Cameco Corporation (CCO) Earnings Call Transcript & Summary

Hello, everyone. In this segment, we will hear from the only uranium company presenting today. And it happens to be Cameco, the world's second largest producer of the metal used for fuel in reactors. And joining me from Cameco today is Senior Vice President and CFO, Grant Isaac. Grant, welcome to Miami. And I'll turn the podium over to you.

Great. Thank you very much. If you don't mind, I'm just going to stay here. My tremendous laziness just keeps me right in this chair. It's a good spot to be. I'll make a few opening comments, but happy to go to your questions. At the beginning of that, I just want to, a bit of a shout-out to Lawson on the work that he's been doing in our space lately. It really is a good analysis of what's going on. Ours is a market where the fundamentals were improving. I think a lot of people saw nuclear kind of regain its place in the policy toolbox because of the decarbonization push. A lot of question marks around supply because it turns out that markets work after years of pervasive low prices. There wasn't a lot of investment in capacity, and that was starting to build momentum. And then everything kind of changed on February 24 when Russia invaded Ukraine. And now on top of that fundamental, we're going through an unprecedented geopolitical realignment in our market, which is just code for Western customers are looking to exclude Russia from their nuclear fuel procurement going forward. And Russia is a very big player in that part of our industry. I have no idea how everything is going to work out geopolitically. But I can say with confidence that we are extraordinarily well positioned in a market that's bifurcating. And there's more Western capacity required to meet Western demand. So that's a really important dynamic going on. Hopefully, we can get into that in a little bit more detail. But just a final comment on how we're positioned. For us, the uranium isn't a spot market. It's not one where we see strong prices for spot conversions, spot enrichment, spot uranium and we rush forward to meet it. It's one where you need to secure homes for your planned production and then you make the right decision. So for us, it's about marketing discipline. That continues. We have lots of customers interested in supply. We're looking for those terms and conditions that make sense for us. So marketing discipline then allows you to make the production decisions afterwards that make sense, the best and most economic way to fulfill it. And we're still in supply discipline mode despite how robust everything is looking. We haven't seen the procurement cycle yet to change those supply decisions. Maybe we could see ourselves there. But the final piece I'll mention is just what's interesting is, we're talking about being on really the early innings of a contracting cycle. And we've never started one from such high prices already. Uranium term price starting with a 5. Conversion price has never been higher than it is today. SWU price is starting to approach historic highs. We've never launched a contracting cycle from a base of this stronger prices before. So lots to talk about in our industry, happy to take questions.

I'd share an interesting comment that I heard from a fuel buyer I spoke with 2 weeks ago. His comment was, as this contracting cycle unwinds, people like Cameco are going to be very well placed to enjoy spot markets. Next down would be the assets that had operated but are currently on care and maintenance. And next would be the developers. So I think Cameco is very well placed. But what I wanted to talk about was the last point you made, which is on contracting activity. So with Q4 results, obviously, you guys had a very exciting announcement of 50 million pounds of new contracting. Q1, there was nothing. I mean, you and I both know that it is very lumpy and it tends not to come on a regular basis, but it certainly surprised a lot of market participants. What I wanted to get your perspective on was when do you expect contracting to come back in a very meaningful way. And I know it's very hard to define, but kind of walk us through your framework.

Yes. Good question. And here's our expectation. But one quick clarification, we contracted 40 million pounds in Q1. We just contracted it. And we're prepared to announce it in early February when we put out our Q4 release. So Q1 actually was one of our biggest contracting quarters ever. So just a bit of history, in 2021, utilities were really paying attention to uranium supply. We saw a lot of uranium contracting going on because of that fundamental story that we were talking about. Us and our competitors in the industry were seeing a lot of interest in uranium. But that changed also on February 24. Utilities shifted their attention from where's my long-run uranium coming from to where's my enrichment and conversion going to come from? Just a reminder, Russia, about 40% of the global enrichment capacity is Russian. About 30% of the global conversion capacity is Russian. They're about 14% of global supply of uranium. They're 50% of the secondary supplies in our market. So utilities turned their attention from where is the uranium coming from to starting to contract the enrichment service. We saw a 40% jump in the enrichment price 2 weeks ago. It went from $72 per unit enriched to $120 per unit enriched. That reflects the panic that's setting in among those Western fuel buyers to secure the non-Russian source of enrichment. Once they have their enrichment lined up, they then have to turn their attention to, I need the feedstock. And so their next focus will be on the conversion sector, which is already pricing strong. We expect to see more strength in conversion. We provide conversion. We're the only North American converter right now operating. And then they will return their attention to uranium because now you need the product to which you're going to apply these services. So February 24 was a bit of a change, and it really shifted attention downstream. And so uranium contracting will pick up again when they feel comfortable with their enrichment coverage and then their conversion coverage and then we'll see the return to the uranium demand in a big way.

A lot of great material there. I would like to touch on blue sky. So I often get the comment from investors that Cameco, an investment in Cameco is capped because of your contract book, which I would note, it only goes out 5 years. And I would also note fails to account for the fact that you're also not fully contracted on that contract book and then there's still all the contracting that you can do beyond the year 2025 where you provide that guidance. Could you walk us through sort of the theoretical capacity that Cameco has in still uncontracted material? And I know it's probably dangerous for you to throw percentages, but that type of thing, I think, really helps investors think about what the true blue sky upside is.

Yes. On that price sensitivity table, we have figured out that there's a lot of misunderstanding about how it's constructed. It only reflects our current committed sales, and we make no representation of an assumed production rate at certain spot prices. And so really, we vigorously retain 3 points of leverage to this market. Number one is, we have a number of existing contracts that are market-related. And so as the uranium price goes up, we get the pickup of the higher prices in those existing contracts. They have a little bit of a kicker on them, too, in that utilities tend to be procyclical. In a rising uranium market, they flex up their contracts not flex down. The psychology there is the price is obviously rising because the product is getting scarce, I should flex up and take more of it. So market-related is our first point of leverage. Second point of leverage is exactly what you talked about. It's the pounds we haven't sold yet. I mean, we are not trying to be sold out right now. We like to be covered in year. We like to have a good comfortable amount of coverage next year. And then we don't mind that uncommitted to fall off dramatically because we think that there's a better pricing environment for those pounds. And so take, for example, the extreme supply discipline at McArthur River. 115 million pounds left in the ground when uranium was $17.75 a pound. And now it's pricing at $50 a pound. That's a pretty good investment in supply discipline by leaving that material inventory into the ground. So that's the second point of leverage, the pounds that haven't been sold and we're far from sold out. We're still in supply discipline mode. Yes, we're bringing McArthur back, but we're going to operate it at a lower than full capacity rate. And we're planning on bringing Cigar Lake back in 2024 as well because the procurement cycle isn't quite there yet. So we will run in 2024 on current plans at 40% below our productive capacity. We make no effort to sell the remaining 40% of supply. It's not our interest right now because we want to be leveraged to that market. But there's a third piece of leverage that's really crucial too. And that is when utilities truly go into a security of supply driven mode reflected in the conversation you had with them. They don't turn to the greenfield projects and take a chance on schedule and risk. They turn to the incumbents that they already have contracts with and they say, look, I don't have time to start a brand-new RFP. I don't have time to launch a brand-new negotiation. We already have a purchase order. Let's just expand the volumes. So we vigorously protect the market-related leverage, the pounds we haven't sold yet and that incumbent advantage because we like to put that business into an up market, not a down market.

Fill in the blanks a little bit on the contract book beyond 2025. How far out does it go out and how quickly does it sort of fall off?

Well, we have about, in that contract table that we announced over the next 5 years, we have about 100 million pounds under contract. But then every year, we disclose that our entire book is about 150 million pounds. So we still have a lot of volume that's outside that 5-year window. We're starting to see in our market, began to see it last year, utilities started shifting their procurement back to a traditional mode. When the spot market was so horrendously oversupplied following Fukushima, the spot market became the home for a bunch of surplus production that didn't have a home. So it got dumped into the spot market in a low interest rate environment, utilities said to themselves, hey, I don't want to pay term prices for uranium. I want to pay spot prices forward. And so they were finding financial intermediaries to buy in the spot market, carry it on a carry trade and take it into the early part of term contracting, and this broke the term price. The term price, instead of being anchored to production economics, was anchored to the forward curve of spot. Utilities then saw Sprott enter the market and start buying a lot of material. We bought a lot of material. The spot market became very, very thin. We actually entered backwardation. And as we entered backwardation, the most expensive pounds were the carry trade pounds. So the carry trade business basically dried up, then interest rates are starting to rise, which condemns the carry trade business going forward. So utilities have gone back to taking bigger bites out of the market. So the tenor of the contracts have gone from 2 to 5 years, 2 to 7. Now we're seeing 2 to 10. The time frames are getting bigger. We had a contract that we announced in Q1 that was 2030 to 2040. So the window that utilities are looking at is getting bigger, reflecting their confidence in their reactor programs and volumes are going up. Not just because there's more years being added, but they're taking bigger bites out of the market. So no surprise, the underlying term price of uranium is back reflecting production economics as opposed to reflecting the carry trade on spot.

Well said. Now a really interesting point in your Q1 results was the delayed material from Inkai. And I mean, you cited insurance concerns, but also other concerns. Maybe you could just speak to that other part. And also, why is there a delay in arranging an alternate route to get that material from Kazakhstan to the rest of the world, aside from Russia, because my understanding was you guys had already established that route. It was Caspian, Georgia, Azerbaijan into Black Sea.

Yes. So we have a joint venture with Kazatomprom. It's an extraordinary joint venture with a great partner and a partner that's doing a tremendous job in a very difficult situation. And they can explain it better than we can for sure. From a Cameco perspective, we're very, very risk averse, and that's a part of the world we don't understand as well as our joint venture partner does. Our joint venture partner might look at forest fire risk in Northern Saskatchewan and say, that's crazy. Well, we can manage forest fire risk. We look at risk in that part of the world and we just don't understand it as well, and we're very risk averse. And so we've taken the position for a variety of reasons that range from the ability to secure insurance, the predictability of the transport system. We don't want to use the Russian route. And we've also taken the position, we shouldn't use the Russian route. And that is the exclusive route for getting Central Asian supply out of that part of the world. There is an alternative route that's been established. It's been used by our joint venture partner. They've successfully used it. An Inkai shipment has actually successfully used it last year. But we just put that disclosure in because it's not clear to us. We can't predict at the moment when that route is going to be available for us. And so we just said, we're going to leave our material in-country. Now the good news for Cameco, we've got production sources in other parts of the world. We've got our long-term purchase program. We've got an inventory. It's a minor problem for us. It's just time and money is all it will take to get access to it. But if you think about it from a utility point of view, it's actually a growing uncertainty and potential problem for the nuclear fuel supply because a lot of conversion facilities in the world require that material from Central Asia. So if there's delays, that's just going to delay the supply chain, which with the tightness in the market, you wonder how much it can tolerate those delays. So for us, it's a manageable problem. It's systemically a bigger challenge for the industry. It just reflects a different risk tolerance that we have because we don't understand that part of the world as well as others do.

That's an excellent perspective. And I'll leave it there on that topic because I think we're going to get into a bit more tomorrow on our uranium plant panel at 10 a.m. What I would like to do is ask about conversion because that is something very specific to Cameco. So one thing, conversion prices, as you mentioned, are very strong, possibly at all-time highs. What do you see as the risk or something that could actually cause that to correct? But in the current environment, how does Cameco take advantage of that? And then secondly, in relation to that, the World Nuclear Association publishes this data on capacity and capacity utilization. They always show you guys using about 70% of your UF6 capacity utilization. Is it possible for you to displace what the rest of that unused capacity is currently being used for to take advantage of the higher prices?

Yes. A lot to unpack there. Conversion is the tightest part of the nuclear fuel cycle at the moment. Western demand for conversion, just throw a few numbers at you, 35,000 tonnes of conversion is needed. Western supply is around 20,000 tonnes. So there's a 15,000 tonne gap. On top of that, the enrichers need more conversion because while they're going to add more capacity to displace the Russian capacity, one way they can get more enrichment out of their plant is to what's called overfeed it, which is just code for they need more UF6 going into it, use it less efficiently. And that's another 6,000 tonnes on top of that. But the good news over time for the conversion industry is, well, there's a plant in the U.S. that's at 0 today. And it will come back to 7,000 tonnes, probably 10,000. There's a plant in France that's running at half capacity and it will go up to 15,000 tonnes. We're at 12,500. And the enricher overfeed will only last until they install new capacity. So on balance, Western conversion to 2027, 2028 could catch up or there'll just be a small gap. So for us, it isn't about jamming a whole bunch of new production into the conversion space because we live through the times when it was oversupplied and we were running our plant at half capacity. So the goal for us is to fill it up, get those margins as good as we can, lock in these historic prices, but not forget that there's capacity that needs to come back and will come back with some of these restarts.

Okay. That's great perspective. Thank you for the conversation today. Unfortunately, we are out of time. So thank you all for being here listening to our presentation, and thank you, Grant, for being here.

Great. Thank you.