Saturday, May 06, 2006

Cameco Corporation (NYSE:CCJ TSE:CCO) Q1 Analysis

I make it a point to read CCJ's Q1 results, because, even though it's not one of my six favorite uranium plays at the moment, it is the dominant company in the uranium sector and its financial results often contain valuable nuggets on both the now and the later of this industry. So without further ado, here is Cameco's publication of their results, with my commentary interspersed between:

Revenue $285 million
Gross profit $97 million
Gross profit 34%
Earnings before taxes $89 million
Average realized price 19.61 ($US/lb)
Sales volume 12.0 million lbs
Production volume 4.3 million lbs

Uranium Results
First Quarter

Compared to the first quarter of 2005, revenue from our uranium business rose by 265% to $285 million due largely to a 179% increase in sales volume. The timing of deliveries of nuclear
products within a calendar year is at the discretion of customers. Therefore our quarterly delivery patterns can vary significantly. An increase in the realized selling price also contributed to the higher revenue, rising by 45% (in US dollars) over the first quarter of 2005. The average realized price in Canadian dollars, however, increased by only 29% due to the strengthening Canadian dollar relative to the US dollar. The increase in the average realized price was the result of higher prices under fixed-price contracts and a higher uranium spot price, which averaged $38.96 (US) per pound in the first quarter of 2006 compared to $21.80 (US) in 2005.

Analysis: Cameco's results are skewed in that they sold almost three times the amount of uranium that they actually produced, thus explaining why their profit was so large compared to the first quarter of 2005. The Canadian dollar continues to be a hindrane to all uranium companies, as it continues to strengthen against the US dollar; it will definitely have a negative impact on company profits.

Our earnings before taxes from the uranium business improved to $89 million from $7 million last year, while the profit margin rose to 34% from 15% in 2005 due to the higher realized selling price.

Uranium Outlook for Second Quarter 2006
Our earnings from the uranium segment are projected to be about half of those in the first quarter of 2006 due to lower sales volumes. We expect deliveries to be about 50% those of the first quarter 2006 due to the timing of customer requirements. The average realized price is expected to be similar.

Uranium Outlook for the Year 2006
In 2006, we expect uranium revenue to be 20% higher than in 2005 due to a projected 18% improvement in the expected realized selling price (in Canadian dollars) and a 2% increase in deliveries. Uranium sales volume is expected to be about 35 million pounds in 2006. Cameco's share of uranium production for 2006 is projected to increase slightly to 21.4 million pounds of U3O8 from 21.2 million in 2005.

Uranium margins are expected to improve to about 30% compared to 23% in 2005.
The second quarter and the 2006 financial results outlook for the uranium business segment is
based on the following key assumptions:
- no significant changes in our estimates for sales volumes, costs, and prices,
- no disruption of supply from our mines or third-party sources, and
- a US/Canadian spot exchange rate of $1.16.

Uranium Price Sensitivity 2006
For the remainder of 2006, a $1.00 (US) per pound change in the uranium spot price from $41.00 (US) per pound would change revenue by about $2 million (Cdn) and net earnings by $1 million (Cdn). This sensitivity is based on an expected effective exchange rate of $1.00 (US) being equivalent to about $1.22 (Cdn), which accounts for our currency hedge program.

Analysis: essentially, Cameco is betting that the uranium price will increase faster than the Canadian dollar strengthen against its American counterpart, buttressing their bet with currency hedging.

Uranium Market Update

Uranium Spot Market

The industry average spot price (TradeTech and UxC) on March 31, 2006 was $40.75 (US) per pound U3O8, up 12% from $36.38 (US) at December 31, 2005. This compares to $22.55 (US) on March 31, 2005 and $20.60 (US) on December 31, 2004.

Total spot market volume reported for the first quarter of 2006 was 5.0 million pounds U3O8. Although lower than the 12.2 million pounds transacted in the first quarter of 2005, prices continued to increase, as supply remains tight.

Industry sources indicate that discretionary purchases, or purchases not for immediate consumption, remained strong accounting for about 50% of first quarter spot volume. This reflects utility purchases, likely for inventory building, and both trader and investment groups taking positions in a moving market.

Analysis: Interesting. One way of interpreting this is that regular buyers are becoming somewhat reluctant to buy are these prices and that much of the demand and subsequent price increase of uranium oxide is driven by investment demand, such as my 5th stock pick Uranium Participation Corporation (U.TO), a company that buys uranium oxide for the sole purpose of storing it and acting as the uranium equivalent of CEF.

Uranium Long-Term Market
The industry average long-term price (TradeTech and UxC) on March 31, 2006 was $41.50 (US) per pound U3O8, up 15% from $36.13 (US) at the end of December 2005. This compares to $27.25 (US) on March 31, 2005 and $25.00 (US) on December 31, 2004. The long-term market continued to be active in the first quarter as utilities attempted to mitigate the risk of potential future supply shortfalls by securing long-term contracts with reliable primary suppliers. Currently, we estimate that more than 200 million pounds will be contracted in the long-term market for 2006 compared to 240 million pounds in 2005 and a five-year annual average of 80 million pounds. The trend for long-term contracting is well above historical levels and may decline from the 2005 level.


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