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Cameco Corporation
Management's Discussion and Analysis (MD&A)
For the period ended March 31, 2008
The following discussion of the financial condition and operating results of Cameco Corporation has been prepared as of May 12, 2008 and updates the annual MD&A included in our 2007 annual financial review and should be read in conjunction with the unaudited consolidated financial statements and notes for the period ended March 31, 2008, as well as the audited consolidated financial statements for the company for the year ended December 31, 2007 and MD&A of the audited financial statements, both of which are included in the 2007 annual financial review. No update is provided where an item is not material or where there has been no material change from the discussion in our annual MD&A. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). The 2007 annual financial review is available on the company's website at cameco.com and on sedar.com.
Statements contained in this MD&A, which are not historical facts or a description of present circumstances, 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, the section titled "Risks and Risk Management" in the MD&A contained in the company's 2007 annual financial review, and the section titled "Risk Factors" in the company's 2007 annual information form.
Note: All dollar amounts are expressed in Canadian dollars unless otherwise stated.
Financial Highlights |
Three months ended March 31 |
Change % |
|
2008 |
2007 |
||
| Revenue ($ millions) | 593 | 409 | 45 |
| Earnings from operations ($ millions) | 163 | 49 | 233 |
| Cash provided by operations ($ millions)1 | 146 | 139 | 5 |
| Net earnings ($ millions) | 133 | 59 | 125 |
| Earnings per share (EPS) – basic ($) | 0.39 | 0.17 | 129 |
| EPS – diluted ($) | 0.37 | 0.16 | 131 |
| Average uranium (U3O8) spot price ($US/lb U3O8) | 73.50 | 85.00 | (14) |
| Average realized uranium price | |||
| 40.85 | 24.00 | 70 | |
| 44.68 | 28.91 | 55 | |
| Average realized electricity price per megawatt hour ($/MWh) | 56 | 54 | 4 |
| Average Ontario electricity spot price ($/MWh) | 50 | 53 | (6) |
| 1After working capital changes. | |||
FINANCIAL RESULTS
Consolidated Earnings
First Quarter
For the three months ended March 31, 2008, our net earnings were $133 million ($0.37 per share diluted), $74 million higher than net earnings of $59 million ($0.16 per share diluted) recorded in the first quarter of 2007. The increase was due to higher earnings in the uranium and gold businesses driven by increases in the realized selling prices and higher reported volumes in the uranium business, partially offset by higher costs in the fuel services business.
Earnings from operations increased to $163 million in the first quarter of 2008 from $49 million in the first quarter of 2007. In the first quarter of 2008, the aggregate gross profit margin was 38% compared to 26% in 2007.
Compared to the first quarter of 2007, exploration expenditures were $1 million lower, at $13 million, with uranium exploration expenditures unchanged at $8 million (focused in Saskatchewan, Australia and Nunavut). Gold exploration expenditures at Centerra Gold Inc. (Centerra) were $1 million lower compared to the first quarter of 2007.
Interest and other charges were $36 million higher than in the first quarter of 2007 due primarily to the recognition of $34 million in mark-to-market losses on hedge contracts that do not qualify for hedge accounting.
In the first quarter of 2008, we recorded an income tax expense of $17 million compared to net recovery of $16 million in 2007. This change was due to the distribution of our taxable income between Canada and other countries. In the first quarter of 2008 as compared to the first quarter of 2007, losses attributable to Canada decreased significantly. For more information on income taxes, refer to note 10 of the unaudited consolidated financial statements.
In the first quarter of 2008, administration costs were $30 million lower due to reduced stock-based compensation expenses. The decline in stock compensation expense is due to a decline in our share price during the quarter. As a result of the amendment to our stock option program in July 2007, the amount of the reported expense is determined using Cameco's share price as of the date of the financial statements. Thus, the reported expense may vary significantly from period to period.
| Administration ($ millions) | Three months ended March 31 |
Change | |
2008 |
2007 |
||
| Direct administration | 30 | 30 | 0 |
| Stock-based compensation1 | (22) | 8 | (30) |
| Total administration | $ 8 | $ 38 | ($ 30) |
| 1Stock-based compensation includes amounts charged to administration under the stock option, deferred share unit, performance share unit and phantom stock option plans. | |||
Quarterly Financial Results ($ millions except per share amounts)
| Highlights | 2008 | 2007 | 2006 | |||||
| Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | |
| Revenue | 593 | 494 | 681 | 726 | 409 | 512 | 360 | 417 |
| Net earnings | 133 | 61 | 91 | 205 | 59 | 40 | 73 | 150 |
| EPS – basic ($) | 0.39 | 0.18 | 0.26 | 0.58 | 0.16 | 0.11 | 0.21 | 0.43 |
| EPS – diluted ($) | 0.37 | 0.17 | 0.25 | 0.55 | 0.16 | 0.11 | 0.20 | 0.40 |
| EPS – adjusted & diluted ($) | 0.37 | 0.18 | 0.74 | 0.55 | 0.16 | 0.11 | 0.12 | 0.21 |
| Cash from operations1 | 146 | 57 | 450 | 155 | 139 | 13 | 79 | 40 |
| 1After working capital changes. | ||||||||
Revenue of $593 million in the first quarter of 2008 was 20% higher than in the fourth quarter of 2007 due to higher reported sales volumes in the uranium business. Revenue is driven by timing of deliveries in our uranium and fuel services businesses and may vary significantly from period to period.
Net earnings do not trend directly with revenue because of unusual items and transactions that occur from time to time. The company uses a non-GAAP measure, adjusted net earnings, to provide a more meaningful basis for period-to-period comparison of financial results. No adjustments were required in the first quarter of 2008 or the first quarter of 2007.
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 first quarter of 2008, we generated $146 million in cash from operations compared to $139 million in the same period of 2007. The increase of $7 million was related to higher revenues in the uranium business, largely offset by an increase in working capital requirements related to an increase in product inventory compared to the first quarter of 2007.
Balance Sheet
At March 31, 2008, our total debt was $722 million, representing a decrease of $4 million compared to December 31, 2007. Included in the March 31, 2008 balance was $187 million, which represents our proportionate share of Bruce Power Limited Partnership's (BPLP) capital lease obligation. At March 31, 2008, our consolidated net debt to capitalization ratio was 17%, down slightly from 18% at the end of 2007.
Compared to the end of 2007, our product inventories increased by $121 million due to higher quantities of uranium concentrates and increases in stockpiled ore of both uranium and gold.
At March 31, 2008, our consolidated cash balance totalled $132 million with Centerra holding $119 million of this amount.
Foreign Exchange Update
During the quarter, the US dollar strengthened against the Canadian dollar from $0.99 at December 31, 2007 to $1.03 at March 31, 2008.
At March 31, 2008, we had foreign currency contracts of $1,137 million (US) that were accounted for using hedge accounting and foreign currency contracts of $216 million (US) and EUR 73 million that did not meet the criteria for hedge accounting. The foreign currency contracts are scheduled for use as follows:
| 2008 | 2009 | 2010 | 2011 | |
| $ millions (US) | 548 | 400 | 325 | 80 |
| EUR millions | 30 | 20 | 15 | 8 |
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.
At March 31, 2008, the mark-to-market gain on all foreign exchange contracts designated as hedges was $22 million compared to a $118 million gain at December 31, 2007. Contributing to this change are realizations on hedges as they mature and changes in the exchange rates since December 31, 2007.
Timing differences between the maturity dates and designation dates on previously closed hedge contracts may result in deferred revenue or deferred charges. At March 31, 2008, net deferred gains totalled $94 million. The schedule for these net deferred gains to be released to earnings, by year, is as follows:
Deferred Gains |
2008 | 2009 | 2010 | 2011 |
| $ millions (Cdn) | 46 | 30 | 18 | 0 |
In the first quarter of 2008, 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 first quarter of 2008, the effective exchange rate, after allowing for hedging, was about $1.09.
At March 31, 2008, every one-cent increase/decrease in the US to Canadian dollar exchange rate would result in a corresponding increase/decrease in net earnings for the balance of the year of about $4 million (Cdn) related to unhedged exposures and about a $2 million (Cdn) decrease/increase related to mark-to-market exposure on hedges that do not qualify for hedge accounting. Going forward, we expect to continue to reduce our US dollar hedge position.
OUTLOOK FOR THE YEAR 2008
During the first quarter of 2008, there were no material changes to Cameco's 2008 consolidated outlook or our 2008 outlook for each business segment contained in Cameco's annual MD&A. For the convenience of the reader, we have summarized Cameco's 2008 consolidated outlook and 2008 outlook for each business segment in a table called "2008 Financial Outlook" on our website at cameco.com.
BUSINESS SEGMENT RESULTS
Cameco's results come from four business segments:
URANIUM
Highlights
| Three months ended March 31 |
||
| 2008 | 2007 | |
| Revenue ($ millions) | 338 | 183 |
| Gross profit ($ millions) | 169 | 60 |
| Gross profit % | 50 | 33 |
| Average realized price | ||
| ($US/lb) | 40.85 | 24.00 |
| ($Cdn/lb) | 44.68 | 28.91 |
| Sales volume (million lbs)1 | 7.4 | 6.3 |
| Production volume (million lbs) | 3.7 | 4.5 |
| 1Revenue in the amount of $85 million on 2.6 million pounds previously deferred due to a standby product loan was recognized in the first quarter of 2008 as a result of the cancellation of a product loan agreement. | ||
Uranium Results
First Quarter
Compared to the first quarter of 2007, revenue from our uranium business increased by $155 million to $338 million due to a 55% increase in the average realized selling price and a 17% 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 was the result of higher prices under both market-related and fixed-price contracts, largely as a result of older contracts, some with low ceilings, being replaced with new contracts at improved prices. The decrease in the industry average uranium spot price to $73.50 (US) in the first quarter of 2008 from $85.00 (US) in the first quarter of 2007 was somewhat offset by the increase in the industry average long-term price of $95.00 (US) for the first quarter 2008 from $81.67 (US) for the first quarter 2007.
Our total cost of products and services sold, including depreciation, depletion and reclamation (DD&R), increased to $168 million in the first quarter of 2008 from $123 million in the first quarter of 2007 due to the rise in reported sales volumes and an increase in the unit cost of product sold. The unit cost increased by 15% as a result of higher production costs and higher royalty charges, which increase with the realized price. During the first two months of 2008, the mill at Rabbit Lake was shut down to allow for rebuilding of ore stockpiles. As a result, Rabbit Lake operating costs ($6 million) incurred during the two-month period were charged to earnings rather than to product inventory.
The following table provides the updated rates for 2008 Saskatchewan tiered royalty calculations on the sale of uranium extracted from our Saskatchewan mines. The 2008 rates were unavailable at the time of the publication of the annual MD&A.
The tiered royalty is calculated on the positive difference between the sales price per pound of U3O8 and the prescribed prices according to the following:
| Royalty Rate | Canadian Dollar Sales Price in Excess of: |
| 6% | $17.16 |
| Plus 4% | $25.74 |
| Plus 5% | $34.32 |
For example, if Cameco realized a sales price of $45 per pound in Canadian dollars, tiered royalties would be calculated as follows (assuming all capital allowances have been reduced to zero):
[6% x ($45.00 – $17.16) x pounds sold] + [4% x ($45.00 – $25.74) x pounds sold] + [5% x ($45.00 -$34.32) x pounds sold] = $2.97 per pound sold (about 6.6% of the assumed $45 contract price).
Cameco's capital allowances were exhausted in 2007. Cameco will be eligible for additional capital allowances once Cigar Lake commences production, at which time we do not expect to pay tiered royalties until the additional allowances are fully exhausted.
Uranium Price Sensitivity (2008)
For the remainder of 2008, a $10.00 (US) per pound change in the market price for uranium from $60 (US) per pound (reflecting the TradeTech weekly spot price indicator at May 9, 2008) would change revenue by $46 million (Cdn) and net earnings by $32 million (Cdn). This sensitivity is based on an expected effective exchange rate of $1.00 (US) being equivalent to about $1.04 (Cdn) as a result of our currency hedge program.
Uranium Price Sensitivity (2008 to 2012)
The table below shows an indicative range of average prices that Cameco would expect to realize under its sales portfolio at this time. The prices shown in the table are intended to provide the reader with a general indication of how Cameco's expected realized prices for uranium may tend to vary with changes in spot market prices. This information will change as Cameco enters into new contracts. Due to the number of variables affecting Cameco's realized prices, we have made a simplifying assumption regarding spot prices. We set the spot price at the levels noted and calculated our expected realized prices accordingly. For example, under the $80.00 (US) spot price scenario, the calculation of realized prices assumes the spot price reaches $80.00 (US) at April 30, 2008 and remains at that level through 2012. Each column in the table should be read assuming the column header spot price remains constant for the entire five-year period. Actual realized prices in any given year will differ from what is shown in the table due to the fact that we are continually signing new contracts, with first deliveries beginning as far out as five years or more after contract signing.
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 five years, reaching almost double the spot price by 2012. In the $140.00 (US) scenario, Cameco would achieve average realized prices of nearly 60% of the spot price by 2012. These prices are in current dollars, which are dollars in the year they are actually received or paid.
The uranium price sensitivity table for the period 2008 to 2012 below has been updated to reflect deliveries made and contracts entered into during the first quarter of 2008.
Cameco Expected Average Realized Uranium Price (Rounded to the nearest $1.00) |
|||||||
| $20 | $40 | $60 | $80 | $100 | $120 | $140 | |
| 2008 | $ 34.00 | $ 37.00 | $ 40.00 | $ 43.00 | $ 46.00 | $ 50.00 | $ 53.00 |
| 2009 | $ 29.00 | $ 34.00 | $ 40.00 | $ 44.00 | $ 49.00 | $ 54.00 | $ 58.00 |
| 2010 | $ 34.00 | $ 39.00 | $ 47.00 | $ 53.00 | $ 59.00 | $ 66.00 | $ 73.00 |
| 2011 | $ 35.00 | $ 40.00 | $ 48.00 | $ 54.00 | $ 62.00 | $ 69.00 | $ 76.00 |
| 2012 | $ 38.00 | $ 41.00 | $ 49.00 | $ 57.00 | $ 65.00 | $ 74.00 | $ 82.00 |
This price table is forward-looking information and is based upon the material assumptions, and subject to the material risks, discussed under the heading "Caution Regarding Forward-Looking Information and Statements", as well as the following key assumptions and material risks which could cause actual prices to vary:
The assumptions stated above, including our annual sales volumes and the price realized from them, are made solely for the purpose of the foregoing price table and do not necessarily reflect our views of anticipated results.
Uranium Contracting
Our current portfolio continues to reflect a 60/40 mix of market-related and fixed pricing (escalated by inflation) mechanisms.
The overall strategy will continue to focus on achieving longer contract terms of up to 10 years or more, floor prices that provide downside protection, and retaining an adequate level of upside potential. Recently, floor prices have been in the $40 (US) range, but will vary depending on the prevailing market prices at the time sales commitments are made.
In the current volatile market environment this strategy has allowed Cameco to add increasingly favourable contracts to its portfolio while maintaining sensitivity to future price movements.
Uranium Market Update
Uranium Spot Market
Outlined below are the industry average spot market prices (TradeTech and UxC).
| March 31/08 | Dec 31/07 | March 31/07 | Dec 31/06 | |
| Average spot market price ($US/lb U3O8) | $71.00 | $89.50 | $95.00 | $72.00 |
In the spot market, where purchases call for delivery within one year, the volume reported for the first quarter of 2008 was 9 million pounds U3O8. This compares to 8 million pounds in the first quarter of 2007.
Discretionary demand represented 82% of the spot market purchases in the first quarter. Actual demand has been minimal as utilities have very little uncovered requirements for 2008. During April, sellers have shown an increased willingness to attract demand back into the spot market by offering lower prices. This is reflected in the spot price of $60 (US) per pound (reflecting the TradeTech weekly spot price indicator as of May 9, 2008). Spot price volatility is expected to continue.
Uranium Long-Term Market
Outlined below are the industry average long-term market price indicators (TradeTech and UxC).
| March 31/08 | Dec 31/07 | March 31/07 | Dec 31/06 | |
| Average long-term market price ($US/lb U3O8) | $95.00 | $95.00 | $85.00 | $72.00 |
The long-term market remained active in the first quarter as utilities continue to seek secure supply with reliable primary suppliers. Long-term contracts usually provide for deliveries to begin two to five years after contracts are finalized and use a number of pricing formulas including fixed prices adjusted by inflation indices and market referenced prices (spot and long-term indicators). In 2008, long-term contracting is expected to be about half of the 2007 volume of 250 million pounds U3O8, however this level will be highly dependent on supply developments and market prices.
In contrast to the spot price, the long-term price held steady at $95 (US) from May of 2007 until its recent decrease to $90 (US). March 2007 saw the spot price begin to diverge from the long-term price, with the spot price increasing at a much greater rate than the long-term price. The spot price reached a high of $135.50 (US) in June 2007, exceeding the long-term price by more than $40 (US). The spot price has since trended downward reaching $60 (US) (reflecting the TradeTech weekly spot price indicator as at May 9, 2008), $30 (US) below the long-term price. The disparity between the spot and long-term price likely reflects the difference between spot market and long-term supply/demand situations. The spot market has limited actual demand due to utilities being well covered, with sufficient supply to meet this demand in 2008. The long-term supply/demand outlook reflects the need for the development of new production. Industry participants suggest buyers in the long-term market are willing to pay a premium to ensure security of supply and to cover exploration and development costs.
Uranium Operations Update
Uranium Production
| Cameco's share of production (million lbs U3O8) | Three months ended March 31 |
2008 planned production1, 2 |
|
| 2008 | 2007 | ||
| McArthur River/Key Lake | 3.1 | 2.7 | 13.1 |
| Rabbit Lake | 0 | 1.1 | 3.6 |
| Smith Ranch/Highland | 0.4 | 0.5 | 1.8 |
| Crow Butte | 0.2 | 0.2 | 0.9 |
| Total | 3.7 | 4.5 | 19.4 |
| 1 These quantities do not include Inkai production, as the mine is not yet in commercial operation. Production at Inkai in 2008 is estimated at 1.2 million pounds subject to the availability of acid. | |||
| 2 See the section titled "Cameco's Uranium Supply Outlook" in the annual MD&A for more information about the assumptions and risk factors associated with this production forecast, which remains unchanged from the forecast presented in our annual MD&A. | |||
The hearing dates to consider Cameco's requests to the Canadian Nuclear Safety Commission (CNSC) to renew our facility operating licences for McArthur River, Key Lake and Rabbit Lake for five-year terms have been set. There will be two days of hearings for each licence renewal. The first hearing day is scheduled for June and the second is scheduled for September.
McArthur River/Key Lake
Cameco's share of production of U3O8 at McArthur River/Key Lake during the first quarter was 3.1 million pounds. The increase in production compared to 2.7 million pounds produced in the first quarter of 2007 is the result of improvements to mill effluent treatment.
Construction of equipment for the first phase of a three-phase plan to reduce concentrations of selenium and molybdenum discharged to the environment was completed in the first quarter. Commissioning is currently underway and the system is expected to be fully operational before the end of the second quarter.
The revitalization pre-feasibility assessment for the Key Lake mill was completed in the first quarter of 2008. Revitalization of Key Lake will include upgrading circuits to new technology for simplified operation, increased production capacity and improved environmental performance. The first step of this program includes replacement of the sulphuric acid and oxygen plants.
Progress was made on the planned work for transitioning to one of the two new underground mining areas at McArthur River. Progress on freezehole drilling in this area was significantly better than anticipated in the first quarter. As well, construction of freezehole piping commenced in this area.
Transitioning to the second new mining area is progressing but activities are behind schedule for 2009 production. Performance in this specific area of the mine is dictated by conditions and risk reduction activities. As a result of the delays encountered, a production contingency plan has been developed. The plan includes mining from areas that are within the protection of the existing freezewall and is intended to reduce the risk of production not achieving the licensed capacity in 2009. During the summer, we expect to complete the engineering for the contingency plan.
Rabbit Lake
During the first quarter, mine production at Rabbit Lake contained about 0.8 million pounds of uranium. However, there was no mill production during the quarter due to the mill being shut down to rebuild ore stockpiles following the inflow that occurred in late 2007. In addition, a change was made to the mill's operating schedule during the quarter. A shut down planned for April was rescheduled to March to accommodate concrete repairs in priority areas of the mill, which were needed as a result of the discovery of uranium groundwater seepage into a construction excavation adjacent to the mill. Our information indicates that the groundwater flows to the tailings management facility (TMF). The regional waters collected at the TMF are pumped to the mill for treatment, which we believe creates a closed loop. We are working with third-party experts to complete an extensive hydrogeological investigation to confirm our views. The mill restarted operations on April 2, 2008. We continue to expect Rabbit Lake to produce the planned 3.6 million pounds U3O8 this year.
The CNSC hearing to consider the environmental assessment to process a little over one-half of the future uranium from Cigar Lake ore at the Rabbit Lake mill has been scheduled for June of 2008. Approval of this environmental assessment is required before the Rabbit Lake TMF can be expanded.
Smith Ranch-Highland and Crow Butte
Smith Ranch-Highland and Crow Butte in situ recovery (ISR) mines, located in Wyoming and Nebraska, produced 0.6 million pounds U3O8 in the first quarter of 2008, down from 0.7 million pounds in the first quarter of 2007.
In March 2008, Smith Ranch-Highland received a Notice of Violation from Wyoming Department of Environmental Quality (WDEQ) related to slow progress on restoration of previously mined wellfields and other matters. Cameco Resources is in the process of addressing these issues with WDEQ.
Subject to Cameco Resources successfully resolving the issues with WDEQ, Smith Ranch-Highland and Crow Butte are expected to produce 2.7 million pounds of U3O8 in 2008.
Cigar Lake
Site crews at Cigar Lake continue to make progress on the remediation plan following a rockfall that caused a flood of the underground development in October of 2006.
We have recently finalized an assessment that indicates no additional precautionary measures are necessary in two other areas of the mine prior to dewatering. We have also completed the corrective actions, related to dewatering the underground mine, that arose from the root cause investigation.
In April, we submitted an application to the CNSC to allow dewatering of the underground development and all other remediation activities leading up to, but not including, the restart of construction underground. The application also included completion of the second shaft and other activities. The CNSC is developing the schedule to review this application.
We continue to anticipate production startup in 2011 at the earliest. We will be able to provide a firmer production date after the mine has been dewatered, the condition of the underground development has been assessed, and the findings incorporated in the new mine development and production plans.
The Cigar Lake expected production date mentioned above and certain other statements regarding our plans and expectations for Cigar Lake remediation are forward-looking information and are based upon the material assumptions, and subject to the risk factors, stated under the heading "Caution Regarding Forward-Looking Information and Statements", as well as the following key assumptions and risk factors that could cause results to differ materially:
We have also assumed that there are no further disruptions to our dewatering and other remediation plans, but we are subject to the risk of delays arising from natural phenomena, such as fires, floods or cave-ins; the occurrence of another water inflow at Cigar Lake; failure of our radiation protection plans, labour disputes, litigation or arbitration proceedings; delays in obtaining or failure to procure the required equipment, personnel, operating parts and supplies; equipment failure; unexpected geological or hydrological conditions, and adverse ground conditions.
If actual results differ materially from the assumptions set out above or if any of the material risk factors above occur, the target date for the completion of dewatering Cigar Lake, and its production start date, may differ materially from the expected dates that are stated above.
Inkai
During the first quarter of 2008, the test mine at block 2 produced about 0.1 million pounds of U3O8. Commercial development of block 2 is underway.
Inkai and other ISR operations in Kazakhstan continue to receive reduced acid allotments from Kazatomprom, Cameco's state-owned joint venture partner in Inkai. Inkai has contracted with an alternative acid supplier and has secured the necessary transportation logistics to partially mitigate the effect of the acid shortage. We continue to acidify the existing wellfield at the block 2 test mine and began acidifying the new commercial wellfield at block 1. However, the acid shortage may reduce Inkai's 2008 planned uranium production of 1.2 million pounds by up to 50%. We are reviewing if this will impact the timing of commercial production in 2008.
Uranium Exploration Update
Saskatchewan Exploration
Exploration activities were completed on eight Cameco operated projects during the first quarter. The dominant exploration activity was diamond drilling. A total of about 31,000 metres were drilled.
On the Rabbit Lake project, surface drilling was undertaken both in support of the Eagle Point operation as well as to test more regional targets. On the Dawn Lake project, three drill holes were completed testing regional targets while the remaining drilling was undertaken at the Tamarack deposit. At Tamarack, winter activities involved both geotechnical drilling and delineation drilling of the deposit at 25 metre centers. Mineralization was intersected in five of the nine holes completed on the Tamarack deposit. At McArthur River, drill testing of the regional P2 fault structure north of the mine continued. Further work is scheduled to be completed during a summer drilling program.
Other exploration highlights included work on the Cree Extension project and the Virgin River project. At Cree Extension, two holes were drilled on a conductor system situated 9 kilometres east of Millennium, while one hole was drilled 4 kilometres north of Millennium along the same conductor trend that hosts the Millennium deposit. At the Virgin River project Centennial deposit, results obtained in the first quarter continue to confirm the significance of this discovery as all holes drilled in the quarter contained uranium mineralization.
FUEL SERVICES
Highlights
| Three months ended March 31 |
||
| 2008 | 2007 | |
| Revenue ($ millions) | 59 | 44 |
| Gross profit ($ millions) | 3 | 9 |
| Gross profit % | 5 | 20 |
| Sales volume (million kgU)1 | 3.4 | 2.4 |
| Production volume (million kgU)2 | 2.1 | 5.3 |
| 1 Kilograms of uranium (kgU) | ||
| 2 Production volume includes UF6, UO2, fuel fabrication, and UF6 supply from Springfields Fuels Ltd. (SFL). | ||
Fuel Services Results
First Quarter
In the first quarter of 2008, revenue from our fuel services business was $59 million, an increase of $15 million compared to the same period in 2007 due to a 42% increase in reported sales volumes, partially offset by a 5% decline in the average realized price.
Total cost of products and services sold, including DD&R, increased by 60% to $56 million from $35 million in 2007. The cost of products sold was impacted by the shutdown of the Port Hope UF6 conversion plant. All operating costs associated with the UF6 conversion plant ($14 million) were expensed as incurred in the first quarter.
Fuel Services Price Sensitivity Analysis
The majority of fuel services sales are at fixed prices with inflation escalators. In the short term, Cameco's financial results for fuel services are relatively insensitive to changes in the spot price for conversion. Newer fixed-price contracts generally reflect longer term prices at the time of contract award. Therefore, in the coming years, our contract portfolio for conversion services will be positively impacted by these higher fixed-price contracts.
UF6 Conversion Market Update
Outlined below are the industry average spot market prices (TradeTech and UxC) for North American and European conversion services.
| March 31/08 | Dec 31/07 | March 31/07 | Dec 31/06 | ||
| Average spot market price ($US/kgU) | |||||
| 9.00 | 8.75 | 11.63 | 11.75 | ||
| 10.00 | 10.25 | 11.15 | 12.38 | ||
Outlined below are the industry average long-term prices (TradeTech and UxC) for North American and European conversion services.
| March 31/08 | Dec 31/07 | March 31/07 | Dec 31/06 | ||
| Average long-term price ($US/kgU) | |||||
| 12.25 | 12.25 | 12.25 | 12.25 | ||
| 13.00 | 13.00 | 13.00 | 13.75 | ||
Fuel Services Operations Update
Production
Refining
At our Blind River refinery, we produced 3.2 million kgU as UO3 in the first quarter of 2008 compared to 3.6 million kgU for the first quarter of 2007. The decrease was due primarily to the suspension of UF6 production at Port Hope, which reduced the requirement for UO3 feed.
Progress continues on the environmental assessment of the proposed increase to the licensed capacity of the Blind River refinery to 24 million kgU per year from the current 18 million kgU per year. Cameco expects the environmental assessment to be completed during the third quarter of 2008. If approved, an amendment to Blind River's operating licence to complete the plant modifications will be required. Cameco anticipates completion of the project in the second half of 2009.
Conversion Services
Our Port Hope fuel services production and SFL supply totalled 2.1 million kgU in the first quarter of 2008 compared to 5.3 million kgU in the first quarter of 2007. The decrease is a result of the suspension of UF6 production at Port Hope in mid 2007.
Cameco has received regulatory approval to install the structures and new equipment required to safely restart and operate the plant. The excavated areas have been backfilled and concrete floors have been reconstructed. Application of leak-proof surface coatings and the re-installation of equipment have begun.
A groundwater management system outside the plant to contain, recover and treat affected groundwater is under construction. Two collection wells are currently operating and four more are planned.
As previously announced, Cameco continues to expect UF6 production to resume at its Port Hope plant in the third quarter of 2008 at the earliest. CNSC staff approval is required to fully restart the plant.
Fuel Fabrication
In February 2008, the CNSC approved the environmental assessment of a plan to modify our fuel manufacturing plant in Port Hope to produce fuel bundles containing slightly enriched uranium, subject to reaching agreement with Bruce A Limited Partnership. Cameco has submitted an application to the CNSC for an amendment to its operating licence required to produce the new fuel. A hearing for the licence amendment is scheduled for June 2008 with a decision expected the following month.
NUCLEAR ELECTRICITY GENERATION
Highlights
Cameco's Earnings From BPLP
($ millions) |
Three months ended March 31 | |
| 2008 | 2007 | |
| BPLP's earnings before taxes (100%) | 24 | 21 |
| Cameco's share of pre-tax earnings before adjustments |
8 | 7 |
| Proprietary adjustments | (2) | 4 |
| Pre-tax earnings from BPLP | 6 | 11 |
First Quarter
Earnings Before Taxes
Cameco's pre-tax earnings from BPLP amounted to $6 million during the first quarter compared to $11 million in 2007. This decrease in 2008 was due to lower generation, partially offset by higher realized prices and lower operating costs in the quarter.
Bruce Power Limited Partnership (100% basis)
| Three months ended March 31 |
||
| 2008 | 2007 | |
| Output - terawatt hours (TWh) | 5.1 | 5.4 |
| Capacity factor (%)1 | 72 | 78 |
| Realized price ($/MWh) | 56 | 54 |
| Average Ontario electricity spot price ($/MWh) | 50 | 53 |
| ($ millions) | ||
| Revenue | 285 | 290 |
| Operating costs2 | 241 | 259 |
| Cash costs | 212 | 230 |
| - operating & maintenance | 167 | 186 |
| - fuel | 16 | 16 |
| - supplemental rent3 | 29 | 28 |
| Non cash costs (amortization) | 29 | 29 |
| Income before interest and finance charges | 44 | 31 |
| Interest and finance charges | 20 | 10 |
| Earnings before taxes | 24 | 21 |
| Cash from operations | 90 | 76 |
| Capital expenditures | 18 | 21 |
| Operating costs ($/MWh) | 47 | 48 |
| Distributions | 105 | 75 |
| 1Capacity factor for a given period represents the amount of electricity actually produced for sale as a percentage of the amount of electricity the plants are capable of producing for sale. | ||
| 2Net of cost recoveries. | ||
| 3Supplemental rent is about $28.3 million per operating reactor for 2008. | ||
In the first quarter of 2008, BPLP generated cash from operations of $90 million compared to $76 million in the first quarter of 2007. The increase reflects a higher realized price and changes to working capital requirements related to a decrease in accounts receivable. Capital expenditures for the first quarter of 2008 totalled $18 million compared to $21 million during the same period in 2007.
Output
BPLP achieved a capacity factor of 72% in the first quarter of 2008 compared to 78% in the same period of 2007. During the first quarter of 2008, the BPLP units generated 5.1 TWh of electricity compared to 5.4 TWh in 2007. The lower generation is primarily due to 83 days, over the four units, of outage during the quarter compared to 75 in the first quarter of 2007.
Revenue
For the first quarter of 2008, BPLP's electricity revenue decreased to $285 million from $290 million over the same period in 2007 due to the lower output.
The realized price achieved from a mix of contract and spot sales averaged $56 per MWh in the quarter, which was 4% higher than the realized price in the same period last year. During the quarter, the Ontario electricity spot price averaged $50 per MWh compared to $53 per MWh in the first quarter of 2007.
To reduce its exposure to spot market prices, BPLP has a portfolio of fixed-price sales contracts. During the first quarter of 2008, about 55% of BPLP output was sold under fixed-price contracts, up from 47% during the same period in 2007.
Cameco provides guarantees to customers under these contracts of up to $38 million. At March 31, 2008, Cameco's actual exposure under these guarantees was nil. In addition, Cameco has agreed to provide guarantees of up to $133 million to CNSC and $58 million to OPG to support other Bruce Power commitments. Of these amounts, corporate guarantees have been issued for $24 million to CNSC and $58 million to OPG at March 31, 2008.
Costs
Operating costs (including amortization) were $241 million in the first quarter of 2008, down from $259 million during the same period of 2007 due to lower maintenance expenditures. About 95% of BPLP's operating costs are fixed. As such, most of the costs are incurred whether the plant is operating or not. On a per MWh basis, the operating cost in the first quarter of 2008 was $47 compared to $48 in the first quarter of 2007.
Electricity Price Sensitivity Analysis
As at March 31, 2008, BPLP had about 11 TWh under contract, which would represent about 55% of Bruce B generation at its planned capacity factor. For the remainder of 2008, a $1.00 per MWh change in the spot price for electricity in Ontario would change Cameco's after-tax earnings from BPLP by about $2 million
GOLD
Cameco owns approximately 53% of the outstanding shares of Centerra, which is listed on the Toronto Stock Exchange under the symbol CG. Centerra owns and operates two gold mines: Kumtor, which is located in the Kyrgyz Republic, and Boroo located in Mongolia.
Financial Highlights (represents 100% as Cameco fully consolidates Centerra's results)
| Three months ended March 31 | ||
| 2008 | 2007 | |
| Revenue ($ millions) | 113` | 96 |
| Gross profit ($ millions) | 44 | 24 |
| Gross profit % | 39 | 25 |
| Realized price (US$/ounce) | 909 | 645 |
| Sales volume (ounces) | 124,000 | 128,000 |
| Gold production (ounces) | 120,000 | 133,000 |
Gold Results
First Quarter
For the three months ended March 31, 2008, revenue from our gold business increased by $17 million to $113 million compared to the first quarter of 2007. The increase in revenue was due to higher realized gold prices partially offset by lower sales. The average realized price for gold rose to $909 (US) per ounce in the quarter compared to $645 (US) per ounce in the first quarter of 2007, due to higher spot prices. Centerra produced 120,000 ounces of gold in the first quarter of 2008, which was less than the 133,000 ounces of gold reported in the first quarter of 2007. The lower gold production was mainly due to reduced gold production at the Boroo mine, partially offset by higher production at the Kumtor mine. Lower gold production at Boroo was primarily attributable to milling of lower ore grades, averaging 2.7 g/t in the first quarter of 2008 compared to the 3.9 g/t milled in the same quarter of 2007.
Political Update
Cameco is aware of media reports that the Supreme Court of the Kyrgyz Republic has issued an order to the Kyrgyz government suspending certain agreements and licences related to the Kumtor gold mine. According to the reports, the order will remain in effect until claims currently before the lower court are resolved. These proceedings were initiated by the vice-speaker of the Kyrgyz parliament. Centerra Gold Inc., the mine operator, is seeking further information including clarification from the government. Cameco and Centerra are not party to any of the proceedings, did not receive any notice of the application to the Supreme Court and have not received any official notice of the order. Disputes with respect to the project are subject to international arbitration.
Gold Market Update
The average spot market gold price during the first quarter of 2008 was $927 (US) per ounce, an increase of 43% compared to $650 (US) per ounce in 2007.
Gold Price Sensitivity Analysis
For the remainder of 2008, a $25.00 (US) per ounce change in the gold spot price would change Cameco's net earnings by about $7 million (Cdn).
LIQUIDITY AND CAPITAL RESOURCES
Credit Ratings
There has been no change to Cameco's credit ratings as discussed in our annual MD&A.
Debt
In addition to cash from operations, debt is used to provide liquidity. Cameco has sufficient borrowing capacity to meet its current requirements with access to about $875 million in unsecured lines of credit.
Cameco has in place a $500 million, five-year, unsecured revolving credit facility. In addition to direct borrowings under the facility, up to $100 million can be used for the issuance of letters of credit and, to the extent necessary, up to $400 million may be allocated to provide liquidity support for the company's commercial paper program. The facility ranks equally with all of Cameco's other senior debt. At March 31, 2008, there were no amounts outstanding under this credit facility.
Cameco may borrow directly from investors by issuing up to $400 million in commercial paper. At March 31, 2008, there was $30 million outstanding under the commercial paper program.
Various financial institutions have entered into agreements to provide Cameco up to approximately $375 million in short-term borrowing and letters of credit facilities. These arrangements are predominantly used to fulfill regulatory requirements to provide financial assurance for future decommissioning and reclamation of our operating sites. At March 31, 2008, outstanding letters of credit amounted to $315 million under these facilities.
Product Loan Facilities
Cameco has arranged for a standby product loan facility with one of its customers. The arrangement, which became effective April 1, 2008, allows Cameco to borrow up to 2.4 million pounds of U3O8 over the period April 1, 2008 to December 31, 2011 with repayment in 2012 through 2014. Under the loan facility, standby fees of 2% are payable on the assigned value of the facility, equal to approximately $217 million (US), and interest is payable on any amounts drawn at the rate of 5.0% per annum. Any borrowings will be repayable in kind.
Revenue from future deliveries to this counterparty (up to the limit of the loan facility) will be deferred until the loan arrangement has been terminated, or if drawn upon, when the loan is repaid and that portion of the facility is terminated.
Debt Covenants
Cameco is bound by certain covenants in its general credit facilities. The financially related covenants place restrictions on total debt, including guarantees, and set minimum levels of net worth. As at March 31, 2008, Cameco met these financial covenants and does not expect its operating and investment activities in 2008 to be constrained by them.
Contractual Cash Obligations
There have been no material changes to Cameco's contractual cash obligations since December 31, 2007, including payments due for the next five years and thereafter. For further information on these contractual obligations, refer to our annual MD&A.
For further information regarding commitments and contingencies, refer to note 25 of our audited consolidated financial statements for the period ended December 31, 2007.
Commercial Commitments
There have been no material changes to Cameco's commercial commitments since December 31, 2007. For further information on these commercial commitments, refer to our annual MD&A.
OUTSTANDING SHARE DATA
At March 31, 2008, there were 344,439,418 common shares and one Class B share outstanding. In addition, there were 7,440,551 stock options outstanding with exercise prices ranging from $3.13 to $55.43 per share. Cameco also has convertible debentures in the amount of $230 million outstanding. This issue may be converted into a total of 21,208,707 common shares at a conversion price of $10.83 per share. The debentures are redeemable by Cameco beginning on October 1, 2008 at a redemption price of par plus accrued interest. At current share prices, we expect existing holders to convert to equity.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the most recent interim period, there have been no changes in Cameco's policies and procedures and other processes that comprise its internal control over financial reporting, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting.
CHANGES IN ACCOUNTING POLICY
Inventories
On January 1, 2008 Cameco adopted the new Canadian standard, Handbook Section 3031, Inventories, which supersedes Handbook Section 3030 and converges with the International Accounting Standard Board's recently amended standard IAS 2, Inventories. This Section provides more extensive guidance on the determination of cost, including allocation of overhead; narrows the permitted cost formulas; requires impairment testing; and expands the disclosure requirements to increase transparency. The additional disclosure requirements include: inventory policies, carrying amounts, amounts recognized as an expense, write-downs and the reversals of write-downs. Upon adoption of the standard, the company assigned a value of $20,400,000 (US) to previously unvalued gold ore stockpiles at Centerra, its 53% subsidiary. This amount, with accompanying adjustments to income taxes and minority interest, has been recognized as at January 1, 2008 with a corresponding adjustment of $8,893,000 (Cdn) to retained earnings. Prior periods have not been restated.
Capital Disclosures
On January 1, 2008, Cameco adopted the standards issued by the Canadian Institute of Chartered Accountants (CICA) relating to capital disclosures. The standard requires disclosure of Cameco's objectives, policies and processes for managing capital, quantitative data about what Cameco regards as capital and whether Cameco has complied with any capital requirements and, if it has not complied, the consequences of such non-compliance. There was no financial impact to previously reported financial statements as a result of the implementation of the new standard.
Financial Instruments – Disclosure and Presentation
On January 1, 2008, Cameco adopted CICA Handbook Sections 3862, Financial Instruments – Disclosures and 3863 Financial Instruments – Presentation. These sections replaced Handbook Section 3861 – Financial Instruments – Disclosures and Presentation and they enhance the users' ability to evaluate the significance of financial instruments to an entity, related exposures and the management of these risks. There was no financial impact to previously reported financial statements as a result of the implementation of these new standards.
NEW ACCOUNTING PRONOUNCEMENTS
Goodwill and Intangible Assets
Effective January 1, 2009, Cameco will adopt the new Canadian standard, Handbook Section 3064, Goodwill and Intangible Assets, which replaces Handbook Section 3062, Goodwill and Other Intangible Assets and Section 3450, Research and Development Costs. The standard introduces guidance for the recognition, measurement and disclosure of goodwill and intangible assets, including internally generated intangible assets. The standard also harmonizes Canadian standards with International Financial Reporting Standards and applies to annual and interim financial statements for fiscal years beginning on or after October 1, 2008. Cameco is assessing the impact of the new standard on its consolidated financial statements.
International Financial Reporting Standards (IFRS)
The Accounting Standards Board (AcSB) has announced that Canadian publicly accountable enterprises will be required to adopt IFRS effective January 1, 2011. Although IFRS employs a conceptual framework that is similar to Canadian GAAP, differences in accounting policies will have to be addressed. The company has undertaken a project to assess the potential impacts of the transition to IFRS and is developing its plan to ensure compliance with the new standards.
QUALIFIED PERSONS
The disclosure of scientific and technical information regarding the following Cameco properties in this MD&A were prepared by or under the supervision of the following qualified persons for the purpose of National Instrument 43-101:
| Qualified Persons | Properties | ||
| McArthur River/Key Lake | |||
| Cigar Lake | |||
| Kumtor | |||
CAUTION REGARDING FORWARD-LOOKING INFORMATION
Statements contained in this MD&A which are not current statements or historical facts are "forward-looking information" (as defined under Canadian securities laws) and "forward-looking statements" (as defined in the U.S. Securities Exchange Act of 1934, as amended) which may be material and that involve risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by them. Sentences and phrases containing words such as "believe", "estimate", "anticipate", "plan", "predict", "goals", "targets", "projects", "may", "hope", "can", "will", "shall", "should", "expect", "intend", "is designed to", "continues", "with the intent", "potential", "strategy" and the negative of these words, or variations of them, or comparable terminology that does not relate strictly to current or historical facts, are all indicative of forward-looking information and statements. Examples of forward-looking information and statements include, but are not limited to: planned uranium production quantities for 2008; the planned transition to new mining zones in 2009 at McArthur River; expected production at Rabbit Lake for 2008; expected production levels at Smith Ranch-Highland and Crow Butte for 2008; the expected date for production startup at Cigar Lake; the date of commencement of commercial production at Inkai; and the expected date of the resumption of UF6 production at Port Hope.
The material risk factors that could cause actual results to differ materially from the forward-looking information and statements contained in this MD&A and the material risk factors or assumptions that were used to develop them include, without limitation: our assumptions regarding production levels, sales volumes, purchases and prices, which are subject to the risk of being materially lower than anticipated; the risk of volatility and sensitivity to market prices for uranium, conversion services, electricity in Ontario and gold, which we have assumed will remain relatively constant; the assumption regarding the B units of BPLP reaching their targeted capacity factor and that there will be no significant changes in current estimates for costs and prices, and the risk that those assumptions vary adversely; the risk of significant increases in competition levels, which we have assumed will remain constant or decline; the risk of material adverse changes in foreign currency exchange rates and interest rates, which we have assumed will remain constant or improve in our favour; our assumptions regarding production, decommissioning, reclamation, reserve and tax estimates, and the risk that our assumptions are incorrect; the risk of material litigation or arbitration proceedings (including as the result of disputes with joint venture partners) and the adverse outcome of such proceedings, which we have assumed will not occur; the risk we may not be able to enforce legal rights which we have assumed to be enforceable; our assumption that there are no material defects in title to properties, and the risk that such defects occur; environmental and safety risks including increased regulatory burdens and long-term waste disposal, which we have assumed will not adversely affect us; unexpected or challenging geological, hydrological or mining conditions which deviate significantly from our assumptions regarding those conditions; the assumption that we will be successful in resolving issues raised by the Wyoming Department of Environmental Quality regarding Smith Ranch-Highland, which we have assumed can be successfully resolved in a timely manner; political risks arising from operating in certain developing countries, including the risks of terrorism and sabotage, which we have assumed will not occur; the risk of adverse changes in government legislation, regulations and policies, which we have assumed will not occur; the assumed demand level for nuclear power and the risk that the actual demand level will be significantly lower; the risk of uranium and conversion service providers failure to fulfill delivery commitments or to require material amendments to agreements relating thereto, which we have assumed will not occur; failure to obtain or maintain necessary permits and approvals from government authorities, which we have assumed may be obtained and maintained; the risk of natural phenomena including inclement weather conditions, fire, flood, underground floods, earthquakes, pitwall failure and cave-ins, which we have assumed will not occur; our assumptions regarding the ability of the company's and customers' facilities to operate without disruption, including as a result of strikes or lockouts, and the risk that such disruptions may occur; assumptions regarding the availability of reagents and supplies critical to production, and the risk that they may not be available; our assumed level of electrical production, and the risk that actual levels may be lower due to planned outages extending beyond their scheduled periods or unplanned outages; assumptions regarding uranium spot prices, gold spot prices and the US/Canadian spot exchange rate, which are subject to the risk of fluctuations that would be materially adverse to us; the assumptions and risk factors regarding uranium price sensitivity set out under the heading "Uranium Outlook for 2008 - Uranium Price Sensitivity (2008 to 2012)"; that the schedule for the development and rampup of production from Inkai is achieved, which is subject to the risk of delay; the successful transition between zones at McArthur River beginning in 2009, which is subject to various expected and unanticipated risks; the success and timely completion of planned development and remediation projects, including the risk factors and assumptions discussed above under the heading "Uranium Operations Update - Cigar Lake" and the risk of delay or ultimate lack of success; and other development and operating risks.
There may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. These factors are not intended to represent a complete list of the material risk factors that could affect Cameco. Additional risk factors are noted in Cameco's current annual information form and current annual MD&A.
The forward-looking information and statements included in this MD&A represent Cameco's views as of the date of this MD&A and should not be relied upon as representing Cameco's views as of any subsequent date. While Cameco anticipates that subsequent events and developments may cause its views to change, Cameco specifically disclaims any intention or obligation to update forward-looking information and statements, whether as a result of new information, future events or otherwise, except to the extent required by applicable securities laws. Forward-looking information and statements contained in this MD&A about prospective results of operations, financial position or cash flows that is based upon assumptions about future economic conditions and courses of action is presented for the purpose of assisting Cameco's shareholders in understanding management's current views regarding those future outcomes, and may not be appropriate for other purposes.
There can be no assurance that forward-looking information and statements will prove to be accurate, as actual results and future events could vary, or differ materially, from those anticipated in them. Further, expected future production estimates are inherently uncertain, particularly in the latter years of the forecast, and could materially change over time. Accordingly, readers of this MD&A should not place undue reliance on forward-looking information and statements. Forward-looking information and statements for time periods subsequent to 2008 involve greater risks and require longer-term assumptions and estimates than those for 2008, and are consequently subject to greater uncertainty. Therefore, the reader is especially cautioned not to place undue reliance on such long-term forward-looking information and statements.
ADDITIONAL INFORMATION
Additional information on Cameco, including its annual information form, is available on SEDAR at sedar.com and on this website.
