FIRST QUARTER RESULTS CONFERENCE CALL
Comments by:Bob Lillie
Jerry Grandey
Questions & Answers
CORPORATE PARTICIPANTS
Bob Lillie
Director, Investor Relations
Jerry Grandey
President & Chief Executive Officer
Kim Goheen
Senior Vice-President & Chief Financial Officer
George Assie
Senior Vice-President Marketing & Business Development
Tim Gitzel
Senior Vice-President & Chief Operating Officer
CONFERENCE CALL PARTICIPANTS
David Snow
Energy Equities Inc.
Orest Wowkodaw
Canaccord Adams
Midesh Dhakkar
FBR
Dan Bushman
CJWW Radio
Fraser Phillips
RBC Capital Markets
Greg Barnes
TD Newcrest
Borden Putnam
Eastbourne Capital
Terence Ortslan
TSO & Associates
Cliff Hale-Sanders
CIBC World Markets
George Topping
Blackmont Capital
Chris Donville
Bloomberg News
Greg Golinski
Klingenstein, Fields & Co., LLC
Lawrence Smith
Scotia Capital
Koushik Ray
Adit Capital
PRESENTATION
Operator
Good afternoon ladies and gentlemen. Welcome to the Cameco Corporation First Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Bob Lillie, Director, Investor Relations. Please go ahead, Mr. Lillie.
Bob Lillie, Director, Investor Relations
Thank you, operator. Good afternoon everyone. Welcome to Cameco’s first quarter conference call to discuss the financial results. Thank you for joining us.
With us today are four of Cameco’s senior executives. They are Jerry Grandey, President and CEO; Kim Goheen is Senior Vice-President and CFO; George Assie, Senior Vice-President, Marketing and Business Development; and Tim Gitzel is Senior Vice-President and Chief Operating Officer. Gerry with start things off with comments on Cameco’s financial results and the uranium markets in the first quarter and then we’ll open it up for questions.
Please note that during the first quarter there were no material changes to Cameco’s 2008 consolidated outlook or our 2008 outlook for each business segment contained in the annual management discussion and analysis. For your convenience we have summarized Cameco’s 2008 consolidated outlook and the outlook for each business segment in a table called 2008 Financial Outlook on our website at Cameco.com.
Today’s conference call is open to all members of the investment community and the media. During the Q&A session, please ask one question only and, if needed, followed by one further question. If you have additional questions, please return to the queue until others have had an opportunity to participate.
Please note that statements made by the Company during this conference call, including statements regarding its objectives, projections, estimates, expectations, or predictions, contain forward-looking information and statements within the meaning of applicable Canadian and U.S. securities laws. The Company cautions that such information and statements involve risk and uncertainty and that actual results could differ materially from those contained in them. In addition, certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections reflected in them. Additional information about the material factors that could cause actual results to differ materially and the material factors or assumptions that were applied are contained in the Company’s annual information form dated March 28, 2008 and the Company’s most recent management discussion and analysis dated May 12, 2008, both of which are available on SEDAR and EDGAR.
With that I’ll turn it over to Jerry.
Jerry Grandey, President & Chief Executive Officer
Thank you, Bob. Let me add my welcome to everyone on the conference call as well as to those that are listening on the web.
I intend to cover two general topics today. I’ll begin with Cameco’s performance so far in 2008 and end with an overview of the uranium market.
2008 has started well for Cameco, as indicated by our strong first quarter results that we issued this morning. You may recall that we had some operational challenges in 2007 despite posting impressive financial results that include record revenue, adjusted net earnings, and cash flow. Those challenges have sharpened our focus on the operations in the short-term and have assisted us in building a foundation that will make us more resilient and stronger in the long-term. I can tell these events have brought out the best in our employees and provided the evidence that we really are driven to succeed.
2008 will be Cameco’s year of renewal. Indeed, it’s coming along quite nicely. Just to give you a few examples:
At Fort Hope we continue to make good progress in preparing the plant for production. After excavating contaminated soil we have put in new floors and started to reinstall equipment. We are also constructing a system to contain, recover, and treat affected groundwater that has already begun water collection. Our estimate for production start-up remains unchanged; at the third quarter of 2008 at the earliest.
At Inkai we continue to deal with the country-wide shortage of sulphuric acid that is required for mining operations. While this may affect Inkai’s output this year and our ability to declare commercial production, we have identified an alternative acid supplier that has been making up some of the shortfall. Our partner, Kazatomprom, has indicated they are making progress in their efforts to bring supply sources on line.
Earlier this year we were pleased that Rabbit Lake was able to restore mining operations more quickly than anticipated after sealing up an historic exploration drill hole that was allowing additional water to enter the mine. After building up sufficient inventory of ore and completing some repairs to the mill, we restarted milling operations at the beginning of April. We expect Rabbit Lake to produce the planned 3.6 million pounds of uranium this year.
At Cigar Lake we continue to progress toward dewatering the mine. Since our last update there are three significant items of note. First, we recently finalized a technical assessment that indicates we do not have to take any additional precautionary measures to safeguard two large underground openings prior to dewatering. Second, we have completed the corrective actions related to dewatering the underground mine that arose from the root cause investigation. The improvements we have made and continue to make are fundamentally changing the way we work at Cigar Lake. Third, in April we submitted an application to the CNSC to allow dewatering of the underground development, completing the second shaft and other activities that will take us up to the point of resuming development underground. The CNSC is developing a schedule to review this application. Our production start-up date remains unchanged at 2011 at the earliest. As we have stated before, we want to complete a full assessment after dewatering before providing a firm production timeline and cost estimate.
In addition to making substantial recovery at our operations, we are making progress with restoring our relationship and reputation with the CNSC. Improving performance, addressing key issues, and ongoing dialogue are re-establishing trust and confidence following the events of 2007. We are committed to build a productive relationship befitting our leadership position in this industry.
Now a few comments about the uranium market.
The uranium spot price has declined to US$60 per pound. This is not surprising given the moderate amounts of supply chasing very limited demand. I should note that this is all within the context of relatively tiny spot market where even minor quantities can have a significant impact.
For the next few years utilities are generally well covered under contracts and they hold modest amount of inventory. This leaves little demand from utilities in the spot market today. Adding to this, utilities are avoiding any discretionary purchases in the hope that the price will decline even further.
On the supply side, we have moderate amounts of uranium in the hands of traditional trading companies that have come to the market to raise cash. There are also small amounts of production available from a few producers that do not have all of their production committed under long-term supply contracts. Meanwhile, in the long-term market the prices remained stable for a long time and only recently declined by $5 to $90 per pound. The reason for this underlying strength is that over the longer-term, that is looking beyond the next few years, utilities uncovered requirements are growing at the same time suppliers are heavily committed.
Typically this scenario would be the market signal that would result in increased production; however, this has not been as easy as some market players assume, as demonstrated by the announcements of delayed or reduced production estimates. The result is that the long-term market price reflects the uncertainty associated with tight supply and uncovered requirements several years out in time.
The difference between the spot and long-term market prices leads to the obviously question: Why are utilities willing to pay a premium for long-term price? Three reasons come to mind. First, there is concern that uranium prices will rise over the longer term; second, some customers prefer price predictability for a portion of their long-term needs; and third, some customers are willing to pay a premium for long-term security of supply.
Cameco is well positioned to meet this demand and continues to sign long-term contracts in this market and we are preparing to sell even more production in the future. By 2016 we are targeting an 80 percent increase over 2007 production volumes, drawing from our powerful asset base of more than 500 million pounds of proven and probable reserves and considerable resources.
While others cast a worried eye in the movements of the uranium spot price, we expect to generate strong returns under any future spot price scenario. Our contracting strategy has capitalized on the long-term market strength and while our realized price has lagged the market, it is no accident that we saw our average realized price on our deliveries in the first quarter increased by 55 percent from one year ago. Those prices contributed to another strong quarter. Delivered planning and financial discipline today and over the past two decades will ensure that our financial results continue to benefit from our strong uranium contract portfolio, a growing production profile, and solid market fundamentals.
In summary, well mutual fund ads sometimes indicate that past performance is not necessarily indicative of the future, we believe our strong results are a good indication of Cameco’s financial performance for many years to come.
With that I will turn the call over to the operator to open up the call to questions. Operator?
QUESTION AND ANSWER SESSION
Operator
Thank you. We will now take questions from investors, analysts, and media. In order to respect everyone’s time on the call today, we will take your question and allow one follow-up question. Then if you have further questions, please return to the queue and we’ll get to them after others have had their chance.
If you have a question, please press star one on your telephone keypad. If you are using a speakerphone, please lift your handset and then press star one. To cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while participants register for questions. Thank you for your patience.
The first question is from David Snow of Energy Equities Inc. Please go ahead.
David Snow, Energy Equities Inc.
Yeah, hi. Good afternoon or good morning. I’m wondering if you can give me an update from the past, I think the last conference call, of your expectation of world production. I believe it was last given at 117 in 07, 109 million pounds was the actual in 07, and 129 is expected 08. I wondered if you could bring me up to date on what you expect for that outlook. And maybe longer-term 2015.
Jerry Grandey, President & Chief Executive Officer
07, David, was I think 107 million pounds that we managed to tabulate. In 2008, subject to all kinds of uncertainties that are out there, about 120 to 125 million pounds. 2016 I’m not at all sure. We know our production is going to be up considerably. You know, there are a lot of supply uncertainties that are out there in that period of time and I think that’s one of the reasons the long-term market is reacting the way it is and maintaining the higher price. You know, they just deal with mines that are out there that are intending to expand or come into production and we have seen over the last few years how difficult it is to bring on either expanded production or new production out of mines.
David Snow, Energy Equities Inc.
Okay. And I wondered if you could give us a little more, ah, I’m sure somebody else will ask, up to date colour on the remediation activities underground at Cigar.
Jerry Grandey, President & Chief Executive Officer
I’ll turn it to Tim, but I’ll tell you, from my own personal perspective, I am quite encouraged by what I see going on there. A real change in culture if you will, safety culture, speaking broadly. People absolutely committed to succeed and doing things correctly. We’re on track in terms of being ready now to pump, all the documentation that needed to be filed has been filed with the CNSC and they’re, as I indicated in my comments, developing a schedule. So we’re marching down the road to get that mine dewatered. It’ll then become quite a conventional recovery operation, going in, looking underground, deciding what needs to be done to rehabilitate, and then ultimately getting back into development.
Tim, do you have anything that you want to add to that?
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Well I just agree. You know, we put out a plan a year ago now, we’re following that plan. Our mantra is assurance of success. We won’t do things unless we’re sure that they’re the right things to do and we’ve said if that takes us a little bit more time or costs us a little bit more, so be it. And so I think we’ve got a very strong team in place now overseeing the rehabilitation. Surface work continues. Our licensing is in and up to date, licensing applications. We’re waiting to get in front of the regulators to get approval to move forward. So it’s moving ahead as planned and we’re pleased with the progress.
David Snow, Energy Equities Inc.
What do you do next once the approval comes?
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Well we’ve asked for, you know, we’re following our five-phase plan that we’ve put out, David. We’re done phase one now, which is drilling down into the area of the fall and pouring the plug. Done that. We’ve tested the plug by drawing the water down in the number-one shaft and the plug has been holding very well. We think it’s holding back 95 percent of the water coming in, which is even as good or better than we’d hoped. So now we’ve got our licensing application in to move to the next phases. Phase two would be then to take the water out of the mine and get our people back in there and cautiously start moving out into the mine and restoring the area. And then we want to pour another engineered bulkhead behind the plug that we’ve poured from surface. So that’s kind of the next steps over the next months and, as I say, we’re in the queue for regulatory approval for those steps. I think we’re on track. We’re working very closely with our regulators, both federal and provincial, on these and hope to be reporting good progress going forward.
David Snow, Energy Equities Inc.
The second bulkhead you’re going to pour from the surface—
Bob Lillie, Director, Investor Relations
David, could you go back in the queue please?
Jerry Grandey, President & Chief Executive Officer
Sorry about that, but we’ve got to take other questions.
Operator
Thank you. The next question is from Orest Wowkodaw of Canaccord Adams. Please go ahead.
Orest Wowkodaw, Canaccord Adams
Hi, good afternoon. I was wondering if you could give us a little more colour here on what’s happening at McArthur River. You mentioned in your disclosure this morning that the transitioning to the second new mining area is behind schedule and I’m curious in terms of what risk that poses to your 2009 production targets. I believe the last number published was your share of a little over 13 million pounds.
Jerry Grandey, President & Chief Executive Officer
Still targeting, Orest, 18.7 million in total. Our share, as you would recite it, at 13 million pounds. But a little bit of flexibility to go into areas that we’re currently mining in order to maintain that production schedule. It’s true we’re a little bit behind; that’s simply the freeze drilling a little bit behind, although that’s coming up to schedule, and some of the underground development a little bit behind, but plans to try and bring that back on schedule as well. But again, flexibility to make sure that we meet the production schedule.
Orest Wowkodaw, Canaccord Adams
Take it you’re still confident of that previous target for next year.
Jerry Grandey, President & Chief Executive Officer
We are.
Orest Wowkodaw, Canaccord Adams
Thank you very much.
Operator
Thank you. The next question is from Midesh Dhakkar from FBR. Please go ahead.
Midesh Dhakkar, FBR
Hi. A quick question on Inkai. You just mentioned that you’re facing some sulphuric acid issues at Inkai; isn’t it sufficient to meet your ramp-up requirements, one, and second, are you planning to revise your Inkai production going forward for 08?
Jerry Grandey, President & Chief Executive Officer
Tim?
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Well we are still struggling with our acid supply in Kazakhstan with Inkai. We have a secondary source, I think as we noted in the past on these calls that we looked at getting our own source, at least in the interim. Long-term we’re looking at still and we’re working on building our own acid plant near Inkai near our facilities. But in the near-term, the short-term, the supply from the Kazaks is, I would say, a bit unreliable. We’re getting our portion of the supply that’s coming, but it’s not enough to really acidify our block one to the levels we’d like it to to get the grade up to where we’d like it to so that we can start running it through ion exchange. So for the next couple of months we’re doing our best with our own supply and what we get from the Kazaks to acidify block one. Block two is being acidified and we’re producing from there.
So it’s kind of a month-to-month piece for us. We’re meeting the Kazaks again in two weeks to talk to them, to get an update as to where we’re at, and we continue to push our own solution to bring as much of our own acid in as we can.
Midesh Dhakkar, FBR
Great. Is it impacting your 2008 production guideline for Inkai?
Tim Gitzel, Senior Vice-President & Chief Operating Officer
I think we’ll know that over the next few months as we see what the Kazaks can bring for acid, but there is some question at block one as to whether we’ll get the full production we’ve predicted out of block one.
Midesh Dhakkar, FBR
All right, thank you. Thank you very much.
Operator
Thank you. The next question is from Dan Bushman of CJWW Radio. Please go ahead.
Dan Bushman, CJWW Radio
Good morning, Mr. Grandey. Do you think the trend will continue as far as high net earnings for the next quarter?
Jerry Grandey, President & Chief Executive Officer
We don’t forecast, particularly with respect to net earnings. We try to do a little bit of annual guidance, which we did in the MD&A that we put out a few months back, and that’s about as much as we’ll do, Dan.
Dan Bushman, CJWW Radio
Okay. Well were you pleased with this first quarter then?
Jerry Grandey, President & Chief Executive Officer
We’re absolutely pleased with the first quarter. You bet.
Dan Bushman, CJWW Radio
All right, thank you.
Operator
Thank you. The next question is from Fraser Phillips of RBC Capital Markets. Please go ahead.
Fraser Phillips, RBC Capital Markets
Thanks. Jerry, I just wanted to ask, make sure I was clear on the comments you made about 2016 and 80 percent increase in volumes. Is that over and above your anticipated or guided sales volumes this year? Or was it production? Sorry, I wasn’t clear.
Jerry Grandey, President & Chief Executive Officer
Over and above our 2007 production.
Fraser Phillips, RBC Capital Markets
Production. Okay. And then one other question. I noticed in the MD&A or I think I’m correct in saying that the original two loan agreements with customers were, ah, you’d basically closed out. I noticed though, I think I noticed that there was another one initiated as of April 1st of this year. What was the thinking behind that?
Jerry Grandey, President & Chief Executive Officer
Fraser, the two that dated back a couple of years were closed out. We did another one with a completely different party because we got terms that were different extending it longer, different variety if you will or flavour. So yeah, that’s exactly as reported.
Fraser Phillips, RBC Capital Markets
Okay. Thank you.
Operator
Thank you. The next question is from Greg Barnes of TD Newcrest. Please go ahead.
Greg Barnes, TD Newcrest
Yes, thank you. Back to the product loan agreement, you said in Q1 that you recognized $85 million into revenue due to the closure of the previous agreement?
Kim Goheen, Senior Vice-President & Chief Financial Officer
Correct.
Greg Barnes, TD Newcrest
How did that impact the bottom line, Kim? I’m not sure I understand that.
Kim Goheen, Senior Vice-President & Chief Financial Officer
The gross profit on those sales, Greg, was about $41 million, and so revenue would have been increased by $85 and the gross profit or gross margin by $41 in Q1.
Greg Barnes, TD Newcrest
So the $41 million flowed right down to the bottom line?
Kim Goheen, Senior Vice-President & Chief Financial Officer
Well, no, gross profit before tax.
Greg Barnes, TD Newcrest
Before tax. Okay. So that’s a bit of an unusual item this quarter then.
Kim Goheen, Senior Vice-President & Chief Financial Officer
There were a number of, you know, kind of items that you couldn’t predict ahead of time, but that would have been in that package, yes.
Greg Barnes, TD Newcrest
Okay
Jerry Grandey, President & Chief Executive Officer
But, Greg, not reported in any earlier quarters either, so we’re just observing accounting rules in terms of how this has to be treated.
Greg Barnes, TD Newcrest
Yeah, I just look at how consensus was at $0.40 I think, but if you knock this $41 million gross profit off it’s going to be coming in somewhere below that.
Kim Goheen, Senior Vice-President & Chief Financial Officer
Greg, I think we would have—I’m pretty sure that we did project or notify people ahead of time that that would be coming back in in quarter one, so I don’t know how people modelled, but it wasn’t a secret in any way.
Greg Barnes, TD Newcrest
Okay, fair enough. Thanks a lot.
Operator
Thank you. The next question is from Borden Putnam of Eastbourne Capital. Please go ahead.
Borden Putnam, Eastbourne Capital
Hi, good morning, Jerry. Maybe this is for Tim. At McArthur, Tim, as they’ve mentioned already on the call here there’s some transitioning that’s going slow to the new areas, and coinciding with the new loan agreement I’m wondering if you could give us a little more colour on which zones are giving you trouble. I’m looking at an old production schedule and it talks about zone 2, panel 5, and zone 4 lower both needing to come in in about 2009, and in your MD&A you mention, and also in the AIF, you mention that additional regulatory approval is required for these zones. So which zones are giving you trouble and what sorts of trouble and what approvals would be required when you are ready to go ahead? Thanks.
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Borden, you’re absolutely correct in the two areas we need to go into, zone 2, panel 5 and what we call lower zone 4 to move forward in 2009 and beyond.
The good news is that zone 2, panel 5, the development work and the freeze curtain and the protection that we’re putting in is going well and that’s moving ahead. That’s the one that is moving ahead nicely.
Where we’re a bit delayed is on the lower zone 4 piece, and that has to do with the, I think the same philosophy we’re applying there, the assurance of success philosophy, where we’re not going to take any chances. We’re going to do it right and we’re going to make sure that we don’t have more incidents. So that’s taking us a little bit longer.
So that said, we have a contingency plan internally at least. We can go into some areas that are already behind freezing and really scrape out if you like, take a few million more pounds in 2009 that would cover us off while we’re still developing the lower zone 4. So we think we have a good plan in place that will allow us to maintain our production in 2009 and going forward.
On the licensing piece, in fact we have to go back for both McArthur River and Key Lake for re-licensing. Our five-year licenses come to an end in October 2008 and so we’ve submitted in fact this week, yesterday, our documents for a renewed five-year license and we’ll be back in front of the commission in June and September for both McArthur River and Key Lake, which will include moving into the new areas.
Borden Putnam, Eastbourne Capital
Okay, thanks. And then back—you prompted my second question then. It sounds like in the areas of zone 2, which you’re going to continue to mine and to make up for this production change, that it might involve more of the remnants in those of the areas where you’ve backfilled around some of the remaining ore, and that’s going to drive some troubles I would guess with additional backfill going to the mill at Key Lake and some of the issues with effluent troubles you’ve had there.
Can you tell us if, ah, am I right about that and, if not, how are things going with the phase one construction and commissioning, which now looks like it’s about six months late I take it by your MD&A.
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Your analysis is right, it’s remnants we call it. Remnants might make a company three or four million pounds—
Borden Putnam, Eastbourne Capital
Yeah, I know. It’s rich stuff.
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Anyway, we do have to pluck it out and there will be some additional cement but, you know, we’ve set up some new concentrating equipment at Key Lake to help us solve that problem, which is working well, so we don’t think that’ll be a big problem going forward.
Borden Putnam, Eastbourne Capital
And you’re about six months behind at Key Lake, is that right by my reading of the MD&A versus the Gant chart in your proposal to CNSC of December 2006?
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Yeah, well, you know, we’re breaking it up—if you’re talking about the Key Lake revitalization, we’re breaking that up into bite-size chunks now and we’re submitting environmental assessments for some of the first work, and acid plant is part of it, and so we’re moving along. I don’t think we’re behind in that regard and, you know, we’ll need approval from environmental point of view and then we’ll get busy with the construction.
Borden Putnam, Eastbourne Capital
Okay, thanks.
Operator
Thank you. The next question is from Terence Ortslan of TSO & Associates. Please go ahead.
Terence Ortslan, TSO & Associates
Thanks, good afternoon. Just a question on this acid in Kazakhstan. Can you talk about the acid balances in the area and how much would it cost today to get the acid if you can find it? And two, how much is it going to cost you to make your own acid?
Jerry Grandey, President & Chief Executive Officer
Terry, as I recall, the acid reduction is at about half of what would normally be expected for all uranium producers and the cost figures I’m not sure that I have. Tim, do you have any?
Tim Gitzel, Senior Vice-President & Chief Operating Officer
No, the—you know, we’ve seen the cost go up. They were, and I don’t have the exact numbers in front of me, I apologize, but they’ve gone up a bit to get our own supply. But we’re looking at that going forward, first we need to have, we need to ensure we have a sustained supply of acid and we’ve had, as I said again on the last call, a company out of Germany do a full study on the situation in Kazakhstan and Russia and Uzbekistan to see what the supply is going forward versus, you know, if we were to buy versus a standalone plant. So we’re doing that work now.
Terence Ortslan, TSO & Associates
And how much acid would you consume block one, block two and all?
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Right now we’re requiring about 5,000 tonne a month.
Terence Ortslan, TSO & Associates
Okay, and you will eventually get up to...?
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Well we’ll now move up depending on how—that varies. It’s not a constant. It’s how you’re acidifying your fields. But the height over the next couple of years, it might go up a couple thousand tonnes to 7,000 tonnes a month.
Terence Ortslan, TSO & Associates
That’s not much. And, I’m sorry; you’re budgeting how much per tonne of acid? What are you budgeting for?
Tim Gitzel, Senior Vice-President & Chief Operating Officer
I’m sorry; I don’t have that number in front of me.
Terence Ortslan, TSO & Associates
I mean the spot market of acid has gone through the roof, depending where you are on this planet, but it’s anywhere between $200 to $600 a tonne. What is it in Kazakhstan?
Tim Gitzel, Senior Vice-President & Chief Operating Officer
I’m sorry; I don’t have that number in front of me.
Terence Ortslan, TSO & Associates
Okay. Come back to the exploration, beyond the annual report, could you talk about any change in emphasis this year and where we should be looking at some news coming out from you guys during the course of the summer and the fall.
Jerry Grandey, President & Chief Executive Officer
Exploration expenditures for this year are going to be between $50 and $55 million, Terry. About half of that is going to be devoted to the Athabasca basin region I guess. So you’re right results, some time at the end of the summer and into the fall when the summer drilling season is over.
Terence Ortslan, TSO & Associates
Okay. Any highlight in terms of which ones we’re going to have some news from?
Jerry Grandey, President & Chief Executive Officer
We would have gone back to Virgin River that we’ve talked about historically. A little bit around Cree Lake. I mean we’re targeting those areas where we’ve had success in the past two or three years.
Terence Ortslan, TSO & Associates
Okay. Who can I talk to about the acid later?
Jerry Grandey, President & Chief Executive Officer
You can talk to Tim.
Terence Ortslan, TSO & Associates
Okay, thanks.
Operator
Thank you. The next question is from Cliff Hale-Sanders of CIBC World Markets. Please go ahead.
Cliff Hale-Sanders, CIBC World Markets
Hi, good afternoon everyone. Just wanted to follow up on Rabbit Lake. Obviously the mine is now back up and running but no production was booked in the quarter. just wanted to know going forward how we should look at that coming into the income stream. Are you going to be able to catch up relatively quickly or should we kind of spread it out over the course of the year?
And then just a second question, a little bit different, on your interest in Centerra, just get the views from Cameco’s point of view how things are progressing with the government there and your expectations now for when you will be looking at obviously moving down to 41 percent ownership and deconsolidating the results.
Jerry Grandey, President & Chief Executive Officer
Okay, we’ll deal with Rabbit Lake first. It was intended that the mill be down during the first quarter, so it came up on the first of April. We still predict 3.6 million pounds produced out of Rabbit Lake this year. So there’s a little bit of a stockpile, working inventory if you will, that can now feed the mill. And then on the second question as to Centerra, I’ll let Kim make a comment on that.
Kim Goheen, Senior Vice-President & Chief Financial Officer
Sure. Cliff, as to the Kyrgyz government, we have been in discussions with them. We continue to have our discussions. Both the president and the prime minister and parliament for that matter have all come up recently, clearly putting their own comments on or their own desire to have our transactions concluded by the end of May. The June 1st deadline is out there. That is ambitious, there’s no question about it. All parties are trying to make that date and we will see what happens.
Cliff Hale-Sanders, CIBC World Markets
So assuming that deadline was magically met, you would look to start deconsolidating post Q2?
Kim Goheen, Senior Vice-President & Chief Financial Officer
Well when that deadline is met or when the transactions close, we will deconsolidate as of that day.
Cliff Hale-Sanders, CIBC World Markets
Okay. Okay, I’ll pass it on to someone else.
Operator
Thank you. The next question is from George Topping of Blackmont. Please go ahead.
George Topping, Blackmont Capital
Good day everyone. I was just interested in following up on the closing out of the contract uranium loans with customers and the impact that it had, not as much on the earnings but in the cash flow. Can you tell me how much of the cash flow is related to that?
Jerry Grandey, President & Chief Executive Officer
Kim?
Kim Goheen, Senior Vice-President & Chief Financial Officer
Actually none. How does that sound, George?
George Topping, Blackmont Capital
That sounds good. Okay.
Kim Goheen, Senior Vice-President & Chief Financial Officer
What would have happened and the way these entries are recorded in the financial statements is when the time of the actual physical sale takes place we receive the cash flow and it is reported in working capital at that point in time as cash from operations. When you then turn around and take it into income, the cash has already been recognized and is on the balance sheet, so it’s just an earnings impact.
George Topping, Blackmont Capital
Okay, that’s perfect. That’s why I use cash flow. Thank you.
Operator
Thank you. The next question is from Chris Donville of Bloomberg News. Please go ahead.
Chris Donville, Bloomberg News
Hi, Jerry. I’m wondering if you can talk a little bit more about the relationship between the spot price and the long-term price and I’m wondering to what extent are you expecting a widening of the spread between those two prices.
Jerry Grandey, President & Chief Executive Officer
Chris, let me ask George to make a comment on that. Go head, George.
George Assie, Senior Vice-President, Marketing & Business Development
Well, Chris, of course the spot market reflects what’s happening in the very near term here and, as I’m sure you’ve heard and Jerry mentioned in his remarks as well, you know, the demand that we have in the market is very discretionary. It’s not for real needs in the near term. And on the supply side you’ll have short-term players I’ll say, traders, some of the traditional traders, a few small producers with some uncommitted volumes, etcetera, adding supply to that market, and that’s moving the price down. The long-term market on the other hand reflects the uncertainty associated with future production. The number of players in that market are significantly fewer and so it’s held fairly firm. It did drop $5 this month down to $90.
So while the two markets, in many respects are, I guess I’ll say in many respects are quite distinct, they’re obviously also related, and the discrepancy that we have at present between the spot and the long-term market, which is $30, in my view can’t be maintained over the longer term. And so to the extent that you see further downward pressure on the spot price you’d expect to see further softening in the long-term price. And, you know, I guess vice versa. If there’s significant strengthening in the spot price that could ultimately allow the long-term price to rise further. But today my view is that that large discrepancy cannot be maintained over a long period of time.
Chris Donville, Bloomberg News
Okay, thank you.
Operator
Thank you. The next question is from David Snow of Energy Equities Inc. Please go ahead.
David Snow, Energy Equities Inc.
Yeah, I was asking about the second cement that you’re going to pour in the Cigar, if you could review that again.
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Yeah, we’ll go back in the area, what we call the 944 drift east, where the rock fall occurred and where we’ve already poured the plug in behind. We’ll go in then and pour another engineered—the plan is to go in and pour another engineered bulkhead to just make sure we’ve absolutely sealed that off.
You know, we were operating from 500 metres away through a lot of rock when we poured the first one and fortunately I think it’s a job well done, but we want to make sure that that is completely sealed off, so that will be one of the first orders of business.
David Snow, Energy Equities Inc.
That’ll be done with the benefit of underground access.
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Absolutely. They’ll be at the face.
David Snow, Energy Equities Inc.
Okay. And could you give me some idea as to what total Kazakhstan output was last year and what the increase was last year and what it may be this year?
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Total Kazak?
David Snow, Energy Equities Inc.
Yeah.
Tim Gitzel, Senior Vice-President & Chief Operating Officer
I don’t have the exact numbers.
Jerry Grandey, President & Chief Executive Officer
Yeah, for industry wide I don’t have them here either. Yeah, we’ll get it for you.
David Snow, Energy Equities Inc.
Okay, great. Thank you.
Operator
Thank you. The next question is from Borden Putnam of Eastbourne Capital. Please go ahead.
Borden Putnam, Eastbourne Capital
Yeah, Tim, if I could go back to Cigar Lake for a second, in the AIF there’s a mention that the plug, although it’s considered effective, if it’s found to not be completely effective that freezing will be used in the inflow area. And remind me—I don’t believe there was freezing there before and that was part of the trouble. You didn’t think you needed it at that level, at that elevation in the mine. but if you were to go back and do this, what sort of time constants would be required to effectively do this to help you with remediation?
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Well, you know, we’re quite happy, Borden, with the way that initial plug is holding and we were concerned that we might not get as good a take on that plug as we did, so we haven’t been talking too much about freezing in that specific area right now. You know, that’s a development area not underneath the ore body, (inaudible) freezing in the ore body of course and underneath there, but... So we’re, you know, once we get back in there and are able to look at it and test it and, you know, as I say, I think we’ll right away pour that engineered bulkhead, not sure that we’ll need the freezing in that area, but we’ll look at that. And you know, that’ll be part of—we’ve said publically that we’re reviewing the mine plan given the circumstances, again, so that’ll be part of the new mine plan going forward as to whether we need to freeze in that area.
Borden Putnam, Eastbourne Capital
Yeah, I appreciated that, but on page 34 of the AIF it talks specifically that it will be utilized to secure the inflow area and so I was just wondering what might have changed your thinking about that. but anyway, we’ll get to that I guess as you discover more down there.
And I want help you a little bit with my question on the Key Lake mill, going back to that. I don’t think I was quite fair. You talk in the MD&A that the construction is done for phase one and so now you’re in the commissioning, and that looks like, according to the Gant chart, that that’s sort of a three month time constant on your work before you’re completed with that, and so it looks like that would be pushing it out into the second quarter perhaps. And my question is then if that, whenever that occurs, how long do you think the CNSC would take reviewing your achievements before they’ll grant you approval to move ahead with phase two construction.
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Oh, I’m sorry; I think there might be some confusion. We talked phase one, two, and three in the context of Cigar.
Borden Putnam, Eastbourne Capital
Yeah, that’s why I wanted to—I realized what had happened.
Tim Gitzel, Senior Vice-President & Chief Operating Officer
You’re talking about our moly selenium removal—
Borden Putnam, Eastbourne Capital
Correct.
Tim Gitzel, Senior Vice-President & Chief Operating Officer
Oh, okay. Yeah, sure. We just got that up and running. In fact, Jerry was up and cut the ribbon a few weeks ago on that piece, so we’re just working the kinks out of that and we should have some results coming—we need to have and will have results by the time we go in front of the commission in June, June 11th on that. So we’ll know how that’s working. And it’s dependent on those results, Borden, as to how we move or if we move into phases two and three.
Borden Putnam, Eastbourne Capital
Right. Right. Okay last—if I can have one more. We’re on the end of the call, maybe it won’t offend anybody.
Jerry Grandey, President & Chief Executive Officer
Borden, go ahead.
Borden Putnam, Eastbourne Capital
Thanks, Jerry. Bob, I wanted to thank you for your help walking me through the issues in Inkai, talking about those revisions to the reserves there. Can you add a little bit of colour to that? When would you perhaps get better clarity on moving those probable back into proven or vice versa based on the mine plans and permits and license there.
Jerry Grandey, President & Chief Executive Officer
I wasn’t privy, Borden, to your conversation with Bob Lillie, so I’m not sure what you’re talking about.
Borden Putnam, Eastbourne Capital
There was a large revision to proven at Inkai and so Bob, through a couple of emails, walked me through what was going on there, and so I thought maybe either you or Tim could give us some more colour on that.
Jerry Grandey, President & Chief Executive Officer
I think it’s just recognizing that there’s a huge soviet resource there that we can’t really bring into our own calculation of reserves. As we prove up block two, block one, we’re able to bring—and confirm some of the soviet drilling and demonstrate that you can recover, we’re able to bring more into our own tabulation of reserves.
Borden Putnam, Eastbourne Capital
Right, but this revision went the other way and it moved from proven to probable and it related, Bob suggested, to uncertainty of permit extensions and things like that.
Tim Gitzel, Senior Vice-President & Chief Operating Officer
We can get you that information off line, Borden. Alain Mainville has got that down to a science, so we’ll be happy to give that to you.
Borden Putnam, Eastbourne Capital
Okay, great. I appreciate that, thanks.
Operator
Thank you. The next question is from Greg Barnes of TD Newcrest. Please go ahead.
Greg Barnes, TD Newcrest
Yeah, thank you. George, the term market has seen pretty low volumes year to date as well as the spot market; I was wondering if you are expecting any improvement on that front over the balance of the year and what you’re thinking for 2009.
George Assie, Senior Vice-President, Marketing & Business Development
No, Greg, our expectation for 2009 would be something in the order of about 125 million pounds in the term market. That would be about half what has been the pace over the last several years. But as we’ve discussed in the past, you know, the pace over the last several years was never seen before. So there’s been such a huge amount of contracting over the last three years that we expected things to start slowing down and 125 million pounds for the year would fit with our expectation.
Greg Barnes, TD Newcrest
And how do you see that developing over the next couple of years, George, with potential new core demand and what have you coming into the market or not? I’m still not clear on how that’s going to develop.
George Assie, Senior Vice-President, Marketing & Business Development
Yeah, you know, I would think that what we’re going to see here is, I think, as we’ve already talked about 08 and I wouldn’t be surprised if 09 was also relatively light, but you’re right, as the nuclear renaissance takes firmer hold and as you start to see plants firmly committed, etcetera, you know, you should start to see those numbers start to ramp up again. Right now, you know, and Jerry made note of it in his remarks, utilities are well covered for the next several years with contracts and modest amounts of inventory. They’ve gone through a period of very heavy contracting. The way it works in our industry you’d expect to see a bit of a respite here and they’ll concentrate on enrichment and then they’ll be coming back to uranium in a bigger way in a couple years.
Greg Barnes, TD Newcrest
Do you sense still, George, that the utilities feel that they have the pricing power at the moment and they’re more than happy to exercise that?
George Assie, Senior Vice-President, Marketing & Business Development
I think that it’s fair to say that utilities are feeling a little better about things in light of the way the spot market has reacted and that will indeed affect some of the terms that they might be willing to accept under longer-term contracts. By the same token, if they’re coming out today for supply in the longer term and they want secure, reliable supply, you’re dealing with just a few players that are able to address it. But I’d say that it’s, you know, it’s certainly fair to say that utilities are more comfortable with the situation today.
Greg Barnes, TD Newcrest
And just quickly on the term price, it slipped a little bit to 90; do you see further slippage there down to the mid-80s?
George Assie, Senior Vice-President, Marketing & Business Development
Well I would expect, you know, if the spot price stays at 60 or weakens a bit further I think that there’s going to be increased pressure on the term price. But again, and I think it’s more the case today than it’s ever been the case in the past, there seems to be a much more clear distinction between the two markets, and it goes back to, as I’ve already noted, you’ve got the very few number of players in that long-term market that can reliably supply and many of them are very, very heavily committed.
So I think what you see developing, and UX wrote about it recently is, you know, you’ve got the traditional spot market, you’ve got a long-term market where, you know, where supply would begin two or three years out and maybe run for eight or ten years, and you’re getting a bit more of a clearly defined mid-term market that’s, you know, for then next one to three years, and prices in that period are somewhere between that spot and that long-term price.
Greg Barnes, TD Newcrest
Great. Thanks, George.
Operator
Thank you. The next question is from Greg Golinski of Klingenstein, Fields. Please go ahead.
Greg Golinski, Klingenstein, Fields & Co., LLC
I’m looking at the chart you guys provide on the detailed uranium prices versus market prices. If uranium price is $100 say in five years, your realized prices are still at a significant discount. Is that because of legacy contracts or the way the new ones are written or, in other words, why isn’t it catching up more quickly? Thanks.
Jerry Grandey, President & Chief Executive Officer
Greg, it’s because we’re always writing contracts, so as the market has gone from $7 up to $90 in the long-term pricing, we would have been writing contracts throughout that period of time, so in a rising, a rapidly rising market we will always lag, and 40 percent of our portfolio is fixed and 60 percent related to the spot price at the time of delivery. So it’s just a function of the way that portfolio is constructed when you’re selling somewhere between 30 and 32 million pounds a year, you’re always writing contracts.
Greg Golinski, Klingenstein, Fields & Co., LLC
Okay, great. Thanks a lot.
Operator
Thank you. Once again, if you have a question, please press star one at this time.
The next question is from Lawrence Smith of Scotia Capital. Please go ahead.
Lawrence Smith, Scotia Capital
Good afternoon. Another question on the table on page seven of the MD&A. I’m struggling with what the implications are for realized prices in a market where there’s a large discrepancy between the spot price and the long-term price, because the table is predicated on the assumption that they’re the same. Maybe George could run us through what it means over the next couple of years if we have a $20 to $30 difference between spot and long-term.
George Assie, Senior Vice-President, Marketing & Business Development
What it means is, ah, it’s a good point. Today, as you’ve noticed, that table is predicated solely upon spot price and it assumes that at any point in time the level of the long-term market price, the published long-term market price, is identical to the level of the spot price.
We do have a significant portion of our market-related contracts in the future which reference actually the long-term market price and not the spot price. So to the extent that there is a large discrepancy in the future, um, and under those contracts that reference long-term market price, we would be realizing—I’m sorry, in that discrepancy is as it is today with the long-term market price being higher, then we would actually be realizing a significantly better price than what is being shown here.
Lawrence Smith, Scotia Capital
Great. Thank you very much.
Operator
Thank you. The next question is from David Snow of Energy Equities Inc. Please go ahead.
David Snow, Energy Equities Inc.
Could you bring us up to date on your take on the U.S. DOE rumbles about selling some of their stockpile? How do you think that’ll play out?
Jerry Grandey, President & Chief Executive Officer
George, do you want to respond to that?
George Assie, Senior Vice-President, Marketing & Business Development
There’s certainly been a lot of that in the press. There’s been a lot of work that’s taken place in the industry with the utilities and producers to arrive at what’s called industry consensus as to recommendations to DOE as to how they should place that material into the market. I think DOE is certainly taking it seriously. They’ve got a lot of different programs in place and a lot of different pulls on them for that material. I think for the near term here it appears that the DOE is not likely to make much, if any, of that material available to the market in the very near term. As you go out in time the industry consensus would have them feeding it into the market—I don’t remember the exact numbers but I think it starts at 1.5 or 2 million pounds a year, and eventually over time rises to a maximum of 5 million pounds a year. So we see it as a fairly orderly stream of supply to the market for the future.
David Snow, Energy Equities Inc.
And on the same note, is there any—can you give us an update on how the soviet change in enrichment plans will affect the availability of enrichment capacity and therefore the substitutablity of enrichment for uranium that might impact the uranium market?
George Assie, Senior Vice-President, Marketing & Business Development
Really what’s gone on and I think what you’re referring to is the recently-signed amendment to the suspension agreement, which gives Russia increased access to the U.S. market. If you look at the agreement closely you’d see that prior to 2013 it’s actually very limited quantities and after 2013 it amounts to about 20 percent of the U.S. market. Today—another way of looking at it is that today Russia actually supplies something closer to 40, 45 percent of the U.S. enrichment market. So it actually represents a, if you will, a tightening of enrichment supply from the Russians to the U.S. market in the future.
David Snow, Energy Equities Inc.
But less so than had previously been expected?
George Assie, Senior Vice-President, Marketing & Business Development
Well, you know, previously under the suspension agreement it would have been zero for enrichment supply, so this gives them access to 20 percent.
David Snow, Energy Equities Inc.
Okay. Now does that have an impact do you think in terms of doing more enrichment or do you think they’ll still go to 0.3 tails?
George Assie, Senior Vice-President, Marketing & Business Development
I think that the—the Russians have demonstrated that in contracting for enrichment they’re going to contract to be competitive with the other enrichment suppliers. So I think the tails assay will go to the natural level that the enrichment industry in total would have it go to. And so I think it’s the relative price between enrichment and uranium that will dictate what the tails assay is. So I don’t see that Russia having access to the U.S. market somehow impacts the price of uranium by virtue of the tails assay they’re willing to contract at.
David Snow, Energy Equities Inc.
You’re still assuming about a 0.3 tails?
George Assie, Senior Vice-President, Marketing & Business Development
No, we don’t—we’re not that high. I believe we have it rising over time to something more in the order of 0.26, 0.27.
David Snow, Energy Equities Inc.
Right now it’s about 0.23?
George Assie, Senior Vice-President, Marketing & Business Development
I would say today, um, the optimum tails assay, if you had complete flexibility, would be close to 0.2, 0.21, something like that, but in fact enrichers have limited the tails flexibility under new contracts. So practically speaking, the tails assay at which most enrichers are operating is probably more like 0.26 or 0.265. Something like that.
David Snow, Energy Equities Inc.
Thank you very much.
Operator
Thank you. The next question is from Koushik Ray of Adit Capital. Please go ahead.
Koushik Ray, Adit Capital
Hi. My question is of the pounds that you supplied in the first quarter to your customers, how many of them were either borrowed or purchased in the spot market?
Jerry Grandey, President & Chief Executive Officer
None borrowed.
Kim Goheen, Senior Vice-President & Chief Financial Officer
None were borrowed.
Jerry Grandey, President & Chief Executive Officer
And, as we’ve indicated in past years, we always have a few purchases in the spot market, mostly to gauge market intelligence. They’re just simply fed into inventory and so I don’t think we have any idea. They’re just part of the average cost of sales. Kim, I don’t know whether you want to make an observation, but it would be simply blended in with our inventories out of which deliveries are made to utilities. So it’s all fungible.
Kim Goheen, Senior Vice-President & Chief Financial Officer
Yeah, I think that’s probably the best answer.
Koushik Ray, Adit Capital
Thanks.
Operator
Thank you. This will conclude the questions from the telephone lines. I would now like to turn the meeting back over to Mr. Jerry Grandey for his closing remarks.
Jerry Grandey, President & Chief Executive Officer
Thank you very much, operator.
You know, as I mentioned at the beginning of this call, we expect 2008 to be a time of renewal for our Company. We’re looking forward to providing further updates on our progress throughout the year and I’ll note that this is the year that we’re celebrating Cameco’s 20th anniversary.
We appreciate your interest and wish you all a good day. Thank you.
Operator
Thank you. The Cameco Corporation first quarter conference has now ended. Please disconnect your lines at this time. Thank you for your participation.