Operational results 1H2019 within expectations. Uranium sales in 1H2019 amounted to 11.5mn lbs which is 3% lower yoy. The lack of work at McArthur River and US ISR caused a decrease in uranium production by 6% yoy to 5mn lbs but the plan for the whole year, as we expected, is 9mn lbs. About 12.7mn lbs were purchased additionally, as a result the volume of produced and purchased uranium exceeded the 1H2018 indicator by 92%.
Financial results under the pressure of selling prices. Although in 1H2019 the average spot price for uranium increased by 19% yoy, due to a lower share of contract sales, price of which exceeds the market, the average Cameco selling price was at USD32.64/lbs which is 17% below yoy (CAD43.67/lbs -13% yoy). The unit cost of production was at the level of CAD28.63/lbs (-6% yoy). In this case the unit procurement cost exceeded the price by 10% yoy. The total unit costs were at the level of CAD34/lbs showing an increase of 8% yoy. In 1H2019 total revenue decreased by 11%, reaching $685mn. Cost reduced by 8% yoy. Gross profit margin decreased from 12% in 1H2018 to 9% in 1H2019. The company reduced operating expenses, which, however, could not dampen the growth of operating loss by 47% yoy to CAD43m. Net loss amounted to CAD41mn versus CAD22mn loss in 1H2018.
The fuel services segment is an additional locomotive of growth. As a result of the changes described above, the revenue of the uranium segment decreased by 16%, reaching CAD500mn. Gross profit fell by 80% to CAD20mln vs. CAD98mln a year earlier. In contrast, production in the fuel services segment increased by 24% yoy, sales increased by 38% yoy, the average price decreased by 11%, which was offset by a decrease in the average unit cost by 13%. Revenue in the segment of Fuel services in 1H2019 increased by 33% to CAD163m and gross margin rose by 33% to CAD40m.
China's bid for new nuclear power plants is a long-term driver for uranium. In 1H2019 uranium market looks better than a year earlier. The average price of uranium in the spot market at the end of 1H2019 formed at the level of $24.6/lbs having consolidated at 8.6%. The average contract prices at the end of June were $31.5/lbs against $29/lbs in June 2018. More than 50 reactors are under construction, the connection of which will inevitably lead to an increase in demand for uranium. The fastest growing atomic energy market today represented by China continues to expand. At the beginning of 2018 in China, 37 reactors were operating, during the last year, 7 new nuclear reactors with installed capacity reaching 8.84mn kW (NEA) were commissioned. To date, 45 reactors are operating in the country with a total installed capacity of 45.9mn kW, and 11 power units are under construction. In 2020 China expects to reach the total installed capacity of nuclear reactors at 88 gigawatts, in 2030 - 120 gigawatts, and by 2050 reach 491.3 GW.
Reducing the risk of restrictions on the import of uranium in the United States. Positive for Cameco is also the decision of the President of the United States following the results of the Investigation 232, the results of which decided that no new trade restrictions on the import of foreign uranium into the United States are required. This news does not make any changes in Cameco export indicators, but positively perceived by the market due to the absence of negative consequences.
Results 1H2019 do not make changes to our forecasts. Based on the actual supply contracts for 2019 Cameco increased its revenue plans for 2019 from the previous CAD1650-1800mn to CAD1730-1880mn, which is in line with our expectations. Revenue forecasts are based on a spot price of uranium at USD24.70/lbs a contract price of USD32.00/lbs and an exchange rate of USD1.00/CAD1.30. The company still expects to meet the $Cdn110-120mn of administrative expenses and $Cdn13mn of the costs of geo exploration, not expecting a lot of activity in current projects. Capital expenditures also remain at the previous planned levels of CAD95mn.
Restarting McArthur River is a major source of operational risk. Despite the fact that in its technical report Cameco makes an assumption on restarting McArthur River by early 2020, the company’s management notes that “there is a long way to go before it is advisable to restart work at the mine”. We agree that current uranium price levels have not yet reached comfortable levels. Over the next three years, we expect more favorable conditions that will help to resume production at the McArthur River mine by 2022. For another large field, the company's 9mn lbs of uranium production at Cigar Lake coincides with our forecasts for 2019. We estimate the subsequent production dynamics at Cigar Lake as stable at about 9mn lbs. until 2026 and we expect a decline to 8.4mn lbs and 1.7mn lbs by the end of the service life in 2026 and in 2027 based on the expected total uranium mining on the project over the entire service life (2016-2028) at 109mn lbs. of U3O8.
