Cameco Corporation (CCJ) Q3 2018 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Cameco Corporation Third Quarter 2018 Conference Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Rachelle Girard, Vice President of Investor Relations. Please go ahead, Ms. Girard.

Thank you, Operator, and day everyone. Thanks for joining us. Welcome to Cameco's conference call to discuss our third quarter financial results. With us today on the call are Tim Gitzel, President and CEO; Grant Isaac, Senior Vice President and CFO; Brian Reilly, Senior Vice President and Chief Operating Officer; Alice Wong, Senior Vice President and Chief Corporate Officer; and Sean Quinn, Senior Vice President, Chief Legal Officer and Corporate Secretary. Tim will begin with some comments then we will open it up for your questions. If you joined the conference call through our website event page, you will notice there will be slides displayed during the remarks portion of this call. These slides are also available for download in a PDF file called Conference Call Slides through the conference call link at cameco.com. Today's conference call is open to all members of the investment community, including the media. During the Q&A session, please limit yourself to two questions and then return to the queue. Please note that this conference call will include forward-looking information, which is based on a number of assumptions and actual results could differ materially. Please refer to our annual information form and MD&A for more information about the factors that could cause these different results and the assumptions we have made. With that, I will turn it over to Tim.

Well, thank you Rachelle, and welcome to everyone on the call today. We appreciate you taking the time to join us. I want to start the call today by highlighting a few important items from the third quarter. First, our results were as expected and reflect the strategic actions we have taken. Second, there were some changes to our 2018 outlook most of which was positive and point to a strong finish in the fourth quarter. Third, and I want to emphasize this, there is the equivocal wins our tax case with the CRA. And finally, we saw the recitation of the spot market in contrast to the tentative nature of the term market. I'll spend most of my time on last two items, but before I do that I want to just highlight a few of the changes to our outlook. Exchange rates, higher uranium prices and additional sales opportunities have increased our outlook for delivery volumes, revenue and the average realized uranium price for 2018. And our expected tax recovery has increased as a result of the decisions in our CRA case. Our outlook for cash from operations is unchanged for 2018. We continue to expect and will be in the range of $715 million to $775 million. As a result, you will see our board approved an annual dividend of $0.08 per share. I will get into more detail a bit later about how putting our strategy into action has impacted the rest of our outlook. Right now, I'm going to move into a discussion of our CRA tax case. Saying this never gets old for me. Our win in the Tax Court of Canada was on equivocal for the three years its stake. We complied with tax laws of Canada, as a result of the tax court endorsement of our marketing and trading structure and are transfer pricing methodology, you will see that we have reverse the provision on our balance sheet of 61 million. We no longer believe there is any basis for the provision. This is the reason the expected tax recovery that I noted earlier has increased. And in accordance with the ruling, we will be making an application to the court to recover this significant cost we incurred over the course of defending this case. I would note the actual cost awarded at the discretion of the tax court. Unfortunately although the ruling was clear and decisive, the CRA has filed a notice of appeal with the Federal Court of Appeal. We are obviously disappointed with this decision as we see no basis for an appeal. However, we are pleased that the CRA has not appeal the tax courts findings that our marketing and trading structure was not a sham. That was an argument and I have to tell you we found offensive. The CRA's appeal appears in general to be focused on the judges' interpretation and application of the transfer pricing provisions in the Income Tax Act. However, until we receive the CRA's complete written submission, we won’t know exactly what aspect of the tax court finding is challenging. We understand it could take well into 2019 before we have any insight in that regard, so more to come on this. We anticipate it will take about two years to receive a ruling from the Federal Court of Appeal. Given the thorough meticulous analysis of the fact stand of the law by Mr. Justice Owen, we firmly believe the decision will be upheld at the Federal Court of Appeal. And furthermore, we also believe the decision should apply in principle to subsequent tax years. Therefore we are prepared to have a reason discussion with the CRA to see if we can reach our resolution for all years on a basis that we would consider acceptable in light of the findings in the ruling. Those findings be, that our intercompany purchase and sale agreements were commercially normal that the prices agree to were representative of the market at the time and where want a third party would have agree to. And furthermore as Mr. Justice Owen noted reliance on hindsight and is subjective yield to the market as opposed to objective benchmarks introduces intolerable uncertainty into the transfer pricing rules. We believe the ruling in our case makes it clear. We are obligated to comply with existing laws not on what the CRA things the law ought to be. The CRA's attempt to retroactively the change the law through the course is unacceptable. The CRA is unhappy with the outcome based on the current laws we encouraged it to be the necessary work to get the laws change through parliament. And I can assure you, we will comply with those laws once changed. The ruling made it clear. We paid all of the Canadian taxes we owed therefore we are entitled to a refund of the remittances we have made. However, you will notice in our MD&A that we have not changed our disclosure with respect to the potential exposure and any payments we might have to make. That is because we don’t know what the CRA intends to do next. It is certainly not our view of the likely outcome nor do we believe there is any basis for the CRA to continue pursuing this matter, but it is the reality of the process. This is particularly frustrating for us because of the impact it will continue to have on our financial capacity at a tenuous time in our market when we most need the result it provides us. So, let’s talk about the market for a bit. There is no question that the uranium spot market is showing a significant improvement compared to a year ago, but make no mistake it has a long way to go. Let me explain both of these statements. What do I mean by significant improvement? The current spot price is up almost 40% from a year ago while the long term price is up about 6%. The improvement has been driven by meaningful production cuts, reductions in producer inventories and an increased in demand for uranium in the spot market from producers and financial players. These actions have helped to remove excess material from the spot market with the uranium’s spot price reaching a two year high in October. We at Cameco have played a big role in the spot market cleanup, a point I’ll come back to later in my remarks. Contributing to the improvement on the demand side, we have finally reached the point where on an annual basis consumption has returned to pre-2011 levels. We have filled in the pothole of lost demand and that demand continues to grow, not at rocket ship rate but with 55 reactors under construction, there is steady growth. That all sounds exciting and don't get me wrong it is, but then you might ask, why do you say there's a long way to go? What I can tell you the fact that we have the world's best mind and mill shutdown indefinitely is certainly not because the market is in great shape. Remember last quarter when we announced the extended shutdown at McArthur River Key Lake, we said that the conditions for a restart would be met when we were able to capture acceptable long-term business in our market, business that allows us to commit those pounds under long-term contracts, contracts that provide an acceptable rate of return on these assets for our owners rewarding them for their continued patience and support of our strategy to build long-term value. While we are seeing some positive developments, we have not yet seen the type of response needed from the uranium market. Unfortunately, today's prices are still nowhere near, not even close to the levels needed. And with about 58 million pounds placed under long-term contracts industry wide so far this year or about a third of what will be consumed in reactors, there are still not enough acceptable long term contracting opportunities. So, prices are too low to incent existing idled Tier 1 capacity to restart. They certainly do not support the investment needed to expand those assets and they're not even close to what is needed to trigger the restart of the idled Tier 2 capacity and its expansion capability. Then you have to consider what price incense the material sitting of financial players to come back to the market because that material isn't gone forever and it needs to be factored into any supply investment decisions. Then when you think about it in this context, we are 5 or 6 steps away from meeting any new greenfield investment. That is why until you see our existing Tier 1 assets restarted and/or expanded and a potential home for all of the other near term sources I just listed investment in new growth makes zero sense. Even the promise of new investment, would create a headwind and erase any possibility for robust investment returns. We believe our assets are among the best in the world and we will continue to show the type of leadership needed to position the Company to add significant value over the long term. So, despite some signs of green shoots, today we find ourselves in a market where there is still a lack of acceptable long-term contracting opportunities. However, the reason for this lack of contracting has changed from a year ago. As I talked about last quarter against a backdrop of growing demand over the long-term and shrinking supply, there are a lot of moving parts in our market. And those moving parts have shifted the sentiment from one of complacency and discretion to one of uncertainty and concern which has led to paralysis. You might say there is an unprecedented level of noise in the market and a lot of that noise like in many other commodities today centers on market access and trade policy issues. These issues are a large factor in why our market tends to be sentiment driven rather than purely driven by fundamentals, is both the origin disconnect in our industry the gap between where supply is produced and where it is needed, and it is the rule of state-owned enterprises that rates concerned about security of supply. With McArthur River Key Lake production indefinitely suspended nearly 70% of primary production is in the hands of state-owned enterprises about 40% from Kazakhstan standalone. It is why from a security supply perspective, origin matters in a world where geopolitics are creating trade distortions, and of course the most significant trade issue today is the investigation under Section 232 of the Trade Expansion Act in the U.S., the investigation has no immediate impact on our existing contracts with deliveries continuing as usual. Meanwhile, you can be certain we are heavily involved in the investigation process. Remember, we were the largest producer in the U.S. before we put those assets on care and maintenance. The U.S. is looking for more domestic production. Our assets would be among the best and quickest to start producing. Until the investigation is complete and the potential impact positive or negative can be determined, it is a moving piece that contributes to the uncertainty I talked about earlier. I highlighted many of the other issues affecting the market last quarter. So I won't repeat them, but there are a couple of recent developments, I want to draw your attention to. First, there is the role of financial players. In addition to the initial public offering of Yellow Cake, a new uranium fund announced earlier this year, there's is now the launch of an IPO for a second uranium fund, the uranium trading corp. In total, these funds are purchased or are planning to purchase more than 10 million funds of uranium on the spot market sequestering it in investment vehicles. And in the case of Yellow Cake, there is the option to purchase even more uranium over the next 9 years. Also, we know there are plenty of other financial players getting involved or kicking the tires. The other item is Kazatomprom's initial public offering. Kazatomprom announces its intent to proceed with an initial public offering on the Astana International Exchange and the London Stock Exchange for securities representing up to 25% of its issued share capital. In its documents, it states that it is transitioned to a market centric production and sales strategy, shifting away from a focus on volume to a focus on value, which is welcome news indeed. All this makes for interesting times in our industry. So what can you expect from Cameco in this environment. As I highlighted last quarter we will continue to adjust our actions using a marketing framework that we believe supports our strategy to build long-term shareholder value. First and foremost, we will not produce from our Tier 1 assets to sell into an oversupply market. Second, we do not intend to build up an inventory of excess uranium. Third, in addition to our current committed sales Cameco will capture demand in the market where we think we can obtain value. And fourth, once we capture demand, we will decide how best to source material to satisfy that demand. Finally, over a rolling 12 month period, our leverage the higher market prices in our sales portfolio is expected to exceed any exposure we have in our sources of supply. In addition, our contracting decisions always factor in who the customer is our desire for regional diversification, the product form and logistical factors. So, let's review where as things were at when we announced the extended shutdown of McArthur River key Lake and just where they sit now, starting with the full calendar year for 2018. In our uranium segment, we now have commitments to deliver between 35 million and 36 million pounds of uranium, leaving 12.5 to 13.5 million pounds for delivery in the fourth quarter. In addition, we have agreed to provide our partners at Orano up to 5.4 million pounds of uranium this year, the majority of which we have delivered. Their deliveries of less than a million pounds remaining which we expect to make in Q4. We remain on track to produce about 9 million pounds of uranium this year. Since the end of July, we have secured about 2.9 million pounds to off market activity and through request for proposals in the spot market. As a result, our purchase commitments for 2018 are now between 11 and 12 million pounds, including our share of Inkai production. In addition, given the increase in delivery commitments for both 2018 and 2019, which I will speak to in a minute, we expect we may still need to purchase an additional 1 million to 3 million pounds in the spot market for delivery in 2018 to meet our commitments and maintain our desired inventory. Looking at 2019, we've been successful in capturing additional demand. We are now committed to deliver between 27 and 29 million pounds, an increase of about 2 million pounds from last quarter. To fulfill these commitments, we now have only two levers we can pull, production and purchases. We don’t have any excess inventory in 2019. We expect to produce 9 million pounds of Cigar Lake and we have long-term purchase commitments which will require us to take delivery of between 5 and 6 million pounds including Inkai purchases. So that means for 2019, we now need to purchase between 10 million and 12 million pounds to meet our delivery commitments and maintain our desired inventory levels. And we've already started entering spot transactions to secure this material for delivery in 2019. In addition to the spot purchasing we have done, we have also been successful in securing long-term purchase arrangements for future delivery of more than 7 million pounds of uranium concentrates. The delivery under these arrangements, are heavily weighted to the years 2025 through 2028. You might ask why we are purchasing material for delivery in the future when we need material while McArthur River production is suspended. Let me explain as we reported, we have long-term commitments to deliver about 150 million pounds of uranium concentrates, securing material today for delivery in the future, provides us with added flexibility in making future sourcing decisions to fulfill our delivery commitments, without the need to build inventory today. Inventory only serves to create an overhang in the market and ties up our cash. These purchase commitments also allow us to defer capital investment decisions while still meeting demand in the market and we can lock in pounds today and take advantage of current low prices with the price escalation based on today's low interest rates. However, we do not have to pay as the deliveries made, and therefore, our cash isn't tied up. In the meantime these pounds are removed from the spot market and are held by intermediaries for our account. And finally, they are another form of risk mitigation. In the event we are unable to find material, we need to meet our committed sales while McArthur River shutdown or if the market price rises rapidly we believe we can to advance the timing of delivery under these arrangements. Before I move on, I want to provide a bit of color on what we are seeing in the market based on our spot activity. Although it’s too early determine if any trends are emerging in general the volume of material on offer has not been surprising and appears to be decreasing. In terms of pricing, we have seen some offers with aggressive discounting and others with premium pricing. However, we’re starting to see a bias now for premium pricing. Our goal is to responsibly manage our supply by preserving the value of our Tier 1 assets and protecting and extending the value of our contract portfolio on terms that recognize the value of our assets and our consistent with our marketing framework. I mentioned risk litigation a moment ago, and it’s an important perspective to examine. Let me explain, we ask ourselves what happens if the market doesn’t transition the answer of course is that it means there was a lot of clean up needed in the market and we are buying a lot of cheaper range. In this scenario, extending the shutdown of McCarthy River Key Lake and preserving its value was the right thing to do. Let me ask ourselves what happens if the price runs from us, we’re unable to find enough cheap price set by our commitments. That is actually a bit of Hollywood problem, let me explain. I already talked about our ability to advance delivery under our long-term purchase commitments, then you need to keep in mind that our 4.5 month inventory targets is just that, a target. We make sights a whole higher inventories or temporary lower them depending on what we see in the market. Also remember, uranium has to be stored in a license facility, as a result our license facilities hold a lot of material for others who may not have any immediate consumption requirements and product loans are not uncommon in our industry. And if we have to pay $50 or $60 purchase material, those higher prices are also probably align us to layer in new long-term commitments which means we have now met the conditions necessary to restart McCarthy River Key Lake. The restart would probably take us a number of months, depending how long we’re down for, but there will be ample delivery lead time in the new contracts being signed. In addition, given the significant higher leverage to market prices and our committed sales portfolio, the higher prices are floating the value of the portfolio more than compensating us for the purchase of few expensive pounds. So in either case, the decision to extend the shutdown was the right one, but rest assured none of this activity will change or jeopardize our financial navigation points. There are three principles we will follow in allocating our capital. First, we will continue to navigate by our investment grade rating. Second, our decisions will be based on the run rate of our business not onetime events. And finally, we are not to save these accounts of our owners. Our capital allocation decision will continue to pivot on what the market is providing us with. So while we are beginning to get more clarity on some of our litigation risk and the market appears to be moving in the right direction, it is too soon to change course. In today's noisy market, we believe we can distinguish ourselves from other uranium producers and are well positioned to response the changing market dynamics. We are commercially motivated supplier with the diversified portfolio of assets including the Tier 1 production portfolio that is among the best in the world, and we have the ability to restart and expand these assets should we see the right signals. Keep in mind these would be among the first and lowest cost pounds in the market. We believe we have the best global exploration and advanced exploration portfolio and are the only producer in Canada with licensing permitting and operating experience and a proven community development track record. Our decisions are deliberate driven by the goal of increasing long term shareholder value. We can't control the timing of a market recovery, but we are taking action on the things we can control. Ultimately, our goal is to remain competitive and position the Company to maintain exposure to the rewards that will come from having uncommitted low cost supply to deliver into a strengthening market. So, thanks for joining us today and with that, we would be pleased to take your questions.

Thank you. We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Ralph Profiti with Eight Capital.

This is the second consecutive quarter that we've seen upward revisions to committed sales right for both 2018 and 2019. And from your comments, it doesn't seem like this is new contracting but I'm guessing its more customers bring deliveries forward. Would you say this is something that you expected when you went with the indefinite shutdown at McArthur River? And how much more flexibility, do these existing contracts have? And maybe could this be sort of an added pinch point in the market as opposed to thinking about contracting in terms of uncovered requirements?

Well, Ralph, nice stuff. Thanks for the question. That's a bit complicated. I am looking at Grant to chip in here, but I mean this is really normal business for us. We're always in the market we've always said that we'll be in the market where it makes sense to do so. I would say we have a preference for term demand with utilities on market related terms with force and the contracts. So that's what we would look for in these contracts. These are not out of the ordinary. There are a few more players in the market now looking for some material. I think the intermediaries and the financial players and some producers so pretty normal business for us. Grant, I don’t know if you need to add to that?

Well, just to the question, Ralph, about it the flex up under existing contracts. It's really not that. We're not seeing dramatic flex up that's accounting for the revisions upward of our committed sales portfolio. You remember back in Q2 and again just reinforced with the comments at the outset, that our marketing framework one of the elements of it is we will step in and grab the demand in the market that makes sense for us. Now as Tim said, our preference is for term demand that's market related, but we will grab spot in midterm demand if it makes sense for us and then we will choose how to source that demand. So, this is reflecting us looking at our portfolio, looking at the customers that are in the market, looking how that lines up with the other factors we talked about regional diversification, who the customer is, the product for and we will make sales decisions of that time, and then we will figure out how to source that. And all of that has just added to the leverage, we've had in the market in terms of grabbing some demand and also then having to go into get the mater to satisfy, either from production from inventory or from purchases. So really what it reflects is just taking a bigger chunk market of the market, Ralph.

As a follow-up I have a question on 232, if recent history is any indication, we could be looking at some type of remedial action now. From Cameco standpoint, is there a more manageable least desirable outcome between tariffs versus quotas?

We've been -- let me back up a little bit because when this first came forward, I think it was in July, we looked at it and said makes no sense specially the remedy is being proposed, if you look at what the U.S. production and capability is to get 25% of U.S. utilities and demand out of for the U.S. assets is not going to happen. And so, we said it doesn’t make any sense, if you go the tariff route you are looking at probably somewhere between the 150% and the 400% tariff that didn’t make a bunch of sense. Quotas, we're not so sure, so we said all and then we said, but just look at some other sectors, the aluminum sector, the steel industry, automobiles, we are not taking this lightly. I would say if that way you’ve seen our submission probably into the department of Congress along with the 834 others that put submissions in were very active down in Washington. We don't know which way they'll go, but we're I would say working hard to come up with. Plan A would be to make the whole thing go away, just make it go way and let's carry on and trade. But we need to have a Plan B, so what that looks like we don't know. There's been talk of by America solution where the government might step in and buy because what we don’t want to do is put utilities in any more jeopardy than they already are and add to their issues in the U.S. of keeping their plants open. So long way to answer just to say, we don't know what the solution will be, but we're not taking this lightly nor is anyone else. We think we could very well see a quotas tariff type solution. We want to make sure we've had full input into that and try and help guide the DoC along.

The next question comes from Andrew Wong with RBC Capital Markets.

So regarding the roughly 300 million that's being held in restricted cash for the CRA dispute. You mentioned this on the prepared remarks, but is there anything you can give us on a timeline and on recovering that cash? And does it get tied up with the appeals process? Could you just help us understand that?

I think the answer is we don’t know yet. I would just say, well, first we're still delighted with the decision that we've got which was very clear on all of the points. And I'm looking at Sean Quinn and the work that he and his team did with our external counsel was outstanding, and so we're in a period now where we know a week ago, they've launched an appeal. We haven't heard anything yet on that. It was very sparse what we did see so it's going to be some months before we are going to see what the guts of their appeal looks like. In the meantime, we're going to be submitting within the next three weeks from today our application for costs. And so, that piece will run through, and in the meantime, we'll see what happens where there any conversations are not. So, we don't know on that 303 million of cash for now, it's still in their bank account. And as soon as we find out anything further, we will certainly let you know.

Okay, that’s fair, maybe just [indiscernible] else regarding the conversion prices in the market, we’ve seen in are pretty big uptick there. How does that affect your field services segment? And maybe if you can just help us try to think about that longer term, I know some of those are fixed contract and maybe not necessary conversion services but other field services just maybe help us out there.

Well, that’s been an interesting segment of the business of the nuclear fuel cycle for the last 10 or 15 years, it's been uranium, big section of the fuel cycle a little bit of conversion then you jump in enrichment and you almost forgot about conversion on the way through. And that we see historically low prices, I mean the prices of KG was touching $5 not long ago. And here we go it's over $10 on moving up, so certainly got everybody's attention. Why while you saw a few months ago, ConverDyn take their facilities right off and so that was a big supplier. [Comorex] over in France, [Comorex du] as they call it, is just wrapping up now and is going to take some time SFL is off. So lots of pieces coming off not many suppliers left out there at the moment put some pressure on the conversion price and so. Yes, I could tell you certainly put some spring in the step of our folks order that portal. And so, we will see contract book up there at decent prices going forward that will be helpful to us as well.

The next question comes from Orest Wowkodaw with Scotiabank.

Couple of questions from me. First of all, Grant, I’m having a bit of trouble reconciling the inventory numbers in the uranium segments and there are -- if I'm reading the statement correct, I think your uranium inventory went down 10 million pounds quarter-over-quarter and as you exited Q3 with only 9.5 million pounds. Based on the guidance you've given for implied Q4, my math would suggest your inventories are going to potentially fall all the way to 3 or 4 million pounds at the end of the year. Is that right?

Let me just step back a bit and provide a bit of a higher level explanation and also just the general comment that I'm not going to reconcile backwards because when you look at what were up to, from a strategic point of view and you think about our committed sales portfolio and we already began with the question from Ralph Profiti about how committed sales are going up. And you remember that we satisfy committed sales from three sources production, purchasing and inventory. That's a very simple equation. Committed sales on one side and production, purchases inventory the other, but it would be incorrect to think of any of those this constant. So think about it as committed sales going up our current commitments go up, we have new demand that we need to fulfill, and as a function well then our target inventory will go up as well because we target 4.5 months of committed sales. So if committed sales are going after our run rate inventory level, it’s going up, so that won’t be a constant. If our production remains largely on target then our purchase is much increased there. So, we’re in a situation where if our inventory is going up as a function of our committed sales going up, we’re going to have to purchase more. But in addition then that guidance on inventory might a little bit out the window, because if purchases are proving harder to obtain product form, location, timing then actually we might have a bit more of precautionary inventory that we would like to build and which will require even further purchasing, which is probably a bit counterintuitive. So, all of that to say, we are going to commit to always looking through the windshield and providing that guidance like Tim did on where we are with our committed sales, where we are with our production, our purchases and our inventory. But because they’re all moving, you kind of have to keep pace with where they’re going rather than where they’ve been. So, in terms of the math, it's laid out in the slide that the Company the presentation, the comments that Tim gave and those are the ones we’re added at the moment. So, if committed sales change you, if we discover that, purchases are harder to combine and decide that we needed a bit more of a precautionary inventory. All of those are variables yet to come. All part of the general strategy that we’re trying to deliver on which is not one of value, it’s one of volume and we’re focusing on say. If this is a market where the price doesn’t incent, our production, we’ll leave it in the ground and chose to buy. So, I’m not sure what numbers you’re calculating and I’m happy to get on the phone afterwards and try to figure it out, but now wouldn’t be the time.

Okay. What we can take that offline. And then just as a follow-up, looks like your stand by cost or McCarthy River increased I think from $5 million to $6 million a month to $7 million to $9 million. Can you give us, how much of that $7 million to $9 million is non cash?

Yes. So, when you have an asset like McCarthy River Key Lake curtailed and really probably the higher level comment here is, you don’t see a lot of mining companies, taking the kind of decisions we’re taking, because they’re complicated and they’re difficult decisions. McCarthy Key is obviously coming back, its’ not an impaired asset and so there are a number of line items on the physical capital side, that you just have to straight line depreciation. So, the only factor there is time, it doesn’t matter whether it's operating or not. So, all we’ve done is that the non cash piece to the stand by care and maintenance cost, those are being driven by straight line depreciation. The cash cost, they haven’t change, same guidance that we gave out when we made the decision and announced that two indefinitely shutdown McCarthy River Key Lake. So, that would be explanation there.

The next question comes from Greg Barnes with TD Securities.

Grant, if I am reading trade press right, it sounds like Cameco was in the market again last week buying 500,000 pounds. Can you give any sense of what the conditions were like? I think last time you said when you’re in the market it was only two times oversubscribed how was it at this time and you said earlier there was a bias towards premium pricing. Can you give us more color around how things went last week?

Yes, Greg, thank you for the question. So, when we go to purchase material to fulfill our committed sales portfolio, we’ll do that on market, we’ll do that off market, and we'll do it through RFPs. And the RFPs give us very interesting information because they really help take a supply demand point being reflected in a reported price and start to get a sense of what the curves are on the supply and demand side that created that point. And there's three variables that are really important to us with those RFPs. One is how much material is on offer, two is, at what prices is, and three is, who’s selling and when we look at those I would say that as we're now three RFPs into the market things are looking positive. Number one, the material on offer is not as robust as you would think. The market appears to be tighter. We don't get offered five times oversubscribed that's not occurring anymore. Secondly, with respect to price, we initially saw some pretty desperate selling which I guess was to be expected given how difficult conditions are for many of the participants in the uranium space. So, there was some desperate selling that we were encountering. We're not seeing that as much anymore in fact as Tim noted in his comments, on the pricing side a bias towards premium pricing and perhaps people are stepping back and they're looking at our disclosures and they're concluding Cameco come into the market to buy. And so you know why offer them a discount when they have to be in a position to buy. So that's possibly good news. And then the third is who's selling, you know there's been this myth kicking around the market all of these pounds held by utilities that will just come flooding into the market, if there's any sort of price recovery. And I guess happy to report we're not seeing any of that material that's not being offered to us. And so, on those three data points is that enough to make a trend, no. But you know to the extent you want to draw some conclusions the market appears to not have the depth that some would have been suggesting in the past and. And so we'll continue working through this purchase program and we'll continue updating you and others on what we see.

Grant, just a follow-up question on the CRA notice appeal, if they're not appealing the sham, this focus on the transfer pricing provisions are having trouble understanding what the appeal just based on. I know you don't have a lot of information but if it's not a sham. How come they appeal on the transfer pricing provision?

Yes, Greg. Good question and we're a bit in the darkest to where they're going with that as well. And it will be important to see their documents when they get them out. I think they have 90 days Sean to get them out if they don't get an extension which they normally do. So Sean do you will have any comment on Greg's?

Well, just simply that they're going to focus the appeal giving up on sham means that they have to focus the appeal on section 247 of the act, which is transfer pricing provisions. And they will have to pursue probably a very legalistic analysis of those sections to try and come up with what they're going to attack. But we really won't know more until we see their appeal book in due course.

The important thing is that there is no retrial at the court of appeal, there’s no following new evidence and that's pretty important piece. They go up the material that's provided in front of them and so you know we went through a 16-week trial with innumerable witnesses and experts and that doesn't happen again. They go up for Mr. Justice Owen's decision. So, we'll see, it's a bit of a road to go yet, but I can tell you we're still feeling pretty good about it.

Our next question comes from Oscar Cabrera with CIBC.

Just getting back to the question you've been getting on the behavior in the spot market. As you closed McArthur announced that you were closing at where it's been in the periods of time. Have you seen any changes in the recycling part of the business? I wonder if you think has that slowed down, is it just in the period that people are keeping from the spot market so in order to increase the spot price?

No, the change that we're seeing on the underfeeding I think it still continues. Our view is that it's going to diminish overtime as the market continues to improve, but it's pretty soon. Still we're a couple of months out from our decision that we took in July. We've seen certainly an improvement in spot price and so, no real change on any of that yet Oscar that we've seen.

Thank you, Tim. And then also notice that you lowered your care and maintenance cost for your operations in the U.S. and drive it late. Can you perhaps provide a little color around that? What are you looking to do?

Yes, I mean going to ask Brian Reilly to comment on that.

Look, we are in a restoration stage primarily. So really nothing, nothing has changed Oscar in terms of the operations. It's just how we allocate our care and maintenance cost. So it's by and large it's been business as usual in the U.S., Oscar.

The next question comes from Alex Pearce with BMO Capital Markets.

Just given we are getting towards the end of the current agreement with Orano. I was just wondering whether perhaps you could comment on first of all the timing, if there was any kind of potential expansion of it, and maybe if Orano was keyed, what is your appetites for providing more material to them and given there's probably increasing approaches next year?

Our agreement with Orano continues as expected. I think we've delivered about 4.1 million pounds out of 5.4 in that range. We will continue to follow the terms of the agreement. So probably top that up by the end of the year or repayment out by 2023. And so, no change there, it's working very well. Listen the hypothetical, I better not to go there, if they need more material I'll have to get it from somewhere I guess, but we haven't add any of your question in that regard.

The next question comes from Fai Lee with Odlum Brown.

Tim, China's National Nuclear Corp has recently made some comments about investing in overseas uranium mines, becoming a leading the uranium company, maybe taking partnerships or acquiring other companies. I guess there is two way to look at those type of comments. One is, as there are risks to Cameco or an opportunity and just wanted to know and just wanted to get take on that?

I was just over there about a month ago with the premier Saskatchewan, we actually met with them. And I can tell you that China continues to go. They are steaming towards their 58 reactors by 2020 probably won't hit exactly that, but that is not stop them at all. They got now a couple of 81,000 going, which they we were hoping to do. They got an EPR up and going. So China continues on a beta and I saw some news report the other day that they need to quicken the pace, if they have any chance of meeting any climate change and all that stuff. So, they're very aggressive, they are going to need lots of uranium going forward, and they always said that they will be buyers in the market for percentage. They will be domestic producers that would be very much because they don’t have very much and then they want to produce internationally and bring it back. And we've been in discussions with them while of course they are big customer of ours as well. But I can tell you they be very interested in our Saskatchewan assets or any other assets we have, and so they're very aggressive, very aggressive. And so we will see, we haven't got anything to announce with them at the moment, but you'll see them because there build out is rapid and larger over time their needs just continue to grow. And so we see them, we’re watching them in Namibia that's their colleague calling CGN. But with that Husab project, it's been put radio silent on that one. We assume they are having the same startup problems that everybody else has and will have -- with a new project new country, new owners, it's tough and it's not getting any easier. I can tell you so. Yes, I say both for the Chinese player CGN and CNNC are aggressive internationally and you'll see, I mean, they have some investments in Saskatchewan already and you'll see them looking for more.

In terms of the CRA, I am just wondering in terms of obviously you’re trying to deal with appeal process that right now. But I’m just wondering, looking beyond that, in terms of I guess it's still the subsequent for years to deal with and whether the transfer pricing is those subsequent years, has that -- without -- is that pricing -- the transfer prices, would they evolve in term of years before or is there a possibility that in terms of this current appeal that just maybe China set it for this subsequent trial to get themselves in a better position.

Certainly hope the subsequent trials are with somebody else and not us, but we’re not sure what their motivation is on the appeal. As we said that, as I said opening the thing up that we’re very happy to see the sham piece disappear. That was a big ticket. The whole structure went down they wouldn’t be a good day. In fact it didn't and in fact they drop that piece. Not only was there financial burden on that on there was a reputational piece, I didn’t like very much because I don’t like if they are attacking our house and our people and so for that to go away is important. We don't know how -- we think of Mr. Justice Owen's decision should apply to subsequent years. We haven't changed anything going forward from the use 303 and 06, we haven't changed our structure. And so, you we're waiting to see and hoping it will apply to those years as well.

The next question comes from Lawson Winder with Merrill Lynch.

The first question would be. What would a timeline be to start of some sort of settlement discussion with CRA? And then, I will give you my follow-up right now, if we'd just be looking at the current situation that you guys are in with CRA in terms of having such an overwhelming ruling from Justice Owen and then having it appealed. Are there any relevant precedent indications that you can point to that might hints it how things might go here?

Thanks Lawson. We don’t use word settlement anymore. We talk about a possible resolution of future years. And I can tell you those discussions have not started, we’re pretty fresh into this like I said we just filed their appeal a week ago and so, the next lease legal move is for us to follow our application for cost. So, Sean and his team were busy putting that together, and we’ll put that in front of Mr. Justice Owen within the timelines required. And so, that’s the next piece, look we’re just kind of waiting to see how things play out overtime. We don’t really know what the process is going forward, we haven’t heard a lot from them and we haven’t made any efforts to do so at least not yet. Sean, do you want to add anything, sorry I’m just…

In terms of, I think there was a question in there about, do we have precedent?

Right, sorry.

That would kind of play on this. And I would just come back to saying that we believe Justice Owen's decision was very strong, very sound, very well reason. And we’d expect to be upheld by the Federal Court of Appeal.

The next question comes from Orest Wowkodaw from Scotiabank.

Hi, thanks for taking the follow-up. I just wanted to ask a bit more about the CRA because I am just a bit of confuse on how things move to go on from here. I mean, how do we or when do you expect to find out whether you need to keep making these installment payments, as potentially laid out over a next couple of years? I understand also the 300 million plus sitting in cash, but do you have to keep making these payment through the whole appeal process? Or I guess what you expected timeline to figure out, if, A, when the refunds coming, but also that the payments?

Yes. Thanks Orest. I’m going to turn it over to Grant because pre-decision. He was the person that was in touch with the CRA. From our point of view, he and Sean were talking to them and we haven't had a whole lot of conversations since, but Grant do you want to talk about our financial capacity and cash?

Yes, happy to do that. So, Orest, these are just great questions and they're not easy. So just bare with me a little bit. Remember the decision pertains to O3, O5 and O6, so when we talk about applying for costs, that was the cost have taking those years to trial. And when we talk about expecting a refund, it’s for what we’ve remitted for those years. And then, there is the other years as you pointed, 2007 to 2012, which they greatest test best for and we have financial capacity tied up in those years as well. And then there is the years beyond and what they do with 2013, 2014, and really we just don’t know. We would expect and I think it’s reasonable to expect, the CRA on the receiving end of such a clear judgment wouldn’t take subsequent action. They would stop their reassessments. They would stop pursuing any transfer pricing penalties because they would recognize the decision said, the Cameco comply with the lot use. That would be a reasonable position to stay course, but I’m not sure I can assume that right now. So, we just don’t know, and of course if they take further steps on the subsequent years, we’ll disclose that, we’ll explain it to you as best as we can. But at the moment, it is one of those thing, that is just uncertain, we certainly, we think they shouldn't, but ultimately it's quite distinct from the years 03, 05 and 06 and the decision around it. So, let me just finish by saying hopefully while we're in appeal there's an armistice if you will to use Sean's words. But we just don't know, and I would say that the behavior in the past would suggest that we probably will be dealing with subsequent years being reassessed.

Which would require you keep making payments until there's some resolution then?

That would be the requirements and then of course, we would look into all our options in face of that appeal.

The next question comes from Patrick Suzuki [ph], a Private Investor.

So, you mentioned some insights from kind of an inventory perspective on the license storage facility. I was curious given some of your relationships with some of the enrichment players globally like Tenex, URENCO or the fact that you guys own quite a significant chunk of global conversion capacity at Port Hope. Can you comment at all on like [slew] pricing or conversion pricing going forward and its potential effects on the underfeeding assay?

Yes, Patrick thanks…

Ton of loaded question, sorry.

Yes, and I don’t know if I'll unload it for you, but [slew] pricing is outside of our expertise, but Grant, maybe if you have a comment on that.

I think the high level comment on [slew] pricing is that is that remains in market that is, has a lot of excess capacity and there would have to be a lot more uranium demand that would come to the market to tie up that excess capacity, and it is that excess capacity which has led to the ability to underfeed and see that material instead of being deployed for enriched uranium being put into the uranium market. So I think that the green shoots that you're seeing in uranium, you're not quite seeing in [slew] yet. But of course, we know that momentum goes hand-in-hand. If we begin to see meaningful term demand occur in the uranium space, it will also carry with a term demand in conversion and it will also carry with it term demand in [slew]. So, there could be a kind of a rising tide floating all boats, but at the moment the [slew] market does have a lot of excess capacity. When it comes to conversion in particular it's important to remember Tim's words and that is conversion like uranium is right now undergoing some price appreciation because of curtailed supply. So you've got ConverDyn down, you've got the Springfield facility in the UK has been down for a couple of years. You had our production back to certainly not optimal levels, and you have Orano going through a transition from an old facility to a new facility. So all of that to say conversion price is not driven by a scarcity due to supply destruction it's been driven by supply discipline. So right now, conversion is doing well, but there is capacity and then it's idle that could come back to the market. So that should temper any view that conversions on its way to $30 or $40 KgU. That's just not going to happen because that will bring back idle capacity. But it is indicative of the fact that as we come out from under significant secondary supplies, significant secondary supplies that have historically showed up as you have six, and we replace it with uranium concentrate, they then have to be converted and so that is buoying for the conversion segment of the industry. So those would be the high level observations on slew and conversion.

Our next question comes from [Indiscernible] with Radiant.

Quick question on Kazakhstan, I know you have some production there. So the production curtailments that were announced by the government in to clean-up the excess supply. How is that conveyed -- I believe half of that comes from the government online now as it comes from private? How does that affect -- how is that translated through to the final players? And what's progress being on that front?

You are right, it is. The reductions that they've put in place do come from all parties because their joint venture partner will all of us whether it's the French or us or whether the Russian partners. And so, they at the state level can make a decision as to what the production level should be and that translates through the Kazatomprom. This year, they are holding it down, we've heard 21,600 tons for this year, which is down it's down from previous years and it’s certainly don't from where they could be producing. And so that just gets translated through to the joint ventures including ours. And so, our production levels will be coherent and consistent with that.

[Indiscernible] with the government what the supplier went? Does the private -- how does that proportion out? And what's the -- who's been doing more on the work or does the other?

Look, it's really proportionate through the joint venture so it depends what your equity interest in the joint venture is, and it's across the board. So I don’t know exactly what the proportion of as you say government and private interest are Kazakhs joint ventures, not a lot of private, private as in the sense of publicly traded like us. But it's the board for all of the joint ventures that they have and so they are all reduced proportionately.

And your sense with that to production is actually going down because the last I heard he was actually not?

Well, you have to understand that we're in the process of increasing our production that’s the agreement we made, the deal we made with the Kazakhs about a year ago, year and half of ago, Sean. And so, we are not getting to the levels we should be at because of the decision in Kazakhs and Kazakhstan to reduce all production proportionately. So we're hit by that as well.

The next question comes from John Tumazos with John Tumazos Very Independent Research.

Excuse my question I'm not fully familiar with the uranium practice. Whenever a customer shuts down, such as the Belgium decided to phase out their nuclear reactors in the past year or FirstEnergy shut a reactor in South Jersey a few weeks ago and plans to phase out shipping port in PA and two in Ohio. And other industries, there is a take back agreements like titanium suppliers or high nickel alloy suppliers might take back the high value scrap for unsold product. How are the inventories of departed customer typically liquidated?

Absolutely on a commercial basis, I mean we expect them to honor the contract we have with them. They usually plan that out in advance as to how much they need, and any kind of a solution would have to be on a commercial basis. There is no real rule for that, but we haven't seen a whole lot of that, but it's dealt with commercially.

So, you've retained the right to buyback at market, the inventories of one of these shutting down end of these.

Yes, in some cases, we do and in some cases, others that we don't have dealings with might come to us to see what we might do. But it's not, I mean it's such a minor amount wouldn’t even get the radar screen for us.

Next question comes from Jim Ostroff with Platts.

I’m hoping you can provide a little bit of clarification here. You had issued an estimate that Cameco this year here on will need to buy 1 million to 3 million pounds of material. Reference was made a little earlier with the conversation here about the 0.5 million pound of RFP. I guess could you say whether that has closed?

Yes, that has closed Jim.

And just them to clarify, they need by 1 million to 3 million pounds is makes that into account.

Yes. Sorry, yes, Jim, it does. That we need 1 to 3 in addition to that and so, we're just looking through that one now. And as Grant was pointing out to provide us some really good information on who's out there, who might be selling one of the quantities, and what’s the price spread, and we’re certainly seeing that tightening up. So that one is in and we still have a 1 to 3 million to purchase.

And if I could one other very brief thing, in the full presentation here, there was a statement obviously here you know, that overtime financial interest, that’s the target. If we believe some of the material currently sequestered in these funds or make its way back in to the market, potentially temporally over supplying the stock market and pulling downward or putting downward pressure on prices. Would appreciate, if you would provide any additional information is to how significant the potential risk this maybe?

Jim, you and I both have been in the industry a long time, we've seen that happen in the past. You remember in the '06, '07, '08, '09 time period, financial players like lighter fluid on the market there was moving up. They really moved it up fast and then when things started to move, they went the other way to liquidate. I don’t think it’s a big risk at the moment. I think there's a lot of interest. We see a lot of interest from financial players, some of them you know and others that might be surprised to know that are looking at the uranium space now, see the supply demand fundamentals. And so there's always that risk. Most of these funds I think Yellow Cake and some of the others that are UPC that have put their funds together are buying hold. They plan to hold for a long time to play the commodity overtime. So, but there is always that risk at some point, they could put some back into the market, but we certainly see it going the other way at the moment.

At them therefore at the moment you see them buying?

Yes, we absolutely. I think, the allocate was the biggest ticket. I think they've got 8.441 million pounds now in well with us actually in their control. And so, we know there is other outlook so it’s going to the other way at the moment.

This concludes the question-and-answer session. I would like to turn the conference back over to Tim Gitzel for any closing remarks.

Well, thank you Shiny. With that, I just want to say thanks to everybody who has been on the call with us today. We always appreciate your interest and support and I just say that we’re managing this company through this noisy market, and we will always make the decisions necessary to keep Cameco strong and viable for the long-term. So thanks for joining us today. Have a great day and a great weekend. Thank you.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating. And have a pleasant day.