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TABLE OF CONTENTS Nov 19 - 25, 2012 Volume 98 Number 40 - 0 comments

Soft uranium market hurts Cameco's Q3 earnings

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By: Anthony Vaccaro

With its latest quarterly earnings, Cameco (CCO-T, CCJ-N) proved that its current operational deftness hasn’t been enough to protect its bottom line.

The uranium senior reported that its production was in-line with expectations at 5.3 million lb. uranium oxide (U3O8), but sales volumes were at just 5.1 million lb., well below the expected 7 million lb.

The weaker sales met with realized prices that were 8% off, and the company disappointed with adjusted earnings per share (EPS) of just 12¢, compared with a consensus estimate of 26¢.

But Cameco CEO Tim Gitzel attributes the drop in sales to the nature of the uranium sector.

“This is not a reflection of the underlying strength of our business, but rather a demonstration of the variability that is common for us from quarter to quarter,” he said on a conference call. “The price we realize depends on the contracts we deliver into during the quarter, and the volume depends on when our customers want their deliveries. As is often the case, most of our deliveries will occur in the fourth quarter.”

In fact, Cameco expects that 40% of the year’s deliveries will happen in the coming quarter.

With earnings down, Gitzel emphasized the company’s performance, highlighting that it remains on track for its yearly sales revenue and production guidance.

And while this is true, Gitzel’s comments about the overall state of uranium demand should be of some concern for investors.

Since 2008, Cameco has focused on reaching 40 million lb. U3O8 annual production by 2018, as part of its “double-u” strategy. That strategy is now being pared back to a target of 36 million lb.

Gitzel says that while the company believes in the basic tenets that fed the original strategy — mainly that increasing energy and uranium demand will combine with decreasing secondary supplies to drive future demand to new heights — the timing of that scenario unfolding has shifted. He says that “as a result, we have to adjust our plan.”

Cameco is seeing that restarting reactors in Japan is taking longer than expected, and weakness in the global economy is resulting in softer near-term uranium prices. 

These factors contributed to a reduction in its 10-year forecast for newly built reactors to 80 from 95.

It all means that rather than push new projects into production, Cameco will focus on brownfield expansions to boost its supply to 36 million lb. per year by 2018.

So while new projects like Kintyre and Yeelirrie will likely be shelved, the company will keep pushing to get Cigar Lake into production next year, and carry on with expanding its McArthur River mine. Both projects are part of the company’s suite of world-class assets in Saskatchewan’s Athabasca basin.

“We will be ready to move quickly and efficiently when the market calls for more uranium,” Gitzel says. 

But market reaction was lukewarm at best.

“We view the results as moderately negative. Although the mines are performing well and 2012 production and sales guidance was maintained, capital expenditure guidance jumped to $800 million from $750 million; third-quarter EPS was weaker than expected on lumpy sales; and unsurprisingly, 2018 production guidance was cut to 36 million lb.,” Raymond James analyst David Sadowski writes in a research note.

At CIBC, Matthew Gibson sees reason for optimism. “The stock is sitting at trough-level valuation, which may take some time to improve,” Gibson writes. “We expect the key catalyst for the stock to be the restart of reactors in Japan. With a new regulator now in place, it is expected that new safety guidelines should be in effect by mid-2013. Around this time, it is expected that six to eight reactors are approved to commence operations.”

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