Cameco's CEO Hosts Cigar Lake Project Update Conference (Transcript)

Executives

Rachelle Girard

Timothy S. Gitzel - Chief Executive Officer, President and Director

Robert A. Steane - Chief Operating Officer and Senior Vice President

Jim Corman

Analysts

Oscar Cabrera - BofA Merrill Lynch, Research Division

Greg Barnes - TD Securities Equity Research

David Snow

H. Fraser Phillips - RBC Capital Markets, LLC, Research Division

John Hughes - Desjardins Securities Inc., Research Division

Ralph M. Profiti - Crédit Suisse AG, Research Division

Cameco Corporation (CCJ) Cigar Lake Project Update Conference September 9, 2013 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Cameco Corporation Conference Call. I would like to turn the meeting over to Ms. Rachelle Girard, Director, Investor Relations. Please go ahead, Ms. Girard.

Rachelle Girard

Thank you, Donna, and good morning, everyone. Thanks for joining us. Welcome to Cameco conference call to discuss progress on the Cigar Lake project. With us today on the call are Tim Gitzel, President and CEO; Bob Steane, Senior Vice President and Chief Operating Officer; and Jim Corman, Vice President, Operations and Projects AREVA Resources Canada. Tim will begin with comments on progress of the Cigar Lake project. This will be followed by a brief orientation and overview by Bob about the challenges at the mine, and Jim will then do the same for the milling site. After, we will open it up for your questions.

If you joined the conference call through our website, you'll see some images there, which Bob will refer to. You can also get these images through the conference call link at cameco.com. Today's conference call is open to all members of the investment community, including the media. [Operator Instructions] Please note that this conference call will include forward-looking information, which is based on a number of assumptions, and 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.

Timothy S. Gitzel

Thank you, Rachelle, and welcome to everyone. We are pleased you've joined us on the call today. I'm also delighted to have Jim Corman, our partner from AREVA here with Bob and I. So Jim, welcome. We're nearing the end of summer when we promised you an update on Cigar Lake, and I'm assuming most of you would have already seen the press release we issued earlier today. The purpose for today's call is to provide you with a little more detail. I hope you understand the current challenges and answer any questions you might have. Generally,

I would say we remain pleased with the progress made at Cigar Lake to date. As you know, we're in the commissioning phase. Commissioning involves ensuring all mining systems are performing as designed and that is progressing well. I was at the site a few days ago to get a first-hand look at our progress and hear from the folks on the ground there. Across the site, you can see solid progress from the construction of the maintenance and administrative buildings on the surface to the loadout facilities, and the completed grinding circuit work is substantially complete, and we have begun commissioning the mining system. On the mining site, construction is about 97% complete. The jet boring system is in position beneath the ore body. We have already completed the drill hole and we anticipate starting up the jetting tool shortly perhaps even later today.

But when a mine is being commissioned, issues are going to come up and Cigar Lake is no exception. As part of the commissioning activities, we found we had an issue with the north and south run of mine areas, which we call the ROMs. To orient you, the ROMs are 2 concrete-lined, large excavations, which form tanks in the rock. These tanks are designed to receive a mixture of ore and water from the jet ore mining system. And from there, the ore is transferred to the grinding and processing circuits.

When we fill the tanks with water, as part of commissioning, we found that a small amount of water equivalent to the volume that might come out of a garden hose was seeping out of the ROMs and into other areas of the mine. While the volume of the water is small, once we start production, it would be radon-bearing because of the contact with the ore. So to ensure the safety of our workers, we've decided to seal both of the ROMs with steel liners in advance of production.

In the meantime, commissioning activities in all other parts of the mine will continue, including jet boring and waste rock. The work on the ROM areas is expected to delay the start of mining in ore for the first quarter of 2014. In addition, over the past few days, our partners at AREVA told us that they have determined that some further modifications are required at the McClean Lake mill. This means the mill is expected to begin processing Cigar Lake ore by the end of the second quarter of 2014. As a result of these developments, Cameco will not meet its forecast production for Cigar Lake in 2013. The impact, if any, on our 5-year production forecast will be included in our annual reporting when further progress has been made on commissioning the mine and mill.

The capital cost of the Cigar Lake project will not be materially impacted by the additional work done on the ROMs. And based on preliminary information, the capital cost of the mill modifications is not expected to be material. While we're not happy with these delays, we need to keep in mind Cigar Lake is a long-term project that we expect to last for many, many years. It is an important source of what will be low-cost production for Cameco and a key component of our strategy to increase annual production to 36 million pounds by 2018.

With any industrial project as large as this, challenges in commissioning like those we talked about today are to be expected. To me, what's really important is how these challenges are handled. We have learned many lessons from our years of operation in the Athabasca Basin. First and foremost is when we see a quality or safety issue, we deal with it and get it fixed, and we make sure we do it right. I continue to have every confidence in the Cigar Lake team. We're bringing into production one of the most technically sophisticated mines in the world.

The people we have in place at Cigar Lake are committed to doing the job right for the long term and their approach to commissioning reflects that attitude from the senior management through the front lines. We all understand how important Cigar Lake is to the nuclear industry. We are absolutely committed to bringing this project safely into production and so are our partners at AREVA, and we won't cut corners to make it happen.

So before we open up to your questions, I'd like to turn this over to Bob to run through how the process works at -- the process works at Cigar Lake, where the ROMs fit in and discuss the work that is being done. Then we'll follow with Jim on the milling side. Bob?

Robert A. Steane

Thanks, Tim. As Rachelle mentioned, we have a series of numbered images available on the web through the conference call link on our website at cameco.com. Now these images are at the bottom of the conference call page and will be available for your reference during and after this conference call. The first figure is a schematic diagram showing how all the pieces of the mining system work together, and the role of the run of mine, or ROM, area in the overall process. Starting at the top of the page and moving counter clockwise, we show the jet boring system or JBS.

It is in a tunnel, mining a cavity in the ore using high-pressure jets of water. The ore chips will come out of the cavity as a mixture of water and rock, which is then pumped to a series of pipes to the north or south ROMs, the tank that Tim talked about. The purpose of the ROM is to separate the ore chips from the water. The ore chips settle to the bottom of the ROM, and the water is pumped back to the jet boring system to collect more ore. The rock chips are scooped out of the ROM and fed to the ball mill circuit, where the rock chips are ground to a fine, sand-like consistency. This is referred to a slurry. The slurry from the ball mill is pumped to a clarifier to thicken it to a paste-like consistency. The water from the clarifier is recycled back to the process while, finally, the ore slurry is pumped to the ore loadout facility on the surface, where it is lowered it into purpose-built containers to be trucked to the McClean Lake mill, much like we do at McArthur River.

Figure 2 is a picture of one of the ROMs. Here, you can see the pipes coming into the tank that will be carrying the water and rock chips from the jet boring system. These tanks are about 5 meters wide, 20 meters long and 12 meters deep. The chips from these pipes will drop to the bottom. The water will be pumped back to the jet boring system. Now this photo shows the excavation and how the walls were initially spray-coated with a waterproof, cement-like material. As Tim noted, when this tank was filled with water as the first stage of commissioning of this facility, water from the ROM was detected seeping into some other areas of the mine. We had initially put in place some mitigation measures, which, if successful, would not have impacted the schedule. And while they significantly reduce the CPICH, they did not completely address the situation. This led us to make the decision last week to install a completely welded steel liner.

And Figure 3 shows the south ROM, where we started installing the welded the steel liner over the past week. This gives you some perspective each of those steel plates is 4-feet high and 8-feet long. Figure 4 shows the jet boring system machine, where it currently sits today, it's located in a tunnel and even though the ore, where the initial operation will be starting. In fact, we've already completed at the pilot hole and anticipate we'll soon be jetting in waste rock. We'll use the north ROM to collect the waste rock until we're ready to start installing the steel liner there as well.

Timothy S. Gitzel

Okay. Thank you, Bob. Now we take you through the milling side. I'm going to turn things over to Jim Corman.

Jim Corman

Thanks, Tim. We are working on a major expansion of the McClean Lake mill to double its capacity to 24 million pounds of uranium concentrate per year. Work is currently progressing well on this expansion at the site. The expansion is scheduled to be complete in 2015 and the additional capacity will not be needed before that. At the same time, we were preparing the mill to begin processing the ore from the Cigar Lake mine after it begins production.

About 75% of the mill's capacity will be dedicated to processing Cigar Lake ore. Today, the plant is ready to receive and store ore. However, as a result of the recent metallurgical test work, which differs from previous tests, we must complete some modification to the mill's leaching circuit before we can begin processing the ore. These recent metallurgical tests demonstrate potential for increased hydrogen formation in the leaching circuit when acid is added to the ore slurry compared to previous samples. This phenomenon is not unusual in the processing of base metals, and a number of proven solutions exists. After considering a range of options, we concluded last week that the best solution results -- revolves around the installation of a robust ventilation and purging system to ensure the safe and efficient operation of our leaching circuit. And we are moving forward aggressively to implement these modifications.

This work is confined to the leaching circuit and all other mill circuits are ready for restart. Based on the information we have today, we expect the modifications to be complete and we'll be in a position to begin processing ore by the end of the second quarter of 2014. In the interim, we are planning to store the ore as we receive it from the Cigar Lake mine so that we will not slow down the mine production and we'll catch up in the months following those restart, thanks to our overcapacity. The cost of these modifications will not increase our 2013 mill expenditures.

Timothy S. Gitzel

Well thank you, Jim. And with that, I would like to turn it back to the operator and we'll open things up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Oscar Cabrera from Bank of America Merrill Lynch.

Oscar Cabrera - BofA Merrill Lynch, Research Division

So, Tim, just wanted to clarify, in terms of the CapEx increase at -- you described in the second quarter conference call, 15% to 25%, does this include both mill and mine expenditures that you foresee for Cigar Lake and McClean -- the McClean mill?

Timothy S. Gitzel

Oscar, we weren't anticipating this in our Q2 guidance, given that we just found out about these pieces very recently. So that wasn't included in our Q2 guidance. That said, these don't constitute any material change to our Q2 guidance.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Okay. Now the follow-up to that question is then, of the 15% to 25% increase, can you remind me what those encompass?

Timothy S. Gitzel

Well that had to do with some of the additional freeze hole drilling, I believe, at the site. There were some mill pieces involved in that. I think we set that out in our Q2 guidance. Bob, do you have any sort of comments on what was all included in that 15% to 25%?

Robert A. Steane

Yes. Sure, Tim. That was some escalation we had seen at the mine. It was expansion of the free -- surface-free drilling program at the mine. And as well, that was some anticipated changes on the increase at the jet mill over the life of the project, not in the front end or the leaching end, but to increase the solid extraction capacity to the 80 million-pound production.

Operator

The next question is from Greg Barnes from TD Securities.

Greg Barnes - TD Securities Equity Research

Tim, is this going to have any impact on your contract sales commitment to customers in terms of do you have material on hand to cover any shortfalls that maybe related to Cigar Lake deliveries?

Timothy S. Gitzel

Yes, Greg, good question. No, it doesn't impact us at all. It just differ -- for our -- given the production we were forecasting and continue to forecast for 2013, this was a small amount for 2013. There were some customers that had Cigar-specific contracts, but we certainly can substitute and cover for that. No problem at all.

Greg Barnes - TD Securities Equity Research

Okay. And the changes to the 5-year plan, clearly, you're not quite in a position to disclose them, but it doesn't sound like there are going to be material at least from what you know at this point.

Timothy S. Gitzel

No, it doesn't sound material and as you heard Jim Corman say that mill has a lot of capacity. And so we'll start up the mining tool. As we say, we will -- and then there, we could continue to mine on it. We've got significant storage for the slurry at the McClean Lake mill. So we'll fill up that storage and then once the mill comes on, I think it was scheduled to run every second week, Jim, week-on, week-off, and so we -- as I say, great, we've got some capacity there.

Operator

[Operator Instructions] And our next question is from David Snow from Energy Equities Inc.

David Snow

I'm wondering if you're holding back stock and stockpiling the spot sales that you would otherwise be making given the current low price and if that would give you more flexibility in meeting various possible contingencies on this project at Cigar Lake?

Timothy S. Gitzel

Probably, anything we're doing certainly reflects the market these days. I think we disclosed on NUKEM NUKEM that we were not going to make all of the sales from NUKEM this year, given the current low prices in the market. So that's the only piece. There's no other strategy on our side here.

David Snow

Okay. There's no other delay of other projects around the world?

Timothy S. Gitzel

Not for us. It's business as usual for Cameco other than this slight delay in Cigar Lake, which I can assure you, as you see, we're not thrilled with, but we're going to deal with it and this is -- you all know the history of this project, and we've learned a lot from past lessons and we won't compromise on the safety and quality pieces, so we'll do it right. And so that's the only piece you're hearing today.

Operator

The next question is from Fraser Philips from RBC Capital Markets.

H. Fraser Phillips - RBC Capital Markets, LLC, Research Division

Two questions, Tim. One, just on CapEx issue. It strikes me that there would be some additional amount of spending that will end up being capitalized prior to commercial production. Is that -- but that perhaps is spending on physical equipment is de minimis. Is that -- will there be that kind of additional capitalized cost that have to be taken into account here?

Timothy S. Gitzel

Fraser, if there is, it wouldn't be much, and it's certainly wouldn't be anything material at all.

H. Fraser Phillips - RBC Capital Markets, LLC, Research Division

Okay. The other question I had was on a different subject. This is with the jet boring machines. How many of them are -- have been put together underground at this point? Where are you in that process?

Timothy S. Gitzel

Thanks, Fraser. I'll ask Bob to answer that part.

Robert A. Steane

Yes, sure, Fraser. We have 2 machines on-site now assembled underground and we have the third machine on an order. It's now being manufactured and we'll soon be ordering the fourth. There will be 4 machines in total in operation with 3 of them at any one time in the mining sequencing process.

Operator

[Operator Instructions] And the next question is from John Hughes from Desjardins Securities.

John Hughes - Desjardins Securities Inc., Research Division

Just one quick one. Looking through 2014 and '15, it appears to be sort of a 6-month delay in production at the mill. I may be wrong. Maybe it's 4 months or whatever, but we were originally looking at 5.5 million pounds out of Cigar Lake in '15 and 1.8 million next year. By the time you get -- especially and I know the mine plan is changing, I guess, as we speak, but I'm just wondering in terms of order of magnitude for next year versus the 1.8 million, so are you going to get anywhere near that number or should we use half of that number for '14, and then continue to, say, with the 5.5 million for 2015? Any guidance you can provide just in terms of, again, order of magnitude would be helpful because, of course, we have to adjust your 5-year mine plan today?

Timothy S. Gitzel

What I would say today is we have not changed our forecast to date for 2014 or '15. We're going to look at that as we get more information on the mill modifications and the startup of the commissioning of the mine. But today, we have not changed our forecast.

John Hughes - Desjardins Securities Inc., Research Division

So you're not changing the forecast based on what you know today?

Timothy S. Gitzel

Not at all.

Operator

Our next question is from Fraser Philips from RBC Capital Markets.

H. Fraser Phillips - RBC Capital Markets, LLC, Research Division

Tim, this business has been nonsequitur or I figured we've got you on the phone as we head into this WNA meetings. Can you give us any current thoughts on what's going on in Japan and its effects or your thoughts on its effect on the market? And perhaps whether we're at risk of building more inventories and what you think the commercial inventory situation is around the globe at this point?

Timothy S. Gitzel

Yes, that's a great question, Fraser. Then as you anticipated, Amano [ph] was going to go yesterday, but on my way over for a week of meetings, starting tomorrow when I get there. I'll tell you, I will have better information at the end of the week. There are some high-level presentation, head of the Japanese utility delegation will be there. We'll be presenting on exactly that subject then I can tell you the rumor. I'm sure we'll be brought to hear what he has to say with Kansai. The Kansai, of course, the one with the one Ohi operator -- or one Ohi plant that's still operating. So we'll wait to hear from him. The Chinese representing South Korea and so it should be an interesting week over in London. And so Fraser, we'll have a bit more information there at the end of the week.

Operator

Our next question is from Ralph Profiti from Crédit Suisse.

Ralph M. Profiti - Crédit Suisse AG, Research Division

I just want to confirm that particularly at the mill, that this increased hydrogen formation or any of these modifications don't require any type of regulatory review and by use of the Canadian Nuclear Safety Council or other? And then my second question is, I just want to clarify whether that fourth machine was ordered or is going to be ordered?

Timothy S. Gitzel

Well, thanks, Ralph. Bob, do you want to take the machine question first? Have we ordered that machine?

Robert A. Steane

Excuse me -- the third machine, is it being manufactured now? We have not yet placed the order for the fourth machine.

Timothy S. Gitzel

Jim, the question regarding the CNSC or review of the mill mods.

Jim Corman

Certainly, on the regulatory side, we are augmenting our existing safety systems that we have within the plants, so it's an improvement to our safety systems. That being said, certainly, the regulators are interested in what we're doing and we will be communicating. We have communicated with them and we will be communicating more of the changes that we anticipate making.

Operator

[Operator Instructions] And our next question is from David Snow from Energy Equities.

David Snow

Just following up on the idea of no change in the expected -- current expected guidance for '14. I think I heard that you said that the ore will be delivered to the mill and stored there until it is ready to go. And then I believe I heard that the mill will operate with a lot of excess capacity every other week, so I suppose we could play catch-up and process the ore that get stockpiled in the first half. And secondly, I'm guessing if the -- you can make up the lost time and giving the mining production on previous expected targets for '14. Can you help me on those?

Timothy S. Gitzel

Yes -- no, David, I think you're on the right track. Our ramp-up, we've always said, that have been -- I think conservative, but prudent where we want it to be. And so I think on both of those points, the mining and the milling, we do have capacity to -- at Cameco, I think we talked about 300,000 pounds for this year and then I believe the number for 2014 that was 1.8 million pounds. So we'll see. I don't want to say for sure and we'll certainly if we have a different view in the future to that to change our forecast for production. But today, we have no different view than what you've heard from us already.

Operator

Our next question is from Oscar Cabrera from Bank of America Merrill Lynch.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Tim, with regards to the operating expenses for Cigar Lake. I know this is early, but do you need to do anything in addition to what you were expecting before? And would this have an impact on your -- I believe it is -- it was $18 a pound expected life of mine cash cost.

Timothy S. Gitzel

Oscar, we haven't changed our forecast on unit cost due to this. As I said, we don't anticipate this to be material and so no change to our unit cost and forecast.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Right. And with respect to the time frames that you're providing, your level of confidence at this point?

Timothy S. Gitzel

Well, it's a -- this is -- these are decisions that we've taken, given what we've seen during the commissioning process, and safety is for all of us. I just don't say for me, for all of us. Above all else, given the lessons we've learned in the Athabasca over the past, I say 10 years. Now I think McArthur was back in '03, when we've got some issues there. And so this project is going to run for a long time, many years, Phase I and then we'll see what happens after that. We want, when we have the chance right now, to -- when we see a deficiency, we said, "Let's fix it and fix it right," so we don't have to get back after. And so that's what we're doing now, and this is new information. As I say, we're filling up the ROMs over the last days and saw that CPICH, we said, "Let's fix it and do it right." And same with Jim here and the middle, they've got some new information on the metallurgy of the ore, especially the ore sample is coming out of our freeze hole drills and said there's a risk of increased hydrogen. We said, "Let's deal with it now before we get going, and so we don't have to go back on that." So that's really our thinking on this. And those were decisions we took, and so that's the way we want to do it to bring the mine safely into production. So there's a bit of a delay on that and then as I said, we're not happy about that, but we think it's the right decision.

Operator

Our next question is from Emily Meredith from Nuclear Intelligence Weekly.

Emily Meredith

Just a quick question. Do you have a per pound cost for Cigar Lake that incorporates both the capital and the cash cost?

Timothy S. Gitzel

Well I think our unit cash cost is $18.60 a pound and that's what we've disclosed, Emily, in our technical report.

Emily Meredith

But nothing that incorporates the capital expenditures of the mine?

Timothy S. Gitzel

No, those are operating costs, yes.

Operator

This conclude the questions from the telephone lines. I would like to turn the meeting back over to Mr. Tim Gitzel for his closing remarks.

Timothy S. Gitzel

Well, thank you, operator, and thank you very much to everyone who has joined us on the call today. I know you're all very interested in Cigar Lake, and we very much appreciate the questions you've raised and we hope we were able to answer them appropriately and give you a bit more information. I don't have to remind you that Cigar Lake is a challenging project so it's not surprising that we encountered challenges during commissioning. The important thing is that we're keeping our eyes on the prize. That is safely and efficiently bringing Cigar Lake into production, and we're doing this in a careful and systematic way. And we'll be absolutely sure to keep you updated on our progress. So once again, thanks for joining us today, and have a great day, everyone. Thank you.

Operator

Thank you. The Cameco Corporation conference call has now ended. Please disconnect your lines at this time. We thank you for your participation, and have a great day.

Cameco Corporation (CCJ) Cigar Lake Project Update Conference September 9, 2013 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Cameco Corporation Conference Call. I would like to turn the meeting over to Ms. Rachelle Girard, Director, Investor Relations. Please go ahead, Ms. Girard.

Thank you, Donna, and good morning, everyone. Thanks for joining us. Welcome to Cameco conference call to discuss progress on the Cigar Lake project. With us today on the call are Tim Gitzel, President and CEO; Bob Steane, Senior Vice President and Chief Operating Officer; and Jim Corman, Vice President, Operations and Projects AREVA Resources Canada.

Tim will begin with comments on progress of the Cigar Lake project. This will be followed by a brief orientation and overview by Bob about the challenges at the mine, and Jim will then do the same for the milling site. After, we will open it up for your questions. If you joined the conference call through our website, you'll see some images there, which Bob will refer to. You can also get these images through the conference call link at cameco.com. Today's conference call is open to all members of the investment community, including the media.

[Operator Instructions] Please note that this conference call will include forward-looking information, which is based on a number of assumptions, and 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.

Thank you, Rachelle, and welcome to everyone. We are pleased you've joined us on the call today. I'm also delighted to have Jim Corman, our partner from AREVA here with Bob and I. So Jim, welcome. We're nearing the end of summer when we promised you an update on Cigar Lake, and I'm assuming most of you would have already seen the press release we issued earlier today.

The purpose for today's call is to provide you with a little more detail. I hope you understand the current challenges and answer any questions you might have. Generally, I would say we remain pleased with the progress made at Cigar Lake to date. As you know, we're in the commissioning phase. Commissioning involves ensuring all mining systems are performing as designed and that is progressing well.

I was at the site a few days ago to get a first-hand look at our progress and hear from the folks on the ground there. Across the site, you can see solid progress from the construction of the maintenance and administrative buildings on the surface to the loadout facilities, and the completed grinding circuit work is substantially complete, and we have begun commissioning the mining system.

On the mining site, construction is about 97% complete. The jet boring system is in position beneath the ore body. We have already completed the drill hole and we anticipate starting up the jetting tool shortly perhaps even later today.