Diversification helps Cameco ride out weak uranium market

Uranium producers have had little to cheer about in recent years.

Hopes were raised earlier this year when the U.S. government unveiled its proposed energy policy, which included an increase in the use of nuclear power to improve air quality, reduce greenhouse gases and maintain diversity of energy sources. For a moment or two, it seemed nuclear energy would find favour again as a cleaner source of energy than fossil fuels, but those hopes were dashed somewhat in late July, when international negotiators agreed not to allow emission credits from nuclear energy under the Kyoto Protocol. This meant that the hoped-for credits would not be available to subsidize the construction of new nuclear power plants in developing countries. And without new plants, uranium price expectations settled back to levels more in keeping with traditional supply-demand fundamentals.

In its Aug. 27 issue, The UX Weekly newsletter published the results of its most recent survey of uranium price expectations. Some 60 companies took part in the survey, which dealt with two questions: what will spot prices be at year’s end, and what will prices be five years from now? The general view, when compared with a February survey, was that year-end and 2006 prices would be higher.

The survey shows that most respondents expect year-end prices (per pound of U308) to fall in the US$9-$9.50 range, or roughly the range in which the price currently resides. Looking ahead five years, most respondents believe that the restricted spot price will be in the US$10-13 range (in terms of 2006 dollars). Only four utilities believe the price will climb above US$13, though suppliers are more bullish, perhaps because the new Bush administration is showing a more positive approach toward nuclear energy than did the previous administration.

Producers such as Cameco (CCO-T) expect their nuclear revenue for 2001 to fall short of the level achieved last year, reflecting lower average prices. In the first half of the year, revenue from Cameco’s nuclear business declined by 42%, to US$152 million from US$264 million in 2000, owing to lower deliveries and weaker spot prices.

For the first six months of 2001, Cameco’s net earnings fell to US$13 million from US$20 million a year earlier. The decline was mainly attributable to the nuclear segment, which suffered from lower sales and prices. Cameco notes, however, that reduced earnings from the nuclear business were partially offset by improved results from its gold division.

Cameco’s main gold asset is a one-third interest in the Kumtor mine in Kyrgyzstan. The high-altitude operation is turning in a respectable performance even in these tough times, with low gold prices more than offset by reduced costs and higher production.

In the first half of 2001, gold production at Kumtor was 33% higher than in the January-to-June period last year, chiefly as a result of higher grades (5.14 grams, compared with 4.13 grams). The cash cost per ounce was US$134, down considerably from US$171 a year earlier.

Cameco’s gold division reported a 36% increase in the first half. Gross profits rose to US$18 million, up from US$8 million a year earlier. The higher grades are expected to continue this year, resulting in annual production of about 735,000 oz. gold (Cameco’s share being 245,000 oz.), up 10% from last year.

Over the longer term, Cameco’s fortunes are tied to the nuclear business, as the company is the world’s largest uranium producer. Like other suppliers, the company is encouraged by the Bush administration’s willingness to include nuclear power in its energy plans for the future, and by projections showing that electricity demand will increase significantly over the next 20 years. Even so, the industry continues to suffer setbacks, including the rejection of emissions credits from nuclear energy as a means to meet targets under the Kyoto Protocol, and growing public resistance to the construction of plants in both developed and developing nations.