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Cameco Corp
Symbol C : CCO
Shares Issued 395,350,394
Close 2013-02-08 C$ 21.71
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Cameco earns $266-million in 2012

2013-02-08 19:36 ET - News Release

Mr. Tim Gitzel reports

CAMECO REPORTS FOURTH QUARTER AND 2012 FINANCIAL RESULTS

Cameco Corp. has released its consolidated financial and operating results for the fourth quarter and year ended Dec. 31, 2012.

"Two thousand twelve was a busy and challenging year, but we again delivered solid results," said Tim Gitzel, president and chief executive officer. "Our focus in 2013 will be on execution and reducing costs without compromising on our values.

"We are confident in a positive future for our industry based on its fundamentals. On the demand side, new reactor construction continues in China and there are strong indications that additional plants will be coming back on line in Japan. On the supply side, about 24 million pounds of annual uranium supply will be removed from the market after 2013 with the end of the Russian highly enriched uranium agreement. We are also seeing new mine projects delayed or cancelled due to the prevailing uncertainty in our markets. Cameco remains committed to nuclear energy. We see a great opportunity to grow our business and build value for shareholders, and are working to realize it."

                         HIGHLIGHTS
       (in millions of dollars, except per-share amounts)

                                                 Three months ended
                                                            Dec. 31,
                                                     2012      2011  

Revenue                                           $   958   $   971
Gross profit                                          307       353
Net earnings attributable to equity holders            45       265
$ per common share (basic and diluted)               0.11      0.67
Adjusted net earnings (non-IFRS)                      237       249
$ per common share (adjusted and diluted)            0.60      0.63
Cash provided by operations (after working
capital changes)                                      283       258
Average realized prices
Uranium
Uranium ($US/lb)                                    49.97     52.09
Uranium ($Cdn/lb)                                   49.37     53.08
Fuel services ($Cdn/kgU)                            16.70     14.67
Electricity ($Cdn/MWh)                                 54        53


                         HIGHLIGHTS
       (in millions of dollars, except per-share amounts)

                                                         Year ended
                                                            Dec. 31,
                                                     2012      2011

Revenue                                          $  2,321  $  2,384
Gross profit                                          723       776
Net earnings attributable to equity holders           266       450
$ per common share (basic and diluted)               0.67      1.14
Adjusted net earnings (non-IFRS)                      447       509
$ per common share (adjusted and diluted)            1.13      1.29
Cash provided by operations (after working
capital changes)                                      644       745
Average realized prices
Uranium ($US/lb)                                    47.62     49.17
Uranium ($Cdn/lb)                                   47.61     49.18
Fuel services ($Cdn/kgU)                            17.24     16.71
Electricity ($Cdn/MWh)                                 55        54 

The 2012 annual financial statements have been audited; however, the 2011 and 2012 fourth quarter financial information presented is unaudited. You can find a copy of the company's 2012 audited financial statements on its website. Its 2012 annual management's discussion and analysis (MD&A) will be posted on its website before markets open on Monday, Feb. 11, 2013.

Starting in the first quarter of 2013, IFRS (international financial reporting standards) 11, joint arrangements, requires that Cameco account for its interest in Bruce Power Limited Partnership (BPLP) using equity accounting. Cameco will recast its quarterly results for 2012 for comparative purposes.

For the purposes of this document, Cameco's interest in BPLP is presented in accordance with the proportionate consolidation method.

Full year

Cameco's net earnings attributable to equity holders (net earnings) were $266-million (67 cents per share diluted), compared with $450-million ($1.14 per share diluted) in 2011, mainly due to:

  • A $168-million writedown of the company's investment in the Kintyre project;
  • Lower earnings from the company's uranium business as a result of lower realized prices and an increase in the cost of product sold;
  • Lower earnings from the company's fuel services business as a result of a decrease in sales volumes;
  • Higher earnings from the company's electricity business due to higher generation and lower costs;
  • Lower taxes due mainly to lower pretax earnings and a decrease in the expense recorded in 2012 related to Cameco's transfer pricing dispute with the Canadian Revenue Agency (CRA).

Fourth quarter

In the fourth quarter of 2012, Cameco's net earnings were $45-million (11 cents per share diluted), a decrease of $220-million compared with $265-million (67 cents per share diluted) in 2011. This decline was largely the result of the $168-million writedown of Cameco's interest in the Kintyre project and lower earnings from its uranium business, partially offset by stronger results in the electricity business. Uranium profits were affected by a 7-per-cent decline in the average realized selling price due mainly to a lower spot price compared with the fourth quarter of 2011. Earnings in the electricity business improved as a result of higher generation and lower operating costs.

The 5-per-cent decrease in adjusted net earnings in the quarter followed the same trend as Cameco's net earnings, due to lower results in its uranium business, partially offset by the results in its electricity business.

Impairment charge on non-producing property

During the fourth quarter of 2012, Cameco recorded a $168-million writedown of the carrying value of its interest in Kintyre, its advanced uranium exploration project in Australia. Due to the weakening of the uranium market since the asset was purchased in 2008, no increase in mineral resources in 2012 and the decision not to proceed with the feasibility study, the company concluded it was appropriate to recognize an impairment charge for this asset. Kintyre remains an important asset in Cameco's portfolio. However, given the current state of the market, it was necessary to reduce its carrying value at this time. The amount of the writedown was determined as the excess of the carrying value over the fair value less cost to sell based on the implied fair value of the resources in place using comparable market transaction metrics.

The nuclear energy industry today

In last year's annual review of the uranium market, Cameco indicated that the near-term environment for the industry was challenging, but that the long-term outlook remained very positive. The company believes this continues to be the case today.

There was little improvement in 2012 over 2011 due to the lingering effects of the events in Japan, as well as global economic slowdown. However, the company started to see some clarity on issues that have been overhanging the market. The most significant of these was the establishment in Japan of the Nuclear Regulatory Authority (NRA), which is currently drafting new safety standards for the nuclear industry in that country, against which reactor restarts will be evaluated. The NRA indicated that this process would likely take until mid-2013. While this means that reactor restarts will take longer than Cameco had previously thought, the company believes that the NRA brings important stability to the nuclear regulatory environment in Japan, and welcomes the clarity it has already brought to the issue of reactor restarts.

Cameco believes the election of the Liberal Democratic Party (LDP) in Japan will be similarly positive for the nuclear industry. Though it remains to be seen what kind of energy policy will emerge from the newly elected government, the LDP has been positively disposed toward nuclear in the past, and has been clear that rebuilding Japan's economy is its main priority, in which the nuclear industry plays a large role.

Later in 2012, China lifted a temporary moratorium on new reactor construction, and has since started construction on four reactors. The resumption of reactor construction in China is clearly a positive signal for the market.

Beyond Japan and China, some other countries made changes to their nuclear programs, including announcements of older reactor retirements from Canada, France and Belgium. India also revised its 2020 nuclear target down from 20 to 14.6 gigawatts. These changes, combined with slower-than-expected restarts in Japan, the temporary pause in China new-build approvals and slower economic growth worldwide, caused Cameco to re-examine its reactor forecast at the end of 2012. While the market continues to evolve, the company's current estimates project nuclear generating capacity to reach about 510 gigawatts by 2022 from today's 392 gigawatts, which represents average annual growth of 3 per cent. Of this expected growth, approximately 64 new reactors with 64 gigawatts of generating capacity are under construction today.

Reactor retirements and delays in both restarts and new construction have had an effect on demand and the uranium price in 2012. There has been concern that excess inventories resulting from reduced requirements, deferrals and/or cancellations of deliveries under sales contracts could be introduced to the market. In 2012, any excess inventories have been responsibly managed between suppliers and customers, but the situation has caused market participants to be discretionary in their purchases and the uranium price to remain depressed. This remains the case at the beginning of 2013, but Cameco believes the clearing of excess inventories, the resumption of restarts in Japan and new build around the world, and promising supply-demand fundamentals will lead to improved market conditions. It also anticipates utilities will be ramping up contracting activities well in advance of their requirements becoming uncovered around 2016.

The other side of the equation is supply, which saw a great deal of destruction and deferral in 2012 as the uranium spot price remained at a level well below where new projects are economic. A number of uranium producers decreased their production growth plans, Cameco included when it announced the adjustment to its growth plans from 40 million pounds of annual production down to 36 million pounds of annual supply by 2018.

These challenges to primary supply occur while secondary supply is decreasing as a result of the end of the Russian highly enriched uranium (HEU) commercial agreement in 2013, and while steady demand growth continues -- with an expectation that it will reach about 3 per cent per year.

So, although the supply-demand outlook continues to evolve, nuclear remains an important part of the global energy mix, and it is clear that new uranium supply will be needed. Though some of the future supply gap could be filled by additions to secondary supplies, the majority will need to come from new mines and expansions to existing mines, which Cameco expects will bring the economics of new production to bear on the market.

Outlook for 2013

Over the next several years, Cameco expects to invest significantly in expanding production at existing mines and advancing projects, subject to market conditions, as it pursues its growth strategy. The projects are at various stages of development, from exploration and evaluation to construction.

The company expects its existing cash balances and operating cash flows will meet its anticipated 2013 capital requirements without the need for significant additional financing. Cash balances will decline as the company uses the funds in its business and pursue its growth plans.

Cameco's outlook for 2013 reflects the growth expenditures necessary to help it achieve its strategy. It does not provide an outlook for the items in the table that are marked with a dash.

2013 financial outlook

BPLP is not included in consolidated amounts due to a change in accounting (see below). NUKEM is also excluded (see below).

                        Consolidated        Uranium   Fuel services   Electricity

Production                         -   23.3 million        14 to 15              -
                                                 lb     million kgU
Sales volume                       -       31 to 33        Increase              -
                                         million lb        0% to 5%
Capacity factor                    -              -               -            88%
Revenue compared            Increase       Increase        Increase       Decrease
with 2012                   0% to 5%       0% to 5%(1)    5% to 10%      5% to 10%
Average unit cost of               -       Increase        Decrease       Increase
sales(including                            0% to 5%(2)     0% to 5%     25% to 30%
depreciation and
amortization (D&A))
Direct                      Decrease              -               -              -
administration              0% to 5%
costs compared
with 2012(3)
Exploration costs                  -       Decrease               -              -
compared with 2012                        5% to 10%
Tax rate                 Recovery of              -               -              -
                          15% to 20%
Capital expenditures    $655-million(4)           -               -    $93-million
                                                                   (Cameco's share) 

1. Based on a uranium spot price of $43.65 (U.S.) per pound (the Ux spot price as 
   of Feb. 4, 2013), a long-term price indicator of $56 (U.S.) per pound (the Ux 
   long-term indicator on Jan. 28, 2013) and an exchange rate of $1 (U.S.) for $1.
2. This increase is based on the unit cost of sale for produced material and 
   committed long-term purchases. If Cameco decides to make discretionary   
   purchases in 2013, then it expects the overall unit cost of product sold  
   to increase further.                                                    
3. Direct administration costs do not include stock-based compensation expenses.
4. Does not include Cameco's share of capital expenditures at BPLP.          

Consolidated outlook

Effective Jan. 1, 2013, with the adoption of IFRS 11, Cameco will apply the equity method of accounting for its interest in BPLP and will no longer consolidate its share of BLPL's revenues. Cameco's revenue outlook for 2013 does not include BPLP. For comparative purposes, its revenue for 2012 was $1,851,000 excluding BPLP. Furthermore, its outlook for 2013 presented herein does not include any revenues expected to be recognized through NUKEM.

Cameco expects consolidated revenue to be up to 5 per cent higher in 2013 due to:

  • An increase in realized prices in the uranium business;
  • Higher sales volumes in the fuel services business;
  • An increase in realized prices in the fuel services business.

The company expects administration costs (not including stock-based compensation) to be up to 5 per cent lower than in 2012 due to expected reductions in business development and corporate administrative activities related to its adjusted growth plans.

It expects exploration expenses to be about 5 per cent to 10 per cent lower than they were in 2012 due to:

  • Decreased evaluation activities at Kintyre;
  • A general reorganization of the company's global exploration portfolio that has allowed Cameco to focus on its core projects in Saskatchewan, the United States, Kazakhstan and Australia.

In 2012, approximately $27-million in cash taxes became payable on receipt of the reassessment of the Cameco's 2007 tax return due to the continuing dispute with the CRA related to the company's transfer pricing structure and methodology. The Canadian Income Tax Act includes provisions that require certain companies to pay 50 per cent of the tax associated with disputed reassessments upfront until the dispute is settled. Until now, Cameco has not been required to make any significant cash payments due to the availability of elective deductions and tax-loss carryovers. The company expects the CRA will reassess its tax returns for subsequent years on a similar basis and that these will result in future cash payments on receipt of the reassessments.

Cameco has contractual arrangements to sell uranium produced at its Canadian mining operations to a trading and marketing company located in a foreign jurisdiction. These arrangements reflect the uranium markets at the time they were signed, with the risk and benefit of subsequent movements in uranium prices accruing to the foreign trading and marketing company.

On an adjusted-net-earnings basis, Cameco expects a recovery of 15 per cent to 20 per cent in 2013 from its uranium, fuel services and electricity segments, as taxable income in Canada is expected to decline. Subject to success in the litigation with CRA, the company expects its tax rate to continue in accordance with the 2013 outlook until the contractual arrangements noted above expire in 2016. As these arrangements expire and are replaced by new contracts that reflect the uranium market at the time of signing, Cameco's tax expense is expected to rise over time.

First quarter 2013

It is not Cameco's practice to provide an earnings outlook. However, due to a combination of factors expected to occur in the first quarter, the company has determined it appropriate to provide some outlook for investors regarding its current expectations for its first quarter earnings.

In the uranium and fuel services segments, Cameco's customers choose when in the year to receive deliveries, so the company's quarterly delivery patterns, sales volumes and revenue can vary significantly. Cameco expects its uranium deliveries for the first quarter will be in the range of five million to six million pounds, down considerably from the eight million reported in the first three months of 2012. Uranium sales for the balance of 2013 are expected to be more heavily weighted (approximately 60 per cent) to the second half of the year. However, not all delivery notices have been received to date, which could alter the delivery pattern. Typically, Cameco receives notices six months in advance of the requested delivery date.

In addition, BPLP has outages scheduled for three of its four units in the first three months of 2013. Accordingly, Cameco expects electricity generation to be significantly lower in the first quarter of 2013 than it was in the first quarter of 2012. The capacity factor is likely to be in the range of 75 per cent to 80 per cent, and it is probable BPLP will report an operating loss for the quarter.

As a result, Cameco expects its adjusted net earnings for the first quarter of 2013 will be significantly lower than the $124-million (31 cents per share) in the first quarter of 2012. The company does not believe that these factors will continue to have an effect on its adjusted net earnings for subsequent quarters of 2013. The guidance Cameco has provided in the accompanying table reflects its current expectations for the full year. The company also expects its net earnings attributable to equity holders will be similarly affected.

Uranium outlook

Cameco expects to produce 23.3 million pounds in 2013, and has commitments under long-term contracts to purchase 12 million pounds.

Based on the contracts in place, Cameco expects to sell between 31 million and 33 million pounds of U3O8 (triuranium octoxide) in 2013. It expects the unit cost of sales to be up to 5 per cent higher than in 2012. The increase is due primarily to higher costs for produced material. If Cameco decides to make additional discretionary purchases in 2013, then it expects the overall unit cost of sales to increase further.

Based on current spot prices, revenue should be up to 5 per cent higher than it was in 2012 as a result of an expected increase in the realized price.

Price sensitivity analysis -- uranium

The accompanying table is not a forecast of prices Cameco expects to receive. The prices Cameco actually realizes will be different from the prices shown in the table. It is designed to indicate how the portfolio of long-term contracts Cameco had in place on Dec. 31, 2012, would respond to different spot prices. In other words, the company would realize these prices only if the contract portfolio remained the same as it was on Dec. 31, 2012, and none of the assumptions listed herein change.

Cameco intends to update this table each quarter in its MD&A to reflect deliveries made and changes to its contract portfolio each quarter. As a result, the company expects the table to change from quarter to quarter.

EXPECTED REALIZED URANIUM PRICE SENSITIVITY UNDER VARIOUS SPOT PRICE ASSUMPTIONS
                           (rounded to the nearest $1)
Spot prices                                                                 
($US/lb U3O8)                $20     $40     $60     $80    $100    $120    $140
 
2013                          43      46      53      61      69      77      83
2014                          45      48      56      64      73      82      89
2015                          41      46      56      66      76      86      95
2016                          43      48      58      69      80      90      98
2017                          42      47      57      67      78      87      95

The table illustrates the mix of long-term contracts in Cameco's Dec. 31, 2012, portfolio, and is consistent with the company's contracting strategy. It has been updated to Dec. 31, 2012, to reflect:

  • Deliveries made and contracts entered into up to Dec. 31, 2012;
  • Cameco's best estimate of future deliveries.

Cameco's portfolio includes a mix of fixed-price and market-related contracts, which the company targets at a 40-60 ratio. Those that are fixed at lower prices or have low ceiling prices will yield prices that are lower than current market prices. In 2012, a number of older contracts expired, and Cameco is starting to deliver into more favourably priced contracts.

The company's portfolio is affected by more than just the spot price. The following assumptions (which are not forecasts) were made to create the table:

Sales

  • Sales volumes on average of 32 million pounds per year.

Deliveries

  • Customers take the maximum quantity allowed under each contract (unless they have already provided a delivery notice indicating they will take less);
  • Cameco defers a portion of deliveries under existing contracts for 2013.

Inflation

  • Is 2 per cent per year.

Prices

  • The average long-term price indicator is the same as the average spot price for the entire year (a simplified approach for this purpose only). Since 1996, the long-term price indicator has averaged 15 per cent higher than the spot price. This differential has varied significantly. Assuming the long-term price is at a premium to spot, the prices in the table will be higher.

          CAMECO'S SHARE OF PRODUCTION -- ANNUAL FORECAST TO 2017


Current forecast (million lb)           2013    2014    2015    2016    2017

McArthur River/Key Lake                 13.2    13.1    13.1    13.1    13.1
Rabbit Lake                              4.2     4.2     4.2     4.2     4.2
U.S. ISR                                 2.6     2.9     2.9     3.0     3.0
Inkai(1)                                 2.9     2.9     2.9     2.9     2.9
Cigar Lake                               0.3     1.8     5.5     7.9     8.2
Total share of production               23.2    24.9    28.6    31.1    31.4


                    CAMECO'S SHARE OF INKAI'S PRODUCTION  
                       ON WHICH PROFITS ARE GENERATED(2)   
                                       
Current forecast (million lb)           2013    2014    2015    2016    2017

Inkai(1)                                 3.0     3.0     3.0     3.0     3.0
Total(2)                                23.3    25.0    28.7    31.2    31.5

1. In 2011, Cameco signed a memorandum of agreement (MOA) with Kazatomprom
   to increase annual production to 5.2 million pounds (100-per-cent basis).  
   Under the 2011 MOA, it will have the right to purchase 2.9 million pounds   
   of Inkai's annual production and receive profits on three million pounds.    
2. Cameco has adjusted the production table to reflect the share of Inkai's   
   production it will use to calculate its profits under the 2011 MOA, as  
   described in the note above.                                           

The 2013 and future annual production targets for Inkai assume, and Cameco expects, that Inkai will obtain the necessary government permits and approvals to produce at an annual rate of 5.2 million pounds (100-per-cent basis), including an amendment to the resource-use contract.

Fuel services outlook

In 2013, Cameco plans to produce 14 million to 15 million kilograms of uranium (kgU), and it expects sales volumes to be up to 5 per cent higher than in 2012. Overall revenue is expected to increase by 5 per cent to 10 per cent, as a result of the higher volumes and an expected increase in the average realized price. The company expects the unit cost of product sold (including D&A) to decrease by nil to 5 per cent; therefore overall gross profit will increase as a result.

NUKEM

On Jan. 9, 2013, Cameco completed the acquisition of NUKEM GmbH from Advent International and other shareholders. NUKEM is one of the world's leading traders and brokers of nuclear fuel products and services.

NUKEM was acquired for cash consideration of 107 million euros ($140-million (U.S.)), plus closing adjustments. Cameco also assumed NUKEM's net debt, which amounted to about 84 million euros ($111-million (U.S.)), on Jan. 9, 2013. Acquisition-related costs of $4-million have been expensed and included in administration expense in the consolidated statement of earnings. Cameco received the economic benefits of owning NUKEM as of Jan. 1, 2012; however, in accordance with accounting requirements, its financial reporting will reflect results from Jan. 9, 2013, forward.

The purchase agreement also includes an earn-out provision that could provide Advent with a share of NUKEM's earnings under certain conditions for the years 2012 through 2014. The earn-out is based on NUKEM exceeding certain minimum threshold levels of EBITDA (earnings before interest, taxes, depreciation and amortization), as specified and defined in the purchase agreement. The EBITDA is derived from NUKEM's audited financial statements and the earn-out payment to Advent is paid in the following year. For 2012, Cameco estimates the earn-out amount will be about $5-million (U.S.).

For accounting purposes, the purchase price is allocated to the assets and liabilities acquired based on their fair values as of the acquisition date (Jan. 9, 2013). As the acquisition has closed very recently, Cameco has not yet finalized the allocation of the purchase price. However, it expects that the majority of the purchase price will be allocated to the purchase and sales contracts acquired, nuclear fuel inventories and goodwill.

NUKEM outlook

The requirement to assign fair values to the sales and purchase contracts as of the acquisition date will affect the future operating results reported for NUKEM. For example, NUKEM is a party to the Russian HEU commercial agreement, which provides for the purchase of uranium at a price well below the current market. Cameco will assign a portion of the purchase price to this contract. Its future cost of sales will reflect the amortization of the value assigned to the contract in the periods in which this HEU material is delivered. This accounting will be applied to all contracts in the portfolio as of the acquisition date. As a result, Cameco expects the profit margins it reports for NUKEM will be in the range of 3 per cent to 5 per cent in 2013. It plans to report NUKEM as a separate business segment.

For 2013, NUKEM expects to deliver approximately nine million to 11 million pounds of uranium and about 500,000 separative work units (enrichment), resulting in total revenues in the range of $500-million to $600-million. NUKEM expects to incur costs for administration in the range of $10-million to $12-million. The effective income tax rate is expected to be in the range of 30 per cent to 35 per cent. Operating cash flows are expected to be in the range of $100-million to $125-million.

Electricity outlook

Bruce Power estimates the average capacity factor for the four Bruce B reactors to be 88 per cent in 2013, and actual output to be about 5 per cent to 10 per cent lower than it was in 2012 due to more planned outage days in 2013. The 2013 realized price for electricity is projected to be slightly lower than 2012. As a result, Cameco expects that revenue will decrease by about 5 per cent to 10 per cent.

Cameco expects the average unit cost (net of cost recoveries) to be 25 per cent to 30 per cent higher in 2013 and total operating costs to increase by about 15 per cent to 20 per cent, mainly due to more planned outages resulting in higher costs.

In 2013, the company will account for its interest in BPLP using equity accounting.

Capital spending

Starting in 2013, Cameco is classifying capital spending as sustaining, capacity replacement or growth. Sustaining capital is the money Cameco spends to keep its facilities running in their present state, which would follow a gradually decreasing production curve, while capacity replacement capital is spent to maintain current production levels at those operations. Growth capital is money Cameco invests to generate incremental production, and for business development. Previously, the company categorized its capital spending as either sustaining (which included capacity replacement projects) or growth.

                               CAMECO'S SHARE
                          (in millions of dollars)
                                                      2012 plan  2012 actual
Growth capital                                                              
Cigar Lake                                                $ 215        $ 231
Inkai                                                        10            9
McArthur River                                               35           32
Millennium                                                    5            9
U.S. ISR                                                     30           48
Total growth capital                                        295          329
Sustaining capital                                                          
McArthur River/Key Lake                                     145          154
U.S. ISR                                                     50           26
Rabbit Lake                                                  75           77
Inkai                                                        30           15
Fuel services                                                20           15
Other                                                         5           15
Total sustaining capital                                    325          302
Talvivaara                                                    -           41
Total uranium and fuel services                             620(1)       672
Electricity (Cameco's 31.6% share of BPLP)                   80           62

1. Cameco updated its 2012 capital cost estimate in the second quarter MD&A 
   to $680-million and in the third quarter MD&A to $730-million.   

Capital expenditures were 5 per cent above the company's 2012 plan, mainly due to variances at Cigar Lake caused by a change in the timing of expenditures and increased costs.

Cameco expects total capital expenditures for uranium and fuel services to decrease by about 1 per cent in 2013.

                               CAMECO'S SHARE
                          (in millions of dollars)

                                         2013 plan    2014 plan    2015 plan

Total uranium and fuel services                650      600-650      550-600
Sustaining capital                             200      300-320      290-310
Growth capital                                 310      175-190      140-155
Capacity replacement capital                   140      125-140      120-135
Talvivaara                                       5                                                    
Total uranium and fuel services                655                                                    
Electricity (Cameco's 31.6% share of BPLP)      93                          

Cameco expects total capital expenditures for uranium and fuel services to decrease by about 1 per cent in 2013.

Major sustaining, capacity replacement and growth expenditures in 2013 include:

  • McArthur River/Key Lake: At McArthur River, the largest component is mine development, at about $50-million. Other projects include the upgrading of electrical infrastructure, at about $40-million, as well as other site facility expansion and equipment purchases. At Key Lake, various projects to revitalize the mill will be undertaken at about $30-million, as well as upgrades to site electrical services and work on the tailings facilities.
  • U.S. in situ recovery (ISR): Wellfield construction and well installation is the largest project, at approximately $40-million. Cameco also plans to continue work on the development of the North Butte project and revitalization of the processing plant.
  • Rabbit Lake: At Eagle Point, the largest project includes mine development, at about $15-million. Other projects include work on electrical systems, various mill equipment replacements, and continued work on mine dewatering systems and tailings facilities.
  • Cigar Lake: In order to bring Cigar Lake into production in 2013, Cameco estimates its share of capital expenditures will be about $182-million, including $27-million on modifications to the McClean Lake mill.

Cameco's growth capital expenditures are related to its strategy to increase annual supply to 36 million pounds by 2018 and maintain the ability to respond quickly to changing market signals. The mix of projects and their underlying capital estimates could change significantly.

Sensitivity analysis

At Dec. 31, 2012, every one-cent change in the value of the Canadian dollar versus the U.S. dollar would change Cameco's 2013 net earnings by about $10-million. This sensitivity is based on an exchange rate of $1 (U.S.) for $1.

For 2013:

  • A change of $5 (U.S.) per pound in each of the Ux spot price ($43.65 (U.S.) per pound on Feb. 4, 2013) and the Ux long-term price indicator ($56 (U.S.) per pound on Jan. 28, 2013) would change revenue by $77-million and net earnings by $44-million.
  • A change of $5 per megawatt hour in the electricity spot price would change Cameco's 2013 net earnings by $2-million, based on the assumption that the spot price will remain below the floor price of $51.62 per megawatt hour provided for under BPLP's agreement with the Ontario Power Authority (OPA).

2012 financial results by segment

Uranium

Fourth quarter

Production volumes for the quarter decreased by 2 per cent year over year.

Uranium revenues were down 3 per cent due to a 7-per-cent decrease in the Canadian-dollar average realized price, partially offset by a 4-per-cent increase in sales volumes.

Cameco's realized prices this quarter were lower than the fourth quarter of 2011 mainly due to lower U.S.-dollar prices under market-related contracts. In the fourth quarter of 2012, the uranium spot price averaged $42.46 (U.S.), 18 per cent lower than the $51.79 (U.S.) in the fourth quarter of 2011.

Total cost of sales (including D&A) increased by 13 per cent ($472-million, compared with $417-million in 2011). This was mainly the result of the following:

  • The 4-per-cent increase in sales volumes;
  • The 11-per-cent increase in average unit costs for produced uranium due to an increase in non-cash costs;
  • A 75-per-cent increase in the average unit costs for purchased uranium due to increased purchases at spot prices:
    • In the fourth quarter of 2011, most of Cameco's purchases were under long-term contracts at more favourable fixed prices;
  • Lower royalty charges due to the lower realized price and reduced deliveries of Saskatchewan-produced material:
    • In 2012, total royalty charges were $52-million, compared with $61-million in 2011.

The net effect was a $77-million decrease in gross profit for the quarter.

Full year

Production volumes in 2012 were 2 per cent lower than 2011, due to lower production from Smith Ranch-Highland and McArthur River/Key Lake, which had record production in 2011.

Uranium revenues this year were down 4 per cent compared with 2011, due to a slight decrease in sales volumes and a decrease of 3 per cent in the Canadian-dollar average realized price. Cameco's realized prices this year in U.S. dollars were 3 per cent lower than 2011, mainly due to lower U.S.-dollar prices under market-related contracts. The spot price for uranium averaged $48.40 in 2012, a decline of 14 per cent compared with the 2011 average price of $56.36. Total cost of sales (including D&A) increased by 6 per cent this year ($1-billion, compared with $984-million in 2011). This was mainly the result of the following:

  • Average unit costs for produced uranium were 13 per cent higher and average unit costs for purchased uranium were 9 per cent higher due to an increase in spot purchases;
  • Lower royalty charges in 2012 due mainly to the decline in the realized price:
    • In 2012, total royalties were $116-million, compared with $124-million in 2011.

The net effect was a $128-million decrease in gross profit for the year.

Fuel services results (includes results for UF6, UO2 and fuel fabrication)

Fourth quarter

Total revenue decreased by 7 per cent due to an 18-per-cent decrease in sales volumes, offset by a 14-per-cent increase in realized price.

The total cost of products and services sold (including D&A) decreased by 2 per cent ($79-million, compared with $81-million in the fourth quarter of 2011) due to the decrease in sales volumes, offset by an increase in the average unit cost of sales. When compared with 2011, the average unit cost of sales was 20 per cent higher due to the mix of fuel services products sold and to higher cost recoveries being recorded in 2011.

The net effect was a $6-million decrease in gross profit.

Full year

Total revenue decreased by 9 per cent due to a 12-per-cent decrease in sales volumes. Cameco set lower sales target in 2012 due to weak market conditions at the beginning of the year.

The total cost of products and services sold (including D&A) decreased by 6 per cent ($235-million, compared with $251-million in 2011) due to the decrease in sales volumes. The average unit cost of sales was 6 per cent higher due to higher unit costs for UF6 relating to lower production.

The net effect was a $12-million decrease in gross profit.

Electricity results

Fourth quarter

Total electricity revenue increased 16 per cent due to higher output and slightly higher realized price. Realized prices reflect spot sales, revenue recognized under BPLP's agreement with the OPA and financial contract revenue. BPLP recognized revenue of $198-million this quarter under its agreement with the OPA, compared with $147-million in the fourth quarter of 2011. The equivalent of about 58 per cent of BPLP's output was sold under financial contracts this quarter, compared with 66 per cent in the fourth quarter of 2011. From time to time, BPLP enters the market to lock in gains under these contracts. Gains on BPLP's contracting activity in the fourth quarter 2012 were similar to 2011.

The capacity factor was 100 per cent this quarter, up from 86 per cent in the fourth quarter of 2011. There were no outage days in the fourth quarter this year, compared with a planned outage in 2011.

Operating costs were $221-million, compared with $271-million in 2011, due to lower supplemental lease payments and lower maintenance costs incurred as a result of no outages in the fourth quarter.

The result was a 194-per-cent increase in Cameco's share of earnings before taxes.

BPLP distributed $140-million to the partners in the fourth quarter. Cameco's share was $44-million. BPLP capital calls to the partners in the fourth quarter were $14-million. Cameco's share was $4-million. The partners have agreed that BPLP will distribute excess cash monthly, and will make separate cash calls for major capital projects.

Full year

BPLP's increased results in 2012 when compared with 2011 are partially the result of revenues being 10 per cent higher than in 2011 due to a 2-per-cent increase in realized electricity prices. BPLP's average realized price reflects spot sales, revenue recognized under BPLP's agreement with the OPA and revenue from financial contracts.

BPLP has an agreement with the OPA under which output from each B reactor is supported by a floor price (currently $51.62 per megawatt hour) that is adjusted annually for inflation. The floor-price mechanism and any associated payments to BPLP for the output from each individual B reactor will expire on a date specified in the agreement. The expiry dates are Dec. 31, 2015, for unit B6, Dec. 31, 2016, for unit B5, Dec. 31, 2017, for unit B7 and Dec. 31, 2019, for unit B8. Revenue is recognized monthly, based on the positive difference between the floor price and the spot price. BPLP does not have to repay the revenue from the agreement with the OPA to the extent that the floor price for the particular year exceeds the average spot price for that year.

The agreement also provides for payment if the independent electricity system operator (IESO) reduces BPLP's generation because Ontario's baseload generation supply is higher than required. The amount of the reduction is considered "deemed generation," for which BPLP is paid either the spot price or the floor price -- whichever is higher. The deemed-generation approach has provided the IESO with significant flexibility in dealing with changes to the Ontario electricity market in recent years. Deemed generation was 0.4 terrawatt hour in 2012, the same as in 2011.

During 2012, BPLP recognized revenue of $773-million under the agreement with the OPA, compared with $498-million in 2011.

BPLP also has financial contracts in place that reflect market conditions at the time they were signed. BPLP receives or pays the difference between the contract price and the spot price. BPLP sold the equivalent of about 64 per cent of its output under financial contracts in 2012, compared with 54 per cent in 2011. From time to time, BPLP enters the market to lock in gains under these contracts. Gains on BPLP's contracting activity were slightly higher than in 2011.

In addition, BPLP's increased results in 2012 when compared with 2011 were also partially the result of lower operating costs. BPLP's operating costs were $889-million this year, compared with $1-billion in 2011, due to lower supplemental lease payments and lower maintenance costs incurred during outage periods.

The net effect was an increase in Cameco's share of earnings before taxes of 90 per cent.

BPLP distributed $425-million to the partners in 2012. Cameco's share was $134-million. BPLP capital calls to the partners in 2012 were $63-million. Cameco's share was $20-million. The partners have agreed that BPLP will distribute excess cash monthly, and will make separate cash calls for major capital projects.

BPLP's capacity factor was 94 per cent in 2012, up from 87 per cent in 2011, due to a lower volume of outage days during the year's planned outages compared with last year's planned outages.

Operations and development projects

Uranium -- production overview

McArthur River/Key Lake

Cameco's share of production in 2012 was 1 per cent higher than its forecast for the year and 2 per cent lower than total production in 2011.

At McArthur River and Key Lake, Cameco realized benefits under the production flexibility amendments to the McArthur River and Key Lake operating licences for the fourth consecutive year. Continuing efforts to improve the efficiency and reliability of the Key Lake mill resulted in record mill performance.

Cameco has mitigated the risk to production in 2013 associated with the transition to the upper mining area of zone 4. It has made productivity improvements on cycle times, which include the use of blast-hole stoping in smaller, lower-grade areas of the mine located away from the freeze walls. In addition, it has changed the sequencing of the raises in zone 2, panel 5, which will improve productivity.

Cameco continued drilling to install the freeze wall in the upper mining area of zone 4 north. It expects to finish installing brine circulation lines and start freezing upper zone 4 north in 2013, and begin production from this area in 2014.

In addition to the underground work, Cameco has started to upgrade its electrical infrastructure on surface to address the future need for increased ventilation and freeze capacity associated with mining new zones and increasing mine production.

In 2012, it completed the feasibility study on the McArthur River extension project, and, based on the positive results, revised its mine plan to incorporate a mine expansion. This includes an increase in its annual production rate to 22 million pounds U3O8 (100-per-cent basis) by 2018, subject to receipt of regulatory approval.

Cameco was notified by the Canadian Nuclear Safety Commission (CNSC) that the environmental assessment for the planned increase in production would be transitioned to the CNSC licensing and compliance processes rather than the federal environmental assessment process. The company is developing plans to complete this regulatory process.

In addition, Cameco must continue to successfully transition into new mine areas through mine development and investment in support infrastructure. As part of this multiyear project, it plans to:

  • Expand the freeze plant and electrical distribution systems;
  • Increase ventilation by sinking a fourth shaft at the northern end of the mine;
  • Improve its dewatering system and expand its water treatment capacity.

In 2012, Cameco updated the McArthur River technical report. Highlights included:

  • A 19-per-cent increase in its share of the mineral reserves due to a 22-per-cent addition in tonnage and a slight decrease in the estimated average grade;
  • A decrease in the estimated average cash operating cost to about $19.23 per pound over the life of the mine from about $19.69 per pound estimated in 2009, despite the escalating costs in the industry
  • A production rate increase to 22 million pounds per year scheduled for 2018, subject to regulatory approval;
  • A mine life of at least 22 years, based on the planned production schedule.

In 2013, Cameco plans to continue advancing the underground exploration drifts to the southwest and northeast directions. Additional drilling is planned underground to delineate zone A, and from surface to identify additional mineral resources in the deposit.

The Key Lake mill began operating in 1983. Mill production at Key Lake is expected to closely follow McArthur River production, subject to receipt of regulatory approval. As part of Cameco's Key Lake extension environmental assessment, the company is seeking approval to increase Key Lake's nominal annual production rate to 25 million pounds U3O8 and to increase its tailings capacity.

The mill revitalization plan includes upgrading circuits with new technology to simplify operations and improve environmental performance. As part of this plan, Cameco replaced the acid, steam and oxygen plants.

This year at Key Lake, Cameco:

  • Advanced the environmental assessment for the Key Lake extension project by submitting the draft environmental impact statement to the regulators, receiving their comments and providing responses;
  • Began flattening the slope of the Deilmann tailings management facility pitwalls, relocating about 80 per cent of the sand.

In 2013 at Key Lake, Cameco expects to:

  • Complete installation and commissioning of a new electrical substation;
  • Complete the structural steel work and equipment installation for a new calciner, to be commissioned in 2014;
  • Complete flattening of the Deilmann tailings management facility pitwalls and begin constructing a buttress to prevent sand sloughing when the water level is raised;
  • Advance the environmental assessment for the Key Lake extension project by submitting the final environmental impact statement for review by the provincial and federal regulators, and pursue the required regulatory approvals.

Cameco will be applying for a renewal of its McArthur River and Key Lake operating licences in 2013. The CNSC has scheduled a one-day hearing in the third quarter as part of the application process.

Inkai

Production this year was 4 per cent higher than Cameco's forecast for the year and 4 per cent higher than production in 2011.

Cameco continued to bring on additional wellfields to maintain some new, typically higher-grade wellfields in the production mix. The processing plant has the capacity to produce at an annual rate of 5.2 million pounds (100-per-cent basis) depending on the grade of the production solution. Production at Inkai steadily improved over the course of the year, and the facility is now operating at design capacity. However, regulatory approval is required to carry out production at the annual rate of 5.2 million pounds (100-per-cent basis).

An amendment to Inkai's resource-use contract was signed early in 2011, and Inkai received government approval to:

  • Increase annual production from blocks 1 and 2 to 3.9 million pounds (100-per-cent basis);
  • Carry out a five-year assessment program at block 3 that includes delineation drilling, uranium resource estimation, construction and operation of a test leach facility, and completion of a feasibility study.

In 2011, Cameco also signed an MOA with its partner, Kazatomprom, to increase production from blocks 1 and 2 to 5.2 million pounds (100-per-cent basis). Under the 2011 MOA, Cameco's share of Inkai's annual production will be 2.9 million pounds with the processing plant at full capacity. Cameco will also be entitled to receive profits on three million pounds.

To implement the increase, Cameco continues to await government approval of an amendment to the resource use contract.

In 2012, Cameco entered into a binding MOA with its joint venture partner, Kazatomprom, setting out a framework to:

  • Increase Inkai's annual production from blocks 1 and 2 to 10.4 million pounds (Cameco's share -- 5.2 million pounds) and sustain it at that level;
  • Extend the term of Inkai's resource-use contract through 2045.

Kazatomprom is pursuing a strategic objective to develop uranium processing capacity in Kazakhstan to complement its leading uranium mining operations. The 2012 MOA builds on the non-binding memorandum of understanding signed in 2007, which sought to align the annual production increase with the development of uranium conversion capacity. Kazatomprom's primary focus is now on uranium refining rather than uranium conversion.

The 2012 MOA strengthens Cameco's partnership with Kazatomprom and includes a number of connected provisions relating to the increase of Inkai's annual production and extension to the term of Inkai's resource use contract. Under the terms of the 2012 MOA, Cameco agrees to:

  • Adjust its ownership interests in Inkai to 50 per cent on an overall basis after achieving the production increase;
  • Make two milestone payments of $34-million (U.S.) each -- the first after Inkai receives all necessary government approvals to increase uranium production to 10.4 million pounds (100 per cent) annually through 2045, and the second after the increased production target is achieved;
  • Pay to Kazatomprom a royalty of $5 (U.S.) per pound of uranium concentrate on its share of production above 2.6 million pounds annually from Inkai once Inkai obtains all approvals required for the production increase to 10.4 million pounds (100-per-cent basis);
  • Participate in the construction and operation of a uranium refinery in Kazakhstan with capacity to produce 6,000 tonnes of uranium as UO3 (uranium trioxide) annually, where it will own one-third of the refinery and the remaining two-thirds will be owned by Kazatomprom, with construction to begin by 2018;
  • Provide Kazatomprom with a five-year option to license its proprietary uranium conversion technology for purposes of constructing and operating a UF6 conversion facility in Kazakhstan;
  • Negotiate with Kazatomprom toward a conversion services agreement for up to 4,000 tonnes of uranium of conversion services annually and/or, for a three-year period, provide an opportunity for Kazatomprom to acquire a one-third interest in its conversion facility in Canada.

Under the 2012 MOA, the first steps will be to complete a feasibility study for the production increase, and a prefeasibility study for the uranium refinery. Cameco agrees to work with Kazatomprom to pace investments for increasing uranium production to match progress on the transfer of its uranium refining technology and construction of the uranium refinery in Kazakhstan, subject to market conditions.

Implementation of the 2012 MOA is subject to:

  • Further agreements on a number of issues, including agreements governing the ownership, construction and operation of the uranium refinery in Kazakhstan;
  • The receipt of all necessary Canadian and Kazakhstan governmental approvals, including all licences and permits required to allow the transfer and licensing of Cameco's uranium refining technology.

In April, 2012, Inkai received regulatory approval for the detailed block 3 delineation and test leach work programs. Inkai continued delineation drilling, started technological drilling of test wellfields, continued with infrastructure development and started construction of a test leach facility for the block 3 assessment program.

At block 3 in 2013, Inkai expects to:

  • Complete delineation drilling;
  • Complete construction of the test leach facility and test wellfields;
  • Extend power line to block 3 facilities;
  • Start operation of the test wellfields.

Cigar Lake

During the year, Cameco:

  • Completed the sinking of shaft 2 to its final depth of 500 metres;
  • Began installing shaft 2 infrastructure, including construction of a concrete ventilation partition, installation of electrical cable, water services, ore slurry pipes and hoist systems;
  • Began commissioning of the surface ore load-out facility;
  • Remediated a portion of an existing mine development tunnel and continued to explore ways to optimize methods of ground support;
  • Resumed underground development in the north end of the mine;
  • Completed mine development on the 500-metre level;
  • Replaced temporary contingency pumps with permanent infrastructure;
  • Completed the Seru Bay pipeline;
  • Completed all engineering designs and drawings for the project;
  • Constructed the primary clarifier infrastructure.

Cameco also assembled the first jet-boring system unit underground and moved it to a production tunnel, where the company:

  • Began preliminary commissioning and system testing;
  • Established temporary infrastructure to support testing in waste rock.

As of Dec. 31, 2012, Cameco had:

  • Invested about $911-million for its share of the construction costs to develop Cigar Lake;
  • Expensed about $86-million in remediation expenses;
  • Expensed about $63-million in standby costs.

Cameco's total share of the capital cost for this project is about $1.1-billion since it began development in 2005. In order to bring Cigar Lake into production in 2013, the company estimates its share of capital expenditures will be about $182-million, including $27-million on modifications to the McClean Lake mill. Its share of standby charges until production is achieved this year are estimated to be about $52-million.

In 2013, Cameco expects to:

  • Test the jet-boring unit in waste and begin commissioning of the system;
  • Complete the installation of all infrastructure required to begin production;
  • Bring the mine into production in mid-2013;
  • Produce the first packaged pounds from AREVA's McClean Lake mill in the fourth quarter.

Cameco expects its share of production from Cigar Lake to be 300,000 pounds in 2013.

Cameco has submitted an operating licence application to the CNSC. The CNSC will be holding a public hearing in the second quarter of 2013 as part of the process to obtain the operating licence. The company's construction licence is currently set to expire on Dec. 31, 2013. It anticipates that Cigar Lake will be in a position to start mining in ore following the safe commissioning of the ore processing circuits in mid-2013.

Given the scale of this project and the challenging nature of the geology and mining method, Cameco has made significant progress. It will continue to develop this asset in a safe and deliberate manner to ensure it realizes the economic benefits of this project.

Fuel services

Fuel services produced 14.2 million kgU, slightly higher than Cameco's plan at the beginning of the year and 3 per cent lower than 2011.

In February, the CNSC approved a five-year operating licence for the Port Hope conversion facility and a 10-year licence for CFM.

Based on the current market for UF6 conversion, Cameco does not anticipate an extension of its toll conversion contract with SFL beyond 2016. It remains fully committed to the current contract. If market conditions improve over the next few years, Cameco would consider resuming its discussions to extend the contract.

Cameco has increased its production target for 2013 to between 15 million and 16 million kgU.

Qualified persons

The technical and scientific information discussed in this document for Cameco's material properties (McArthur River/Key Lake, Inkai and Cigar Lake) were approved by the following individuals, who are qualified persons for the purposes of National Instrument 43-101.

McArthur River/Key Lake

  • David Bronkhorst, vice-president, Saskatchewan mining south, Cameco;
  • Les Yesnik, general manager, Key Lake, Cameco.

Cigar Lake

  • Grant Goddard, vice-president, Saskatchewan mining north, Cameco.

Inkai

  • Dave Neuburger, vice-president, international mining, Cameco.

Quarterly dividend notice

Cameco announced today that its board of directors approved a quarterly dividend of 10 cents per share on the outstanding common shares of the company, payable on April 15, 2013, to shareholders of record at the close of business on March 28, 2013.

Conference call

Cameco invites you to join its fourth quarter conference call on Monday, Feb. 11, 2013, at 11 a.m. ET.

The call will be open to all investors and the media. To join the call, please dial 877-240-9772 (Canada and the United States) or 416-340-8530. An operator will put your call through. A live audio feed of the conference call will be available from a link at Cameco's website.

A recorded version of the proceedings will be available:

  • On Cameco's website, shortly after the call;
  • On postview until 12 a.m. ET, March 11, 2013, by calling 800-408-3053 (Canada and the United States) or 905-694-9451 (passcode -- 7039949 followed by the pound sign).

Additional information

Cameco's 2012 annual MD&A and annual audited financial statements will be available shortly on SEDAR, on EDGAR and on the company's website. Its 2012 annual information form is expected to be available later in February.

We seek Safe Harbor.

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