Cameco CCJ released second-quarter results Aug. 14, reporting a big drop in sales from the prior year as a result of the timing of customer purchases. With this revenue lumpiness in mind, we’d suggest investors refrain from the usual quarter-versus-quarter comparison and instead consider the firm’s performance in the first half of 2008 versus the first half of 2007. From this perspective, Cameco’s results looked good. Dramatically higher realized prices on uranium sales represented the biggest contributor to Cameco’s strong performance. In U.S. dollar terms, realized prices rose 42% versus the first half of 2007. Interestingly, the average spot price for uranium fell 36% in U.S. dollar terms over the same period, while the average long-term price gained a mere 5%. Contract terms explained the divergence between Cameco’s realized prices and the list prices published by major industry sources. Specifically, realized price levels benefited from the addition of new contracts that included higher price ceilings than those specified in the expiring contracts they replaced.
Notwithstanding the positive developments on the uranium pricing front, Cameco’s second quarter also included some disappointments on the operational side. Even though all mining companies deal with a wide range of technical headaches, Cameco seems to have more than its fair share. Foremost among these have been continued water-inflow problems at the promising Cigar Lake uranium deposit, which have plagued the site’s operations for a few years now. On Aug. 12, just when it looked like Cameco had the water issue largely under control, remediation work at the site had to be suspended following a surge in water inflow to a rate beyond what the company is permitted under its license to pump out. Cameco expects to provide an update on the situation in late September, at which time we wouldn’t be surprised to hear that the company intends to yet again push back its production timetable for the site. Unfortunately, Cigar Lake isn’t the only problem Cameco is coping with. Uranium fluoride production at Port Hope hasn’t yet been restarted because of continued investigations of current and historical groundwater contamination at the site. Meanwhile, Cameco’s sole supplier of hydrofluoric acid (a chemical required for uranium fluoride production) unilaterally terminated its supply contract with Cameco in an apparent effort to push for significantly higher prices. Acid supply issues of a different sort continue to plague the company’s Kazakh mine, which has curtailed operations because of reduced availability of sulphuric acid. We’re modestly reducing our fair value estimate for Cameco to account for the continued operational headaches.