Managing our Contract Commitments and Costs
We deliver more uranium than we produce every year. To meet our delivery commitments, we use uranium obtained:
- from our existing production
- through purchases under long-term agreements and in the spot market
- from our existing inventory
Over the past three years, we have maintained sales in excess of 32 million pounds annually. Previously, we planned to maintain our sales volumes year-over-year using a combination of sources, including production increases and normal course purchases, even once the Russian HEU commercial agreement came to an end. However, given the longer-than-expected period of market uncertainty, we have changed our plans in our continued pursuit to add value. Rather than maintaining sales at a fixed level, we will allow sales volume to vary depending on:
- the level of sales commitments in our long-term contract portfolio (the annual average sales commitments over the next five years is 30 million pounds, with commitment levels through 2016 higher than in 2017 and 2018)
- our production volumes, including from the rampup of Cigar Lake and from planned increases at McArthur River/Key Lake
- purchases under existing and/or new arrangements
- discretionary use of inventories
- market opportunities
To help us operate efficiently and cost-effectively, we manage operating costs and improve plant reliability by prudently investing in production infrastructure, new technology and business process improvements. Like all mining companies, our uranium segment is affected by the rising cost of inputs such as labour and fuel. In 2013, labour, production supplies and contracted services made up 92% 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 (27%) included mining and maintenance contractors, air charters, security and ground freight.
In 2014 and over the next few years, we will complete a number of capital projects at our various production facilities, including Cigar Lake. Upon completion, we will begin to depreciate the assets. This will increase the non-cash portion of our production costs and is expected to increase our unit cost of sales.
In addition, starting this year, we expect to begin to recognize the profits or losses related to Cigar Lake’s operating activities. All expenditures incurred prior to 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 cash cost of material produced from Cigar Lake will initially be higher, which is also expected to increase our unit cost of sales.
Operating costs in our fuel services segment are mainly fixed. In 2013, 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.
Purchases and inventory
Our costs are also affected by the purchases of uranium and conversion services we make under long-term contracts and on the spot market.
Previously, our most significant long-term purchase contract was the Russian HEU commercial agreement, which ended in 2013. With that source of supply no longer available, and until Cigar Lake ramps up to full production, to meet our delivery commitments, we will make use of our inventories and we may purchase material where it is beneficial to do so. We expect our purchases will result in profitable sales; however, the cost of purchased material may be higher than our other sources of supply, depending on market conditions.
To determine our cost of sales, we calculate the average of all our sources of supply including opening inventory, production and purchases. Therefore, to the extent the cost of our purchases are higher than the cost of our other sources of supply, we would expect our unit cost of sales to increase.
The impact of these increased unit costs on our financial results is expected to be temporary. As greater certainty returns to the uranium market, based on our view that the market will transition from being supply-driven to being demand-driven, we expect uranium prices will rise to reflect the cost of bringing on new production to meet growing demand.
We expect rising market prices for uranium will have a positive impact on our average realized price. In addition, as Cigar Lake reaches full production and the expansion at McArthur River/Key Lake is complete, our production will increase, which we expect will create more stability in the unit cost of sales for our uranium segment.