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Cameco Reports Record Quarterly Revenue and Earnings
Saskatoon, Saskatchewan, Canada, July 30, 2007
Cameco Corporation today reported record net earnings in the second quarter of 2007 due to higher realized prices and deliveries in the uranium business, offset somewhat by decreased electricity profits due to lower generation resulting from planned and unplanned outages.
"Cameco achieved the highest quarterly revenue and earnings ever recorded in the company's history reflecting the company's core strength in the uranium business," said Jerry Grandey, Cameco's president and CEO. "We will continue to build on this strong financial performance in the future."
All numbers in this release are in Canadian dollars, unless otherwise stated. For a more detailed discussion of our financial results, see the management's discussion and analysis (MD&A) following this news release.
| Second Quarter 2007 | |||
| Financial Highlights ($ millions except per share amounts) |
Three Months Ended |
||
| 2007 | 2006 | Change % | |
| Revenue | 725 | 417 | 74 |
| Earnings from operations | 256 | 91 | 181 |
| Cash provided by operations 1 | 155 | 40 | 288 |
| Net earnings | 205 | 150 | 37 |
| Earnings per share (EPS) – basic ($) | 0.58 | 0.43 | 35 |
| EPS – diluted ($) | 0.55 | 0.40 | 38 |
| Adjusted net earnings 2 | 205 | 77 | 166 |
| EPS – adjusted and diluted ($) 2 | 0.55 | 0.21 | 162 |
| 1 After working capital changes. 2 Net earnings for the three- and six-month periods ended June 30, 2006 have been adjusted to exclude a $73 million ($0.19 per share diluted) recovery of future income taxes related to reductions in federal and provincial income tax rates. Adjusted net earnings is a non-GAAP measure used to provide a representative comparison of the financial results. |
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For the three months ended June 30, 2007, our net earnings were $205 million ($0.55 per share diluted), $128 million higher than the adjusted net earnings of $77 million ($0.21 per share adjusted and diluted) recorded in the second quarter of 2006. The increase was due to higher earnings in the uranium business driven by significant increases in the realized selling price and deliveries. Results from the fuel services and gold businesses were similar to the second quarter of 2006 while profits from the electricity business declined due to lower generation. Earnings from operations increased to $256 million in the second quarter of 2007, from $91 million in the second quarter of 2006. The aggregate gross profit margin rose to 43% from 31% in 2006.
Record quarterly revenue of $725 million in the second quarter of 2007 was 77% higher than in the first quarter. Our realized selling price for uranium reached an all-time-high and contributed significantly to the reported revenue.
Cash from operations in the second quarter was $155 million compared to $40 million in the second quarter of 2006. The increase of $115 million was related to the higher realized prices in the uranium business, partially offset by increased working capital requirements related mainly to an increase in receivables in the second quarter of 2007.
In our uranium business, revenue increased by $317 million to $458 million due to a 61% increase in the realized selling price and a 100% increase in reported sales volumes.
The increase in the average realized price for the second quarter of 2007 was the result of higher prices under market-related contracts due to a higher uranium spot price, which averaged $125.83 (US) per pound compared to $43.42 (US) in the same quarter of 2006.
"Cameco's balanced uranium contract portfolio will continue to generate higher realized prices for our uranium business for many years even with volatile uranium prices," said Grandey. "With this solid foundation, we expect to continue to demonstrate increasing financial strength, allowing us to reinvest in our core assets and profitably grow the company."
As previously disclosed, Cameco terminated two of three standby product loan agreements in April of 2007. As a result, the second quarter results include recognition of previously deferred revenue totalling $39 million and the associated costs of sales on 2.6 million pounds of U3O8. Cameco is now able to borrow up to 2.6 million pounds U3O8 equivalent (or 1.0 million kgU as UF6) under the remaining agreement.
In early July, Cameco announced that the startup of Cigar Lake production could be delayed from 2010 to 2011. The potential change in startup is due to Cameco considering a more conservative approach to remediation and the delay in completion of phase two of the remediation plan. In order to keep our stakeholders informed on the progress of our remediation activities, Cameco has committed to regular progress updates and will therefore provide an update on September 19, 2007.
For fuel services, revenue was $64 million, an increase of $7 million compared to the same period in 2006.
Cameco's pre-tax earnings from Bruce Power Limited Partnership (BPLP) amounted to $31 million during the second quarter compared to $38 million over the same period in 2006. This decrease in 2007 was due to lower generation and higher operating costs related to planned and forced outages in the quarter.
For gold, revenue decreased by $4 million to $117 million compared to the second quarter of 2006. The decline in revenue was due to lower production, which offset the benefit of a higher realized gold price.
Year to Date 2007 |
|||
| Financial Highlights ($ millions except per share amounts) |
Six Months Ended |
||
| 2007 | 2006 | Change % | |
| Revenue | 1,135 | 959 | 18 |
| Earnings from operations | 304 | 229 | 33 |
| Cash provided by operations 1 | 294 | 326 | (10) |
| Net earnings | 263 | 263 | 0 |
| Earnings per share (EPS) – basic ($) | 0.75 | 0.75 | 0 |
| EPS – diluted ($) | 0.71 | 0.71 | 0 |
| Adjusted net earnings 2 | 263 | 190 | 38 |
| EPS – adjusted and diluted2 | 0.71 | 0.52 | 37 |
| 1 After working capital changes. 2 Net earnings for the three- and six-month periods ended June 30, 2006 have been adjusted to exclude a $73 million ($0.19 per share diluted) recovery of future income taxes related to reductions in federal and provincial income tax rates. Adjusted net earnings is a non-GAAP measure used to provide a representative comparison of the financial results. |
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For the six months ended June 30, 2007, our net earnings were $263 million ($0.71 per share diluted), $73 million higher than the adjusted net earnings of $190 million ($0.52 per share adjusted and diluted) recorded in 2006. The increase was due to higher earnings in the uranium business resulting from a significant increase in the realized selling price driven by the rise in the spot price of uranium, partially offset by the recognition of $19 million in remediation expenses for Cigar Lake. Profits from the electricity and gold businesses were lower than in 2006 due to lower generation and production respectively.
In the first six months of 2007, we generated $294 million in cash from operations compared to $326 million in the first half of 2006. The decrease of $32 million was related to increased working capital requirements related mainly to a reduction in payables in 2007, which more than offset the benefit of the higher revenues.
At June 30, 2007, our consolidated net debt to capitalization ratio was 10%, compared to 12% at the end of 2006.
Outlook for Third Quarter 2007
We expect consolidated revenue for the third quarter of 2007 to be about 10% higher than in the second quarter. This is primarily due to anticipated higher sales prices for uranium and electricity. Reported sales volumes for uranium are projected to decline relative to the second quarter due to normal variability.
Projections for the quarter assume no major changes in the ability of Cameco's business units to supply product and services and no significant changes in our current estimates for price and volume.
Outlook for the Year 2007
In 2007, Cameco expects consolidated revenue to grow by about 40% over 2006 due largely to higher revenue from the uranium business.
In the uranium business, we now expect our reported revenues to be about 75% higher than in 2006, due to stronger realized prices under our contracts relative to 2006.
We anticipate that revenue from the fuel services business will be nearly 5% higher than in 2006 due to an anticipated increase in the average realized selling price. Reported sales volumes are expected to be about 5% lower than in 2006.
At Port Hope, full production of UF6 will likely be suspended for a minimum of two months until Cameco has determined the source of the previously disclosed uranium and chemicals found under the UF6 plant and we have developed appropriate remediation plans. We will provide a revised conversion production forecast once this work has been completed. Uranium dioxide (UO2) conversion and other activities at the site are not affected.
BPLP revenues in 2007 are projected to be about 7% higher than in 2006 due to higher expected realized prices. This outlook for BPLP assumes the B units will achieve a targeted capacity factor in the low 90% range.
In 2007, Centerra's gold production (100% basis) is now expected to total between 550,000 and 560,000 ounces compared to Centerra's earlier forecast of 700,000 to 720,000 ounces. The reduction is due to an expected production decrease at the Kumtor mine to 300,000 ounces from 450,000 ounces, due to the decision to change the angles of the pit wall. Centerra's gold production from its two mines totalled 587,000 ounces in 2006. Gold revenue is expected to be similar to 2006 primarily due to higher expected realized gold prices.
The financial outlook noted above for the company is based on the following key assumptions:
For 2007, the effective tax rate is expected to be in the range of 10% to 15% compared to 6% in 2006. Our effective tax rate varies from the Canadian statutory tax rate primarily due to differences between Canadian tax rates and rates applicable to subsidiaries in other countries. This range is based on the projected distribution of income among the various tax jurisdictions being weighted less heavily toward foreign subsidiaries compared to 2006.
Statements contained in this news release, which are not historical facts, are forward-looking statements that involve risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For more detail on these factors, see the section titled "Caution Regarding Forward-Looking Information" in the MD&A that follows this news release.
Quarterly Dividend Notice
Cameco announced today that the company's board of directors approved a quarterly dividend of $0.05 per share on the outstanding common shares of the corporation and is declared payable on October 15, 2007, to shareholders of record at the close of business on September 28, 2007.
AMENDMENT TO EMPLOYEE STOCK OPTION PROGRAM
On July 27, 2007, the Board of Directors approved an amendment to the company's stock option program that allows eligible option holders to elect cash settlement upon exercise of the option. Settling options in cash reduces the need to issue shares and permits Cameco to apply a portion of its future free cash flows to, in effect, repurchase shares that would otherwise have been issued, thereby mitigating the dilution of shareholders' interests. In addition, payments made to employees under the cash settlement alternative are deductible for tax purposes.
With the introduction of the cash settlement feature, we are required to classify the stock options as liabilities rather than as equity. As a result, we will record a charge of approximately $103 million in the third quarter and a corresponding $39 million recovery of future income taxes. The foregoing values are based on a share price of $43.00, which was the closing price on the Toronto Stock Exchange on July 27, 2007. Going forward, the liability for the outstanding stock options subject to cash settlement will be remeasured using the company's share price at the balance sheet date. As of July 27, 2007, there were 6.7 million stock options outstanding, of which 3.8 million were vested.
Conference Call
Cameco invites you to join its second quarter conference call on Monday, July 30, 2007 at 3:00 p.m. Eastern time (1:00 p.m. Saskatoon time).
The call will be open to all investors and the media. To join the conference on Monday, July 30, please dial (416) 340-8010or (866) 540-8136 (Canada and US). A live audio feed of the call will be available on our website at cameco.com. See the link on the home page on the day of the call.
A recorded version of the proceedings will be available:
Additional Information
Additional information on Cameco, including its annual information form, is available on SEDAR at sedar.com and the company's website at cameco.com.
Profile
Cameco, with its head office in Saskatoon, Saskatchewan, is the world's largest uranium producer, a significant supplier of conversion services and one of two Candu fuel manufacturers in Canada. The company's competitive position is based on its controlling ownership of the world's largest high-grade reserves and low-cost operations. Cameco's uranium products are used to generate clean electricity in nuclear power plants around the world, including Ontario where the company is a partner in North America's largest nuclear electricity generating facility. The company also explores for uranium in North America and Australia, and holds a majority interest in a mid-tier gold company. Cameco's shares trade on the Toronto and New York stock exchanges.
- End -
Second Quarter Management's Discussion and Analysis
The following discussion of the financial condition and operating results of Cameco Corporation should be read in conjunction with the unaudited consolidated financial statements and notes for the period ended June 30, 2007, as well as the audited consolidated financial statements for the company for the year ended December 31, 2006 and management's discussion and analysis (MD&A) of the audited financial statements, both of which are included in the 2006 annual financial review. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). The 2006 annual financial review is available on the company's website at cameco.com.
Statements contained in this MD&A, which are not historical facts, are forward-looking statements that involve risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For more detail on these factors, see the section titled "Caution Regarding Forward-Looking Information" in this MD&A and the section titled "Risks and Risk Management" in the company's 2006 Annual Financial Review.
Note: All dollar amounts are expressed in Canadian dollars unless otherwise stated.
| Financial Highlights | Three months ended |
Six months ended June 30 |
Change % |
||
| 2007 | 2006 | 2007 | 2006 | ||
| Revenue ($ millions) | 725 | 417 | 1,135 | 959 | 18 |
| Earnings from operations ($ millions) | 256 | 91 | 304 | 229 | 33 |
| Cash provided by operations 1 ($ millions) |
155 | 40 | 294 | 326 | (10) |
| Net earnings ($ millions) | 205 | 150 | 263 | 263 | 0 |
| Earnings per share (EPS) – basic ($) | 0.58 | 0.43 | 0.75 | 0.75 | 0 |
| EPS – diluted ($) | 0.55 | 0.40 | 0.71 | 0.71 | 0 |
| Adjusted net earnings ($ millions) 2 | 205 | 77 | 263 | 190 | 38 |
| EPS - adjusted and diluted ($) 2 | 0.55 | 0.21 | 0.71 | 0.52 | 37 |
| Average uranium (U3O8) spot price ($US/lb U3O8) | 125.83 | 43.42 | 105.42 | 41.19 | 156 |
| Average realized uranium price | |||||
34.69 |
20.21 |
30.87 |
19.91 |
55 |
|
|
|
40.11 | 24.89 | 36.10 | 23.95 | 51 |
| Average realized electricity price ($/MWh) | 48 | 48 | 51 | 49 | 4 |
| Average Ontario electricity spot price per megawatt hour ($/MWh) | 43 | 45 | 48 | 48 | 0 |
| Average realized gold price ($US/ounce) | 667 | 632 | 657 | 587 | 12 |
| Average spot market gold price ($US/ounce) | 668 | 610 | 659 | 591 | 12 |
1 After working capital changes. |
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FINANCIAL RESULTS
Consolidated Earnings
Second Quarter
In the second quarter of 2006, Cameco recorded a non-cash recovery of $73 million ($0.19 per share diluted) of future income taxes related to reductions in federal and provincial income tax rates. Consolidated net earnings for the second quarter and first half of 2006 in the following discussion are adjusted to exclude these items in order to provide a more meaningful basis for period-to-period comparisons of the financial results. A non-GAAP measure, adjusted net earnings should be considered as supplemental in nature and not a substitute for related financial information prepared in accordance with GAAP.
For the three months ended June 30, 2007, our net earnings were $205 million ($0.55 per share diluted), $128 million higher than the adjusted net earnings of $77 million ($0.21 per share adjusted and diluted) recorded in the second quarter of 2006. The increase was due to higher earnings in the uranium business driven by significant increases in the realized selling price and deliveries. Results from the fuel services and gold businesses were similar to the second quarter of 2006 while profits from the electricity business declined due to lower generation. Our reported revenues and earnings for the three months ended June 30, 2007 represent a company record for quarterly financial performance. For details on the uranium, fuel services, electricity and gold businesses, see "Business Segment Results" later in this report.
In the second quarter of 2007, our total costs for administration, exploration, interest and other were $46 million, an increase of $8 million compared to the same period of 2006. Administration costs were $6 million higher due primarily to increased stock-based compensation expenses stemming from the increase in the company's share price in the second quarter. Exploration expenditures were $3 million higher, at $15 million, with uranium exploration expenditures up $4 million to $10 million (focused in Saskatchewan, Australia and Nunavut). Gold exploration expenditures at Centerra Gold Inc. (Cameco's 53% owned subsidiary) were $1 million lower compared to the second quarter of 2006.
In the second quarter of 2007, our effective tax rate rose to 15% from the 9% reported in the second quarter of 2006 due to the distribution of our taxable income between Canada and other countries. In the second quarter of 2007, a higher proportion of income was earned in Canada, where tax rates are higher than those of the other jurisdictions. For more information about income taxes, refer to note 11 of the unaudited consolidated financial statements dated June 30, 2007.
In March 2007, the federal government introduced amendments to the Canadian Income Tax Act that provide for a 0.5% reduction in the general corporate income tax rate. The federal tax rate will decline in 2011 to 18.5% from 19%. This legislation was substantively enacted in June 2007.
Under Canadian accounting rules, the cumulative effect of a change in income tax legislation on future income tax assets and liabilities is included in a company's financial statements in the period of substantive enactment. Accordingly, Cameco reduced its balance sheet provision for future income taxes and recognized a non-cash income tax adjustment of $3 million ($0.01 per share diluted) in the second quarter of 2007.
Earnings from operations increased to $256 million in the second quarter of 2007, from $91 million in the second quarter of 2006. The aggregate gross profit margin rose to 43% from 31% in 2006.
Year to DateFor the six months ended June 30, 2007, our net earnings were $263 million ($0.71 per share diluted), $73 million higher than the adjusted net earnings of $190 million ($0.52 per share adjusted and diluted) recorded in 2006. The increase was due to higher earnings in the uranium business resulting from a significant increase in the realized selling price driven by the rise in the spot price of uranium, partially offset by the recognition of $19 million in remediation expenses for Cigar Lake. Profits from the electricity and gold businesses were lower than in 2006 due to lower generation and production. For details on the uranium, fuel services, electricity and gold businesses, see "Business Segment Results" later in this report.
In the first six months of 2007, our total costs for administration, exploration, interest and other were $98 million, an increase of $8 million compared to the same period of 2006. Administration costs were $5 million higher due to increased costs for systems enhancements and costs to maintain the workforce. Exploration expenditures were $5 million higher, at $30 million, with uranium exploration expenditures up $7 million to $19 million. Gold exploration expenditures at Centerra were $2 million lower compared to 2006.
In the first half of 2007, our effective tax rate declined slightly to 8% from the 9% reported in the first half of 2006 due to the distribution of our taxable income between Canada and other countries. In the first six months of 2007, a lower proportion of income was earned in Canada. Since Canadian tax rates are higher than those of the other jurisdictions, the net result was a decline in our effective tax rate. For more information about income taxes, refer to note 11 of the unaudited consolidated financial statements for the period ended June 30, 2007.
Earnings from operations increased to $304 million in 2007, from $229 million in the second quarter of 2006. The aggregate gross profit margin rose to 37% from 33% in 2006.
| Quarterly Financial Results ($ millions except per share amounts) | ||||||||
| Highlights | 2007 | 2006 | 2005 | |||||
| Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | |
| Revenue | 725 | 409 | 512 | 360 | 417 | 542 | 522 | 287 |
| Net earnings | 205 | 59 | 40 | 73 | 150 | 112 | 83 | 79 |
| EPS – basic ($) | 0.58 | 0.17 | 0.11 | 0.21 | 0.43 | 0.32 | 0.24 | 0.23 |
| EPS – diluted ($) | 0.55 | 0.16 | 0.11 | 0.20 | 0.40 | 0.30 | 0.23 | 0.22 |
| EPS – adjusted & diluted ($) | 0.55 | 0.16 | 0.11 | 0.12 | 0.21 | 0.30 | 0.21 | 0.22 |
| Cash from operations | 155 | 139 | 13 | 79 | 40 | 286 | 91 | 148 |
Record quarterly revenue of $725 million in the second quarter of 2007 was 77% higher than in the first quarter. Revenue in the uranium and fuel services businesses is driven by timing of customer requirements, which tends to be highest in the fourth quarter of each year. However, in 2007, reported sales are more heavily weighted in the second quarter of the year. In addition, our realized selling price for uranium reached an all-time-high and contributed significantly to the reported revenue.
Cash from operations tends to fluctuate largely due to the timing of deliveries and product purchases in the uranium and fuel services businesses.
Cash Flow
In the second quarter of 2007, we generated $155 million in cash from operations compared to $40 million in the second quarter of 2006. The increase of $115 million was related to the higher realized prices in the uranium business, partially offset by increased working capital requirements related mainly to an increase in receivables in the second quarter of 2007.
In the first six months of 2007, we generated $294 million in cash from operations compared to $326 million in the first half of 2006. The decrease of $32 million was related to increased working capital requirements related mainly to a reduction in payables in 2007, which more than offset the benefit of the higher revenues.
Balance Sheet
At June 30, 2007, our total long-term debt was $695 million, representing a decrease of $10 million compared to December 31, 2006. Included in the June 30, 2007 balance sheet was $196 million, which represents our proportionate share of Bruce Power Limited Partnership's (BPLP's) capital lease obligation. At June 30, 2007, our consolidated net debt to capitalization ratio was 10%, compared to 12% at the end of 2006.
Over the first six months of 2007, our product inventories increased by $17 million compared to December 31, 2006, due primarily to increased levels of UF6 inventory. Production and purchases of UF6 exceeded our sales in the first half of 2007.
At June 30, 2007, our consolidated cash balance totalled $369 million, with Centerra holding $147 million of this amount.
Cameco has a number of consolidated or equity-accounted investments in publicly traded entities. The following table illustrates the book and market values for our more significant holdings.
 |
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| Book Value | Market Value1 | ||
| Investment ($ millions) | June 30/07 | June 30/07 | Dec. 31/06 |
|
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| Centerra Gold Inc. | $457 | $1,202 | $1,504 |
| UEX Corporation | 17 | 291 | 220 |
| UNOR Inc. | 8 | 8 | 14 |
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| Total | $482 | $1,501 | $1,738 |
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| 1 Market value is calculated as the number of shares outstanding multiplied by the closing share price as quoted on the TSX on June 30, 2007 and December 31, 2006. | |||
Foreign Exchange Update
Cameco sells most of its uranium and fuel services in US dollars, while most of its production of uranium and fuel services are in Canada. As a result, these revenues are denominated mostly in US dollars, while production costs are denominated primarily in Canadian dollars.
We attempt to provide some protection against exchange rate fluctuations by planned hedging activity designed to smooth volatility. Hedging activities partly shelter our uranium and fuel services revenues against declines in the US dollar in the shorter term. Our strategy is to hedge net exposure based on a declining range over a rolling 60-month period. For the 0 to 12 month period, the target is to hedge 45% to 100% of net exposure. This range declines over each subsequent period to where, in the final 12-month period, between 48 and 60 months, the target range is 0% to 10%.
Cameco also has a natural hedge against US currency fluctuations, as a portion of its annual cash outlays, including purchases of uranium and fuel services, is denominated in US dollars. The influence on earnings from purchased material in inventory is likely to be dispersed over several fiscal periods and is more difficult to identify.
At each balance sheet date, Cameco calculates the mark-to-market value of all foreign exchange contracts with that value representing the gain or loss that would have occurred if the contracts had been closed at that point in time. We account for foreign exchange contracts that meet certain defined criteria (specified by GAAP) using hedge accounting. Under hedge accounting, mark-to-market gains or losses are included in earnings only at the point in time that the contract is designated for use. At June 30, 2007, the mark-to-market gain on all foreign exchange contracts was $84 million compared to an $18 million loss at March 31, 2007. Of the $84 million mark-to-market gain, a $93 million gain relates to the fair market value of the spot price of the contracts that qualify for hedge accounting and a $9 million loss relates to the market value of the forward points and contracts that do not qualify for hedge accounting.
In all other circumstances, gains or losses in foreign currency derivatives are reported in earnings as they occur. A loss in foreign currency derivatives of $5 million has been included in earnings for year to date 2007.
During the quarter, the Canadian dollar strengthened against the US dollar from $1.15 at March 31, 2007 to $1.06 at June 30, 2007.
At June 30, 2007, we had foreign currency contracts of $1,832 million (US) and EUR 91 million that were accounted for using hedge accounting and foreign currency contracts of $79 million (US) that did not meet the criteria for hedge accounting. The foreign currency contracts are scheduled for use as follows:
| 2007 | 2008 | 2009 | 2010 | 2011 | |
| $ millions (US) | 299 | 682 | 500 | 350 | 80 |
| EUR millions | 30 | 31 | 20 | 10 | 0 |
The US currency contracts have an average effective exchange rate of $1.13 (Cdn) per $1.00 (US), which reflects the original foreign exchange spot prices at the time contracts were entered into and includes net deferred gains.
Timing differences between the maturity dates and designation dates on previously closed hedge contracts may result in deferred gains or deferred charges. At June 30, 2007, net deferred gains totaled $23 million. These deferred balances are recognized in "accumulated other comprehensive income" along with $93 million of the mark-to-market gain on our cash flow hedges. Please see the "Consolidated Statements of Shareholders' Equity and Comprehensive Income" and notes 1 and 2 of the unaudited consolidated financial statements dated June 30, 2007. The resulting net $116 million pre-tax gain will be brought into earnings, by year, as follows:
| 2007 | 2008 | 2009 | 2010 | 2011 | |
| $ millions (Cdn) | 16 | 55 | 26 | 18 | 1 |
In the second quarter of 2007, most of the net inflows of US dollars were hedged with currency derivatives. Net inflows represent uranium and fuel services sales less US dollar cash expenses and US dollar product purchases. For the uranium and fuel services businesses in the second quarter of 2007, the effective exchange rate, after allowing for hedging, was about $1.16. Results from the gold business are translated into Canadian dollars at prevailing exchange rates.
BPLP Financial Instruments
To mitigate risks associated with the fluctuations in the market price for electricity, BPLP enters into various sales contracts that qualify as cash flow hedges. These cash flow hedges are required to be measured at their fair value and at June 30, 2007, the mark-to-market gain on these contracts was $57 million. This amount has been recognized in "accumulated other comprehensive income" and will be brought into earnings, by year, as follows:
| 2007 | 2008 | 2009 | 2010 | |
| $ millions (Cdn) | 16 | 19 | 12 | 10 |
Outlook for Third Quarter 2007
We expect consolidated revenue for the third quarter of 2007 to be about 10% higher than in the second quarter. This is primarily due to anticipated higher sales prices for uranium and electricity. Reported sales volumes for uranium are projected to decline relative to the second quarter due to normal variability.
Projections for the quarter assume no major changes in the ability of Cameco's business units to supply product and services and no significant changes in our current estimates for price and volume.
Outlook for the Year 2007
In 2007, Cameco expects consolidated revenue to grow by about 40% over 2006 due largely to higher revenue from the uranium business. We now expect uranium revenues to increase by about 75% due to stronger average realized prices under our contracts relative to 2006. This represents a decrease from our projection at the end of the first quarter of a 90% uranium revenue increase in 2007 as we now project reported sales volume to be lower than previously anticipated. The benefit of higher uranium revenue is offset slightly as Cameco anticipates its share of Cigar Lake remediation expenses will be $36 million in 2007 and will reduce pre-tax earnings accordingly. For further details on the uranium business outlook, see "Uranium Outlook for the Year 2007" later in this MD&A.
We anticipate that revenue from the fuel services business will be about 5% higher than in 2006 due to an increase in the average realized selling price. Reported sales volume is anticipated to be 5% lower than in 2006.
For 2007, we anticipate BPLP revenue to be about 7% higher than in 2006 due to higher expected realized prices. This represents a decrease from our first quarter projection of an 18% increase for 2007 as a result of a reduction in our estimate for expected realized electricity prices in 2007. This outlook for BPLP assumes the B units will achieve a targeted capacity factor in the low 90% range.
Gold production (100% basis) in 2007 is now expected to total between 550,000 and 560,000 ounces compared to Centerra's earlier forecast of 700,000 to 720,000 ounces. The reduction is due to an expected decrease at the Kumtor mine to 300,000 ounces from 450,000 ounces, due to the decision to change the angles of the pitwall. Centerra's gold production from its two mines totalled 587,000 ounces in 2006. Gold revenue is expected to be similar to 2006 primarily due to higher expected realized gold prices.
For the balance of 2007, every one-cent increase/decrease in the US to Canadian dollar exchange rate would result in a corresponding increase/decrease in net earnings of about $3 million (Cdn).
The financial outlook noted above for the company is based on the following key assumptions:
Administration costs are projected to be about 15% greater than in 2006. The increase reflects higher charges for regulatory compliance, information systems and process enhancements, and costs to maintain the workforce. Exploration costs are expected to be about $73 million in 2007. Of this, $45 million is targeted for uranium, a 41% increase over 2006.
For 2007, the effective tax rate is expected to be in the range of 10% to 15% compared to 6% in 2006. Our effective tax rate varies from the Canadian statutory tax rate primarily due to differences between Canadian tax rates and rates applicable to subsidiaries in other countries. This range is based on the projected distribution of income among the various tax jurisdictions being weighted less heavily toward foreign subsidiaries compared to 2006.
Outlook Information
For additional discussion on the company's business prospects for the second quarter of 2007 and for the full year, see the outlook section under each business segment.
BUSINESS SEGMENT RESULTS
Cameco's results come from four business segments:
URANIUM
| Highlights | ||||
| Three months ended June 30 |
Six months ended June 30 |
|||
| 2007 | 2006 | 2007 | 2006 | |
| Revenue ($ millions) | 458 | 141 | 641 | 425 |
| Gross profit ($ millions) | 234 | 36 | 293 | 133 |
| Gross profit % | 51 | 26 | 46 | 31 |
| Earnings before taxes ($ millions) | 214 | 28 | 258 | 117 |
| Average realized price | ||||
| ($US/lb) | 34.69 | 20.21 | 30.87 | 19.91 |
| ($Cdn/lb) | 40.11 | 24.89 | 36.10 | 23.95 |
| Sales volume (million lbs) 1 | 11.2 | 5.6 | 17.5 | 17.6 |
| Production volume (million lbs) | 5.6 | 5.4 | 10.1 | 9.7 |
| 1 Revenue on 2.6 million pounds previously deferred due to standby product loans was recognized in the quarter as a result of the cancellation of two of the product loan agreements. | ||||
Uranium Results
In the second quarter of 2006, we reported that Cameco had entered into standby product loan agreements with two of our customers. As previously noted, Cameco has terminated two of the three loan agreements and is now able to borrow up to 2.6 million pounds U3O8 equivalent (or 1.0 million kgU as UF6) under the remaining agreement.
As a result of terminating two loan agreements in April of 2007, the second quarter results include recognition of previously deferred revenue totalling $39 million and the associated costs of sales on 2.6 million pounds of U3O8.
As of June 30, 2007, Cameco had not borrowed any material under the remaining standby loan agreement. However, regardless of whether any material is borrowed, we defer revenue recognition from sales to the counterparty of the standby product loan agreement, up to the limit of the loan. This is in accordance with GAAP. Cameco will recognize the remaining deferred revenue and associated costs when the loan agreement is terminated, or if drawn upon, when the loan is repaid and that portion of the facility is terminated.
The timing of cash receipts on the deferred revenue is the same as on any other sale and is unaffected by the accounting treatment.
Standby fees associated with the loan facilities are reflected in the "Interest and Other" expense item on the "Consolidated Statement of Earnings".
Our year-to-date reported revenue, costs and average realized price for U3O8 discussed throughout this report have been adjusted to reflect the deferral required under the remaining product loan agreement.
Second Quarter
Compared to the second quarter of 2006, revenue from our uranium business increased by $317 million to $458 million due to a 61% increase in the realized selling price and a 100% increase in reported sales volumes. The timing of deliveries of uranium products within a calendar year is at the discretion of customers. Therefore, our quarterly delivery patterns can vary significantly. The increase in the average realized price for the second quarter of 2007 was the result of higher prices under market-related contracts due to a higher uranium spot price, which averaged $125.83 (US) per pound compared to $43.42 (US) in the same quarter of 2006.
Our total cost of products and services sold, including depreciation, depletion and reclamation (DDR), increased to $224 million in the second quarter of 2007 from $105 million in the second quarter of 2006 due to the rise in reported sales volumes and a 6% increase in the unit cost of product sold. The unit cost of product sold increased primarily as a result of higher royalty charges, which increase with the realized price.
Our earnings before taxes from the uranium business increased to $214 million, from $28 million in the second quarter of last year.
Year to Date
Compared to the first six months of 2006, revenue from our uranium business rose by 51% to $641 million due to an increase in the realized selling price. Reported sales volumes were essentially unchanged. The timing of deliveries of uranium products within a calendar year is at the discretion of customers. Therefore, our quarterly delivery patterns can vary significantly. The increase in the average realized price in 2007 was largely the result of higher prices under market-related contracts due to a higher uranium spot price, which averaged $105.42 (US) per pound compared to $41.19 (US) in the first half of 2006. Realized prices under fixed price contracts were also stronger than in 2006.
In 2007, our total cost of products and services sold, including depreciation, depletion and reclamation (DDR), increased to $348 million from $292 million in 2006 due to an 18% rise in the unit cost of product sold. The unit cost increased primarily as a result of higher charges for royalties and other selling costs. Royalty charges increase as the realized price increases and we have recorded $13 million in tiered royalties in the first half of 2007.
Our earnings before taxes from the uranium business increased to $258 million, from $117 million in 2006, primarily as a result of the rise in the realized price.
Uranium Outlook for Third Quarter 2007
In the third quarter of 2007, we expect reported sales volumes in our uranium business to be about 8 million pounds, down from the 11 million pounds reported in the second quarter due to normal variations in the timing of customer requirements. Uranium revenue in the third quarter is expected to be similar to the second quarter due to higher expected realized prices. The unit cost of product sold is projected to increase marginally from the second quarter due to higher royalty charges.
Uranium Outlook for the Year 2007
In 2007, the reported sales volume and associated revenue will be affected by the termination of two of the three product loan agreements. Total uranium deliveries amounted to 36 million pounds in 2006, while reported sales volume was 32 million pounds due to the deferral of revenue as a result of accounting for the product loans.
In 2007, uranium deliveries are expected to total 30 million pounds U3O8, including 3 million pounds at spot market prices. Our estimate of 30 million pounds is a decrease of 3 million from our previous estimate due to a delay in some customer deliveries and lower expected spot market sales. Our decision to reduce sales targets was also influenced by the lack of attractive opportunities for acquiring material on the spot market.
Customers have delayed about 2 million pounds of deliveries from 2007 to 2008 based on reactor reload requirements. The movement in volumes related to requirements-based contracts is not unusual.
As previously disclosed, we had almost 4 million pounds of uranium available to sell on the spot market in 2007. We had assumed for revenue forecast purposes that all 4 million pounds would be sold and delivered in 2007. Approximately 3 million pounds have been committed for sale at spot market prices for delivery in 2007. The remaining 1 million pounds may be placed into long-term contracts with deliveries in 2007 or 2008. For the purpose of forecasting 2007 revenue, we have excluded these 1 million pounds. The 3 million pounds of spot sales are included in the 2007 uranium deliveries projection of 30 million pounds noted above.
However, due to the influence of the product loan agreements, the reported sales volume for revenue purposes in 2007 is projected to be about 33 million pounds. For 2007, we now expect our reported revenues to be higher than previously estimated, about 75% greater than in 2006, due to a 70% increase in our realized price (based on the July 23, 2007 UxC spot price of $120.00 (US) per pound) and a 5% increase in reported sales volumes. The spot price assumption is the most current price available for this MD&A. Changes in the uranium spot price would impact the prices we realize under our contracts. See the section titled "Uranium Price Sensitivity (2007 to 2017)" below for more information.
Cameco's share of uranium production for 2007 is projected to be 20.6 million pounds of U3O8, slightly less than our earlier target of 21 million pounds due to a forecast reduction in Rabbit Lake production. This compares to 20.9 million pounds produced in 2006. These quantities do not include Inkai production, as the mine is not yet in commercial operation.
The unit cost of product sold is projected to increase by about 15% as a result of higher royalty costs due to an increase in the realized price, the impact of tiered royalty charges and increased production costs expected to be incurred in 2007.
Cameco did not pay provincial tiered royalties in 2006 and prior years due to the availability of prescribed capital allowances that reduce uranium sales subject to tiered royalties. Capital allowances have been fully exhausted during 2007 and, therefore, Cameco is paying tiered royalties this year. We currently estimate that tiered royalties will reduce pre-tax earnings by approximately $21 million ($14 million after tax) in 2007. Once Cigar Lake commences production, we will be eligible for capital allowances related to the mine expansion, estimated to be about $325 million. We will not be required to pay tiered royalties until the additional allowances are fully exhausted. The capital allowance is calculated based on a prescribed formula. Tiered royalties are paid only on sales of uranium produced at Saskatchewan mines.
The outlook for the third quarter and 2007 uranium business results are based on the following key assumptions:
Uranium Price Sensitivity 2007
For the remainder of 2007, a $5.00 (US) per pound change in the uranium spot price from $120 (US) per pound would change revenue by $10 million (Cdn) and net earnings by $7 million (Cdn). This sensitivity is based on an expected effective exchange rate of $1.00 (US) being equivalent to about $1.07 (Cdn) as a result of our currency hedge program. The spot price noted is the UxC spot price at July 23, 2007.
Uranium Price Sensitivity (2007 to 2017)
The table below shows an indicative range of average prices that Cameco would expect to realize under the current sales portfolio. The prices shown in the table are intended to show how various market price scenarios may impact Cameco's uranium revenue. This analysis makes a number of assumptions that are included as table footnotes.
As shown in the table, in the $20.00 (US) scenario, Cameco would expect the average realized price to exceed the spot price over the next 10 years, reaching 208% of the spot price by 2013. In the $140.00 (US) scenario, Cameco would achieve average realized prices of more than 75% of the spot price by 2015 and beyond. These prices are in current dollars, which are dollars in the year they are actually received or paid.
| Cameco Expected Average Realized Uranium Price (In brackets, expressed as a % of Spot Price) Current US $/lb U3O8 |
||||||
| $20 | $40 | $60 | ||||
| 2007 | $ 33.00 | ( 165% ) | $ 34.75 | ( 87% ) | $ 36.25 | ( 60% ) |
| 2008 | $ 25.75 | ( 129% ) | $ 31.75 | ( 79% ) | $ 37.50 | ( 63% ) |
| 2009 | $ 27.50 | ( 138% ) | $ 33.00 | ( 83% ) | $ 38.25 | ( 64% ) |
| 2010 | $ 33.75 | ( 169% ) | $ 38.75 | ( 97% ) | $ 46.25 | ( 77% ) |
| 2011 | $ 36.25 | ( 181% ) | $ 40.25 | ( 101% ) | $ 48.50 | ( 81% ) |
| 2012 | $ 36.50 | ( 183% ) | $ 40.50 | ( 101% ) | $ 49.50 | ( 83% ) |
| 2013 | $ 41.50 | ( 208% ) | $ 46.50 | ( 116% ) | $ 56.25 | ( 94% ) |
| 2014 | $ 37.00 | ( 185% ) | $ 44.50 | ( 111% ) | $ 56.00 | ( 93% ) |
| 2015 | $ 34.00 | ( 170% ) | $ 43.25 | ( 108% ) | $ 56.25 | ( 94% ) |
| 2016 | $ 35.00 | ( 175% ) | $ 45.00 | ( 113% ) | $ 58.00 | ( 97% ) |
| 2017 | $ 30.25 | ( 151% ) | $ 42.75 | ( 107% ) | $ 57.75 | ( 96% ) |
| continued | ||||||||
| $80 | $100 | $120 | $140 | |||||
| 2007 | $ 37.75 | ( 47% ) | $ 39.25 | ( 39% ) | $ 40.50 | ( 34% ) | $ 42.00 | ( 30% ) |
| 2008 | $ 42.50 | ( 53% ) | $ 47.75 | ( 48% ) | $ 53.25 | ( 44% ) | $ 58.50 | ( 42% ) |
| 2009 | $ 42.50 | ( 53% ) | $ 46.75 | ( 47% ) | $ 51.00 | ( 43% ) | $ 55.50 | ( 40% ) |
| 2010 | $ 51.50 | ( 64% ) | $ 57.50 | ( 58% ) | $ 63.50 | ( 53% ) | $ 69.25 | ( 49% ) |
| 2011 | $ 54.75 | ( 68% ) | $ 61.75 | ( 62% ) | $ 69.00 | ( 58% ) | $ 75.75 | ( 54% ) |
| 2012 | $ 57.25 | ( 72% ) | $ 65.70 | ( 66% ) | $ 74.50 | ( 62% ) | $ 83.00 | ( 59% ) |
| 2013 | $ 65.75 | ( 82% ) | $ 75.25 | ( 75% ) | $ 85.00 | ( 71% ) | $ 94.75 | ( 68% ) |
| 2014 | $ 67.00 | ( 84% ) | $ 78.25 | ( 78% ) | $ 89.50 | ( 75% ) | $ 101.00 | ( 72% ) |
| 2015 | $ 69.00 | ( 86% ) | $ 81.25 | ( 81% ) | $ 94.25 | ( 79% ) | $ 107.25 | ( 77% ) |
| 2016 | $ 70.75 | ( 88% ) | $ 83.00 | ( 83% ) | $ 95.75 | ( 80% ) | $ 108.75 | ( 78% ) |
| 2017 | $ 72.25 | ( 90% ) | $ 86.50 | ( 87% ) | $ 101.00 | ( 84% ) | $ 115.50 | ( 83% ) |
Key Assumptions:
Uranium Contracting
As we have discussed in the past, our contracting objective is to secure a solid base of earnings and cash flow to allow us to maintain our core asset base and pursue growth opportunities over the long term.
Our current portfolio reflects a 60/40 mix of market-related and fixed pricing (escalated by inflation) mechanisms. Today our contracting is more focused on market-related pricing. Consequently, we expect this existing ratio to change over time. The overall strategy will continue to focus on achieving longer contract terms of up to 10 years or more, with floor prices that provide downside protection, and retaining an adequate level of upside potential. In general, most new offers include price mechanisms with a mix of market-related and fixed components. The fixed-price component is generally near the industry long-term price indicator at the time of offer and is adjusted by inflation. The market-related component includes a floor price (escalated by inflation).
Cameco has a variety of supply sources including primary production, firm commitments for long-term purchases, inventories of about six months forward sales (equivalent to about 16 million pounds, including working inventory) and uranium from opportunistic purchases in the spot market.
Uranium Market Update
Uranium Spot Market
The industry average spot price (TradeTech and UxC) on June 30, 2007 was $135.50 (US) per pound U3O8, up 43% from $95.00 (US) at March 31, 2007. This compares to $45.75 (US) on June 30, 2006 and $40.75 (US) on March 31, 2006.
Spot market volume reported for the second quarter of 2007 was 4 million pounds U3O8 and 11 million pounds in the first half of 2007. This compares to 8 million pounds in the second quarter of 2006 and 18 million pounds in the first half of 2006.
This quarter over quarter decrease was attributed to a decline in demand. The current spot prices have resulted in buyers becoming more conservative and re-evaluating purchasing plans.
Limited supplies of U3O8 throughout the second quarter have resulted in spot market participants procuring 38% of their product in the form of UF6 in order to obtain the contained U3O8. This is a continuation of the trend seen in the first quarter.
Spot volumes are anticipated to remain low in the third quarter, which is typical during this period in the uranium market.
Historically, published long-term prices correlated closely to the spot price, with the long-term price generally at a $1 to $2 premium to the spot price. Buyers were willing to pay the premium to lock-in a price for future deliveries.
At the end of March 2007, the spot price began to diverge from the long-term price, with the spot price increasing at a much greater rate than the long-term price. Uranium purchases, including those made by the investment and hedge funds, reduced near-term supply resulting in the market viewing uranium for immediate delivery to be relatively scarce. This resulted in increased competition for near-term supplies in the second quarter and significant upward pressure on the spot price. In the case of the long-term price, buyers are willing to lock in at the then current long-term prices, but not for extended periods (i.e. 10 to 15 years) at today's historically high price levels. As such, at the end of the second quarter the spot price exceeded the long-term price by about $40.00 (US). However, during the month of July 2007, spot market demand decreased and the spot price has declined to about $120.00 (US) per pound.
Uranium Long-Term Market
The industry average long-term price (TradeTech and UxC) on June 30, 2007 was $95.00 (US) per pound U3O8, up 12% from $85.00 (US) at the end of March 2007. This compares to $46.75 (US) on June 30, 2006 and $41.50 (US) on March 31, 2006.
The long-term market remained active in the second quarter as utilities continued to seek secure supply with reliable primary suppliers in an effort to mitigate supply risk. Long-term contracting in 2007 is expected to be in the order of 200 million pounds U3O8, similar to the volumes contracted in 2006.
Uranium Operations Update
| Uranium Production | |||||
| Cameco's share of production (million lbs U3O8) 1 | Three months ended June 30 |
Six months ended June 30 |
2007 planned production | ||
| 2007 | 2006 | 2007 | 2006 | ||
| McArthur River/Key Lake | 3.9 | 3.2 | 6.6 | 5.9 | 13.1 |
| Rabbit Lake | 1.0 | 1.6 | 2.1 | 2.6 | 5.1 |
| Smith Ranch/Highland | 0.5 | 0.4 | 1.0 | 0.8 | 1.6 |
| Crow Butte | 0.2 | 0.2 | 0.4 | 0.4 | 0.8 |
| Total | 5.6 | 5.4 | 10.1 | 9.7 | 20.6 |
| 1 These quantities do not include Inkai production, as the mine is not yet in commercial operation. | |||||
McArthur River/Key Lake
Cameco's share of production at McArthur River/Key Lake in the second quarter of 2007 was 3.9 million pounds U3O8. Production improved relative to the first quarter as a result of excellent quality and quantity of ore from the McArthur River operation and improved milling production rates. Cameco's share of production for the third quarter of 2007 is expected to be 3.3 million pounds U3O8 and 13.1 million pounds for 2007.
In 2006 and during the first two months of 2007, we encountered mill process difficulties associated with higher levels of concrete dilution. Sand filters were installed in 2006 and while this equipment has improved the clarity of the uranium solution, very fine particles carrying organic material were not removed. The resulting organic carryover to the water effluent treatment circuit resulted in effluent quality that required re-treatment in order to achieve acceptable standards for release to the environment. In March 2007, a hydrogen peroxide circuit was added to reduce the concentration of organic material to acceptable levels. This process change was operated through the second quarter, demonstrating that it enables consistent operation at target production rates during periods of processing high concrete dilution ore, with significantly improved water treatment.
As previously reported, we have applied to increase the annual licensed production capacity at both the McArthur River mine and the Key Lake mill to 22 million pounds U3O8 (compared to the current 18.7 million pounds). This application has been undergoing an environmental assessment (EA) as required by the Canadian Environmental Assessment Act with the Canadian Nuclear Safety Commission (CNSC) as the responsible authority.
The CNSC has focused on an evaluation of the longer-term environmental impact of low levels of selenium and molybdenum in the Key Lake mill's effluent and the concentration of these substances in the downstream receiving environment.
Cameco has developed an action plan to further reduce selenium and molybdenum discharges in the mill effluent. This action plan was approved by the CNSC in March 2007 and the first phase of implementation is under way with completion now expected in the first part of 2008. Reducing the current level of these metals discharged to the environment is expected to help advance the EA to increase the annual licensed production limit at the McArthur River mine and at the Key Lake mill. Discussions with the CNSC are now under way to complete the assessment. We remain confident that we can incrementally increase production levels with minimal environmental effect.
In addition to obtaining approval for the EA, we need to transition to new mining zones at McArthur River and to implement various mill process modifications at Key Lake in order to sustain increased production levels. Mine planning, development and freeze-hole drilling for the McArthur River transition are ongoing.
We continue to make progress on freeze hole drilling in advance of development for two future mining zones, meeting targeted rates in one area and experiencing delays in the other. Another freeze-hole drilling program (required for eventual production from one of these zones) was scheduled to start in the first quarter of 2007. However, startup challenges related to recruiting drillers and commissioning of the drills resulted in delays. Many of the startup challenges have been overcome and freeze hole drilling started in July. Complete crews and processes are expected to be in place and ramped up to full production in the latter part of August.
Pre-feasibility assessment work is ongoing for the Key Lake revitalization project with completion of this stage of assessment targeted for the end of 2007.
In summary, before we can achieve the full increase in production at the McArthur River/Key Lake operations, there are a number of activities that need to be completed. We need to resubmit the EA and obtain regulatory approvals for it as well as licence approval to operate at higher production levels, demonstrate the effectiveness of our plan to reduce selenium and molybdenum discharges in the mill effluent, transition to new zones at the McArthur River mine and complete the revitalization work at the Key Lake mill. As such, we anticipate it will be a number of years before we can achieve the full planned increase at these operations. Increased annual production to an intermediate level between 18.7 and 22 million pounds may be possible prior to the completion of the Key Lake mill revitalization work but will require completion of the other items noted.
Rabbit Lake
Rabbit Lake produced 1.0 million pounds U3O8 during the second quarter. Production for the first six months of 2007 was 2.1 million pounds. For the first half of 2007, both tonnage and mill head grade were lower than in the same period in 2006. Changes to the mine plan, which were necessary while we were doing work required to obtain regulatory approvals to bring on a new mining zone, contributed to the production shortfall. We received regulatory approvals in the second quarter to proceed with production mining in this new zone, and therefore, tonnage in the second half of 2007 is expected to improve.
Production for 2007 is now expected to be equal to 2006 production of 5.1 million pounds U3O8, compared to our earlier plan of 5.5 million pounds.
We continue our exploration program near the Rabbit Lake operation. The underground drilling reserve replacement program has been extended to include drilling to the end of 2007 and potentially beyond. Approximately 16,000 metres of drilling were completed in the second quarter and 34,000 metres so far in 2007. Drill targets included testing the north zone of the mine beyond the area where reserves were reported in 2006, as well as an area south of the mine that continued to provide good mineralized intersections.
As previously reported, we have submitted an EA to process a little over one half of the future uranium production from Cigar Lake at the Rabbit Lake mill beginning in the second to third year of Cigar Lake production and to expand the Rabbit Lake tailings facility. The submission review is now nearing completion and it is expected that a CNSC hearing on the EA will occur late in the fourth quarter of 2007.
We began engineering work for the expansion of the Rabbit Lake in-pit tailings management facility in the first quarter of 2007. Physical earthwork is expected to begin sometime in the first quarter of 2008, subject to regulatory approvals.
Smith Ranch-Highland and Crow Butte
Smith Ranch-Highland and Crow Butte in situ recovery (ISR) mines produced 0.7 million pounds U3O8 in the second quarter of 2007.
Cigar Lake
Cameco began construction of the Cigar Lake mine on January 1, 2005. On October 23, 2006 Cameco reported that a rockfall causing a water inflow had flooded the underground development.
On March 30, 2007 Cameco released a technical report that provided details of a five-phase plan to restore the underground workings at Cigar Lake and complete construction.
Cameco continues to make progress on its phased remediation plan. The first phase of the remediation plan involves drilling holes down to the source of the inflow and to a nearby tunnel where reinforcement is needed, pumping concrete through the drill holes, sealing off the inflow with grout and drilling dewatering holes. Subsequent phases for remediation include dewatering the mine, ground freezing in the area of the inflow, restoring underground areas and resumption of mine development. Regulatory approval is required for each phase of the remediation plan.
Reinforcement of the adjacent tunnel is now complete, and all of the holes required for pouring concrete to seal off the inflow have been drilled. Drilling of four larger-diameter holes required for dewatering is 90% complete. Completion of the last hole was temporarily suspended to allow for the completion of the fines flushing described below.
Our plans to flush sand and fine material away from the inflow area and to pour the concrete plug have been approved and this work is now proceeding. The fines flushing step was successfully completed leading to the final preparation to begin pouring the concrete plug. To assure success, a new readiness assessment process has been implemented as a formal step prior to any new action being taken. This assessment is under way as the last step before pouring commences. The first concrete is expected to be placed within the next few days to a week. The overall plug pouring process will take 10 to 12 weeks. The effectiveness of the plug will not be known until dewatering is under way.
The second phase of remediation includes dewatering the underground development, verifying that the water inflow has been sufficiently sealed, and installing the surface freezing piping.
Cameco is now working to provide regulators with the information needed to secure approval for installation of dewatering pumps and infrastructure, and ongoing operation of water treatment facilities required for dewatering.
Submissions are being prepared for regulatory approval to dewater the underground development, initiate the installation of the surface freezing infrastructure, and any additional remedial work identified in phases two and three, such as determining if additional reinforcement is required in higher risk areas. We are also preparing to submit an application to the CNSC for extension of the Cigar Lake construction licence, which expires at the end of 2007. We expect the application will be considered at a hearing in early November.
Completion of the second phase had been expected by the end of the third quarter of 2007. Cameco now expects it will require a number of additional months to seal the inflow and dewater the mine. Similar to other remediation activities, completion of this work is subject to the application for and receipt of regulatory approval.
In addition, in order to ensure a more conservative approach, we and our partners are examining whether an alternative route out of the mine should be in place prior to beginning excavation in areas at elevated risk of water inflow, and whether the second shaft needs to be completed to provide additional underground ventilation. Completing the second shaft as a priority item and the delay in completing phase two, as noted above, would set back the planned production startup date from 2010 to 2011. We anticipate that by year end we will make a decision on the second shaft. A revised production forecast will be provided after the decision is made on the second shaft, the mine has been dewatered and the condition of the underground development has been assessed.
There are about 285 people on site working on remediation and construction of surface facilities including the access road, piping infrastructure, load-out building and water treatment facilities.
In order to keep our stakeholders informed on the progress of our remediation activities, Cameco will provide an update on September 19, 2007.
Inkai
At the Inkai ISR project in Kazakhstan, there are two production areas currently in development (blocks 1 and 2). At block 1, construction is under way for the commercial processing facility. In 2007, we expect to begin commissioning of the commercial facility, subject to regulatory approvals. We expect startup of commercial production in 2008.
At block 2, the test mine produced about 0.2 million pounds U3O8 during the second quarter of 2007. We plan to apply for a mining licence in 2007 for block 2. Commercial development of block 2 is planned for 2008.
As previously reported, production from blocks 1 and 2 is expected to total 5.2 million pounds (Cameco's share is 60% or 3.1 million pounds) per year by 2010. However, a recently signed non-binding memorandum of understanding (MOU) between Cameco and Kazatomprom provides for the doubling of future production capacity from the Inkai uranium deposit, raising the total annual production capacity to 10.4 million pounds on a timeframe yet to be confirmed.
While the existing project ownership would not change, Cameco's share of the additional capacity under the MOU will be 50%, raising Cameco's share of the future annual production at Inkai to 5.7 million pounds.
In addition to the increased production, Cameco will work with Kazatomprom under the MOU to study the feasibility of constructing a uranium conversion facility in Kazakhstan and elsewhere. Cameco would provide the technology and potentially hold an interest of up to 49%, at the company's discretion.
Cameco anticipates that binding agreements will be signed in 2007 or 2008 and that various government approvals will be required as the agreements are implemented.
Inkai will be subject to taxes and royalties in Kazakhstan at statutory rates. The income tax rate is 30%. We expect Inkai will begin to pay income tax in 2007, after it receives official government confirmation of Kazakh-defined reserves for block 2. Inkai is also subject to royalties calculated as 1.5% of the gross value (calculated based on sales price) of production in the year. Inkai is also subject to a customs fee on the export of uranium and it is expected this fee will be approximately $1 million (US) per year once full production is achieved. In addition, a one-time payment of a commercial discovery bonus will be payable when Inkai receives confirmation of Kazakh-defined recoverable reserves located in a particular licensed area. The bonus is calculated as 0.05% of the value of Kazakh-defined recoverable reserves. Inkai expects to pay this bonus in the third quarter, which is estimated to range between $5 to $20 million (US), with respect to block 2. These taxes, royalties, custom fees and bonuses are paid to the Kazakh government. The Kazak-defined reserves do not conform with, and are not equivalent to, reserves classified under Canadian securities laws. Some reserves categories used by Kazakhstan overlap with multiple Canadian resources categories, and contrary to Canadian standards, Kazakh-defined reserves can be based on the equivalent of inferred resources. The reconciliation of Kazakh-defined reserves to Canadian resources and reserves definitions will be required for future disclosure.
Inkai will also be subject to an excess profits tax. The excess profits tax becomes payable when the internal rate of return of the project (as defined in the applicable tax code) exceeds 20%. The excess profits tax is levied at rates scaled from 4% to 30%, depending on the internal rate of return. The excess profits tax rate is applied to pre-tax net income less income tax. Inkai will not pay the excess profits tax in 2007. The timing of the excess profits tax in the future, after Inkai reaches commercial production, will be dependent on the internal rate of return of the project.
Operational Changes
As we have previously discussed, we have put in place a revised management structure for operations led by Cameco's chief operating officer. This new structure separates production operations and development projects and addresses key lessons learned over the past year. This structure affects our mining and fuel services divisions.
We are also acting to add more technical resources to support our mining and fuel services divisions. Since the beginning of 2007, we have added 29 technical specialists in various fields including, geology, metallurgy, engineering, safety, geophysics, quality, and radiation. In addition, at Cigar Lake, we are in the process of reorganizing the management team and hiring a new general manager.
Over time these steps will provide additional oversight and direction as well as reinforce our commitment to excellence and accountability.
Uranium Exploration Update – Second Quarter 2007
Saskatchewan Exploration
Second quarter exploration activities on many Saskatchewan projects were delayed as a result of the increased time required to obtain exploration permits from the provincial government regulator. New permitting processes are being put in place that satisfy court decisions regarding the duty to consult that the Crown has with respect to industry proposals that may impact First Nations' traditional lands.
On the Dawn Lake project, drilling at Collins Creek was deferred from June until July as a result of the delayed permitting noted above. A scoping study on the Collins Creek open pit conceptual design recommended additional drilling to obtain more information on the assumed mineralization.
We continued to undertake feasibility related activities on the Millennium deposit. The 3D seismic survey over the Millennium area was completed by late April. Data interpretation is ongoing. Borehole seismic surveying of the two pilot shaft holes was completed in June along with 15 of 19 standard penetration tests for mine infrastructure foundations. Drilling was initiated in mid June as part of continued exploration along the prospective trend that hosts the Millennium deposit.
The English River First Nation (ERFN) has selected claims for Treaty Land Entitlement (TLE) designation that include the Millennium uranium deposit. Similarly, the Peter Ballantyne Cree Nation has selected lands under the TLE process that cover portions of the mineral claims held by the Dawn Lake joint venture. The TLE process does not affect the rights of our mining joint ventures, however, it may have an impact on the surface rights and benefits ultimately negotiated as part of the development of our two uranium deposits. Cameco, as operator of both affected joint ventures, is investigating the potential implications of the TLE land issue.
During the second quarter, evaluation of the P2 trend north of the McArthur River mine continued. A combination of conventional and directional drilling was undertaken with about 9,000 metres completed in 16 drill holes, bringing the total drilling for the year to approximately 12,600 metres in 23 drill holes. We have now tested the P2 trend at regular 200-metre spacing for a distance of approximately 3,000 metres north of the mine. Results along this world-class trend continue to be encouraging.
On the AREVA operated Cree Zimmer project, surrounding the Key Lake operation, a resistivity survey was undertaken in the West Zimmer area southwest of the historic Gaertner and Deilmann uranium deposits. Permits for drilling had not been received by the end of the quarter. Cameco's ownership of the Cree Zimmer Joint Venture is 83.335%.
On the Waterbury/Cigar Lake Joint Venture Project operated by AREVA, a property-wide airborne gravity survey was completed and the summer drilling program was initiated. Cameco's interest in the Waterbury property is 50.025%.
Canadian Exploration
Late in the second quarter, permitting activities began for the startup of field programs on several projects in Nunavut and Northwest Territories. This work will consist of geophysics, as well as field mapping and sampling. We plan to complete a drilling program during the third quarter at Cameco's Otish South project in Quebec.
Global Exploration
Drilling was initiated on three projects in Mongolia, and field work commenced on the Lastourville project in Gabon.
We signed a letter of intent for a strategic alliance with Western Uranium Corporation. Cameco will acquire a 10% equity interest in WUC through a non-brokered private placement subject to signing and closing definitive agreements. The immediate emphasis for this strategic alliance will be WUC's Kings Valley property in Nevada. This property covers a portion of the McDermitt caldera in northcentral Nevada where Chevron discovered volcanic-hosted uranium in 1975.
FUEL SERVICES
Highlights
Three months ended June 30 |
Six months ended June 30 |
|||
2007 |
2006 |
2007 |
2006 |
|
| Revenue ($ millions) | 64 |
57 |
108 |
101 |
| Gross profit ($ millions) | 6 |
6 |
15 |
16 |
| Gross profit % | 9 |
11 |
14 |
16 |
| Earnings before taxes ($ millions) |
5 |
6 |
13 |
14 |
| Sales volume (million kgU)1 | 3.8 |
4.3 |
6.2 |
7.6 |
| Production volume (million kgU) | 3.2 |
2.4 |
7.1 |
5.8 |
| 1Kilograms of uranium (kgU) | ||||
Fuel Services Results
The second quarter and six-month results for 2007 reflect the recognition of previously deferred revenue and the associated costs on conversion services deliveries of 0.4 million kgU, related to the termination of two of three standby product loan agreements discussed under the uranium business segment. The effect of the termination was an increase of $3 million in reported revenue and marginal impact on gross profit.
As in the case of the deferred uranium revenue, the timing of cash receipts on the deferred revenue is the same as on any other sale and is unaffected by the accounting treatment for the revenue. Cameco will recognize the remaining deferred revenue and associated costs when the loan agreement is terminated, or if drawn upon, when the loan is repaid and that portion of the facility is terminated.
Second Quarter
In the second quarter of 2007, revenue from our fuel services business was $64 million, an increase of $7 million compared to the same period in 2006, as the impact of a decline in reported sales volumes was offset by an increase in the realized price.
