Cameco shutdown extended indefinitely

Thursday, 26 July 2018

Gitzel's announcement accompanied Cameco's second quarter results, which Gitzel said reflected the impact of a weak uranium market and actions taken by the company aimed at increasing long-term shareholder value.

"We continue to expect to generate strong cash flow this year as we draw down inventory and focus on operating efficiently. However, we have not seen the improvement needed in the uranium market to restart McArthur River and Key Lake," Gitzel said.

"This means we will extend the suspension of production at McArthur River and Key Lake for an indeterminate duration."

Gitzel said the decision had been a difficult one, since it will result in the permanent layoff of about 550 site employees, including those temporarily laid off since January, as well as a reduction of about 150 positions at the company's corporate offices. A reduced workforce of around 200 employees will remain at the McArthur River and Key Lake sites to keep the facilities in a state of safe care and maintenance. Cameco's share of the care and maintenance sites are expected to be between CAD5-6 million per month once the layoffs take effect.

Cameco's joint venture partner Orano has agreed to extend the suspension. The deadline for Orano's repayment of up to up to 5.4 million pounds of uranium concentrate to Cameco has been extended to 31 December 2023.

"We believe our assets are among the best in the world, and we will continue to show the type of leadership needed to position the company to add significant value over the long term," Gitzel said. "We will not produce from our tier-one assets to deliver into an oversupplied spot market. Until we are able to commit our production under long-term contracts that provide an acceptable rate of return for our owners, we do not plan to restart.

"As 2018 unfolds, we will continue to evaluate the market signals. However, we remain resolved in our efforts to maximize cash flow, while maintaining our investment-grade rating so we can self-manage risk and preserve the value of our tier-one assets," he added.

Cameco in November announced its plans for a ten-month temporary suspension of production from the McArthur River mining and Key Lake milling operations. In December, Kazakh uranium producer KazAtomProm announced plans to cut its uranium production by 20% for three years beginning in January 2018, to better align output with demand.

Market turnaround ahead

The uranium market has long been acknowledged to be in a state of oversupply, with material entering the market from commercial and government inventory, byproduct production and enrichment plant underfeeding, and producers largely shielded from falling prices by long-term contracts concluded when prices were higher. Uranium resources remain plentiful, but the investment needed to bring resources into production depends heavily on the market.

Reacting to Cameco's announcement, Australia's Vimy Resources Ltd said Cameco had taken a leadership role in a difficult uranium market.

"The closure of a single mine of the size of the McArthur River operation, which produces 18 million pounds U3O8 per annum, highlights the need for utility customers to diversify their supply of uranium oxide from sources such as Vimy," it said.

Vimy, which recently completed the acquisition of the Alligator River uranium project in Australia's Northern Territory from Cameco Australia, is continuing to develop Mulga Rock in Western Australia with a view to first production in 2021, "at which time the market is forecast to reach a sustainable price point”.

Canadian mining company NexGen Energy said Cameco's announcement had been the "correct call", driven by economics.

"This is hugely constructive for the supply-demand fundamentals and is representative of the state of the industry which is in a structural crisis. Incentive pricing for current mines is orders of magnitude higher than the current market price and has been the case for many years," it said.

"The overall result of this shutdown is that it indefinitely removes 11% of global supply while simultaneously requiring Cameco to source that amount of material from the market to fill contracted sales positions putting a tremendous strain on a market which already appears in deficit," it added, noting that an estimated 25-30% of global supply has been removed from the market since 2016.

"Again, the significance of this action taken in terms of its beneficial impact on the supply-demand fundamentals cannot be overstated," NexGen said.