Cameco Corporation (CCO) Earnings Call Transcript & Summary

Good afternoon, good evening, and good morning to our listeners from around the globe. I'm Lawson Winder, BofA, North American Metals and Mining Research Analyst. It is my pleasure to be hosting on this call, Cameco Corporation, Senior Vice President and CFO, Grant Isaac. Now I would like to note to the audience that the audience, not us, has control of the presentation slides scrolling. So we will refer to the specific slides that we're speaking to. And before Grant and I begin our discussion and I take questions from the audience, I would like to invite Grant to say a few words. Grant, over to you.

Yes. Thank you, Lawson, and welcome to everybody. Thank you for your interest in the uranium space and the Cameco story. Obviously, getting to questions is a top priority for us. There are always good ones coming from Lawson. But we did provide just a few slides that I might refer to in the spirit of some opening comments, and I'm really only going to refer to Slides 3 and 4. On Slide 3 that we sent around titled Uranium market. The main point we're trying to convey there is right now, on the back of years of planned supply discipline, we're now being confronted with unplanned supply disruptions, largely driven by COVID, of course. And yet the risks that are created to the supply of nuclear fuels seem to exceed the risk to the demand for nuclear power. And so on balance, we're seeing a market that has transitioned upwards. Spot price, some 40% increase just in a few short weeks here as folks deal with the reality of the supply challenges, both planned and unplanned. In the face of a demand that had been strong for us prior to COVID and actually remains resilient due to a number of important key attributes of nuclear power. So for us, on balance, that's obviously a good situation to be in. When we think about the unplanned supply disruptions, notably, our Cigar Lake asset in Northern Saskatchewan put into care and maintenance because of public health concerns to deal with COVID. Obviously, Kazakhstan has had some issues as well and has announced some supply disruptions. When we think about the recovery from those supply disruptions, it's much like the broader conversation about the entire economic opening from the disruption created by public health. There are 2 main questions, and that is: What is the date of any restart of those assets? And then what is the rate at which those assets come back? And those decisions will be a function of public health realities that will really determine whether -- when the date is that it restarts. But also it will play a role in determining the rate at which the assets come back because it will be a function of ensuring proper protections at the operating sites for folks. And then, of course, you would expect a producer to also think about the market conditions, under which they're bringing back those assets. And so probably a few comments, and I'm sure Lawson will have some questions in that area. But for us, right now, Cigar Lake remains in an indeterminant shutdown mode, our JV Inkai asset in Kazakhstan. As part of the broader Kazakh response was that 3-month supply disruption that largely revolves around well field development. So a recovery of that process would have to happen before you'd be able to resume the production rates there. The next point on concentrated supply, geographically and geologically. It's just to point out that when we go through times of unplanned supply disruptions, it does highlight for our industry. And for those who rely upon the industry for nuclear fuels, that through the years, we've seen a significant degree of geographic and geologic concentration in the supply of uranium. And so an upset at any one location ends up having a fairly big impact on the overall industry, because there are so few players and so few sources of supply. But in addition, I think there's a COVID element to that as well. And it's a reminder that some of the supply disruptions are occurring in jurisdictions that might not have the same level of public health infrastructure, or social safety net infrastructure, or have the same governmental firepower, fiscal firepower, if you will, to deal with the disruptions and the economic impacts of a public health crisis. And so it does highlight that not only is it concentrated and upsets are quite significant, but that the ability of all the jurisdictions that produce uranium to recover and deal with these issues, it's probably not equivalent either. So that's obviously factoring in to some of the thinking, exacerbated probably by continuing trade concerns. You've heard over the years that there's been a push to challenge the role of state-owned enterprises in the supply of nuclear fuels. The U.S. has looked at that through the Section 232 process and then through the nuclear fuel working group process. More specifically, the United States continues to look at that through the Russian Suspension Agreement administrative review. And that raises the prospect that the market may evolve or tilt towards a preference for commercial suppliers of nuclear fuels, or at least some markets might tilt toward that in order to decrease reliance upon state-owned enterprises. So there is that overhang of national security or geopolitical concerns in there, and those continue. And they simply add to the uncertainty that comes when you already have unplanned supply disruptions. So we sort of look at the situation right now at an industry level, and we say, well, at a minimum, what's going on is accelerating the destocking that was occurring anyway. It's accelerating the need to consume the excess materials that were in the market. At a maximum, could this be one of those unplanned supply disruptions that actually trigger a procurement cycle? And that really is the question, for which it's not yet clear what the answer is. But important to, sort of, put it in that context that, at the very least, what's coming out of this is a continued destocking of global inventories and, therefore, leaving the market even tighter for when a procurement cycle does begin. Just a couple of comments on the spot market. We've obviously seen a very rapid move in the spot price. I would say it's been fairly broad-based. The main driver there has been producer buying. And I guess there's no surprise when you have a planned production scenario against committed deliveries and obviously, production goes down, you're going to have to source that material. So it is Cameco. Most folks know, we're the world's largest spot buyer at the moment as part of our normal strategy. Now obviously highlighted by COVID, we just simply have to buy a little bit more. But of course, we have partners in our assets that probably find themselves in a position of needing to cover their committed sales. And there are joint venture partners in the Kazakh assets that probably also need to do that. So there's been some producer buying. There's been some direct utility buying, probably some indirect utility buying through intermediaries as well. And that's more focused on sort of the discretionary volumes that they would be looking at. The market's gone through a couple of phases where it initially jumped from $24 to sort of $27-ish. And then consolidate a bit to test whether that was a real move, and then it moved up by another $3. And today, I think we're seeing another one of those stair steps where we're into May. We've been through 2 big months' ends in March and in April, and the spot market did not move backwards through those month ends. And so a bit of consolidation now, but ultimately, the main theme is unplanned supply disruptions added to the planned supply discipline, and the market is just simply feeling tighter. I would just comment on the term market. Some folks have asked us recently, where's the term demand? How come it hasn't shown up yet? And I would just say, it takes time for term demand in our industry. It takes time to see it come to the market. It takes time to negotiate it. So I would say I'm rather not concerned at the moment that the term demand hasn't followed as quickly as the spot demand has. And I would say there's probably 2 main reasons for that. The first is our customers, globally, are not immune to COVID themselves and have implemented their own pandemic plans and their own business continuity plans and are -- have spent time making sure they have line of sight to the critical nuclear fuels that they need to power their reactors, and a bit of a triaging of their supply chain, I guess, is probably a way to look at it. So that obviously would distract a little bit from future procurement as they lined up the material and making sure that it was there. But the second one is when the market moves as quickly as it does, it also takes away some of the producer urgency. I mean, as many folks know, we had a successful year in 2019 negotiating new term contracts off-market, some 36 million pounds added to our long-term contract portfolio. In February of this year, during our Q4 results, we talked about how we had more pounds under negotiation in our pipeline from origination to execution than we've had for many years. So obviously, we have been enjoying term demand conversations. And now suddenly, 6, 8 weeks later, we find ourselves in a much more favorable environment, where you have a spot price close to $34. You have a 5-year price touching $40. It is a more favorable environment for us, and one that takes away our urgency a little bit. Some of the estimates for the amount of term demand that would come to the market in 2020, hovered in that 100 million pound range. And here we are in mid-May, we've seen very little of it. And to the extent that, that demand is still there, it's going to be compressed in a much tighter window in the second half of the year. So obviously, that's an industry perspective that we think bodes well. I'm going to just quickly flip over to Slide 4, just a reminder of where we fit in. But in the interest of time, let me just put it this way. Because we've been on this supply discipline strategy, with this demand action to go with it to meet our committed sales portfolio, backed up by a very conservative financial approach that finds us in a negative net debt position, over $1 billion cash on our balance sheet, we actually encountered a public health crisis in an extraordinarily good position. And the public health crisis, as much as we wouldn't have wanted to see it, actually lends itself to the commercial objectives that we were already setting out to deliver on, and that is the destocking of the inventory in order to prepare for a procurement cycle. So maybe I would just say, on Slide 4, that we're very well positioned within the market and very well positioned to also deal with the uncertainty that comes with the public health crisis as well. So just a couple of slides to provide some opening comments. And Lawson, maybe over to you to ask some questions.

Okay. That was an excellent presentation, Grant. I think you covered a lot of the big questions on investors' minds and a lot that are on mine. But of course, there's always more. I think what I'll do is actually just start right off with a question from the call, because there's actually been several questions from the call along these same lines, and that is, basically, do you worry that Kazakhstan is going to restart or rather ramp back up their operations to full capacity far before everybody else, and thus any shortages will just be met by that?

I think it's -- probably the first comment to make to that is Kazakhstan will restart. It will get past the COVID issue. And it will resume well field development. And it will get back towards its stated objective, which is to produce, at a nation, at 20% below the subsoil use agreements. So that's the path that they were on, a lot of discipline being shown by Kazatomprom. COVID made the production cuts deeper, for sure. I think it's a virtue of certainty that they will put operating people back on the sites and develop well fields. It's the same question for Cigar Lake. So it's the date at which that happens, and it's the rate at which that occurs. And so we listen very carefully to what our partner at JV Inkai, but also our competitor, Kazatomprom says about their operations. And clearly, they have laser focused on health and safety, and I think that's going to be a very important determinant of what they can accomplish. They originally said 3 months. They haven't changed that. So that would suggest kind of midyear, they might start having operating folks back on site. So the question is, do we worry about it? Well, to the extent that Kazatomprom has been acting with a strong commercial acumen, we think that they probably understand that as stewards of a very important national asset, they can create more national value by being disciplined rather than the alternative that you framed where they just get back to producing a bunch of material, more material than they require for their own committed sales, and are either inventory in material and creating an overhang, or leaking it out maybe through their joint venture partners into the market to be sold through intermediaries, that's not a way to create national value for them. And I think probably the speed at which the spot market has moved, and quite frankly, their leverage to that spot market has empowered the very strong leadership team at Kazatomprom, to understand that their best pathway to creating good, sustainable national value is actually to be disciplined as opposed to undisciplined. So worry about it? No. We factor those decisions into our own decisions. But it's certainly something to be aware of. And I wouldn't want anybody to think that they're not going to resume production at some point.

Okay, thank you very much for that. And thank you for those questions as well. Maybe to look at this from a sort of higher level governmental point of view. And I guess you kind of touched on the government aspect of the industry, which is always pervasive. But with a lot of Russian nuclear build contracts, as an example, there are also a lot of long-term uranium fuel supply contracts that then would preclude competitors from accessing that contracting market. I'm just curious your views on how important it is that U.S. and Canadian and perhaps, other European and western companies build the reactors in order to assure access for Cameco and other western producers. And it's more of a long-term question, really.

Yes, it's a great question. And I actually might put a slightly different spin on it, Lawson, because for us, it's a global market. It's a market where there are a number of countries who champion in nuclear new builds. Some of them want a supply of uranium at the time that they win the vendor contracts to install the nuclear reactor. So there's no doubt about it. And so far, the model in Russia has been to design, build, in some cases, operate, but in many cases, fuel the reactors. But looking ahead, it's not clear to us that the ambitions to build out the nuclear fleet, both domestically and internationally by someone like Russia, for example, can continue to carry with it the promise that they will fuel it unless, of course, the Russians themselves enter into long-term supply agreements for the underlying uranium. I just don't see their ability to do that. So in the past, that's never been a market for western commercial suppliers of uranium. I'm not sure -- so sure that's the case going forward. So as I look down the road, I think the opportunities to be a part of those vendor programs, whether they're Russia or Chinese, South Korean, actually may be available in the way that they tend to be available with the Western reactor builders. But your point is a good one as you look at it through the lens of -- remember, we have folks who are on the supply side of our business for whom that's not their priority. The priority of the Russian nuclear enterprise is to build and operate reactors and probably to build them out globally for geopolitical reasons. Their money is not made in the fuel cycle. Their money is not to be made in uranium. And so you see that tension, and that tension is at the heart of The Russian Suspension Agreement discussions in the United States, for example, the trade policy. Here, you have an actor that actually has a bias towards lower fuel prices, or better economics of nuclear power as they sell their reactors. And so I talked about the trade policy tensions. And the effort there is to levelize the playing field, to say that as Russia does it, as China increasingly wants to move into that area, we just have to make sure that those state-owned interests that are integrated, that don't play by the same balance sheet rules, but a commercial supplier does and who deliberately, actually, want to see lower front end prices as part of the broader integrated nuclear business are dealt with on a fair and reasonable basis. And that's why we don't think these trade policy concerns are going away any time soon. So I hope I didn't take it too far off on a tangent on that one, Lawson.

Not at all. I think you hit on the general concept of the question. I think it was a great response. There's another from the audience that I think I'd like to take at this point, as it does come up in conversations with investors for me a lot, too, I think it is relevant. Basically, it's along the lines of your U.S. assets. We've seen the white paper come out, which is clearly indicating an intense level of support for the current administration for the nuclear industry in the U.S. Basically, the question is under what condition would you restart those assets? And do you see that white paper as bullish for your U.S. assets?

Well, it's a good question because there's absolutely no doubt that the nuclear fuel working group report said very positive things about nuclear power in the United States, and very positive things about the need to have reliable sort of Western supplies, U.S. supplies of nuclear fuel, both for defense purposes, but also kind of in that strategic fuel supply, so that utilities in the U.S. have the comfort of knowing they had reloads available and material available, if the world ever got into a situation where suppliers retreated to their own national corner, and it wasn't available to the U.S. So very positive things to be said there. But on the other hand, very little clarity on actually how to get there. And so what I've always found interesting is the U.S. has now had a couple of opportunities to take really decisive action at the executive level. So Section 232, of course, tariffs and quotas, were the tools that were on the table, chose not to use them. Nuclear fuel working group. One of the proposals that was in -- some of the proponents they'd put in all along was that, well, maybe the U.S. should harness the Defense Production Act, which everybody is familiar with, now that we've had COVID, and have seen it be deployed for the meatpacking plants and potentially deployed for ventilators, could be deployed to purchase U.S.-origin uranium. And again, that would have been kind of an executive decision that wouldn't have required anybody else to support it. But in both cases, that decisive action was not taken. And instead, proposals were made that require legislative action. It requires Congress to get involved in this. And when we just sort of step back and look at the challenges with achieving some of those legislative wins, and we see a report that's very positive, short on specifics and therefore, absolutely not the basis to make any decisions about restarting our U.S. assets. You wouldn't restart it for 1 years' worth of funding to buy some U.S. uranium. But yet, it's not clear that they're going to have an ability to secure 10 years' worth of funding to buy a material amount, which in sense, a restart. So lots of things that were said that were positive, but the lack of specificity, it makes it challenging to make any commercial decisions.

And just a follow-up to that, what -- assuming they were to get that funding for 10 years and were to buy U.S.-sourced uranium, I mean, is that not bearish for the supply-and-demand picture?

It would be new demand, think of it that way. It would be demand that, at the moment, kind of isn't factored in. So that would certainly add to kind of the bull case that you would end up having new demand come into the market and compete with us, as we're looking to buy material for our committed sales portfolio. It would compete with utilities. So on one hand, it could be positive. The bear argument is actually the familiar one in the U.S. because remember prior to the nuclear fuel working group, prior to Section 232, the U.S. uranium producers, we're actually arguing the exact opposite that they're now arguing. It was -- the worst thing in the world is that the DOE has this inventory and they make it available to the commercial markets, and there needs to be really strong legislative protection to prevent them from selling material into the market. And government should never have inventories because they can't be trusted with them, and that's damaged commercial interests. And here you have the exact opposite now being argued. Oh, the best thing that could ever happen is if we allow the DOE to build up another inventory. And so for us, it's a little bit of a challenge. That's probably what adds to the bear case. Because the last time we saw the DOE with an inventory, we had to deal with the barter program and material coming out of it and actually negatively impacting the commercial market. So you would want upfront to work very carefully to make sure that if there was this new demand to procure material that was U.S. origin, it is absolutely sequestered and can't be flopped back into the commercial markets at a later date because that wouldn't be very helpful. That will have just created a structural increase in production that wasn't required.

I think that's a great perspective. We tend to agree. A question for me, and it's a bit philosophical, but it is one that I've gotten often over the past several years, and that's just regarding the CFA (sic) [ CRA ]. I mean, does it sound strikes you as odd that a branch of the Canadian government, a government that helps promote Canadian nuclear technology abroad, would then seek to disrupt Cameco's success in a way by attacking what's a perfectly legal tax structure? I mean, to me, it seems like there's a big disconnect there. And I'm sure you guys have thought about it a lot. I'd be very curious to hear your thoughts on that.

Yes. I actually have to be careful here. Our CRA dispute has been going on for quite a while. We -- as everybody knows, we received 100% victory at the tax court level, and the CRA decided to appeal it. And we've been through the appeal process now. We're just waiting to hear from the Federal Court of Appeal judges on that. And we feel very good about how that appeal went, how our arguments went. And we think that we were unsurprised by any of the arguments we were confronted with by the Crown. And so we think there's no reason to overturn the Owen decision. But obviously, we're waiting for that process to come out. To your broader question, obviously, it's a source of frustration for us. We do view ourselves as a Canadian champion on the ESG front, a Canadian champion on our commitment to indigenous communities, a Canadian champion in our global reach. And the fact that we're an important player in an industry where 100% of our products go to carbon-free power, and that's supposed to be a good thing right now. But I guess I probably have to draw up a little before I get too frustrated because the reality is the government isn't just, sort of, my observation, one big monolith that thinks the same. We seem to be dealing with a group that has very little understanding of how multinational corporations work. Justice Owen would conclude they have very little understanding of their own Income Tax Act and kind of threw out -- as he threw out all of their arguments. So I just -- I don't think it's a coordinated anti-uranium, anti-Cameco thing. But instead, a group who says, regardless of the law, we don't think the outcome is fair and want to reserve the right to go back and reassess on the basis of hindsight, which, of course, the major problem there is that's not what the law says. So I would just draw it up and say, yes, there is a disconnect. But I think the disconnect is because the federal government is big and different people have different ideas. And I don't think anybody's step back and said, what is the implication of pursuing this retroactive ability to reassess companies and the chill that it would create? I mean, think about the message. Come to Canada, invest in Canada, put your money to work here, but just run the risk that the CRA, at any point in time, could change its mind about how it reassesses you. It can hit you with reassessments, tie up your financial capacity while you're in that dispute. And oh, by the way, they're going to grab all your foreign income, too, that has nothing to do with Canada and bring that into the dispute as well. I mean, that just sends such a chill at a time when we're supposed to be wanting to attract foreign investment. So there is a disconnect. There absolutely is, and it is -- yes, it's a source of frustration for us.

That was a tough question, and I appreciate the answer. I think you answered it well and fulsomely. Unfortunately, though, we have reached the end of the scheduled presentation time. So I think I'd like to take this opportunity now to thank you, Grant, for being here, participating in the conference. And I'd also like to thank the audience for your interest and all your questions today. All the best.

Yes. Thank you.

Bye-bye.