OREANDA-NEWS. June 20, 2016. Uranium is having the worst start to a year in a decade. U3O8 is down more than 20% in 2016 with the UxC broker average price trading around the \\$28 a pound mark this week. Current levels are the cheapest spot uranium has been since 2005. At the same time the long term price, where most uranium business is conducted, is hovering at around \\$44 a pound, where it’s been since July 2015. Irina Dorokhova of MINEX Central Asia sat down with Tim Gitzel, President and CEO of Cameco to talk about the changing dynamics of the uranium market, how the Canadian company is riding out the slump and its new agreement with Kazakh giant Kazatomprom.

–  Mr. Gitzel, what’s happening in the spot uranium market? Why do you think the spot price stabilized in 2015 and dropped in the first quarter of 2016?

 – Prices are very low today, just 28 dollars per pound. We haven’t seen prices this low for many years. There’s not very much activity on the market, small amounts of material, often changing hands among traders. There is a sense among utilities that there is a lot of uranium around and so there is no urgency to be buying. Utilities are well covered for the next few years so the prices are staying low for now. We expected Japan to move more quickly with restarting their reactors but it didn’t happen. Material that would have been delivered to Japan is now coming onto the market and keeping the price down.

– Why is it happening this year, but not last year?

 –Last year was flat as well with prices around 35 dollars. That’s not a high price, but it was strengthening. Today it’s 28 dollars and there is no clear driver for that.

– What do you think, who knows why such processes appears now?

 – I don’t know who.

– Maybe traders?

 – Yes, maybe traders. There is not a lot of activity, and so if you look at our company, we are not heavily involved in the spot market. We have long-term contracts. We have stable customers. We have a solid portfolio of contracts so we know what prices we will be getting for the next three years from 2016 to 2018.

– What share of its contracts Cameco has at the spot market?

 – Very little. Most of our activity in the spot market is through NUKEM, a trading company, which we purchased just a few years ago. And if you look at the results of the first quarter, they did very, very little. Less than five percent.

– How do spot prices affect the long-term price? Do you reference the spot price in your contracts?

 – We see that they are disconnected today. In some of our contracts we have market pricing formulas that may reference spot prices or the long-term price. In our quarterly reporting we include a table that shows how changes in the spot price would affect our realized uranium price.

– Has Cameco changed the price formulae in its last deals?

 – We try to have about 40 percent of our contracts fixed price so we are negotiating on the price escalation factors all the time.

– Absolutely fixed?

 – Yes. The other sixty percent have market-related provisions. Sometimes with a ceiling, sometimes with a floor price. If you look at the table, you can see how our realized price changes under our contract portfolio with spot price moves.

– What type of contracts do you prefer to sign – the fixed or market related?

– Today the prices are low, we are not interested in the fixed-price contracts.

– But for example you can say: “We will sign the contract at 50 dollars”. Or not?

– We will find nobody who will sign. We are not signing a lot of contracts today. We are more interested in market-related pricing because any contract that we sign today – in May or June 2016 – calls for deliveries in three years. We believe the market will be better in three years.

– What is the usual time duration of your contracts?

 – Normally from five to 10 years on a long-term contract.

– What contracts were signed in the last year and last months of this year?

 – We are always in the market. We’ve signed a few contracts, the public one was with India. That was seven million pounds over five years. This is very important us to get into the Indian market, so we were happy to get this contract.

– How does the company determine the materiality criteria for its transactions? What volume or maybe what money?

 – We know that we want to sell 30 to 32 million pounds every year. That’s for sales. Right now we are heavily committed from 2016 to 2019 under our long-term contracts. We do not have much additional material to sell.

– You haven’t any contracts that will be started in 2019, yes?

 – Yes we do. 2016-2018 are heavily committed.

– Why does the company produce less than it sells?

 – We often purchase material on the market when opportunities arise. We would like to match what we produce to what we sell, but it doesn’t always happen like that. So we often purchase material on favourable terms to make up to difference.

– The share of “non-produced” uranium is quite big.

– Small.

– If you sell about 30-32 million pounds and produce about 25-28 million, the difference is quite big…

 – You remember the HEU-LEU agreement between Russia and the United States. For many-many years we received about seven million pounds annually under that agreement. So we produced 22 to 23 million pounds. Now we are producing more because we have Cigar Lake, McArthur Lake and Inkai. We still have some purchase agreements in place. We also have inventory we use that up the difference.

– What is the source of uranium which you buy?

 – Anywhere on the market. It is through the spot market and longer-term agreements with different parties. We don’t generally disclose who we are buying uranium from.

– Please explain what “spot market” means. As I understand, there isn’t any special place for trading.

 – There is no exchange as you would find with other commodities. The transactions are made between different combinations and of traders, producers and utilities. It is not centralized like the London metal exchange. And usually there is no immediate physical delivery.

– What volume is usually traded on the spot market?

 –From 40 to 50 million pounds each year. It doesn’t mean that 50 million pounds actually change hands.  It might mean that I trade one thousand pounds to you and you trade the same thousand to him, but it counts as two thousand pounds though it’s the same material. So when we say it’s 50 million, that’s how many deals get done, it is not a measure of how much uranium was consumed by reactors. That 50 million pounds might be half of what actually goes out to utilities and gets used in a reactor.

– What is the trend on the spot market? Does it become bigger or smaller?

 – It’s been flat for the last five years.

– Did the Fukushima disaster have any influence?

 – The big difference is on the long-term market where normally about 150-160 million pounds were traded each year. In a last three or four years it’s been about a one third of that. Companies are not into signing long-term contracts now. They are very comfortable that there is enough uranium on the spot market. We’ve seen very little long-term contracting in the last three or four years.

– Sorry, you said that the spot market is flat, but new volume of material appeared because the long-term market shrank. How can these two statements both be true?

 – Utilities carried large inventories. They are not buying, so they use their inventories. There is now a mid-term market, not the spot market, but also not the long term market. That’s new, relatively new.  Instead of entering to 10-year contracts, utilities might enter into a two-year contract. So we wait and see what the prices will do.

– Are the existing stockpiles really three times the annual requirements for the world’s reactors?

 – Nobody knows exactly how much is stockpiled. The numbers being reported include all uranium inventories, including many that are not available to the market such as materials that require significant cleanup or processing before they could be brought to the market.

Chinese inventories are high, largely a result of aggressive stock building. This inventory is held for strategic purposes and does not pose a risk to entering the market. With the aggressive reactor construction program underway in China, once those units begin consuming, they will need a lot of uranium.

Japan is another region where inventories remain high. While it had not been expected that Japanese material would come to market, with the prolonged delay in restarts, we have been seeing some excess material make its way into the market, primarily as a result of contract deferrals.

– Ok, thank you. Let start about Kazakhstan. What is Cameco’s strategy in Kazakhstan?

 – We’ve been here over 20 years. When we first came in, we found the country is very open to partnerships. Our joint venture at Inkai is operating very well. We’d like to do more going forward and hope we will. That’s the reason why we are here – to meet with prime minister and the president and discuss our future in Kazakhstan.

– Is the company confident it will be granted the Block 3 mining license?

At the end of May Cameco signed an agreement with Kazatomprom that sets out a clear path to increase production from JV Inkai to 2045 and for Cameco to assist our partners in development of uranium processing capacity within Kazakhstan. Block 3 will contribute to increased production from Inkai. The agreement is conditional upon a number of government approvals including amendments to Inkai’s resource use contract. The interests of the partners are aligned under the agreement and we are very confident it will close successfully.

– Earlier it was expected Cameco’s share in Inkai should be 50%. But in last agreement your share was cut to 40%. Why?

– Kazatomprom was intent on consolidating JV Inkai’s results in its corporate reporting and must hold a majority interest in order to do that. If you look at the totality of the agreement, it delivers tremendous value to our investors and our minority rights are well protected.

– Does it mean that Cameco will not be able to consolidate Inkai in its financial reports when transformation will be over?

– Once all the necessary approvals are in place and the agreement closes we will not be able to consolidate Inkai’s results.

– Cameco is the single producer of UO3. The part in agreement regarding refinery plant means that Cameco will generate the competitor for itself. What is the meaning of this initiative for Cameco?

– We are leveraging our expertise in uranium processing to strengthen our relationship with our partner. Kazatomprom wants to investigate the feasibility of deploying our technology in Kazakhstan and we are committed to look at the feasibility of doing that. Current market conditions are unfavourable, but are expected to improve in the future due to the expansion of nuclear capacity allowing both facilities to thrive.

– What side will operate at proposed refinery plant?

– The refinery would be operated by a joint venture entity, of which KAP will own at least 70.67%.

– What does the phrase “a governance framework that provides protection for Cameco as a minority owner” mean in the company’s release?

The agreement includes governance provisions that ensure our minority rights are protected and we are             the arrangements. The specific details are confidential under the terms of the agreement.

– How will Cameco’s market share change after production will increase due to Cigar Lake and Inkai will ramp up?

– It will take a number of years to secure the necessary approvals and ramp up production at Inkai. We are expecting stronger markets by then, but it’s too early to predict market share five years from now with so much uncertainty in global uranium supply.

 – What are the company’s plans with respect to the UlbaConversion JV this year? Next year?

 – We are still studying Ulba conversion. Right now the conversion market is very weak. The price of conversion is very low, so there is not a lot of pressure to move forward in a soft market. We continue to look at the feasibility of a uranium refining plant at Ulba.

– As an outlook: when could UlbaConversion be commissioned?

 – I don’t know that. We haven’t fixed a date.

– But maybe the fixed year?

 – We are still doing the study. We have to do a feasibility study to see whether it makes sense financially. It will depend on what the market is like going forward, and is a decision for both partners so we need to discuss it further with Kazatomprom.

– What does Kazatomprom’s deal with ConverDyn mean for Cameco? Will two companies compete in Kazakhstan?

 – I don’t know the details of that deal. It’s between Kazatomprom and ConverDyn.  I can only tell you we continue to work with Kazatomprom on the possibility of processing facilities here and that it will depend on the feasibility and market conditions.

– Kazatomprom initiates the new exploration program in Kazakhstan. Will Cameco participate?

–We’re working at blocks one, two and three at Inkai. We’re happy with those positions.

– EIA reported Kazakhstan is the lowest-cost uranium supplier. Could Athabasca deposits challenge Kazakhstan’s domination?

 – The strategy of Cameco is to produce safely and efficiently from our tier one assets. That is our low-cost Cigar Lake, McArthur River and Inkai operations.

– But Cameco reports that costs will rise due to the share of production from Cigar Lake will increase.

 – We are now producing below Cigar’s capacity. As we ramp up production to higher levels cost comes down.

– What is average cost for mines in Athabasca basin?

 – Under the twenty dollars per pound. Cash cost.

– And full cost including capital expenditures?

 – We only disclose a cash cost.

– What are the strategic destinations for the company’s development? Canada? The US? Kazakhstan? Africa?

 – We are now focused on Canada and Kazakhstan. In the current market we will keep that focus.

– But Mongolia?

 – Canada and Kazakhstan.

– While the prices are low, yes?

 – They’re very low. Every company is being very cautious. We’ve just closed mines as you heard recently at Rabbit Lake in Canada and in Nebraska and Wyoming in the US. That was necessary because the market is very low. That’s a very difficult decision for any mining company. We are being very cautious with all of our spending and hoping that the price will recover soon.

–  Cameco sold its share in the utility company, cut production costs, and it is now reducing its production rates and workforce. Are there other options if the market continues to deteriorate?

 – That’s exactly what we must plan for. We want to be ready if the market is lower for longer and we will be profitable even if the price stays low. That’s why we are focused on Canada and Kazakhstan where our lowest-cost production is located.

– Is it true that you sold the share in Bruce Power to survive?

 – Oh, no.

– But why?

 – We just decided, that being involved in nuclear reactors was not a core business. We want to focus on uranium mining. That’s where we have the greatest potential to reward our shareholders. We decided it was the right time to sell our interest in Bruce Power and we are happy that we sold.

– You didn’t need to have the best expertise because Cameco wasn’t operator of power plant.

 – We just decided strategically that we didn’t want to be directly involved in generation of nuclear power. We wanted to take the money from there and invested in uranium mining.

– It is the opinion of many that vertical diversification can protect from crisis and can be the good strategy…

 – For some companies it can be the strategy, but our strategy is to focus on uranium mining and conversion.

– Could China become a strong competitor in the natural uranium market over the next few years?

 – Kazatomprom clearly is the world leader. Forty percent of world production comes from Kazakhstan. I don’t see a lot of new entrants to the uranium business. It’s a very difficult market. I think just the same competitors that we see today will be there in the future.

– Yes, Kazakhstan is the leader. But China can participate in this market.

 – That’s true. They are building a mine in Namibia.

– What do you think about Husab?

 – We are watching. They said they will be in production this year. The Chinese are very aggressive in uranium. They bought some properties in Canada including, for the first time, in Saskatchewan where they acquired a 20% interest in Fission Uranium. They are also interested in Niger and Kazakhstan. They have publicly stated that they want to get more involved in uranium mining. Obviously they are building reactors very quickly and so they need a lot of uranium.