2011 Financial Results by Segment
Uranium
| Highlights | 2011 | 2010 | change |
|---|---|---|---|
| Production volume (million lbs) | 22.4 | 22.8 | (2)% |
| Sales volume (million lbs) | 32.9 | 29.6 | 11% |
| Average spot price ($US/lb) | 56.36 | 46.83 | 20% |
| Average long-term price ($US/lb) | 66.79 | 60.92 | 10% |
| Average realized price | |||
| ($US/lb) | 49.17 | 43.63 | 13% |
| ($Cdn/lb) | 49.18 | 45.81 | 7% |
| Average unit cost of sales ($Cdn/lb) (including D&A) | 29.94 | 27.87 | 7% |
| Revenue ($ millions) | 1,616 | 1,358 | 19% |
| Gross profit ($ millions) | 632 | 532 | 19% |
| Gross profit (%) | 39 | 39 | – |
Production volumes in 2011 were 2% lower than 2010 due to lower production from Smith Ranch-Highland and Inkai. See Operating properties for more information.
Uranium revenues this year were up 19% compared to 2010, due to an 11% increase in sales volumes and an increase of 7% in the Canadian dollar average realized price. Sales volumes in 2011 were higher than 2010 due to some customers deferring 2010 deliveries under contracts until 2011. The 19% increase was higher than the guidance we provided in the third quarter (increase 10% to 15%) as sales volumes for 2011 were at the top of the range provided (31 million pounds to 33 million pounds) at that time.
Our realized prices this year in US dollars were 13% higher than 2010 mainly due to higher US dollar prices under market-related contracts. Our Canadian dollar selling price, however, was only 7% higher than 2010 as a result of a less favourable exchange rate when compared to 2010. Our exchange rate averaged $1.00 compared to $1.05 in 2010.
Total cost of sales (including D&A) increased by 19% this year ($983 million compared to $826 million in 2010). This was mainly the result of the following:
- the 11% increase in sales volumes
- average unit costs for produced uranium were 7% higher, although our average unit cost of sale for produced material was within the guidance we provided
- average unit costs for purchased uranium were 14% higher due to the increase in spot prices
- standby costs paid to AREVA relating to the McClean Lake mill
- higher royalty charges due to higher deliveries of Saskatchewan-produced material and higher realized prices. In 2011, total royalties rose to $124 million from $78 million in 2010.
The net effect was a $100 million increase in gross profit for the year.
The following table shows the costs of produced and purchased uranium incurred in the reporting periods (non-IFRS measures see below). These costs do not include selling costs such as royalties, transportation and commissions, nor do they reflect the impact of opening inventories on our reported cost of sales.
| ($Cdn/lb) | 2011 | 2010 | change |
|---|---|---|---|
| Produced | |||
| Cash cost | 18.45 | 16.89 | 9% |
| Non-cash cost | 6.50 | 6.32 | 3% |
| Total production cost | 24.95 | 23.21 | 7% |
| Quantity produced (million lbs) | 22.4 | 22.8 | (2)% |
| Purchased | |||
| Cash cost | 26.08 | 22.85 | 14% |
| Quantity purchased (million lbs) | 9.6 | 10.6 | (9)% |
| Totals | |||
| Produced and purchased costs | 25.29 | 23.10 | 9% |
| Quantities produced and purchased (million lbs) | 32.0 | 33.4 | (4)% |
Cash cost per pound, non-cash cost per pound and total cost per pound for produced and purchased uranium presented in the above table are non-IFRS measures. These measures do not have a standardized meaning or a consistent basis of calculation under IFRS. We use these measures in our assessment of the performance of our uranium business. We believe that, in addition to conventional measures prepared in accordance with IFRS, certain investors use this information to evaluate our performance and ability to generate cash flow.
These measures are non-standard supplemental information and should not be considered in isolation or as a substitute for measures of performance prepared according to accounting standards. These measures are not necessarily indicative of operating profit or cash flow from operations as determined under IFRS. Other companies may calculate these measures differently so you may not be able to make a direct comparison to similar measures presented by other companies.
To facilitate a better understanding of these measures, the table below presents a reconciliation of these measures to our unit cost of sales for the years ended 2011 and 2010 as reported in our financial statements.
| ($ millions) | 2011 | 2010 |
|---|---|---|
| Cost of product sold | 824.3 | 691.3 |
| Add / (subtract) | ||
| Royalties | (123.6) | (78.2) |
| Standby charges | (22.0) | (12.0) |
| Other selling costs | (9.4) | (13.4) |
| Change in inventories | (5.7) | 39.6 |
| Cash operating costs (a) | 663.6 | 627.3 |
| Add / (subtract) | ||
| Depreciation and amortization | 159.2 | 134.9 |
| Change in inventories | (13.6) | 9.2 |
| Total operating costs (b) | 809.2 | 771.4 |
| Uranium produced and purchased (millions lbs) (c) | 32.0 | 33.4 |
| Cash costs per pound (a ÷ c) | 20.74 | 18.78 |
| Total costs per pound (b ÷ c) | 25.29 | 23.10 |
Outlook for 2012
We expect to produce 21.7 million pounds in 2012. In addition, we have commitments under long-term contracts to purchase about 8 million pounds.
Based on the contracts we have in place, we expect to sell between 31 million and 33 million pounds of U3O8 in 2012. We expect the average unit cost of sales to be 0% to 5% higher than in 2011. The increase is due primarily to higher costs for produced material. If we decide to make additional discretionary purchases in 2012 then we expect the average unit cost of sales to increase further.
Based on current spot prices, revenue should be about 0% to 5% lower than it was in 2011 as a result of an expected decrease in the realized price.
Our customers choose when in the year to receive deliveries of uranium and fuel services products, so our quarterly delivery patterns, and therefore our sales volumes and revenue, can vary significantly. In 2012, we expect that deliveries will be evenly distributed across the quarters. However, not all delivery notices have been received to date, which could alter the delivery pattern.
Price sensitivity analysis: uranium
The table below is not a forecast of prices we expect to receive. The prices we actually realize will be different from the prices shown in the table.
It is designed to indicate how the portfolio of long-term contracts we had in place on December 31, 2011 would respond to different spot prices. In other words, we would realize these prices only if the contract portfolio remained the same as it was on December 31, 2011, and none of the assumptions we list below change.
We intend to update this table each quarter in our MD&A to reflect deliveries made and changes to our contract portfolio each quarter. As a result we expect the table to change from quarter to quarter.
Expected realized uranium price sensitivity under various spot price assumptions
(rounded to the nearest $1.00)
| ($US/lb U3O8) | |||||||
|---|---|---|---|---|---|---|---|
| Spot prices | $20 | $40 | $60 | $80 | $100 | $120 | $140 |
| 2012 | 38 | 42 | 50 | 57 | 66 | 74 | 81 |
| 2013 | 43 | 46 | 54 | 62 | 71 | 80 | 88 |
| 2014 | 45 | 48 | 56 | 65 | 74 | 83 | 91 |
| 2015 | 43 | 47 | 56 | 66 | 77 | 87 | 97 |
| 2016 | 45 | 50 | 58 | 68 | 78 | 88 | 97 |
The table illustrates the mix of long-term contracts in our December 31, 2011 portfolio, and is consistent with our contracting strategy. The table has been updated to December 31, 2011 to reflect:
- deliveries made and contracts entered into up to December 31, 2011
- changes to deliveries under some sales contracts to assist our customers who were directly impacted by the March nuclear incident in Japan
- changes to deliveries under some contracts where deliveries are tied to reactor requirements
Our portfolio includes a mix of fixed-price and market-related contracts, which we target at a 40:60 ratio. We signed many of our current contracts in 2003 to 2005, when market prices were low ($11 to $31 (US)). Those that are fixed at lower prices or have low ceiling prices will yield prices that are lower than current market prices. These older contracts are beginning to expire, and we are starting to deliver into more favourably priced contracts.
Our portfolio is affected by more than just the spot price. We made the following assumptions (which are not forecasts) to create the table:
Sales- sales volumes on average of 32 million pounds per year
- customers take the maximum quantity allowed under each contract (unless they have already provided a delivery notice indicating they will take less)
- we defer a portion of deliveries under existing contracts for 2012
- the average long-term price indicator is the same as the average spot price for the entire year (a simplified approach for this purpose only). Since 1996, the long-term price indicator has averaged 14% higher than the spot price. This differential has varied significantly. Assuming the long-term price is at a premium to spot, the prices in the table will be higher.
- we deliver all volumes that we do not have contracts for at the spot price for each scenario
- is 3% per year
Tiered royalties
As sales of material we produce at our Saskatchewan properties increase, so do the tiered royalties we pay. The table below indicates what we would pay in tiered royalties at various realized prices. We record tiered royalties as a cost of sales.
This table assumes that we sell 100,000 pounds U3O8 and that there is no capital allowance available to reduce royalties, and is based on 2011 government prescribed rates. The index value to calculate rates for 2012 is not available until April 2012.
| Realized price ($Cdn) |
Tier 1 royalty 6% x (sales price – $18.05) |
Tier 2 royalty 4% x (sales price – $27.07) |
Tier 3 royalty 5% x (sales price – $36.09) |
Total royalties |
|---|---|---|---|---|
| 25 | 41,700 | – | – | 41,700 |
| 35 | 101,700 | 31,720 | – | 133,420 |
| 45 | 161,700 | 71,720 | 44,550 | 277,970 |
| 55 | 221,700 | 111,720 | 94,550 | 427,970 |
| 65 | 281,700 | 151,720 | 144,550 | 577,970 |
| 75 | 341,700 | 191,720 | 194,550 | 727,970 |
| 85 | 401,700 | 231,720 | 244,550 | 877,970 |