Lake is also tied to market outlook market, market view we’ll continue to make sure that that’s a secure and safe site. But in terms of what the overall cost would be to put it in that we’re just we’re doing that work now as part of preparing for our 2017 budget targets anyways and so nothing to guide. I don’t have any direction to give you other than Bob’s constantly working very hard to make sure those numbers are as low as possible.

Edward Sterck

Okay fair enough. Thank you very much.

Tim Gitzel

Thanks Ed.

Operator

Thank you. Our next question is from Paul Luther with Bank America Merrill Lynch. Please go ahead.

Paul Luther

Hi, guys thanks for taking my follow-up. Just want to talk a little bit more about Rabbit Lake, kind of what your process, your thought process would look like to consider permanent curtailment of that facility or given your positive long-term views that’s unlikely?

Tim Gitzel

It’s Tim, we’ll – we just made the decision in April, so it’s a bit early and since then we’ve seen the market deteriorate a bit, but that hasn’t changed our plans to put it into it a care and maintenance mode and we’re working on that, we’ve got the mine being secured in the middle of facilities and what comes with that is the reduction, big reduction of the workforce, which I can tell you we’re not we regret, but it’s necessary for the long-term viability that how we saw – we’re taking all those steps now, we’ll watch the market through the course of this year and into next year and see how it performs. There’s still significant resource base there that could be going after should the market improve, but it would have to improve significantly from where it is today before we would think about bringing it up again. Grant, you have any…?

Grant Isaac

Yes, I would just add as well that any decision we would make that would be tied to a broader portfolio decision and we would look to say if the market was incenting us to produce more we would look to all of our sources potential production that includes McArthur River expansion that includes Cigar Lake. And so there would have to be a process to determine what the best way in most profitable way to meet our market best incenting that supply would be and Rabbit Lake would be part of that evaluation.

Paul Luther

Understood. That makes sense, thanks. And then Grant just if I could just one housekeeping question. Can you give us sense for working capital or the balance of 2016? Do you expect to get some more news?

Grant Isaac

Well, what happens when we have sales heavily weighted to the end of the year, you see this build up in our inventory position, because we’re producing material, but we’re not placing it into contract. And then through quarter three and quarter four when we deliver what is going to be the balance of our contract portfolio. You see that’s come down and then that flows through obviously to the cash position as well. So that that annual flow that we seen for the last, I think its five years now, it’s just how we expect 2016 to end up.

Paul Luther

Perfect, thank you very much.

Operator

Thank you. Our next question is from Daniel Horner with Nuclear Intelligence Weekly. Please go ahead.

Daniel Horner

Thank you, and thank you for taking my question. Last year you were quite active in buying uranium, I was wondering what the situation was that – was with that this year if that your continuing that practice where if you could tell us little about that with regard to your inventories and future plans? Thanks.

Tim Gitzel

So Daniel, we do have some purchase commitments in place for this year, I think to the tune of our 9 million pounds, just under 9 million pounds. Many of these commitments we made some years ago while we’re watching Cigar Lake ramp up and want to make sure we were well supplied. And seeing that there’s some real decently priced pounds available and – without any operational risks. So we have some purchases for this year, I’d say last year and this year was two big years and it trails off from there. So we’re always in and out of the market.

Daniel Horner

Okay, so I just to clarify, there were some – I think some that we made previously and some that you made recently is that what you said?

Tim Gitzel

Yes, mostly previously Daniel, we have commitments for as I see – I think it’s just under 9 million pounds purchases this year.

Daniel Horner

Okay, and but trailed up after this year. Okay. Thank you.

Tim Gitzel

Thank you.

Operator

Thank you. Our next question is from Orest Wowkodaw with Scotia Bank. Please go ahead.

Orest Wowkodaw

Hi, thanks for taking my follow-up, two more things. You’ve got – you’ve disclosed that you have 469 million of uranium purchase commitments for the second-half of this year. You’ve already purchased I think close to a 6 million pounds. I’m wondering how we should think about that in terms of volume, so that will show up in the uranium segment as purchase material for the year?

Grant Isaac

Yes, in terms of volume as Tim just said, we were looking at purchase commitments at 9 million for the year. And so we have a few more of the commitments that we enter – entered into in a prior period that are flowing – that will be flowing in. But it’s that remainder of the purchases that are coming. So if I’m looking at the six-month year-to-date number, I mean, we’re at 5.7 now, and so we have three and a bit more left to buy. That number that you saw in the first commitment table is actually covered the whole gambit, not just what’s remaining.

So we don’t have 3 million price that – 3 million pounds, priced at 469 million or so.

Orest Wowkodaw

Sorry, that $469 million is for the year, not just the back-half of the year?

Tim Gitzel

Yes, that’s our commitments. Yes.

Orest Wowkodaw

Okay. Okay, my mistake. And then in terms of understanding your sensitivity table that you put out for realized price.

Tim Gitzel

Yes. When we start to move in time into the –to – say, 2018 to 2020 period. And, for example, if I just look at the $40 level of price realizations, how should – how do – what does this assume in terms of volume, like this just only capture what you currently have contracted in those years or like are you still assuming something close to 30 million pounds even if it’s on contracted?

Tim Gitzel

Yes. So if you speak down to the assumptions that are under that price sensitivity table, you’ll see in there the first bullet under sale – sales volumes on average 27 million pounds per year with commitment levels in 2016 through 2018 higher higher than in 2019 and 2020.

In other words, that price sensitivity table is following the contract portfolio is the known contract terms and conditions that we have today. To the extent that, for example, we see a demand driven industry begin to transition. Then we will have the leverage to that higher pricing mechanism and that table would improve as an example.

Orest Wowkodaw

Okay. So in the years of 2019 and 2020, this assumes volumes – contracted volumes below 27?

Tim Gitzel

Yet, it would, because the average for all those years is 27. But it’s not like our contract portfolio falls off a cliff at that period, it’s a slow transition. So when we say, we’re well protected to 2019 and, in fact, into 2020, it’s just a reflection that when we look at our Tier 1 production, it has homes in an attractively priced contract portfolio and gives us good protection from this week market for a period of time still measured in years.

Orest Wowkodaw

And can you give us a sense of when that contract portfolio would drop below 50%, how far in time?

Tim Gitzel

Yes, we haven’t disclosed that. But it’s probably fair to say that as we get out into the 2022 window, we – there are a lot of pounds that we would have to place. We’re actually okay with that by the way. I mean, as we think about the market transitioning that cumulative demand that’s out there that has not yet been procured, the fact that a lot of term demand has been deferred in the last couple of years with really low term replacement contracting. That’s actually the period where we want some exposure. We want that price in operating leverage to reward our owners. And so that for us is a timing that’s consistent with our view on the market outlook.

Orest Wowkodaw

Okay. Thank you very much.

Operator

Thank you. Our next question is from Jacqueline Morea with Goldman Sachs. Please go ahead.

Andrew Quail

Hi, Tim and Grant, it’s Andrew Quail by the way. Sorry about this, it’s a busy day on the conference call since a frantically [ph] put out. I just have a – host a question, I don’t actually know, all the questions have been asked. But it seems to me that the spot prices is in the doldrums, because no one’s transacting and people are looking at that for future performance, which we know is not true.

Well, my question to you is, Tim, what do you see, well, how long do you think the style might between, say, the producers and the utilities can last, because I think it’s lasting longer than people would have thought. Is it something that might not lead up to the end of the year, or is this more of a 2017 story, or could it be even lighter than that?

Tim Gitzel

Hi, Andrew, you’re right, it is a busy day for calls, we know that we emphasizes all of you that are – have three phones and on the growth for same time. Listen, I would say new answer to that.

Andrew Quail

Yes.

Tim Gitzel

So we look at it – we look at it, we think we’ve been consistent saying, it’s tough in the near-term, no question about that. We base that on some assumptions, and clearly Japan was a big one. We would have said a few years ago that there would have been a lot more reactors operating in Japan today than the two that are growing. And so, we think that has given some comfort to the utilities, there’s no pressure to contract, no sense of urgency that there’s going to be a shortage in the near-term. And so it’s just dragged out longer than we ever thought it would.

And so we’ve had to adopt the company in this floor – into the floor for longer. I think watch Japan, keep an eye on that, see how that progresses. I think we’re looking at another unit starting up this summer back in next week, so which is good. There is a court case going on for another two that had already been going and then back.

So if you can get some momentum going in Japan, I think that good – China carries on with its aggressive play, South Korea, the Russian, the and Indians are building supply as they said has kept pace, is that something, I think I said a few years ago, keep your eye on supply, because I quite frankly thought there would be perhaps some other curtailments or supply disruptions we haven’t seen a lot of the supplies performing quite well.

So there’s a lot of factors out there. It’s something we talk about when Grant and I when rode on the road kind of a compass that we’re guiding the company by. So we’re – we don’t know, say, much.

Andrew Quail

Yes.

Tim Gitzel

Those things – when you see those things start to come into play, then I would say, there has to be an improvement. Demand, again, go back to the fundamentals – economic fundamentals. Demands are growing, supply flat are coming up. There’s extra supply today that we think is getting chewed up. But if you look out ten years even, which in our world isn’t that long.

We see, if these are chemical numbers, demand in the 220 million pound range and supply is something less than that – could be considerably less than that. So you could make an argument that we should be looking at new projects we’re investing today and we’re not. And so at some point that’s going to come to a head in it’s going to have to drive some price.

Andrew Quail

And the sort of the noise around the shutdowns tap much in the U.S., but I think there’s a couple of them. I mean, the next is small, because they’re actually building too, and it’s not going to have much of an impact long-term, is it?

Tim Gitzel

Well, it’s not particularly helpful, I’d say. It’s been – the U.S. market there hasn’t been a lot of electricity growth, and then you get these single units in merchant markets competing with $2 gas and heavily subsidized the wind and solar, and they’re having trouble of bidding into the auctions and winning. And so it hasn’t been helpful, I would say, but there are five new ones in the U.S. One just fired up, two more we just visited the pair of units of over with our Board few months ago. So there’s some good results with bigger units, I think about 1,200 megawatt units and some of them going down are smaller.

So it’s not a great story, but there’s an offset there. And we’re hoping that the world starts to live up to its commitments, the cop 21, [ph] the Kyoto this – keeping the temperature down increase to two degrees and moving fossil fuels, we have the answer for that quite frankly, say, we in the bigger nuclear power, the answer to that. And so we’re hoping that gets us on, as it has in some of the Asian countries.

Andrew Quail

Yes. Okay, thanks, Tim.

Tim Gitzel

Have a nice day.

Operator

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

Tim Gitzel

Well, thank you very much, operator. And thanks to, everyone, who called in today obviously a busy day for a lot of you. Here we’re in challenging times, there’s no doubt about that. However, at Cameco, we remain confident that we have the strategy, the assets and the talent to deal with this and we’re going to do that, and we’re going to be able to sustain our business through a market that could stay lower for longer.

So, again, I want to say thanks to all of you. Enjoy your summer, be safe, and we’ll talk to you sometime in the fall and have a great day. Thank you.

Operator

Thank you. The Cameco Corporation second 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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