Thursday, November 01, 2007

A Canadian Uranium Moment: What the Fahhh?

Cameco confirms Cigar Lake 2011 target, Russian supplier wants higher uranium prices

October 31, 2007 - 4:28 pm


SASKATOON - Cameco Corp. (TSX:CCO) has confirmed the flooded Cigar Lake uranium mine in northern Saskatchewan won't start production before 2011, and also revealed Wednesday that one of its suppliers in Russia is looking to charge higher prices for the uranium the Canadian company buys from dismantled nuclear weapons.

The news came as the world's biggest uranium producer reported a 25 per cent rise in third-quarter profit to $91 million on an 89 per cent increase in sales to $681 million, but trimmed its outlook for full-year revenue growth to reflect moderating prices.

Cameco shares were down 3.4 per cent on the TSX, losing $1.63 to close at $46.55 with a 52-week range between $59.90 and $35.35.

In a release Wednesday evening, Cameco said that joint stock company Techsnabexport has requested talks to get higher prices for the last few years of the remaining term of a commercial agreement to buy uranium from dismantled Russian nuclear weapons.

Cameco currently buys about seven million pounds or uranium a year under the commercial agreement, which ends in 2013. However, terms under the deal were set in 2001, when uranium prices were far lower than today. Cameco said it will talk to its two partners before deciding whether to reopen the deal.

Cameco and its partners, Areva and Nukem, convert the highly enriched uranium from dismantled Russian nuclear weapons into fuel for nuclear power plants in the United States. The commercial agreement falls under the umbrella of the United States-Russia government-to-government deal and supplies a significant portion of the U.S. enrichment, uranium and conversion services requirements.

In another matter Wednesday, Cameco said it hopes to resume operation next spring at its leaky uranium hexafluoride plant in Port Hope, Ont.

At the Port Hope plant near the Lake Ontario shore 100 kilometres east of Toronto, where output of the highly toxic nuclear fuel processing compound has been shut down since soil contamination was detected in July, "we expect to restart production in the latter part of the first quarter of 2008," CEO Gerry Grandey told a conference call.

"We've completed a root-cause analysis and identified the cause; we've begun corrective actions and we've developed plans for improved monitoring."

Grandey stressed that there has been no health hazard to workers or the public from "the very low levels of contamination," and he said Cameco has sufficient inventory to meet delivery commitments.

He added that long-term plans for Port Hope entail "a very, very large refurbishment of that plant that would see it upgraded, see it get ready for production for many decades to come."

At Cigar Lake, "we're making good progress" following flooding in October 2006 with construction 60 per cent complete.

A concrete plug in the tunnel where the inflow occurred is near completion, Grandey said, but Cameco has decided to sink a second shaft, needed for ventilation and as an alternative exit before excavation starts in flood-prone areas.

"Production start-up remains 2011 at the earliest," he said.

Given Cigar Lake's complexity - Cameco has to freeze the ground to prevent flooding and add rigidity around the half-kilometre-deep mining work - "there is no off-the-shelf manual to guide remediation."

Responding to questions about corporate growth plans, he said "our preference would have been to make a few large acquisitions; however, rocketing uranium prices and a rejuvenated nuclear industry sent valuations far beyond what we consider to be sustainable, profitable levels."

He asserted that "on my watch, we will not heed the public musing of short-term thinkers that want us to grab some headlines with a quick purchase."

In the meantime, "while we monitor the industry for larger acquisitions, we have been steadily making strategic alliances and equity investments with uranium companies around the world."

Saskatoon-headquartered Cameco, with more than 2,400 employees at the end of 2006, said its July-September revenue of $681 million compared with $360 million in the year-earlier quarter.

Net income of $91 million, 25 cents per share, compared with $73 million, 20 cents per share.

Earnings per share adjusted for currency effects and one-time items were reported at 74 cents, up from 12 cents a year ago and burying the Thomson Financial analyst expectation of 45 cents.

The third quarter included an all-time high selling price for Cameco's uranium of $56.78 per pound and "results from the electricity and gold businesses were also stronger, due to higher realized prices," Cameco said.

Uranium revenue increased by $273 million to $409 million, due to a 136 per cent increase in the realized price and a 31 per cent rise in sales.

For all of 2007, Cameco expects consolidated revenue to grow by 30 per cent over 2006. Three months ago it had forecast a 40 per cent increase, based on a uranium spot price of US$120 per pound.

The latest forecast assumes a spot price of US$80 per pound, reflecting the industry situation at Sept. 30.

For Cameco's fuel services business, third-quarter revenue was up $15 million to $54 million despite the Port Hope woes.

Pre-tax profit from the Bruce Power nuclear generating partnership business in Ontario (TSX:TRP) rose to $49 million from $31 million, thanks to higher prices and energy output.

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