Outstanding financial performance
The mining industry is becoming increasingly competitive, particularly in two of the jurisdictions where we operate, northern Saskatchewan in Canada and Western Australia. Our financial results depend heavily on our sales and production volumes, on the cost of supply, and on the prices we realize in our uranium and fuel services segments.
Managing our supply and costs
We sell more uranium than we produce every year. We meet our delivery commitments using uranium we obtain:
- from our own production
- through long-term purchase agreements and on the spot market
- from our existing inventory—we target inventories of about six months of forward sales of uranium concentrates and UF6
Like all mining companies, our uranium segment is affected by the rising cost of inputs like labour and fuel. In 2011, labour, production supplies and contracted services made up 88% of the production costs at our uranium mines. Labour (34%) was the largest component. Production supplies (27%) included fuels, reagents and other items. Contracted services (27%) included mining and maintenance contractors, air charters, security and ground freight.
Operating costs in our fuel services segment are mainly fixed. In 2011, labour accounted for about 49% of the total. The largest variable operating cost is for energy (natural gas and electricity), followed by zirconium and anhydrous hydrogen fluoride.
To help us operate efficiently and cost-effectively as we grow, we manage operating costs and improve plant reliability by prudently investing in production infrastructure, new technology and business process improvements.
Our costs are also affected by the purchases of uranium and conversion services we make under long-term contracts and on the spot market.
Our long-term purchase contracts are at fixed prices that are lower than the current published spot and long-term prices. Our most significant long-term purchase contract is the Russian HEU commercial agreement, which ends in 2013. We expect to purchase about 17 million pounds, our remaining volumes, under this agreement to the end of 2013. The purchase price escalates with inflation and was agreed to in 2001 when uranium prices were much lower than today. In 2008, pricing on approximately 6 million pounds of the remaining volumes available to us in 2012 and 2013 was renegotiated. Using a $60 (US) per pound uranium spot price, the average price increase from 2012 to 2013 on these 6 million pounds is expected to be about $18 (US) per pound (including an adjustment for inflation).
After the Russian HEU commercial agreement ends in 2013, we expect to maintain our sales volumes using a combination of sources including:
- increased production from various supply sources (including the rampup of Cigar Lake)
- normal-course purchases of uranium under existing and/or new arrangements
- discretionary use of inventories
We expect our purchases will result in profitable sales; however, the cost of purchased material is likely to be higher than our other sources of supply.
In addition, we will make spot purchases to take advantage of opportunities to place material into higher priced contracts. We make spot purchases prudently, looking at the spot price and other factors relating to our business to decide whether a spot purchase is appropriate. This activity gives us insight into the underlying market fundamentals and is a source of profit.
Managing contracts
We sell uranium and fuel services directly to nuclear utilities around the world, as uranium concentrates, UO2, UF6, conversion services or fuel fabrication.
Uranium is not traded in meaningful quantities on a commodity exchange. Utilities buy the majority of their uranium and fuel services products under long-term contracts with suppliers, and meet the rest of their needs on the spot market.
Our extensive portfolio of long-term sales contracts—and the long-term, trusting relationships we have with our customers—are core strengths for us.
Because we deliver large volumes of uranium every year, our net earnings and operating cash flows are affected by changes in the uranium price. Our contracting strategy is to secure a solid base of earnings and cash flow by maintaining a balanced contract portfolio that maximizes our realized price. Market prices are influenced by the fundamentals of supply and demand, geopolitical events, disruptions in planned supply and other market factors. Contract terms usually reflect market conditions at the time the contract is accepted, with deliveries beginning several years in the future.
Our current uranium contracting strategy is to sign contracts with terms of 10 years or more that include mechanisms to protect us when market prices decline, and allow us to benefit when market prices go up. Our portfolio includes a mix of fixed-price and market-related contracts, which we target at a 40:60 ratio. Fixed-price contracts are typically based on the industry long-term price indicator at the time the contract is accepted, adjusted for inflation to the time of delivery. Market-related contracts may be based on either the spot price or the long-term price as quoted at the time of delivery, and often include floor prices adjusted for inflation and some include ceiling prices also adjusted for inflation.
This is a balanced approach that reduces the volatility of our future earnings and cash flow, and that we believe delivers the best value to shareholders over the long term. It is also consistent with the contracting strategy of our customers. This strategy has allowed us to add increasingly favourable contracts to our portfolio that will enable us to benefit from any increases in market prices in the future.
The majority of our contracts include a supply interruption clause that gives us the right to reduce, on a pro rata basis, defer or cancel deliveries if there is a shortfall in planned production or in deliveries under the Russian HEU commercial agreement.
We are heavily committed under long-term uranium contracts through 2016, so we are being selective when considering new commitments.
The majority of our fuel services contracts are at a fixed price per kgU, adjusted for inflation, and reflect the market at the time the contract is accepted.