Cameco prepares for less cash in Q4 (November 19, 2007)

Record-breaking uranium prices have continued to mask the setbacks that Cameco (CCO-T, CCJ-N) has been confronting over the last year, with third-quarter net earnings reaching $275 million.

That’s a 525% increase over the third quarter in 2006, when Cameco pulled in $44 million, and a 34% increase over second-quarter earnings of $205 million.

“This quarter we set a new Cameco record for the average price we received for our uranium,” said Cameco president and CEO Jerry Grandy in a statement. “Our long-term contracting strategy will ensure that we continue to enjoy expanding margins and strong cash flow.”

Cameco sold uranium for US$52.76 per lb. over the quarter compared with US$20.12 during the same period in 2006. The average spot price averaged US$96.33 per lb. compared with US$50.83 per lb. a year earlier.

Overall revenue was 6% lower than the second quarter of 2007 at $681 million, due to lower deliveries in the uranium business. The selling price, however, kept Cameco’s revenue from dipping lower, offsetting the decline in deliveries.

The uranium business is credited for most of the increase, with revenue increasing to $409 million from $273 million, but fuel service revenue was up $15 million to $54 million and pretax earnings from the Bruce Power partnership came to $49 million. Gold revenue rose $18 million to $104 million.

Cameco has made $539 million, or $1.45 per share, adjusted and diluted, over the first nine months of 2007 compared with $233 million, or 64 per share, for the same period in 2006.

The company doesn’t expect this trend to continue — the timing of sales contracts will increase accounts receivable and a corresponding decrease in cash provided by operations in the fourth quarter. Cameco estimates total revenue will be down 10% in the fourth quarter due to lower sales volumes while the uranium oxide spot price is expected to decrease to US$80 per lb.

Looking ahead to 2008, Cameco hopes to reopen its uranium hexafluoride (UF6) conversion plant in Port Hope, Ont., by the end of the first quarter. The plant was shut down in July after workers found contaminated soil beneath the plant.

“In order to understand the extent of the contamination under the building, we ended up removing a fair bit of piping,” Grandy said during a conference call to discuss the quarter’s results. “We are now looking at what needs to be done to make sure this doesn’t persist.”

The company has been able to meet deliveries using existing supplies and says it should be able to meet all commitments until the plant reopens, assuming that customers don’t accelerate deliveries and UF6 production and purchases go as planned.

Centerra Gold (CG-T, CAGDF-O), which is 53%-owned by Cameco, is still awaiting approval of an agreement that will provide increased business certainty for mining operations at the Kumtor gold mine and support its growth plans in the country. Parliament was dissolved before any approvals could be completed, delaying the original Oct. 31 deadline to Feb. 15, 2008.

And Cameco still has no firm date for production startup at Cigar Lake, in Saskatchewan’s Athabasca basin, which flooded in October 2006, causing a major setback in development.

“We have deferred or eliminated tasks or projects that are not mission critical,” Grandy said.

The next milestone for Cameco is dewatering the underground, but the company won’t know when dewatering can start until December.

Grandy says the earliest possible production date will be the end of 2011 because they company has decided to sink a second shaft.

Before the flood, Cameco planned to start mining this year and earlier projected 2010 as a startup date. Cigar Lake is expected to eventually produce 18 million lbs. uranium a year, which would be about 10% of world production.

The Canadian Nuclear Safety Commission must approve all stages of Cameco’s rehabilitation of Cigar Lake. On Oct. 31, CNSC staff recommended that Cameco’s environmental guidelines be accepted. The acceptability of the project will be reviewed at a December hearing.

The company is facing one other minor hurdle. Production at its 60%-owned Inkai uranium mine in Kazakhstan could be delayed depending on the availability of sulphuric acid. A fire at one acid plant and a delay in the startup of another has limited the availability of acid, which is needed for mining.

“We are looking for alternate supplies of acid in other jurisdictions,” Grandy said. “There’s plenty of sulphur in Kazakhstan and surrounding countries, and making sulphuric acid is relatively simple.”

Cameco plans to begin commercial production at Inkai Block 1 by 2008 with commissioning beginning before the end of the year. Commercial development of Block 2 is planned for 2008.

Kazatomprom, Cameco’s state-owned, joint-venture partner, is supplying Inkai and other operations with acid. The arrangement could continue through the second quarter of 2008.