Wednesday, August 8, 2012

Cameco Takes 2Q Hit On Falling U3O8 Prices

The firm maintains it financial guidance for 2012

This is my coverage as published in Fuel Cycle Week V11:N483 published 8/2/12 by International Nuclear Associates, Washington, DC

CamecoCameco (TSX:CCO) recorded precipitous drops in revenue and earnings for the 2012 second quarter compared to the first quarter.

The second quarter’s average realized U3O8 price declined 15%, from $49.40 at the start of the year to $42.21 by June 30.

And sales to customers were off by 3.2 million pounds, due to scheduled deliveries being back end loaded to the fourth quarter.

In a conference call with securities analysts on July 27, CEO Tom Gitzel said demand for uranium globally has fallen since the March 2011 Fukushima crisis. He said, however, that sales, revenue, and production for the year are unchanged from previous guidance.

News about risks and the feasibility of new projects seemed to outweigh concerns about current markets based on questions asked by securities analysts during the call.

Two areas garnered the most questions. The first is the U.S. Department of Energy’s plan to sell up to 15% of annual U.S. reactor requirements from its surplus UF6 inventory. The second is the nature of prospects for profits from the Kintyre project in Western Australia.

DOE Surplus Uranium Sales With U.S. uranium requirements of approximately 50 million pounds a year, a 15% slice, represented by federal government sales, would be approximately 7.5 million pounds a year—a 5% jump from the 10% limit set in the Energy Department’s 2008 uranium inventory management plan.

According to the Energy Information Administration, U.S. uranium production in 2011 was just 4.1 million pounds. Cameco executives expressed their unhappiness with DOE’s decision but said “it is what it is and we’ll live with it.”

The surplus uranium, combined with the end of the Megatons-to-Megawatts agreement. Analysts were not excited by this news because uranium spot prices have not seen a corresponding rise as a result. One reason for the pessimism is the follow on contract between USEC and TENEX.

Under the terms of the agreement announced last year, the supply of low enriched uranium to USEC will begin in 2013 and ramp up until it reaches a level in 2015 that is approximately one-half the level currently supplied by TENEX to USEC under Megatons-to-Megawatts. The new contract includes a mutual option to increase the quantities up to 5.5 million SWU, which is the same level as the nonproliferation program.

Unlike that program, the quantities supplied under the new contract will come from Russia’s commercial enrichment activities, rather than from down blending of Russian weapons material. Deliveries under the agreement are expected to continue through 2022. USEC will purchase the SWU contained in the LEU and deliver the uranium feed to TENEX.

Kintyre Delayed

Cameco has completed a prefeasibility study for the Kintyre project, which shows production of 40 million pounds with an estimated mine life of six years. The mineral resource estimate is about 55 million pounds with an average grade of 0.58%. Cameco says to break even at the mine the spot price needs to move north of $67 per pound—a $7 per pound jump from the $60 figure assumed by analysts and $17 lower than current market price.

“The economics of the project are not as favorable as we had hoped,” Gitzel explained during the call. But Cameco is moving on to the feasibility stage and accelerating exploration drilling.

“The aim is to improve the economics of the project by expanding the resource base and have the project ready when the market improves. So I want to emphasize that this is not a production decision but rather the next step in our stage gate process. “We are not going to develop Kintyre at any cost,” he said.

Other Projects

For the Smith Ranch-Highland project in the U.S., Cameco has a bone to pick with state and federal regulatory agencies. It blames delays in bringing new wellfields into production on a “lengthened review process” needed to get decisions out of various levels of government.

At Inkai, increases in uranium production are tied to success of a uranium conversion project. However, there is no timing on the start of construction of a plant. If the conversion plant is built it would be accompanied by a doubling of Inkai production from 5.2 million to 10.4 million pounds per year. However, both Cameco and Kazatomprom recognize the weakness of prices in the conversion market.

Meanwhile, there have been problems with rail transport from the mine to China. Gitzel confirmed what had been rumored for some time: shipments have not made it past the Chinese border. He did not say what the nature of the delay is, but expects the situation to be resolved in a month or two.

On enrichment, Cameco’s equity investment in GE-Hitachi’s laser technology may have to wait a few more years to pay off. Gitzel said it will be another year or so before a decision is made to move to full industry-scale development of the technology.

Japan, China, and Market Demand

Cameco is encouraged by the fact that two nuclear reactors have restarted in Japan. It is a psychological boost. The firm thinks that at least six to seven more units will restart by the end of the year. Cameco executives declined to say whether there has been any slowdown in uranium business with Japanese utilities.

Like the rest of the nuclear vendor world, Cameco is waiting for China to announce restart of approvals of new reactors. The nation has 26 units under construction. Gitzel said he still sees confidence in estimates that China will complete 60 GWe by 2020.

While China has published a new safety plan for its current and planned reactor fleets, the central government has not authorized restarting approvals of new projects.

USEC Q2 Profitability Plunges

USEC logoOn July 31 USEC Inc. (NYSE:USU) reported dismal second quarter financial results. The company posted a loss of $92 million, the result of $85.7 million in development costs for its American Centrifuge project.

In an Aug. 1 conference call with securities analysts, USEC CEO John Welch said project progress is being made with a Department of Energy funded research, development and demonstration program.

So far 50 machines for the first 120- unit cascade of the American Centrifuge effort have been built. Another 90 cascades are planned to complete the facility.

DOE is providing funds to complete the technology design, but current year cash will last only until November. While the agency has promised a total of $300 million in an 80/20 cost share effort, Congress has not yet acted on the request.

Welch said no promises have been made by the federal government for a $2 billion loan guarantee upon completion of the RD&D effort. USEC also announced the appointment of a board of managers to guide the project. It is composed of current USEC investors, a key customer, and several nuclear industry experts.

Welch said with regard to uranium sales, there is one more year of life left in the Paducah gaseous diffusion plant. It will be processing depleted uranium tails under the multi-agency re-enrichment deal involving the Energy Department, Tennessee Valley Authority, Bonneville Power Administration and Energy Northwest.

On the global front, Welch said that the restart of Japanese reactors following the earthquake at Fukushima is taking longer than expected, but he did not qualify that disappointment in terms of specific contracts with Japanese nuclear utilities.

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