Cameco Corporation (CCO) Earnings Call Transcript & Summary

Hello, and welcome. I'm Lawson Winder, BofA, Canadian Metals, Mining and Steel Analyst. Joining me today is Grant Isaac, Senior Vice President and CFO of Cameco. Grant, it's a pleasure to have you here today. Welcome.

Yes. Thank you, Lawson. Delighted to be here.

So I'd like to mention to the audience that should you have any questions, they can be submitted through the Veracast panel, and then I can read them out to Grant.

And so Grant, I think I'd like to start off with a question on decarbonization and nuclear, sort of set the stage for where it all begins in the nuclear fields or where it all ends rather in the nuclear fuel cycle. So you've said in the past that the adoption of net 0 targets are a potential game changer. Obviously, as these targets are achievable without any nuclear power, but yet, tax breaks and financial incentives to keep nuclear reactors online are hotly debated and sometimes don't materialize. So western governments have seemed to put a premium on how to achieve net 0 preferring wind and solar as opposed to actually achieving those targets by incentivizing nuclear plants to continue operating. And I'd just like to see if you see the situation changing at all.

Yes. Great question to start with, Lawson. Thank you. And I probably should not going to plow anybody through slides. So -- but I probably should make a little bit of a statement that I may include some forward-looking expectations. So just asking people to review our MD&A and our AIF for information on the material risks that could make the actual results differ from those expectations. So you've heard us say for some time now that one of the interesting developments for us in our business is this improving nuclear outlook. And we've even gone so far as to say there could be a profound durability to at this time, that may have escaped nuclear renaissance in the past. And what we're actually referring to is exactly where your question started, which is these net 0 targets, which are the mechanism to actually achieve these clean air objectives that we're seeing. And certainly, it's exciting from a policy, a traditional policy point of view, country after country, recognizing that decarbonizing the grid and the electricity system must include nuclear. It's an inevitable conclusion that you can't get there by throwing nuclear out of the box. But I think what's different this time, and it's a really important fact is while in the past, the renaissance, if you will, required policymakers to be on side nuclear. And of course, then it was subject to the whims of the policy process. It was subject to the public acceptance and the public approval and the fact that policymakers can come and go in election cycles. What's different this time is I mean the count is growing. It's in excess of, what, 1,500, 1,600 companies that now have net 0 carbon targets of their own. And what that drives is a resilient electron accountability because it's no longer good enough for the biggest electricity users to say, "Oh, we're just energy takers." We didn't put the grid in. So it's not our responsibility, but we know with net 0 carbon targets those users are accountable, and they are asking profound questions about the grid that they're pulling their electrons from. They're chasing those questions back up to the grid and really challenging the basis on which policymakers are making these decisions. So now we've got sort of this second front opened up where it really is the private sector that is saying, the grid has to be clean. If you're plugging electric vehicles into a dirty grid, what are you really achieving? If you're creating hydrogen from a dirty grid, what are you really achieving? So where are the electrons coming from? And it's that accountability that we think is different this time, and it's creating a durability. And I think you did an important piece of work not too long ago, where you actually pointed out that, that electron accountability of course, it improves the nuclear outlook in the longer term, but it's actually improving the nuclear outlook in the midterm as well as the near-term as well because if policymakers, for example, driven or pressured by those who are responsible for the electrons, realize that saving the reactor fleet you have today is a pretty important part of achieving your clean air goals in the future. That's demand today. That's taking a reactor that might have been looking at an early shutdown, putting it back on a more certain and predictable path and bringing real demand associated with that reactor into the near term. So I think about some of the reactor situations in the U.S., and I think your work on that really highlighted it. In France, you're kind of talking about the midterm story. EDF confirming 32 reactors going to run 2025 to 2035. Now I don't think anybody believed they were going to shut them all down. But that opens up demand that wasn't in the market before. And then, of course, the longer run is the new build, the new build that's being attached with the carbon targets. Just -- and I just have to highlight it, China's alone, by 2060, net carbon 0 nuclear's contribution 200 gigawatts, maybe doesn't sound like a lot until you remind yourself that's 200 nuclear reactors in order to get 200 gigawatts of nuclear power by rule of thumb. That would result in China consuming 100 million pounds of uranium per year alone by them, so double what the U.S. currently consumes. So for us, it's a demand outlook that's improving. There are some features of it that seem different this time. And so you point out some of the challenges for sure, but it feels like there could be a durability here.

Great. You referenced the U.S., of course, about 2/3 of Cameco's revenue comes from the Americas, with the majority of that from the U.S. So you have a unique insight into that market. So why for the past several years of U.S. nuclear utilities allowed one, uranium inventories to decline; and two, uncovered requirements to continue growing? How long do you think that can continue for? And then what ultimately is the catalyst that's going to change that trend?

Yes. So the good news is at the outset that it's not like utilities, whether it's in the U.S. or around the world are not sort of recognizing an improving demand outlook, a challenging supply outlook and therefore, are taking action. I mean for Cameco, you know that over the last couple of years since we started our supply discipline strategy, we've been actually able to add nearly 60 million pounds to our long-term contract book out into the future. So on the uranium side, some are clearly getting it. And remember that the front end of the nuclear fuel cycle, it's got the uranium component, but it also has conversion. It also has enrichment, it has fuel fabrication. And when we look downstream at those different components, well, conversion's been through a full-term contracting cycle. We contracted more conversion last year than we ever have in a 12-month period and been able to lock in great prices on a multiyear basis for our fuel services group, exactly like our portfolio discipline is designed to do. Enrichment has enjoyed a significant amount of contracting. And what we've never seen is a delinked cycle where the services go through contracting, but you eventually don't come and shore up the uranium you need to plug into the services you've already contracted for. So some parts of the market are actually going very, very well. Now it's absolutely true that on the uranium segment, on the on market piece, the competitive RFPs, they have certainly lagged. We have not seen a steady drumbeat of competitive RFPs into the market that would signal the sellers there's demand that they can count on. And as a result, you have some suppliers who are quite eager to sell and still aggressive in their pricing. Fortunately, for us, we don't have to play in that space because of our off-market activity. And that gives some fuel buyers a sense that maybe isn't the time to panic yet because when they put an RFP out, it gets well bid, for example or if they look for material in the spot market, they can still find a bid or if they're looking forward in the midterm, they can find somebody willing to carry trade. Good news for me is none of those factors are sustainable. It really is on borrow time. But I think at the heart of your question is a really important understanding, and that is after a couple of these cycles, I think we have all kind of recognized that there are a group of fuel buyers who can kind of take the bet that they can wait longer because it's pretty clear there's no consequence for waiting. If they wait and the price transitions, they'll just contract at a higher term price, like they just did in conversion. And it's not like anybody sort of professionally accountable. So it's almost a bit of a free option for them to wait. But the reasons and the fundamentals behind it, I wouldn't take that bet. And obviously, our view is that a transition absolutely needs to occur.

We have a great question from the audience. So your view, can renewables and solar plus batteries replace baseload power? So the audience member asks or notes that California seems to think so in the longer term and obviously, the last reactor will be retiring there in 2025. So what's your view on that?

Yes. Well, I think our view is that there's often a false competition set up between nuclear and renewables, in particular, solar and wind. When in fact, there should be a complementarity to it. I mean a grid needs to achieve a number of objectives. It needs to be economic. Clearly, now we're seeing it needs to lower its emissions but it also needs to be secure and reliable. And of course, nuclear and hydro fit right in the middle of that policy triangle. And we see with some of these weather-dependent sources they don't -- they fail the reliability test, right, because they're dependent on the sun shining, they're dependent on the wind blowing. That doesn't happen 24 hours a day. So where we see really smart grid decisions being made is folks are applying nuclear with the renewables that are actually online at the same time demand comes. And so you see in China, for example, it's not solar versus nuclear. It's nuclear as the 24-hour baseload and the solar, when the sun is shining and the demand is higher because of air conditioning and all of that stuff. So we actually think the conversation has to go back to the complementarity between clean, 24-hour baseload power and then harnessing the intermittent, not so reliable, not so secure, but could be dispatchable at a time when demand is higher. So for us, we don't think the solution is 100% renewables. We've seen the experiment. I take the province of Ontario as an example. You live through that experiment, Lawson, where shut down coal, going to replace it with renewables. It became the so-called snake that eats its own tail. You're subsidizing renewables to come to the front of the grid. Who's paying the subsidies? The baseload producers who are getting squeezed more and more, so they have a smaller base for which the subsidy is growing and eventually, it was unsustainable. And so where did Ontario land, refurbishing the nuclear fleet, underpinning baseload power with carbon-free nuclear and then adding on the renewables in a complementary way. That's the strategy in China, strategy in India. It seems to be the smart strategy.

And of course, battery power today can't replace nuclear. Do you have any views on the longer-term outlook for battery tech? And whether or not that might actually be the major competitor for nuclear?

Yes. Certainly not a strong view. So just take my comments as quite casual because I'm certainly not an expert in this space. The idea of energy storage is not new. There are a number of countries, Switzerland is a perfect example, buys cheap electricity overnight to pump water up to height. And then during the day, when the demand is high, releases the water to turn turbines. So the storage of energy is not new. But at the heart of it, it has to be the dispatchable power in order to charge the batteries, for example, and you're probably going to charge them overnight. And overnight, the sun is not shining very bright. That's for sure. And in a lot of places in the world overnight, the wind is not blowing. So you need a grid that's still clean in order to charge those batteries to charge the electric vehicles. So it still comes back to the fundamental question of how clean is the grid. And to your original question, what we feel is durable this time is people are asking fundamentally is the grid clean. I can have all the batteries I want. But when I drain the power and need to charge it again, am I charging it off clean power, and that's the question.

Well said. Now another question from the audience that I think is fair because I get this question a lot. Why would Cameco decide to reopen Cigar Lake when the secondary supplies are still a concern in the uranium market and prices continue to remain relatively low historically and certainly relative to production costs?

Yes. You say a fair question. I find that to be a very interesting question because obviously, Cameco has taken on a disproportionate amount of supply discipline in this industry. McArthur is down, McArthur River and Key Lake are down. Our Rabbit Lake mine is down. Our U.S. assets are down. But of course, we have a contract portfolio that we need to fulfill. And we've made the decision that we're going to fulfill or source that contract portfolio from a combination of Tier 1 production from Cigar Lake offsetting the higher cost of buying it in the market. Now buying it in the market obviously has a benefit to cleaning up the sense that their supply is kicking around. But it is part of our strategy. We need those pounds in our cost structure in order to be able to continue on this path of supply discipline. Asking us to do more is quite simply unreasonable, in part because, remember, Cigar Lake supply is not for the spot market. So Cigar Lake supply is spoken for, it has home. So it's not like Cigar coming back contributes to the oversupply, and it's needed for us to fulfill the 3 legs on the stool of our strategy: supply discipline, plus our marketing strategy of both buying and being strategically patient on our term contract portfolio build. And of course, backing it up by a balance sheet that can convince our owners that there will be no awkward lurches to the capital markets while we're seeing this strategy out. So I guess I just look at it as we're not running a uranium benevolent society here. We have a business to run, and it makes sense as part of our strategy to run Cigar Lake, and that's what allows us to keep McArthur River down.

I'd like to touch on Sprott taking over management of uranium participation. Just to get to your view there, I mean by my calculations, that fund will need billions of dollars of inflows to have a long-term meaningful impact on the market. Do you think it will?

I won't make a comment on its potential inflows, but I have said that there is a lot of potential upside. To that mechanism, as I understand it from the precious metal space being applied to the uranium space. And I guess where I'm going with it is, in the past that fund has really been kind of chunky. The UPC fund jumps into the market, buys material then goes away. It hasn't been an active manager of the asset. It hasn't been an active manager of the fund. So the prospect of having investors signaling where they believe the marginal price of uranium needs to be by a mechanism of at the market trust issuance allowing the fund to then go and put a bid in the market to buy uranium could drive a level of price formation in our industry that we currently don't see. What we see instead is traders who generally like to make their margins by discounting uranium as opposed to holding it and driving premiums often outweigh the spot market on any 1 day, maybe 3:1, 4:1, 5:1. 500,000 pounds of offers, 100,000 pounds of bids in the market. But if you start to see a steady investor bid via at the market mechanism, it's a very active way for investors to signal when they think uranium is cheap and actually help the transition back to production economics versus the current price, which, let's face it, it reflects supply -- surplus disposal of excess production is what it reflects. It doesn't reflect production costs. So I think there's some real potential upside of an experienced manager with an active platform engaging in the physical funds in the uranium space. And I see very little downside because if they choose not to be active, well, that's what it was before. So that doesn't change anything.

I agree. I think there's certainly great potential. It's just whether or not it plays out. So Cameco is obviously in the market purchasing uranium. Where are you finding material? Who are the sellers? Are you seeing producers? Is it traders, enrichers? Any commentary would be helpful.

Yes. This is an important question. And because we've been the largest spot buyer for a period of time. And as you know, when we buy, we buy with a very narrow definition of spot, we're looking for material that's already in a can of uranium oxide. It's already in a canister of uranium gas. What we're not doing is putting our demand out into the market in the longer term, 6 months out, 9 months out, 12 months out, because then we're just going to encourage people to try to produce into our demand and that's obviously not what we're trying to do here. So when we focus on the very narrow end of the spot market, it's tight. It's thin. And I think the evidence there is you saw a bunch of purchasing from advanced exploration companies in the past month, past 6 weeks. And many of them couldn't buy spot. They ended up buying out along the curve because that's how the -- that's how far they had to go out to find it without having a fairly significant impact on the spot price. So when we go in to find it -- here's the good news. We're not finding inventory. We're not finding enricher under feed. We're not finding sort of the classic secondary supplies. Those seem to have been worked through. What we're still finding, though, is what we call uncommitted primary production, folks like BHP, moving some of the uranium out of Olympic Dam as it's in the way of the copper and gold. We can see some African origins. And what this is, is primary producers who don't have a home for it, didn't take the time to build up a contract portfolio, have no other outlet, and they push it into the spot market. So even the traders that are offering material, when you scratch behind where that material is coming from, it's uncommitted primary production. That's -- what we're seeing there is also some good indicators. As you know, 2 very important mines that were sources of uncommitted primary production, the Ranger mine in Africa -- or in Australia, the Cominak mine in Niger, are done now. So they sort of exhausted the mine on the surplus disposal strategy in a low market, and those sources are drying up. So we're seeing a market that's thinning out. It's thinning out. And the good news is it's not an inventory story that we seem to have worked through those mobile inventories.

Question from the audience on the U.S. reserve Fund. You and I have discussed this in the past, but I think it would be helpful to the audience just to get your thoughts on whether or not you'd restart your operations in the U.S., have you had discussions with the U.S. government?

Yes. You can be rest assured that we're very active in those kind of discussions. We're a well-known player in terms of the U.S. government. They know Cameco. They're gracious in hearing us out and they give us lots of time, and quite frankly, ask us a lot of questions about what our thoughts are on it. The -- on the good news, if you will, the strategic uranium reserve reflects an underlying trend going on, which is only beneficial to a company like Cameco and that is growing concern about the concentration of critical minerals. And in the case of uranium, it's the concentration in the Russian sphere of influence. And so that was born out of a concern that we've become too reliant upon sources that we might not be able to count on. And so obviously, the strategic uranium reserve has the aspect of saying, we need a bit more indigenous production in the U.S., but it really is captured in a general sense that they've got to secure the broader critical mineral supply chain. So we're seeing that in other areas, certainly seeing it in uranium, and that's good news for Cameco. Commercial operator, non-SOE, lots of Canadian production, not from the Russian sphere of influence, for example. And so that tendency is certainly positive for us. It leverages to the advantages that are being created by ESG. But what we don't need to see in our industry, as this market is working through its problems, is solving the problem of subsidized state supply with subsidized state supply. I mean really, if you think about it, it doesn't make a lot of sense to bring material into the market that can't stand on its own because it's not like the sovereigns. It's not like the SOEs in our industry are going to go, "Oh, well, the U.S. is going to restart some mines. So we're going to lower our production so that we're not oversupplying the market." They're just -- they're not going to keep it, so we're going to end up with a structural oversupply. Now if it goes to a reserve and stay sequestered, that's fine. But in the past, you'll remember, prior to the Trump administration, many producers in the U.S., us included, our biggest challenge was the DOE selling its inventory. We sort of viewed the DOE inventory as one of the greatest evils ever created in the uranium space because they were bartering material in order to pay their bills. And now many of us apparently have decided that the best thing that could ever happen for the uranium business is for the DOE to get back in the inventory game. So on balance, these markets don't need those kind of distortions to be created. So for us, it's key to see what's the size of it? What is it underwrite? And does that production absolutely stay sequestered with no risk of it coming back to the market? And if you can meet those conditions, it makes sense. But if you can't solving a structural oversupply in the market with creating more oversupply just doesn't make sense to us.

So your largest customers are the U.S. and the EU, yet a lot of the growth that's happening today are in other places. So India, China, the Middle East, just to name a few. So of all the markets outside of the EU and the U.S., which do you think have the greatest growth potential for Cameco specifically?

Yes. Well, certainly, the ones you mentioned, I mean the U.S. will remain a great baseload customer for Cameco for years and decades. There's no doubt about it. Great customers in Western Europe in those traditional markets. And we expect customers like in South Korea to remain strong baseload customers. But you identified the growth markets, China, India, both customers of ours, got lots of experience selling to them. The one area that I would say intrigues me and often gets left out of the discussion is, remember, about 20% of the global markets for uranium have historically been captive. And they're the nuclear countries surrounding Russia -- the Eastern European countries that have Russian reactors that have been kept captive to Russia for their fuel supply, but we're seeing, I think, for geopolitical reasons, I think also just raw supply and demand reasons. I don't think Russia has line of sight to the supply of uranium that it used to have. And therefore, opportunities are available to Cameco that weren't available a few short years ago to potentially move into that Eastern European market, but not displace Russian supply that then is going to go someplace else. It's almost like a new market evolving. So you have to add that to the China story and the India story. And no surprise, I expect to continue to spend lots of time in that part of the world once travel starts again.

Let's hope that sooner than later. No, just 1 final question. I wanted to get your thoughts on ESG from the perspective of a miner. What do you see as the most important aspects of ESG that mining company has to get right?

Yes. So for us, the demand story really starts with the E of the ESG. There's no doubt about it. Cameco's excitement ends with the whole ESG because you've known us for a long time, Cameco has been a high performer across ES&G for many years. It's part of the fabric of what we do. It's making sure that our environmental footprint is as low as possible that as our customers have to respond to carbon challenges, we better as well. And if electron accountability is affecting them, it better be in our plans going forward, too. And then on the S side, you've seen that it ranges from safety, all the way through to stakeholder engagement, which needs to be done in a more comprehensive way than it's been done in the past. As you know, with Cameco, when our operations are up and running, we're Canada's largest employer of indigenous people. But it's not just employment. It's also the businesses that support your operations. Are they contributing to the local communities? And are you leaving something that is going to create value long after the mines are exhausted. That's really the question that needs to be asked. And we'll stand on our performance on that any day. We're really excited that those ESG metrics are coming in. And on the governance side, lots of awards on the governance. And because we're commercial and traded on the Toronto and New York Stock Exchange, you don't have to guess whether our CEO is going to be replaced by a political appointment, like you do with some producers in our industry. I mean we're pretty transparent in how we work. So it kind of -- the story begins with ESG on the net carbon 0 target, and it ends with ESG in terms of our performance in it. And I think just mining companies have to take a lot of credit for being very proactive in ESG, even when it wasn't required, but we all have to do more, and we all have to continue to do better.

Fantastic. Very well said. Thank you very much for being so generous with your time today. Thank you to our audience for your interest, and take care, everyone.

Thank you.