The Perfect Storm is about to startCameco extends delay over flooded mine
Cigar Lake woes bigger than expected; Uranium sales postponed up to 7 years
ANDY HOFFMAN
MINING REPORTER
Cameco Corp. has deferred planned uranium sales from its flooded Cigar Lake mine for up to seven years, putting further supply constraints on an already tight market and raising concerns the crucial project could be delayed even longer than expected.
The world's largest uranium producer said it has postponed deliveries of Cigar Lake uranium initially scheduled for this year to the end of those contracts and said other customer deliveries affected by the supply interruption will be put off for "a five- to seven-year period."
TD Newcrest analyst Greg Barnes said this may suggest a more protracted holdup in getting Cigar Lake into production than first thought. "This statement is likely, in our view, to provide further upward momentum behind the uranium price," Mr. Barnes said in a note to clients.
The massive Cigar Lake mine in Northern Saskatchewan filled with water in late October, quashing hopes it would begin producing uranium -- which is used as fuel in nuclear reactors -- by the end of this year.
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At the time, the company said the project would be delayed by a year.
Jerry Grandey, Cameco's president and chief executive officer, yesterday cautioned against correlating the length of the sale deferrals with production at Cigar Lake.
In a conference call to discuss the company's fourth-quarter financial results, Mr. Grandey noted Cameco is considering terminating some or all of the uranium loan arrangements that it uses to ensure it can meet customer supply contracts.
"That's why I wouldn't read anything into the five to seven years in terms of our expectations for Cigar. We're certainly looking at the loan agreements to see whether we need to keep them in place," he said.
The mine is the world's single largest uranium project in development, with reserves of 232 million pounds of uranium. Cameco, which owns 50 per cent of the project, had predicted Cigar Lake would produce 10 per cent of industry supply by 2010.
The flood propelled already buoyant uranium prices to record levels on concerns supply may not keep up with demand from new nuclear reactors. The spot price was $75 (U.S.) a pound this week, roughly double the year-ago level.
Cameco is now trying to stop the flow of water into the underground facility. It hopes to seal off the leak with concrete, drain the mine and resume construction. It said it will provide an update on its progress early next month, and will disclose estimates for the full cost of the flood and confirm in late March when it can begin production.
"We have great confidence Cigar Lake is going to come back. We'll know the timing better in a month or two," Mr. Grandey said.
Compounding the need for Cigar Lake production is the fact that Cameco's uranium sales will be subjected to a "tiered royalty" by the Saskatchewan government this year that will reduce profit by $10-million (Canadian). Until Cigar Lake is operational, Cameco will have to pay the province a royalty of up to 19 per cent on uranium sales over $32 a pound.
Costs of $20-million related to Cigar Lake, and weaker sales from its electricity and gold business pushed Cameco's fourth-quarter profit to $40-million, 52 per cent below last year's levels.
Cameco shares fell $1.07 or 2.4 per cent to $43.78 on the Toronto Stock Exchange, while shares of other uranium companies were among the top gainers in the mining sector. Denison Mines Corp. rose 4.5 per cent, sxr Uranium One Inc. added 3.6 per cent and Paladin Resources Ltd. shares gained 2.7 per cent.
Cameco
Q4
2006
2005
Profit (loss)
$40-million
$83-million
EPS
11¢
23¢
Revenue
$512-million
$522-million