Lower uranium prices temper a strong year at Cameco

Its earnings fell in tandem with the price of uranium, but Cameco (CCO-T) still achieved considerable financial success in 1997.

Annual earnings from operations increased by 4% to a company record of $151 million in 1997, despite a 23% drop in the average uranium spot price from the previous year. After the introduction of a non-cash income tax (which increased the tax expense to $65 million in 1997 from $5 million in 1996), Cameco posted net earnings of $82 million (or $1.51 per share). This compares with net earnings of $138 million ($2.60 per share) in 1996.

“We are pleased with our earnings from operations, given the depressed commodity markets,” says President Bernard Michel. He notes that Cameco set several records in 1997, including revenue, production, sales volume and contracts concluded for uranium.

Revenue grew by 9% to $643 million in 1997, from $591 million in 1996. In 1997, uranium products and services accounted for 84% of total revenue with the remainder coming from gold.

Cameco maintained its market share of about 15% of the Western World’s uranium consumption and approximately 20% of the West’s conversion services.

The company sold a record volume of U3O8 (uranium concentrates) in 1997, up about 5% from 1996, but the average realized selling prices were approximately 8% lower due to the decline in the uranium spot price. In conversion services, average selling prices increased by almost 4%. However, sales volumes were down by about 8%.

In 1997, the company generated cash flow from operations of $266 million ($4.88 per share), up by 12% from 1996, reflecting the positive contribution from gold activities. Future cash flow from the Kumtor mine in Kyrgyzstan is underpinned by 710,000 oz. hedged at a minimum of US$346 per oz.

The company’s strong cash flow was used to pay $27 million in dividends and to fund investments of $126 million, mostly spent on McArthur River and Cigar Lake — the world’s two largest, highest-grade uranium deposits. The company considers the two Saskatchewan projects to be the foundation of its future growth.

Cash provided by financing activities amounted to $258 million in 1997, an increase of $274 million compared with 1996. Most of this increase reflects Cameco’s public share offering of 4 million shares, which yielded net proceeds of $195 million. In addition, an increase in debt was required to finance the purchase of Power Resources, the largest uranium producer in the U.S.

The uranium spot price fell by US$4.50 per lb. U3O8 during the first eight months last year to a low of US$10.20 per lb., then rebounded to US$12.05 per lb. by year’s end.

“Utilities avoided the spot market in 1997 after securing additional volumes in 1996 through long-term contracts,” says Michel. “This acted to reduce spot demand. In addition, a few suppliers were engaged in distress selling.

Weak spot demand and ample supply resulted in a soft spot price for the first eight months of the year.”

In the latter half of the year, the spot market became more active and, by the end of the year, almost 21 million lbs. of U3O8 had been traded, up 7% from 1996.

Long-term contract price indicators published in the industry fell by as much as 23% to US$11.50 per lb. U3O8 before recovering to US$12.50 at the end of the year.

“Because the spot market remains thinly traded, we expect to see continued volatility in the spot price in 1998,” says Michel. “This contrasts sharply with the long-term market outlook, where consumption continues to outstrip production by almost 50%.”

During 1997, Cameco contracted to sell about 32 million lbs. U3O8 for deliveries extending well into the next decade. This represents an increase of 3% over volumes contracted in 1996. With these new commitments, Cameco maintains more than 100 million lbs. U3O8 and more than 50,000 tonnes of uranium conversion services under long-term contracts.

Cameco also announced today that the company’s board of directors declared its regular quarterly dividend of 12.5cents per share payable April 15, 1998, to shareholders of record on March 31, 1998.