Cameco Corporation (CCO) Earnings Call Transcript & Summary

All right. Good morning, everyone, and welcome back to another session. My name is Adam Wijaya. I work on the energy research team here at Goldman Sachs. And I'm joined today by Executive Vice President and Chief Financial Officer of Cameco Corporation, Grant Isaac. This is the first time we've really had a nuclear uranium presence at the GS Energy Conference, and we're extremely excited to be opening up the franchise to this side of the energy space. So Grant, thank you for being here. Thank you for making the trip.

Nuclear has been an extremely topical subject in 2024, and that's really where I want to start is what we've seen in 2024 and then the setup for 2025. So on the supply side, we've seen headlines of disruptions. People are seeing Kazakhstan. They're seeing Russia. On the demand side, they're seeing hyperscalers talk about the use of nuclear power and empowering their data centers. So Grant, help us put this together. What have we seen in 2024 as it relates to those supply-demand developments? And then what's the setup for 2025?

Yes. Happy to start there. And just would start with a bit of a plug too as well. I thank you to Adam. Adam picked up the coverage and picked up very well of Cameco with a really strong understanding that there's more to the nuclear fuel cycle than just the uranium component, and that's certainly important. But once you have uranium, it then begins a really long journey to become a bespoke fuel bundle for a reactor. So if you don't understand the reactor cycle and you don't understand the rest of the fuel cycle, you're missing a big part of the story, and I think the work that you did, Adam, to connect the conversion and the enrichment, the fabrication piece back to uranium was really well done. So a bit of a plug for that. I want to talk about 2 main things. One is fundamentals and one is bifurcation because those are the main themes generally in the nuclear fuel market. On the fundamentals, I would agree with the idea that the demand is facing tailwinds, the likes of which we've never seen, and it's creating a durability of demand, the likes of which we have never seen in our industry and really the main reason there is nuclear started to enter the conversation as being part of the climate security strategy. And then, quite frankly, with the Russian invasion of Ukraine, it became part of an energy security strategy, which obviously elevated it. But the final piece to really add wind to the opportunities in nuclear was once the world understood the importance of big data and understood the importance of onshoring and remanufacturing of the industries, it was the reality that the critical path item to achieving these objectives was electrons. And not just any electrons, electrons that were baseload, firm, durable and clean. And those are nuclear electrons. And so nuclear suddenly became part of a national security agenda, Climate security, energy security, national security agenda, which is given the demand profile strength that, quite frankly, we haven't seen before. Yet on the supply side, it turns out markets work. After years of low prices, the investments weren't being made in preparing the fuel cycle for the opportunity that's now in front of it. So some catch-up has to occur. And that catch-up is actually in the form of higher prices. And the higher prices come about through contracting. So it's just as simple as utilities gain more confidence and how long their reactors are running as utilities restart reactors that were shut down as utilities go through subsequent license renewals to extend the life of reactors. And of course, 63 reactors under construction globally. As all of that starts to build, utilities gain confidence and a confident utility comes and procures. They procure fabrication. They procure enrichment, conversion and uranium that helps discover appropriate production economic pricing. So there is a durability to demand. There's an uncertainty of supply that needs to be filled by more contracting and price discovery. That is underway, but there's also a bifurcation in the market that needs to be factored in. This bifurcation in the market is relatively new. The uranium fuel market, the nuclear fuel market was unfettered globalization for a long time, and those days seem to be over. Origins matter, where those origins come from matter. And really, we have to grapple with a world where Western capacity has to grow to meet Western demand and offset the dependence that was created by, for example, Russia. You don't have to look any further than the U.S. market where they were providing 1/4 of the enrichment service into the U.S. market which the President of Russia does not allow to be exported from Russia at the moment. Here is the voluntary export restraint in place. So lots of exciting things going on. Demand is strong. Supply is uncertain. It has to be filled by price corrections and contracting. And the market is bifurcating in a very permanent way, all exciting for an incumbent producer like Cameco.

That's great, Grant. Let's stay on the supply side for a moment, and we're going to talk a lot about origin disconnect throughout this panel. But let's just talk about what you think might be underappreciated by the market as it relates to new supply coming online. This is not a resource that we can just develop tomorrow. I think in previous statements, you said it could take 10-plus years to develop a mine and it's assuming everything goes right. So talk about what it really means to bring a mine online and what that path looks like in the longer term?

Yes, that's a great question. And let's again nest it first in the fuel cycle. If you think about the fuel cycle of having 4 big components, the uranium that then needs to be converted that then needs to be enriched for the 90% of the reactors that are light water reactors. And then it needs to be fabricated. The last 3 steps are all manufacturing steps. They're manufacturing steps that occur in factories, factories that can be built anywhere and generally, factories that with the right demand profile and the right contracts can be built within the time frame of building a new nuclear reactor, uranium cannot be. Uranium cannot be built in the time frame of building a new nuclear reactor. The process of exploring for and discovering and developing and commissioning and then operating uranium mines takes way longer. And that's the piece we think the market is now falling asleep on. We think the market has figured out they need to incent more enrichment. And the market clearly has figured out it needs to incent more conversion through historic conversion prices. But there's still a bit of a sleepy notion that -- but isn't there lots of uranium? Isn't there a lot of people providing uranium? Isn't there a lot of sources you can get your uranium from? Every day, a uranium mine runs, it depletes. And if you're not putting in replacement capital, you're running a depletion curve. But even replacement capital is not growth capital, and growth capital hasn't been assigned to the uranium space for a long time. So right now, yes, there's a lot of appropriate focus downstream. There isn't enough focus on uranium. Here's the good news. That focus is coming. You can't have a de-linked cycle. So at the moment, while there's focus on enrichment and conversion, that demand has to find its way into the product, which is uranium, which there is no substitute. That demand has to come. And every day we delay that demand, it pushes it out in a more compressed way over top of supply stack that's growing more uncertain. That sounds super constructive for a company like Cameco. This is why we remain in supply discipline. This is why we remain patient because we've seen these wall to worry build before, and we've seen this demand come, and there's no incentive for us to front run it. We wait for the demand to show up in the form of long-term contracts, then we plan our investment decisions. The piece that I think is really misunderstood on the uranium side is the role of mills. I hear a lot about, well, I've got mining projects, and I've got land, and I've got this and I've got that, but there's no milling strategy. Milling in uranium is actually a critical path item. Mills in the uranium space are hard to build and they're hard to operate. They're unlike any other mill that you find in the mining business. So you actually have to have a combined mining, milling and marketing strategy to be successful in the uranium space. That's the piece that's underloved and underappreciated, and it's the one that needs to attract more attention in the coming years.

That's great. Let's flip over from supply to demand. And obviously, the demand profile for nuclear power has undergone a huge shift in the past 12 to 18 months. Can you talk about what that shift really looks like. Some of your conversations maybe with the hyperscalers that are trying to potentially explore the use of nuclear power going forward. And then maybe touch on -- I think you've said in the past, nuclear is getting bigger, but it's also getting smaller. So can you clarify what you mean by that?

Yes. There's a number of elements to that question. And maybe I'll start with when you look at the demand buildup, it is more full cycle in a way that it hasn't been. The nuclear story for those of you who have been around it for a while, was always idiots like me sitting up on stages like this saying, "Well, demand is going to be flat for a while, but don't worry, then there's going to be a whole bunch of new build, and it will hockey stick upwards, and it will be really good times." And then -- and then someone says, "Well, you said that last year." And you said that the year before. But what's occurring right now is something very different. We're saving reactors we thought we were going to shut down. And not only that, we're starting reactors that were already shut down and already begun decommissioning. And why does that matter? It brings near-term fundamental utility demand into the market. And then reactors are going through subsequent license renewal. The U.S. pioneered it. Now many other jurisdictions have figured out the best way to retain baseload carbon-free power is to keep your nuclear power plants running. So now subsequent license renewal, the U.S. term is being extended in many, many markets. Look at the refurbishments going on in Ontario. That's bringing massive midterm demand into the market, and that's connecting to the 63 reactors plus under construction. So the demand curve no longer goes flat in hockey sticks, it's jumping now to connect to a higher point on the demand curve. Second element that's different, and I -- you alluded to it, in the past, and I look around the room and I see some familiar faces from the utility side, we used to take our view of where nuclear was going exclusively from our customers, right? We meet with our customers. We'd understand their catchment area. We would add it up regionally, nationally, internationally and we've come up with a view. We now often hear from our customers' customers, right? We hear from the hyperscalers. We hear from those who are interested that the new folks that want to deploy nuclear for mobile nuclear -- mobile remote or micro operations or want to -- want deep decarbonization replacement through nuclear or want to build big gigawatt scale again. When those conversations start, folks understand they need to understand where the fuel is coming from. And so we're hearing from them sooner as Cameco -- as Cameco through Westinghouse, that's unusual. It's unique, and it's giving us a perspective of how real these conversations are, and they're feeling pretty real.

That's great, Grant, and maybe that's a good pivot to Westinghouse. It's been over a year since you closed that acquisition. Maybe to those that are in the room that are maybe newer to the story, talk about the key driving points behind that deal, what it does in terms of unlocking value for Cameco across the value chain? And then talk about really the outlook for this business in the next year to 5 years even.

Yes, the -- the rationale, and I think it's pretty well understood, but let me say it again, what we love at Cameco are strategic assets. We love assets that are already licensed, already permitted that are constructed, that have a skilled workforce, that have social license to operate, have brownfield leverage opportunities, are in sovereign safe jurisdictions that are too big to fail and won't face competition immediately overnight. That's McArthur River. That's Cigar Lake. That's our Blind River refinery. That's our Port Hope conversion facility as well as our Port Hope fuel manufacturing, that's all of Westinghouse's assets. That's the Columbia plant, the Springfields plant, the Västerås plant in Sweden. So for a company like Cameco to get our hands on another set of scarce absolutely critical nuclear assets, you can't pass up that opportunity. So the why is pretty simple. It fits into our strategic view that if you've got the strategic assets in the nuclear fuel cycle, you've got a big part of the story at your fingertips. So the why it was absolute no-brainer. There is one part of Westinghouse that is underperforming acquisition assumptions. And that is the division of Westinghouse that was going to decommission reactors that we're going to shut down. So happily, that division is underperforming our acquisition assumptions. Everything else is overperforming. The core of the business, the fuel fabrication, the reactor services, why is it overperforming because they suddenly have a bunch of new customers from Central and Eastern Europe that they never had before. A region the size of South Korea showing up overnight as demand that never happens in the nuclear business for the fuel fabrication. The reactor services business expands. Why? Because we're restarting reactors that were shut down. They need engineering. They need the proprietary work that only Westinghouse can do. Reactors that are going through subsequent license renewal, reactor new builds. It's pretty clear that as China builds out its nuclear fleet, its preferred model is the Westinghouse reactor is the CAP1000, their version of it. That's great for Westinghouse's instrumentation and control business and its broader reactor services business. So Westinghouse on the core is performing very well with some really neat upsides. Its ability to go into accident tolerant fuel or LEU+ fuel. Its ability to penetrate more into the boiling water reactor space. That's all growth for the core beyond our acquisition assumptions. And of course, there's a conversion plant that's desperately needed for the West. Westinghouse has it in Springfields. It needs to come back to the market, that's all upside to the acquisition case. But let's not forget there's another pillar and that pillar is energy systems. At the time of acquisition, we actually modeled new builds at 0. We just said they're too big, they're too binary, and we're not putting a value to it. Well, since the acquisition, Poland has chosen 6 Westinghouse AP1000s. Bulgaria has chosen 2. Ukraine has chosen 9. They're advancing construction on 1. They bought all the parts from the old summer plant that was being built and abandoned in the U.S. So there are real projects moving forward towards final investment decision which are all upside to the Energy Systems case beyond the acquisition. So happily, the only area that's underperforming is the area that was going to shut down and decommission reactors. And we're absolutely glad that, that's underperforming. Everything else is exceeding our expectations.

I think a big debate in the U.S. right now, at least in the power space is, when are we going to see a large-scale build in the U.S. I think a lot of people point to Vogtle Unit 3 -- Unit 4 as being challenged in terms of the timeline and the cost overrun profile. And even though the technology is safe, it's commissioned, we understand how it works. People are trying to figure out, is this going to happen by the end of the decade? Is it the midpart of the 2030s? So in your conversations with investors, but also as a part of Westinghouse now, what's the outlook for a large-scale build in the U.S. in the context of the new administration coming in as well?

Yes. And I don't know if it's linked specifically to the new administration. It is linked to the sheer reality of the expansion of the electricity grid that's required in the U.S. When the Vogtle plants were opened in the summer, the Secretary of Energy started her speech by saying 2 down, 198 more to go, right? It gives you a sense of the scale of baseload power. 200 gigawatts of baseload power, that's an easy number to model. It's not an easy number to build, but it's an easy number to model just given the sheer expansion of the demand for high-quality electrons that we're seeing in the United States and, quite frankly, elsewhere. So there are lots of conversations about what this means for nuclear. How do you take existing plants and operate them? How do you effectively bring back plants that were shut down? What do subsequent license renewals look like? And yes, what does new build look like? And on new build, the market is really starting to mature. It used to be sort of you treated micro reactors, 5 to 50 megawatts, small reactors, 300 megawatts and gigawatt scale reactors almost equivalently and you just said, well, new build. But the market is starting to separate where the use cases for micro are becoming more clear. Where do you need mobile power? Where are you competing with diesel generation? Remote operations, remote communities, industrial resource operations, you generally burn more diesel taking the diesel to site then you burn at site. So it's a pretty easy math to do to figure out what your power cost is you're competing with. SMRs 300 megawatts are really starting to mature in a use case for deep decarbonization, take down carbon-based power and replace it with non-carbon power but tie into all existing transmission and distribution. But when you get into the gigawatt scale, it's just the sheer size. So Bruce Power right now in Canada, looking at building 4 gigawatt scale reactors because they've been told they need to bring 4,800 megawatts to the grid by 2040, 2050. And that story is being repeated in jurisdiction after jurisdiction. So the conversations are accelerating. What I think we should be mindful of is maybe the model is changing. I think in the past, a single utility on the backs of a single rate base shouldering the cost of new build, it will occur in a few cases, but I'm actually looking to conversations that appear to be suggesting a multi-utility, multi-investor, multi-customer fleet model is probably what's going ahead. If you haven't seen it, I would encourage everybody to read the DOE's recent lift-off report. It's all about building gigawatt scale nuclear again in the United States. It captures the learning effects at Vogtle. It matures them with the learning effects in China, the learning effects at the Barakah units in the UAE and tells a pretty damn compelling story about the role of new nuclear in the United States and other countries.

I want to wrap up the discussion on Westinghouse with Springfields. And when we look at the conversion markets right now, it's essentially triple-digit prices, and I think we are at what $4 5, 10 years ago at this point. So when we think about the conversion market to be extremely tight, the potential value unlock for Cameco to bring this asset back online, what are some of the key considerations going into that decision? And then also talk about the unique advantages of that asset over some of the other ones that are operating across the world right now?