Cameco Corporation (CCO) Earnings Call Transcript & Summary

We're going to now move on to our next speaker. You just give us about 30 seconds so we can prepare the screens by way of bringing up presentations, et cetera, et cetera, during the transition. But I would like to introduce Grant Isaac, CFO and Senior VP of Cameco, coming to us today from Saskatchewan. Grant was appointed CFO of Cameco in July 2011. He joined Cameco in July 2009. I've looked at that tenure and I've compared it with the uranium price during that period. And I noticed that we saw uranium trading as high as $70 a pound and as low as $22 a pound. So my view right now is that Grant is amply qualified to remind us of Cameco's disciplined supply strategy in navigating through the current price environment. Grant, we're all yours. Over to you. Thank you.

Thank you, Chris. Just a quick sound check. Can you hear me okay?

I can. Thank you.

Perfect. The absolute worst place to be in the nuclear fuel cycle is following Treva. So let me do my best in making some comments that she didn't already make in an excellent way. I mean TradeTech has been the leading analyst in our space, providing just timely insights, the work that Adam does, the work that Patrick does. And the production cost indicator has been a very important development in thinking about price formation in our industry. And obviously, we could get into a debate as a producer, I might say there might be some areas for improvement. Like Treva said, it's an average as opposed to the last marginal cost of the last marginal path. But that's, of course, that's just me as a producer, wanting to see that number out there. But it's a very important innovation. So when Treva talks, we should all listen. I know we do here at Cameco. I want to build on some comments rather than put up some slides and plow through Cameco's Q1 disclosure. Instead, I just want to pivot to a few comments in the short period of time that we have built on, a few of the things that she said, but maybe from the perspective of a producer, and how we see the world. I think everybody on the call is probably familiar with Cameco, with our position in the market. I mean, we've been a part of every term contracting cycle on the commercial side of the business as Cameco or our predecessor companies. We've seen it all. So we can quickly figure out what's familiar and what's unfamiliar this time. I think people are familiar with our position in the U.S. Until 2016, we were the largest producer in The United States by quite a margin, then we put our assets into care and maintenance, and they remain in care and maintenance today, and I'll discuss some of the reasons for that. I think people are aware of our position in Global Laser Enrichment which for us is a very important part of the U.S. production story because of the opportunity there to access material that's already mined and already converted and ready to be re-enriched and deployed into the uranium market in a careful and managed way. So with that in mind, a couple of observations with respect to where we are right now in the market. Totally agree with Treva that the demand outlook is improving. It's improving at a rate we probably haven't seen in a generation. And at the same time, the supply outlook has a lot of uncertainty around it for the reasons that Treva mentioned. So this all bodes really well. If Fukushima was the perfect storm, for a uranium producer, then what's going on right now might be the perfect dawn for a uranium producer. So we are very bullish and very constructive on the opportunities ahead for us for sure. The Russian invasion has been amplified what was already pretty strong fundamentals. The first aspect of the Russian invasion that draws -- that requires attention is it's been a crash course on the nuclear fuel cycle. You'd be surprised how many times it appears that people are casually looking at our business on the mining side of uranium. And just sort of conceptually thinking about it like something like coal that you just get uranium oxide and you back up to a reactor and you dump the uranium oxide into the reactor. And there you go, you've got nuclear fuel. Well, of course, that's not the reality. And the Russian invasion has just reminded us all that uranium is the product, but it's the product that has to go in to a pretty elaborate service chain, the service of converting, the service of enriching, the service of fabricating. These steps take time. These steps all involve in-process material. These steps then carry with them some inventory, some buffers, which means we don't see an immediate price response between shutting off one of those services or trying to exclude it and the price of uranium, and I completely agree with Treva because we are more than mining. We're involved in all of those steps at Cameco. Utilities tend to swim upstream. They tend to work on the thing that's closest to the reactor, and then they contract their components eventually getting to uranium. So right now, with the Russian exclusion underway, we're just seeing a lot of attention in the enrichment in the conversion space. Now the good news is that attention eventually has to come into the product itself. Whether that's because we're replacing Russian uranium -- mined uranium, which there isn't a lot of it or because we're derisking from Central Asian produced material, which there's a lot of. Eventually, that demand is going to come back into uranium. And we're probably going to see the levels of contracting network we saw in 2021 and the early part of this year before the Russian invasion. So that's first really important aspect of the Russian invasion. The second is resource market fragmentation, it shouldn't be thought of as de-globalization, it should be thought of as re-globalization. So in some industries, when you see an event like the Russian invasion of Ukraine, you absolutely will imagine the onshoring of activities. But in the resource business, you can't onshore the resources. The resources are there by geological endowment. You can't invent them. And so in the resource industry, these types of market fragmentation moments are a re-globalization. And so I think we're all well served not to get carried away, believing that self-sufficiency is really what the focus is here. In fact, it appears that we're just going to see a strengthening of that critical minerals notion. That notion that resources are available in allied countries that share similar values, that share similar world views. Canada, Australia, for example, are going to be looked at as more important suppliers for markets like Western Europe and The United States. This isn't an onshoring exercise like it might be in manufacturing because no amount of industrial policy can fix geology, and that's all there is to it. So those are 2 really important aspects that have come to light because of the Russian invasion. So lots of attention on Western capacity, lagging Western demand and then what that looks like and what the investments need to be. And so we're pretty excited about that, obviously. Pretty excited about what it means for our assets in North America, at large, but also for our investments in The United States, both the mining investments and our investments in Global Laser Enrichment. But even having said all that, let's just always remind ourselves a couple of important realities. We often put up the spot price as the indicator of health in our industry. And let's just remind ourselves, spot is not the market in the uranium business. The spot market is a small discretionary market. It is not where utilities go to buy their run rate requirements. It is not a true reflection of where utilities believe the production cost needs to -- where the price needs to be in order to incent production cost. And yet we see a lot of attention from investors and others on where that spot price is going. It's thinly traded. And the role of utilities in it is very small, as Treva pointed out. Last year, 100 million pounds in the spot market was transacted, less than 18% of that was by utilities. It was a lot of other actors -- financial actors, some producers were buying. But when producers buy, they're buying for past demand. They're buying to fulfill already existing committed contracts. They're not buying for new demand. And then, of course, just the churn that comes from the traders. And if you want to know what the churn does to the market, don't look any further than last Friday. And the games that we saw at the end of the day on Friday. So spot is not the market nor should it be the market being targeted by any producer because that has proven to be just a horrendous value transfer from the pocket of investors to the pocket of utilities over the years. So spot is not the market. And in fact, the investors who want to play the spot market have a new tool. And they're turning to Sprott -- they're turning to the Sprott Physical Uranium Trust as a way to play spot market dynamics. And so investors are not sort of looking at producers or potential producers as a way to play the spot market. So let's remember that term is the market here. And when we look at the term market, we're seeing a doubling down, not a market that's breaking more to spot, but a market that's moving even more away from spot. So I talked about in our Q4 disclosure and our Q1 disclosure the RFPs and the off-market activity that Treva was referencing, it's -- the tenor is going out on those contracts. Instead of smaller 2- to 5-year bites out of the market, utilities are taking 2 to 7-year bites out of the market or 2- to 10-year bites out of the market. Volumes are going up, not just because more years are being added, but the actual bite per year is going up as well. And the time frames are going out. We're seeing contracting well into the 2030s. One of our contracts that we talked about in our Q4 disclosure, 2030 to 2040. So this is a doubling down of the term market and just reinforcing that a market plan has to go hand in glove with a production plan. And anybody who's looking at investment in uranium has to demand that kind of plan as I would say, as strongly as they demand a plan for production. What are you going to do with it? Because if the strategy is, well, I'm just going to wait until the spot price is high and dump it into the spot market. You might sell 100,000 pounds at that price, and then you'll be the cause for bringing that price down in such a thinly traded market. So term is the market. That's an important lesson we always have to remember. Second important lesson we have to remember is, let's be weary of governments that come along and say, we're here to help. In our industry, for many years, many of us that are on this call spend a lot of time in Washington, bemoaning the fact that the U.S. government had an inventory, an inventory that they weren't particularly concerned about. An inventory that they were putting into the market in a very clumsy way. So many of us on this call were in Washington saying there has to be discipline on how the DOE deals with its inventory. There has to be discipline on how it's managed. There has to be discipline on how those volumes come to the market. And suddenly, things have changed. We now trust government to build up a really big inventory and be responsible with it. I guess the lesson is you can't use a distortion to fix a distortion. The inventories and the role of government policy were a distortion on production cost curves and on pricing in our market for many years. So let's be careful before we rush in and say, well, industrial policy is here to help. It hasn't been in the -- it might be a short-term [ problem ] for this, but it is not a long-term solution to actually making this industry healthy. What makes this industry healthy is utilities that are confident in their nuclear power plants because confident utilities contract and contracting creates a price discovery and price discovery is what allows us to make investment decisions. So I think that's an important second lesson that we always have to remember when we think about how this is shaping up and policy positions that are being taken, just be careful when governments say, we're here to help. The third thing is -- and Treva noted it, and she's been doing a lot of work on this lately, but through a producer's eyes, I would just say, I totally agree with the notion that uranium production and development is not immune to the supply chain and inflation challenges that are besetting all industries today. And let's break that down into components, the supply chain challenges are a threat to schedules. They threaten the schedule that somebody has, if they're developing a project or restarting a project, the supply chain challenges are just causing those schedules to get revised constantly because the predictability of getting the goods that you need, and in some cases, the services you need to procure, the predictability just isn't there. And inflation is a threat to the budget, right? So we're seeing risks to both budgets and schedules across the production space, across the development space. And what we're seeing is utilities, being very careful not to adopt those risks and not to take on those risks. So no surprise that some of the producers or the return to production companies have been the first to contract. Utilities tend to be risk averse. They tend to want to support those that already have licenses, already have permits, already have existing productive capacity even if it might cost them a bit more because they don't want to take on the risk of timing and schedules, of budget and cost overruns. And so that gap just gets bigger when you go from brownfield to greenfield. And so no surprise the behavior we're seeing in the market is utilities are turning to the brownfield. This is the incumbency advantage that we see in our market over and over again, cycle after cycle. It's why the Rabbit Lake mine in Northern Saskatchewan, which lives next to Giants, Cigar Lake and McArthur River. Rabbit Lake has been down before. It was down in the late '90s, and it came back because utilities were prepared to support Rabbit Lake and support its production because it was licensed, permitted and brownfield even though it costs more than Cigar and McArthur, we don't expect that behavior to change at all. We're also seeing utilities be far more aware of the key differences between uranium assets that have a technical report, which is 43-101 governed that actually talks about the operating and capital of a project versus a feasibility study or a definitive -- or a pre-feasibility study or even a preliminary economic assessment. There was a time not too long ago, I would say our customers really weren't aware of the differences and treated them sort of as equivalent. Those days are over as well. So as we look at this industry, we see a lot heading into this cycle that's very familiar. But we've also seen a few things that have shown a sort of a deeper understanding of the fuel cycle and a deeper understanding of how to evaluate projects heading into making contracting decisions. So like I said, building on a lot of what Treva said, but through the eyes of a producer who happens to have some U.S. assets and some very good ones that are still in care and maintenance, I just wanted to give you some perspective on why. So Chris, I wanted to leave a bit of time for questions.

Very, very insightful. Thank you very much, Grant. I guess the question that I think that I have and maybe I think a lot of our viewers have is just moving over to your U.S. facilities at the moment. And I do understand they're on the care and maintenance right now. I wonder if you could remind our audience when they were in production, what was the all-in sustaining cost per pound? And can you give us a sense of what that might be today just on the back of all the inflationary pressures we've seen in the marketplace recently?

Right. So when we report our produced costs, we just put everything into the same bucket. So we never did break out the cost specifically for the U.S. assets or Rabbit Lake relative to Cigar and McArthur, for example. And it was never a material property. So we never had a technical report on the properties. But what I can tell you is that at today's term prices, these are not sufficient for restarting U.S. assets on a fully loaded basis. On a cash cost -- on a noncash cost as it applies to both mine development as well as the [ surety ] bonds that are required in the U.S. and the environmental liability that you have to address as part of the cost structure, these are not sufficient prices. And they're not sufficient by tens of dollars, let alone a couple of bucks. We're not close.

Right. Okay. Thank you for that. So I wonder in closing, and thank you again for your remarks, Grant. Could you just remind us, I guess, of those sort of tail-end costs that I think every producer that has to be aware of when restarting or considering producing from ISL facilities anywhere, I guess, not just the U.S.?

Yes. There's -- I always have this funny little cartoon image in my head when I think about -- mining is always about denominator. And you need a big denominator in order to justify not just the operating and the capital, but the liability requirements that go with it. And when I look at the small denominator assets, I always have this vision, they are these powerful little go-karts, but they have this much bigger steamroller coming behind that's actually a little bit faster. And that's the challenge with small denominator assets. They have a building liability that's coming down the road and it's coming down the road fast. And you just -- you can't upsize the production enough to outpace it. And so you have to remember, it's about cash cost. It's about the ongoing development costs, which often show up as noncash cost. And then it's layering in the responsibility to return those assets to basically a naturally attenuated state, and those are big -- and those are a financial burden that's just growing with every pound you produce. And when you do that math, you tend to want to gravitate to bigger denominator deposits.

Great. Grant, on that, thank you so much. I hope you'll join us later on for our panel discussion.