Cameco's series of unfortunate events

Cameco's series of unfortunate events

ANDY HOFFMAN, Toronto Globe & Mail

24th July 2007

Management at Cameco Corp. took on a firestorm of criticism yesterday, as a triple-whammy of adverse events shook confidence in the Saskatchewan uranium giant, not only among investors but also at Canada's nuclear regulator.

Last Friday, Cameco disclosed it was suspending production at a nuclear fuel conversion plant in Port Hope, Ont., for at least two months, after discovering soil contaminated with uranium.

News of the leak sent Cameco shares down 6.5 per cent yesterday, adding to declines suffered last week when the Saskatoon-based company said annual production from its gold subsidiary would be cut by a third and that delays at its Cigar Lake uranium mine would be at least a year longer than previously thought.

"Management is addressing, as it should, each one of these unfortunate events. Timing makes it look like there is a failing, but I can assure you, people are working overtime on these issues," Cameco president and chief executive officer Jerry Grandey said in an interview.

"They are serious about it. They're serious about not only defining them, but making sure that everybody in the world is fully aware of what's happening. And they are just damn serious about making sure it is remediated," Mr. Grandey said.

The head of the Canadian Nuclear Safety Commission (CNSC), Canada's nuclear industry regulator, recently said her organization has lost faith in Cameco management, following flooding at the Cigar Lake mine.

"One of the very serious results of this is a lack of confidence that now the CNSC, the Commission and the staff has in Cameco and in the leadership of Cameco," CNSC president Linda Keen said at a public meeting with management on June 21 in Ottawa.

During the meeting, Ms. Keen took issue with Mr. Grandey's suggestion that there were a number of root causes for last October's devastating flood at Cigar Lake, which was expected to account for more than 10 per cent of the world's uranium production.

"Mr. Grandey, with due respect, saying that there wasn't one root cause, and I think there was a root cause. I think there was a root cause of leadership and I think it's leadership that we all accept at the top of organizations for what happens in this," she said.

Yesterday, Mr. Grandey conceded that Cameco has plenty of work ahead to restore relations with the CNSC, which oversees and approves nearly all of Cameco's operations.

"A Cigar Lake event is bound to diminish confidence. ... What management at the most senior level and at all levels of the organization must do, is step-by-step and day-by-day, do things in a way that help restore that confidence," Mr. Grandey said.

Some investors are also starting to raise issues with Cameco and its constant stream of bad news.

"It's unbelievable, in general, how much the major uranium mining companies of the world like Cameco are disappointing. It's truly unbelievable. It's like the industry is cursed," said Kevin Bambrough, market strategist at Sprott Asset Management Inc.

Although it has invested heavily in the uranium sector as prices for the metal used to fuel nuclear reactors have soared, Sprott no longer owns Cameco shares, Mr. Bambrough said.

Testing at the Port Hope facility, which converts mined uranium into uranium hexafluoride, revealed uranium and other associated chemicals in the ground beneath the plant. Cameco said public health and worker safety are not affected, but the facility will be closed for at least two months, while further testing is conducted.

Barclay Howden, a CNSC official in Ottawa, said the regulator has sent two teams to the Port Hope site and is getting daily updates from the company.

"Our patience is being severely tested, as is, we expect, the Canadian Nuclear Safety Commission's," said TD Newcrest analyst Greg Barnes in a note to clients.

Mr. Barnes is continuing to rate Cameco shares a buy, but reduced his target price from $65.00 to $62.00. Lower production at the Kumtor Gold mine in Kyrgyzstan, operated by Cameco's 53-per-cent owned subsidiary Centerra Gold Inc. is beyond Cameco management's influence he said, but "the delay at Cigar Lake and the problems at Port Hope are within management's scope. We believe that Cameco's share price will be overhung by these events for some time until it becomes apparent that better controls are in place," Mr. Barnes said.

RBC Dominion Securities analyst Fraser Phillips said Cameco's conversion business accounts for roughly 5.5 per cent of its profit. "While the announcement is clearly negative for Cameco, we have not revised our estimates at this time," he said in a report. Cameco Corp.

Cameco's curse?

April, 2003
Flood at McArthur River mine halts production for three months, costing the company $23-million.

April, 2006
Flood at Cigar Lake project boosts costs more than $100-million and delays the project by an estimated six months.

October, 2006
More flooding hits Cigar Lake, delaying production by at least another year.

May, 2007
An independent report into the Cigar Lake accident places blame for the flood squarely at management's feet.

July 19, 2007
Cameco's gold subsidiary Centerra Gold Inc. says 2007 production will be slashed by one-third because of continuing problems at its Kumtor mine in Kyrgyzstan.

July 20, 2007
Cameco discovers uranium and other chemicals in the soil at its conversion plant in Port Hope, Ont.'