Cameco: Playing Pinocchio or Pangloss (CCJ)

Cameco Corp. (NYSE:CCJ) did something interesting, and it’s a move that most companies do when they aren’t happy about a reaction to a news release.  This morning the company issued earnings at $0.55 EPS, well above consensus estimates.  But the Uranium producer’s guidance was deemed under plan for 2007.  The problem with this is that the company apparently did not believe that its guidance was going to be received in this manner. Then tonight came the ‘clarification press release.’

If the company thought it was going to have a positive reception to the news, then it wouldn’t have made a clarification press release tonight. 

.….While future sales levels were reduced in our assumptions about forecast realized prices, this is not expected to significantly impact our profitability….. During the call, the company provided some background information regarding the updated sales volume assumption for the 2007 to 2017 period. The sales volume assumption in the 2007 first quarter report was 35 million pounds per year for 2008 to 2017. In our 2007 second quarter report, the sales volume assumption was reduced to 30 million pounds per year to eliminate the influence of near-term spot market purchases and subsequent resale…….

You can read the press release here on the next page break for the full data.  The problem with ‘clarifications’ such as this is that it is often symptomatic of ‘corporate communications.’  I fear that this may be taking hold as a culture in Cameco and this is the major Uranium stock play.  I have listended in on the conference calls regarding the Cigar Lake flooding SNAFU, and it just seems from an outsider’s point of view that the company either isn’t doing enough of the right things or that the company has lost control of being able to communicate its message.  The call-in questions and ‘criticisms’ seem to be escalating in tone from the sound of it, and a falling stock price won’t curb that. 

Selling product into the future at fixed and locked-in prices is quite normal.  Making production guestimates is quite normal.  Even making commodity market price assumptions is somewhat normal.  But sometimes it goes wrong.  This stock is closer to its yearly low, but the truth is that this would still easily be considered in the middle part of its 52-week trading range.  The problem regardless of the last year is that the company has seen shares slide from $55 (U.S.) down to the $40 area most recently over the last 45 days. 

Clarification press releases are needed sometimes, but it makes you feel sometimes like the company is trying to do what kids do in games.  "DO OVER!"  This company is the largest play on the Uranium market, and with thousands of shareholders and a hot market for its key commodity it would be in the company’s (and its shareholders’) best interest to communicate better or be in a bit better control than it has been.

The excitement has left this one too because of delays from its flooding of its Uranium project at Cigar Lake: In early July, Cameco announced that the startup of Cigar Lake production could be delayed from 2010 to 2011.  Shares were indicated higher and the ‘clarification’ may help shares onTuesday.  It is just not that frequent that a company worth more than$10 Billion has to make clarifications.

Please see the NOTES REFERENCED ON PAGE 2 at the bottom here showing the descriptions of all of its giuidance remarks from the press release.

Jon C. Ogg
July 30, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.

NOTES REFERENCED ABOVE

Outlook for Third Quarter 2007

We expect consolidated revenue for the third quarter of 2007 to be about 10% higher than in the second quarter. This is primarily due to anticipated higher sales prices for uranium and electricity. Reported sales volumes for uranium are projected to decline relative to the second quarter due to normal variability.

Projections for the quarter assume no major changes in the ability of Cameco’s business units to supply product and services and no significant changes in our current estimates for price and volume.

Outlook for the Year 2007

In 2007, Cameco expects consolidated revenue to grow by about 40% over 2006 due largely to higher revenue from the uranium business.

In the uranium business, we now expect our reported revenues to be about 75% higher than in 2006, due to stronger realized prices under our contracts relative to 2006.

We anticipate that revenue from the fuel services business will be nearly 5% higher than in 2006 due to an anticipated increase in the average realized selling price. Reported sales volumes are expected to be about 5% lower than in 2006.

At Port Hope, full production of UF6 will likely be suspended for a minimum of two months until Cameco has determined the source of the previously disclosed uranium and chemicals found under the UF6 plant and we have developed appropriate remediation plans. We will provide a revised conversion production forecast once this work has been completed. Uranium dioxide (UO2) conversion and other activities at the site are not affected.

BPLP revenues in 2007 are projected to be about 7% higher than in 2006 due to higher expected realized prices. This outlook for BPLP assumes the B units will achieve a targeted capacity factor in the low 90% range.

In 2007, Centerra’s gold production (100% basis) is now expected to total between 550,000 and 560,000 ounces compared to Centerra’s earlier forecast of 700,000 to 720,000 ounces. The reduction is due to an expected production decrease at the Kumtor mine to 300,000 ounces from 450,000 ounces, due to the decision to change the angles of the pit wall. Centerra’s gold production from its two mines totalled 587,000 ounces in 2006. Gold revenue is expected to be similar to 2006 primarily due to higher expected realized gold prices.

The financial outlook noted above for the company is based on the following key assumptions:

– no significant changes in our estimates for sales volumes, purchases and prices,

– a uranium spot price of $120 (US) per pound, reflecting the Ux Consulting spot price at July 23, 2007,

– an average gold spot price of about $650 (US) per ounce,

– no further disruption of supply from our facilities,

– no disruption of supply from third-party sources, and

– a US/Canadian spot exchange rate of $1.05.

For 2007, the effective tax rate is expected to be in the range of 10% to 15% compared to 6% in 2006. Our effective tax rate varies from the Canadian statutory tax rate primarily due to differences between Canadian tax rates and rates applicable to subsidiaries in other countries. This range is based on the projected distribution of income among the various tax jurisdictions being weighted less heavily toward foreign subsidiaries compared to 2006.