Outstanding Financial Performance

Our financial results depend heavily on our sales and production volumes, on the cost of supply, and on the prices we realize in our uranium and fuel services segments.

Managing our supply and costs

Uranium and Fuel services

We sell more uranium than we produce every year. To meet our delivery commitments, we use uranium obtained:

  • from our own production
  • through long-term purchase agreements and on the spot market
  • from our existing inventory (we target inventories of about six months of forward sales of uranium concentrates and UF6)

Like all mining companies, our uranium segment is affected by the rising cost of inputs like labour and fuel. In 2012, labour, production supplies and contracted services made up 91% of the production costs at our uranium mines. Labour (37%) was the largest component. Production supplies (28%) included fuels, reagents and other items. Contracted services (26%) included mining and maintenance contractors, air charters, security and ground freight.

Starting in early 2014, we expect to begin to recognize the profits or losses related to Cigar Lake’s operating activities. All expenditures incurred before that time are expected to be capitalized as development costs. Depending on the actual timing of the rampup to the full production rate, we expect that the cost of material produced from Cigar Lake will initially be higher than our other sources of production, which is likely to temporarily increase our unit cost of sales.

Operating costs in our fuel services segment are mainly fixed. In 2012, labour accounted for about 54% of the total. The largest variable operating cost is for energy (natural gas and electricity), followed by zirconium and anhydrous hydrogen fluoride.

To help us operate efficiently and cost-effectively as we grow, we manage operating costs and improve plant reliability by prudently investing in production infrastructure, new technology and business process improvements. In addition, in the third quarter of 2012, we adjusted our growth strategy to allow us to spread our capital expenditures over a longer period of time and decrease our administration and project-related costs.

See Our strategy for more information.

Our costs are also affected by the purchases of uranium and conversion services we make under long-term contracts and on the spot market.

Prices under our long-term purchase contracts are lower than the current published spot and long-term prices. Our most significant long-term purchase contract is the Russian HEU commercial agreement, which ends this year. Our final purchase is expected to be about 10 million pounds under this agreement. The purchase price escalates with inflation and was agreed to in 2001 when uranium prices were much lower than today. In 2008, pricing on a portion of the volumes available to us in 2011 through to 2013 was renegotiated. This will affect about 3 million of the 10 million pounds we expect to purchase under the agreement in 2013 and, using a $50 (US) per pound uranium spot price, the average price for those pounds is expected to increase by about $11 (US) per pound (including an adjustment for inflation).

After the Russian HEU commercial agreement ends this year, we expect to maintain our sales volumes using a combination of sources, including:

  • increased production from various supply sources (including the rampup of Cigar Lake)
  • normal-course purchases of uranium under existing and/or new arrangements
  • discretionary use of inventories

We expect our purchases will result in profitable sales; however, the cost of purchased material is likely to be higher than our other sources of supply.

In addition, we will make spot purchases to take advantage of opportunities to place material into higher priced contracts. We make spot purchases prudently, looking at the spot price and other factors relating to our business to decide whether a spot purchase is appropriate. This activity gives us insight into the underlying market fundamentals and is a source of profit.

Managing contracts

Uranium and Fuel services

We sell uranium and fuel services directly to nuclear utilities around the world, as uranium concentrates, UO2, UF6, conversion services or fuel fabrication.

Uranium is not traded in meaningful quantities on a commodity exchange. Utilities buy the majority of their uranium and fuel services products under long-term contracts with suppliers, and meet the rest of their needs on the spot market.

Our extensive portfolio of long-term sales contracts—and the long-term, trusting relationships we have with our customers—are core strengths for us. We currently have commitments to supply approximately 270 million pounds of U3O8 under long-term contracts with 52 customers worldwide. Our five largest customers account for 47% of these commitments, and 38% of our committed sales volume is attributed to purchasers in the Americas (US, Canada and Latin America), 39% in Asia and 23% in Europe.

Because we deliver large volumes of uranium every year, our net earnings and operating cash flows are affected by changes in the uranium price. Our contracting strategy is to secure a solid base of earnings and cash flow by maintaining a balanced contract portfolio that maximizes our realized price. Market prices are influenced by the fundamentals of supply and demand, geopolitical events, disruptions in planned supply and other market factors. Contract terms usually reflect market conditions at the time the contract is accepted, with deliveries beginning several years in the future.

Our current uranium contracting strategy is to sign contracts with terms between 5 and 10 years (on average) that include mechanisms to protect us when market prices decline, and allow us to benefit when market prices go up. Our portfolio includes a mix of fixed-price and market-related contracts, which we target at a 40:60 ratio.

  • Fixed-price contracts are typically based on the industry long-term price indicator at the time the contract is accepted, adjusted for inflation to the time of delivery.
  • Market-related contracts may be based on either the spot price or the long-term price as quoted at the time of delivery, and often include floor and ceiling prices adjusted for inflation.

This is a balanced approach that reduces the volatility of our future earnings and cash flow, and that we believe delivers the best value to shareholders over the long term. It is also consistent with the contracting strategy of our customers. This strategy has allowed us to add increasingly favourable contracts to our portfolio that will enable us to benefit from any increases in market prices in the future.

The majority of our existing contracts include a supply interruption clause that gives us the right to reduce, on a pro rata basis, defer or cancel deliveries if there is a shortfall in planned production or in deliveries under the Russian HEU commercial agreement.

We are heavily committed under long-term uranium contracts through 2016, so we are being selective when considering new commitments.

Since March 2011, the nuclear industry has been addressing challenges related to the events in Japan. We have been working with our customers who were directly impacted by those events to help them manage their contractual obligations and excess inventories. As clarity is slowly gained around the situation in Japan, we are receiving fewer requests for assistance. In the limited instances where customers have requested help to manage their inventories, we have agreed to consider arrangements that are financially beneficial to us. We realized benefits from these contract improvement opportunities in 2011 and 2012. We expect that these requests will continue to decline as Japan gets closer to restarting its nuclear fleet.

The majority of our fuel services contracts are at a fixed price per kgU, adjusted for inflation, and reflect the market at the time the contract is accepted.

We have a similar marketing strategy for UF6 conversion services. We sell our conversion services to utilities in the Americas, Europe and Asia and primarily through long-term contracts. We currently have UF6 conversion services commitments of approximately 80 million kilograms of uranium under long-term contracts with 43 customers worldwide. Our five largest customers account for 41% of these commitments, and of our committed UF6 conversion services volume, 51% is attributed to purchasers in the Americas, 33% in Asia and 16% in Europe.

NUKEM Gmbh

NUKEM Gmbh (NUKEM), which we acquired in January 2013, has access to contracted volumes and inventories in diverse geographic locations as well as scope for opportunistic trading of uranium and uranium-related products. This enables NUKEM to provide a wide range of solutions to its customers that may fall outside the scope of typical uranium sourcing and selling arrangements. Its trading strategy is non-speculative and seeks to match quantities and pricing structures of its long-term supply and delivery contracts, minimizing exposure to commodity price fluctuations and locking in profit margins.

NUKEM’s main customers are commercial nuclear power plants using enriched uranium fuel, typically large utilities that are either government-owned, or large-scale utilities with multi-billion dollar market capitalizations and strong credit ratings. NUKEM also trades with converters, enrichers, other traders and investors. It has uranium and uranium-related products under contract until 2022. NUKEM is party to the Russian HEU commercial agreement and will receive its final delivery of approximately 2 million pounds in 2013.