The following discussion and analysis should be read with the information contained in the company's audited consolidated financial statements and related notes. The statements are prepared in accordance with accounting principles generally accepted in Canada and, except as explained in note 27 to Cameco's 1997 consolidated financial statements, conform with those principles generally accepted in the United States.
SIGNIFICANT COMPANY DEVELOPMENTS OF 1997
Cameco experienced an eventful year with the company making solid progress in its nuclear and gold businesses. A number of significant developments occurred in 1997:
McArthur River
In August, Cameco received the regulatory approvals required for construction at the McArthur River project. Construction, which began immediately thereafter, is progressing towards production in 1999, subject to obtaining an operating licence. McArthur River is the world's largest known high-grade uranium deposit.
Kumtor
Commercial production at the Kumtor gold operation was announced on May 1, 1997. The mine was constructed at a cost of approximately $450 million (US). Production was in excess of 502,000 ounces in 1997, exceeding expectations by more than 20% and at a cash cost of less than $200 (US) per ounce. Cameco is operator and one-third owner of this large gold mine located in Kyrgyzstan.
Power Resources, Inc. (PRI)
In January 1997, Cameco completed the purchase of PRI, the largest uranium producer in the United States, providing Cameco with an additional source of lower-cost supply and expertise in the in situ leach extraction technology. PRI owns 74% of the Highland mine. Later in the year, Cameco, through its wholly owned US subsidiary Geomex, acquired the remaining 26% interest in the Highland mine.
Public Equity Issue
On August 27, 1997, Cameco issued 4 million common shares at $51 per share. The proceeds from this sale strengthened the company's financial position and enhanced Cameco's flexibility to pursue future business opportunities.
Russian Highly Enriched Uranium
In August 1997, Cameco and two other western companies entered into a memorandum of understanding with the Russian Ministry of Atomic Energy to purchase a portion of the natural uranium displaced as a result of the dismantling of Russian nuclear weapons. Cameco anticipated its share of such uranium to be up to 80 million pounds of U3O8 over 10 years.
In view of the Russian ownership of the uranium and of the 10-year term of the proposed agreement, Cameco and the other western companies insisted on a number of assurances, including that the agreement be officially sanctioned by the Russian government and be enforceable for the contract term. Positions taken by the Russian negotiators, including a proposed change in selling parties, made the assurances requested by the western companies unattainable. In December 1997, the negotiations were suspended.
The uranium displaced as a result of the dismantling of nuclear weapons has long been accounted for in the supply forecasts of the company and of the uranium industry. This material continues to be subject to trade restrictions and quotas–limiting the volumes that can be sold in the United States and the European Union. Cameco continues to believe that this material can be incorporated into the market in a non-disruptive fashion.
Cigar Lake
The joint federal-provincial panel recommended that the Cigar Lake project be approved subject to a number of conditions, including a further review of waste rock disposal options at the mine and of the resolution of tailings management issues at the mill.
The two governments are reviewing the panel recommendations and are expected to issue a response, with a decision on subsequent action, in early 1998. Cigar Lake ranks second only to McArthur River in terms of size and grade.
RESULTS OF OPERATIONS 1997 COMPARED TO 1996
| Consolidated Financial Results (in millions except per share amounts) |
1997 | 1996 | % Change | |||
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| Revenue | $643 | $591 | +9% | |||
| Earnings from operations | $151 | $145 | +4% | |||
| Net Earnings | $82 | $138 | -41% | |||
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| Earnings per share | $1.51 | $2.60 | -42% | |||
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In 1997, Cameco's consolidated net earnings were $82 million ($1.51 per share), compared to $138 million in 1996. This reduction is due primarily to the introduction of a non-cash income tax expense. Net earnings were also impacted by lower uranium selling prices, partially offset by an increased volume of gold sales.
Cameco posted earnings from operations of $151 million, an increase of $6 million over 1996 despite a significant decline of approximately 23% in the average U3O8 spot price in 1997 from 1996. Earnings from operations exceeded last year's record levels due to the significant increase in gold sales resulting from the commencement of production at Kumtor.
The segmented results of Cameco's two business operations are as follows:
Nuclear Business
Cameco's nuclear business consists of the exploration for and the development, mining, refining and conversion of uranium for sale as fuel for generating electricity in nuclear power plants.
| Financial Results - Nuclear (in millions) |
1997 | 1996 | % Change | |||
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| Revenue | $540 | $561 | -4% | |||
| Cost of products and services sold | $270 | $280 | -4% | |||
| Depreciation, depletion and reclamation | $98 | $88 | +11% | |||
| Exploration | $15 | $11 | +36% | |||
| Research and development | $2 | $3 | -33% | |||
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Revenue
In 1997, revenue from its nuclear business declined by 4% to $540 million in comparison to 1996. Although Cameco sells uranium only in the long-term market, approximately 60% of its 1997 deliveries were impacted by the U3O8 spot price.
The uranium spot price fell by $4.50 (US) per pound U3O8 over the course of the first eight months of the year to a low of $10.20 (US), and then rebounded by $1.85 (US) to end the year at $12.05 (US). In part, the spot market was influenced by weak demand because utilities had filled their 1997 uranium requirements through 1996 spot market purchases or long-term contracts. In addition, there was some aggressive selling by a few suppliers. Overall this resulted in a market with thin demand and excess supply.
The fall in spot prices resulted in an 8% decline in Cameco's average realized selling price for uranium concentrates. This was offset somewhat by an increase in uranium concentrate sales volume of almost 5%, making 1997 a record year for uranium sales volume by the company.
On a proforma basis, a $1.00 (US) increase in the U3O8 spot price throughout the year would have increased revenue by $12 million compared to $14 million in 1996. In 1997, the $12 million impact on revenue from a $1.00 (US) increase in the U3O8 spot price would have translated to about $4 million in additional net earnings. In 1996, because Cameco was not required to record an income tax expense, most of the $14 million impact on revenue would have been reflected in net earnings.
The average selling price realized for conversion services was up almost 4% in 1997 from last year, although sales volumes were down by almost 8%. Spot and long-term prices for conversion services weakened in the last quarter of 1997 due to the perception of excess supply from the conversion component of the uranium displaced as a result of the dismantling of Russian weapons.
Cameco's earnings are also affected by the relationship between the Canadian and US dollars. A $0.01 (US) increase in the Canadian dollar would have decreased 1997 nuclear revenue by $6 million compared to $7 million in 1996.
Cost of products and services sold
The costs of products and services sold including depreciation, depletion and reclamation remained unchanged at $368 million as compared to 1996. Higher costs associated with increased volume of uranium concentrate sales were offset by lower royalty costs and lower costs of sales for conversion services.
Exploration
Exploration expenditures increased by 27% in 1997 to $14 million, reflecting Cameco's objective to expand its reserve base globally, particularly in Australia.
Gold Business
| Financial Results - Gold (in millions) |
1997 | 1996 | % Change | |||
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| Revenue | $103 | $30 | +243% | |||
| Cost of products sold | $46 | $18 | +156% | |||
| Depreciation, depletion and reclamation | $25 | $7 | +257% | |||
| Exploration | $18 | $18 | - | |||
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| Gold sales (ounces) | 173,354 | 40,414 | +329% | |||
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| Average selling price ($Cdn/oz) | $569 | $589 | -3% | |||
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Revenue
Cameco's gold business generated revenue of $103 million in 1997, up $73 million from 1996, reflecting the startup of the Kumtor gold mine. About $98 million of 1997 gold revenue was derived from Cameco's share of Kumtor and Contact Lake production sales. The remaining $5 million was attributable to management fees that Cameco earned as operator of the Kumtor project.
These results compare to $30 million of gold revenue in 1996. About $24 million of 1996 gold revenue was derived from Cameco's share of the Contact Lake production sales. The remaining $6 million was attributable to management fees that Cameco earned as operator of the Kumtor project.
Cost of products sold
Kumtor exceeded expectations this year by producing more than 502,000 ounces of gold (Cameco's share 167,000 ounces) at cash costs below $200 (US) per ounce, which includes 79,000 ounces (Cameco's share 26,000 ounces) produced during the commissioning phase. The revenue from the sale of these 79,000 ounces was credited against the commissioning costs.
The results from Contact Lake have not met expectations with production of 53,000 ounces of gold (Cameco's share 35,000 ounces) in 1997. Lower than anticipated ore grades resulted in reduced production and higher unit costs. It is expected that Contact Lake will be closed in mid-1998 due to depletion of economic reserves.
Exploration
Gold exploration expenditures were unchanged from 1996 at $18 million. Cameco's goal is to expand its gold production through a combination of exploration and acquisition. With gold prices falling significantly, Cameco's efforts have focused on acquisition opportunities and less on exploration.
Non-Segmented Expenses
Administration expenses rose by 17% to $27 million in 1997. This increase is due primarily to the inclusion of Cameco's new US subsidiary, Power Resources, Inc. As a percentage of revenue, administrative expenses remained essentially unchanged at approximately 4%.
In addition to cash taxes, a deferred income tax expense was recorded for the first time in 1997, significantly increasing the total tax expense to $65 million from $5 million in 1996.
Cash Resources
During 1997, operating activities generated net cash flows, after changes in working capital, of $162 million ($2.98 per share) compared to $178 million ($3.37 per share) a year earlier.
Cash from sales of products and services of $642 million in 1997 increased by $71 million compared to 1996 primarily due to increased gold sales. This positive cash flow was mostly offset by an increase of $65 million in cash used to purchase products and services. A combination of higher uranium purchases and gold production expenditures of about $51 million and $41 million respectively, offset somewhat by lower graduated uranium royalty payments, accounted for most of the $65 million increase.
Cash provided by operations was further reduced by increased administration expenditures as a result of the acquisition of PRI and interest on the Kumtor gold project which was classified as an operating expense after the startup of commercial production.
Cash used in investing activities increased by $163 million to $325 million in 1997 compared to 1996. This increase was primarily due to the acquisition of PRI and additional loans made to the Kumtor Gold Company (KGC). About $126 million in cash was used for net additions to property, plant and equipment of which $76 million was spent on the McArthur River and Cigar Lake uranium development projects.
Cash provided by financing activities amounted to $258 million in 1997, an increase of $274 million compared to 1996. The majority of this increase reflects Cameco's public share offering of 4 million shares which yielded net proceeds of $195 million. In addition, an increase in debt was required to finance the purchase of PRI.
RESULTS OF OPERATIONS 1996 COMPARED TO 1995
| Consolidated Financial Results (in millions except per share amounts) |
1996 | 1995 | % Change | |||
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| Revenue | $591 | $395 | +50% | |||
| Earnings from operations | $145 | $104 | +39% | |||
| Net earnings | $138 | $102 | +35% | |||
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| Earnings per share | $2.60 | $1.95 | +33% | |||
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Cameco recorded net earnings of $138 million ($2.60 per share) in 1996 compared to $102 million ($1.95 per share) in 1995. This represents a 35% increase in net earnings on revenue growth of 50%. The 1996 results were achieved through increased sales volumes and improved prices for Cameco's products and services.
During 1996, uranium markets continued the recovery that began in 1995. The U3O8 spot price at the beginning of 1996 was $12.20 (US) per pound of U3O8 and at the end of the year was $14.70 (US). The spot price reached a 1996 high of $16.50 (US) per pound U3O8.
Nuclear Business
| Financial Results - Nuclear (in millions) |
1996 | 1995 | % Change | |||
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| Revenue | $561 | $373 | +50% | |||
| Cost of products and services sold | $280 | $178 | +57% | |||
| Depreciation, depletion and reclamation | $88 | $62 | +42% | |||
| Exploration | $11 | $6 | +83% | |||
| Research and development | $3 | $2 | +50% | |||
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Revenue
In 1996, revenue in this segment rose 50% to $561 million. This improvement was due to increases in both the volume of sales and average unit selling prices. The volume of uranium concentrates sold in 1996 was up approximately 39% over 1995, while the average unit selling price rose by 14%. In conversion services, sales volumes increased by 28% over the 1995 level while unit selling prices did not change significantly.
An increase of $1.00 (US) per pound U3O8 in the spot price throughout 1996 would have increased revenues by $14 million compared to $11 million in 1995. Similarly, a $0.01 (US) increase in the Canadian dollar versus the US dollar would have decreased 1996 nuclear revenue by $7 million, compared to $4 million in 1995.
Cost of products and services sold
The cost of products and services sold along with depreciation, depletion and reclamation increased to $368 million in 1996 from $240 million in 1995, up $128 million or 53%. Approximately 70% of this increase is attributable to the increases in sales volumes. The other 30% was due principally to higher graduated royalty charges and small increases in per unit cost of inventory sold. Material sold that was mined from Key Lake or the Rabbit Lake Collins Bay B-zone orebody is at a stage where it is subject to graduated uranium royalties.
Gold Business
| Financial Results - Gold (in millions) |
1996 | 1995 | % Change | |||
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| Revenue | $30 | $22 | +36% | |||
| Cost of products sold | $18 | $13 | +38% | |||
| Depreciation, depletion and reclamation | $7 | $5 | +40% | |||
| Exploration | $18 | $11 | +64% | |||
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| Gold sales (ounces) | 40,414 | 27,931 | +45% | |||
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| Average selling price ($Cdn/oz) | $589 | $562 | +5% | |||
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Revenue
Cameco's gold activities for the year generated revenues of $30 million, compared to $22 million in 1995. About 80% of 1996 revenues, or $24 million, came from Cameco's share of Contact Lake gold production, with the remaining $6 million being management fees earned as operator of the Kumtor gold project.
Cost of products sold
The volume of gold sales increased to 40,414 ounces in 1996 from 27,931 ounces in 1995. While a cash margin of $5 million was produced from the sale of this gold, amortization charges of approximately $7 million resulted in a net loss of $2 million. As previously reported, results from Contact Lake have not met expectations because of lower than expected ore grades resulting in reduced production levels and higher unit costs.
Non-Segmented Expenses
Administration expenses rose by 19% to $23 million in 1996. As a percentage of total revenue, these expenses remained essentially unchanged at around 4%. Improved skills training programs and higher support costs related to Cameco's expanding operations accounted for most of the change in administration expenses.
Cash Resources
During 1996, the company's operating activities generated cash flows of $178 million ($3.37 per share) compared to $133 million ($2.53 per share) a year earlier. These strong cash flows were used to pay dividends and to fund approximately $150 million of investing activities.
Due to the higher 1996 revenues, cash receipts from the sale of products and services increased to $571 million in 1996 from $377 million in 1995.
Cash used to purchase products and services increased by $129 million to $331 million as compared to 1995. Higher uranium royalty payments and greater expenditures for uranium purchases accounted for about $48 million and $39 million, respectively, of the increase. Most of the remaining $42 million was due to higher cash expenditures at Key Lake, Rabbit Lake and Contact Lake. At Key Lake, 1996 expenditures were higher than in 1995 due to resumption of production mining following one year in which mining activities were capitalized as development stripping or as part of the construction of a tailings management facility. As for Rabbit Lake and Contact Lake, costs were higher primarily due to increased production.
Cash applied to additions to property, plant and equipment, including development projects, decreased slightly to $168 million in 1996 from $175 million in 1995. Included in the $168 million are approximately $84 million that represents Cameco's one-third share of development expenditures at Kumtor, uranium development expenditures of $35 million primarily at McArthur River and Cigar Lake, and other capital expenditures of $49 million for improvements at various operating sites. The decrease of $50 million in additions to long-term receivables and investments to $28 million reflects a reduction in advances of subordinated loans to Kumtor Gold Company (KGC) by Cameco. Of the $77 million subordinated loan that was advanced in 1995, $32 million was a short-term bridge loan which was repaid in early 1996.
LIQUIDITY AND CAPITAL RESOURCES - 1997
Cameco had agreements in place that accessed up to $483 million in unsecured lines of credit and provided liquidity for its operations and funding for capital expenditures.
They included a $250 million revolving credit facility and $233 million in overdraft and letter of credit facilities. The revolving credit facility was used for general corporate purposes, including backup to Cameco's $150 million commercial paper program, and provided for a variety of borrowing options. At December 31, 1997, the revolving credit facility was undrawn and outstanding letters of credit totalled $117 million.
On February 18, 1998, Cameco reached agreement with a syndicate of large financial institutions to provide a $400 million revolving credit facility. The credit facility will mature in five years and will replace the $250 million revolving facility that is referred to above. The $233 million in overdraft and letter of credit facilities remain in place. The company determined current market conditions were opportune for increasing the size of its available bank credit on favorable terms.
In 1997, Cameco borrowed $100 million (US) to finance the acquisition of PRI. This debt, which matures on March 31, 1998, is expected to be refinanced with either a drawdown on the revolving credit facility or a capital markets debt issue.
Separate arrangements were established to provide financing for the Kumtor gold project. A consortium of financial institutions has advanced $285 million (US) in senior and subordinated loans to the project. Cameco proportionately consolidates its interest in the Kumtor Gold Company (KGC). Therefore, $95 million (US) ($136 million (Cdn)) of these outstanding advances are included in Cameco's long-term debt balance. (See financial statement note 8 on long-term debt).
The total cost for Kumtor development was approximately $450 million (US). Funding in excess of Cameco's equity contribution of $45 million (US) and the $285 million (US) from the consortium of financial institutions, net of changes in working capital, was provided by Cameco in the form of a subordinated loan to KGC. At December 31, 1997, outstanding advances under this subordinated loan amounted to $107 million (US).
The Kumtor credit facilities are an obligation of KGC. However, Cameco has agreed to guarantee the payment of all amounts of principal and interest that become due on the $265 million (US) senior debt component of the $285 million (US) Kumtor funding. This guarantee does not apply in the case of certain events of political force majeure, which are covered by political risk insurance purchased on behalf of some lenders and self-insured by other lenders.
Cameco is bound by certain financial covenants that are present in its credit facilities and in those of Kumtor. These covenants place restrictions on total long-term debt, including guarantees, and set minimum levels for net worth. As of December 31, 1997, Cameco met such covenant tests and does not expect its planned operating and investing activities to be constrained by them.
Cameco believes that its operating cash flow and available bank credit, plus ready access to the capital markets will be sufficient for planned expenditures and the pursuit of additional growth opportunities as they arise.
DECOMMISSIONING
Every two years, Cameco formally reviews the anticipated costs of decommissioning and reclaiming each of the company's operating sites as part of its environmental planning process. These estimated decommisioning and reclamation costs are also formally reviewed by Cameco when it submits licence renewal applications to regulatory authorities. Estimated costs, to the extent not already provided for, are charged against future production on a site-by-site basis.
Accordingly, the current year's share of these costs of $13 million has been charged to current production and accumulated in an accounting provision. In 1997, actual expenditures on decommissioning and reclamation activities amounted to $4 million and were deducted from this provision. As a result of the acquisition of Power Resources, Inc., Cameco's provision for reclamation increased by an additional $15 million. At the end of 1997, Cameco had a total accounting provision of $88 million for future reclamation costs.
In 1997, considerable work was undertaken to update decommissioning plans for Cameco's Canadian operations and ensure that required financial assurances were put in place to fulfill regulatory requirements. Irrevocable letters of credit for the Rabbit Lake operation were issued in December 1996 as required by the regulatory authorities. Similar letters of credit for the Key Lake operation were issued in October 1997. Revised letters of credit were issued for the McArthur River project in January 1998 to reflect the further development and construction of the project. All of these letters of credit, totalling $56 million, were issued to the government of Saskatchewan.
Updated decommissioning plans for Cameco's fuel services operations were filed with regulators in February and March of 1997. Formal financial assurances are not currently required for these plants. For the Contact Lake gold operation, a decommissioning plan, together with a cost estimate, was filed with provincial regulators in March 1997. Under current regulation, formal financial assurances for this operation are not required until March 1999.
RISK MANAGEMENT
The statements in this management's discussion and analysis, including those in the outlook section, which relate to the future, are forward-looking statements and are subject to a number of risks and uncertainties. The company's results in the future may differ materially from those which are expressed or implied by the forward-looking statements in this section of the annual report.
Risk Factors
There are several risks that could affect Cameco's results. They include the sensitivity of the company's revenues to market prices of uranium and gold; competition; the impact of changes in foreign currency exchange rates; environmental considerations; political developments, particularly in the developing countries in which the company operates; changes in government regulations and policies including trade laws; demand for nuclear power; replacement of production, and receipt of permits and approvals from governmental authorities.
Financial Risk Management
Cameco engages in a currency hedging program to mitigate risks associated with fluctuations of the US dollar relative to the Canadian dollar. At December 31, 1997, Cameco had sold forward $365 million (US) at an average rate of approximately $1.41 per US dollar as a hedge of future revenues denominated in US dollars. In addition, Cameco has option positions to sell $20 million (US) at an average rate of $1.41 per US dollar.
The company also seeks to manage the risks associated with fluctuating market prices of uranium. Depending on market conditions, Cameco seeks to maintain a portfolio of uranium contracts with a variety of delivery dates and pricing mechanisms.
The company has a policy to actively hedge the price of gold through a combination of forward sale and option contracts. At December 31,1997, Cameco had forward sale contracts for 28,000 ounces of gold at an average price of $420 (US) per ounce. KGC also hedges the price risk for gold in its own name. At year end, it had in place forward sale and put option agreements on 710,000 ounces at a minimum price of $346 (US) per ounce, which hedge a portion of planned production. As part of these hedging activities, KGC also sold call options on 250,000 ounces that will result in a maximum price of $376, if exercised. These call options expire in 1998 and 1999.
Cameco acquires political risk insurance to protect its investment when such coverage is considered appropriate. For example, the company has purchased political risk insurance that covers 90% of both its subordinated loan and equity contribution in KGC. Cameco also benefits from the involvement of international multilateral financing agencies in KGC, whose presence in the project indirectly supports all participants.
Operations Risk Management
To replace existing sources of production which will soon be depleted, Cameco is currently developing two new mines in Saskatchewan, McArthur River and Cigar Lake. McArthur River, which has received regulatory approval for construction, must obtain an operating licence before it can begin production scheduled for late 1999. Cigar Lake is waiting for federal-provincial government approval to begin construction. The timing of these projects depends, in part, on receiving government permits and approvals. In addition, Cameco conducts an extensive exploration program and investigates potential opportunities for property acquisitions.
Cameco invests in a comprehensive insurance program to manage risk in its operations and reduce its exposure to potential liabilities.
Computer-based systems are used extensively by the company in many of its business processes. Cameco is fully aware of the implications of the year 2000 issue, which is the concern that computer programs will create errors because the programs were written using fewer than the four digits required to unambiguously define the applicable year.
Cameco believes, with the software modifications completed and in progress, that the year 2000 issue will not pose a problem for the company. The company is expensing all costs as incurred and the total cost of the project is not material and will not affect the financial results of the company. As of December 31, 1997, Cameco's year 2000 compliance was estimated to be 75% complete and the company expects to achieve full compliance by the end of 1998. Initiatives with key suppliers and vendors are also being undertaken to address year 2000 compliance of their systems.
1998 OUTLOOK
Nuclear Business
The outlook for the long-term uranium fundamentals remains positive. Uranium consumption continues to outpace production by almost 50%. Over the next decade, uranium consumption is expected to grow modestly while production from existing mines will decline as economic reserves are depleted. The shortfall between production and consumption is currently being met primarily by excess western inventories. Even with the supply of uranium coming from the dismantling of nuclear weapons, as existing inventories are drawn down and as some mine reserves are exhausted, there will be a need for new mines.
Cameco believes that prices must improve in order to justify investment in new mine development. If prices remain at the 1997 levels, it is unlikely that many potential mines would be able to justify the capital expenditures required for the development and construction of new facilities.
Notwithstanding longer-term optimism, Cameco expects there will be, from time to time, some weakness in spot market demand with resulting downward pressure on prices. Because the spot market reflects only small and short-term transactions, spot prices are likely to exhibit some volatility during 1998.
Cameco's revenue and net earnings are affected by changes in U3O8 spot prices. The magnitude of any effect is influenced by the various pricing structures in Cameco's sales contracts. These may moderate the effect of a change in the spot price, limit the realized price at a predetermined ceiling or floor, or, if the contract is based on a fixed price, preclude a price change entirely. Furthermore, any change in net earnings resulting from a change in the realized prices will be mitigated by royalties and taxes.
In 1998, Cameco's sales of uranium concentrate and conversion services are expected to remain relatively constant.
In the near future, the cost of products and services sold along with depreciation, depletion and reclamation charges will be influenced by the transition from Key Lake and Rabbit Lake production to McArthur River and Cigar Lake production.
During the period of transition, as depleting mines reduce output and new mines commence, unit costs are expected to temporarily increase.
| Capital and Development Expenditures (in millions) |
Cameco's share (1998) |
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| Mine development | $140 | |
| Plant modifications and sustaining capital | $30 | |
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| Total | $170 | |
Cameco plans to invest approximately $170 million in its uranium business during 1998. This includes about $140 million for mine development at its Saskatchewan projects, McArthur River and Cigar Lake, and at the US properties, Highland, Crow Butte and Gas Hills. In addition, $30 million is planned to be spent for plant modifications and sustaining capitals at its existing minesites and conversion facilities.
Construction is ongoing at the McArthur River project and to the extent allowed by existing permits and licences, some development work will take place at Cigar Lake and at PRI's Gas Hills uranium project. Obtaining regulatory approval for the development of the Cigar Lake project is a priority during 1998.
Gold Business
In 1998, gold production is scheduled to exceed 550,000 ounces at Kumtor and 30,000 ounces at Contact Lake with Cameco's share of production totalling about 200,000 ounces.
Applying current hedge contracts in place for Contact Lake and Kumtor, and including the management fee from Kumtor, total gold revenue is expected to be higher for 1998.
Only sustaining capital expenditures are anticipated at Kumtor in 1998, with Cameco's share expected to total about $6 million.
Revenue sensitivity
In 1998, a $1.00 (US) increase in the U3O8 spot price is expected to increase revenue by $14 million. The resulting affect on net earnings would be about one-third of this change in revenue mainly because of income taxes and uranium royalties. Fluctuations in foreign currency exchange rates are not expected to materially impact the company's revenue during 1998 as a result of the currency hedging program in place.