Cameco Corporation (NYSE:CCJ) Q3 2023 Earnings Call Transcript

Cameco Corporation (NYSE:CCJ) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Thank you for standing by. This is the conference operator. Welcome to the Cameco Corporation Third Quarter 2023 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions] Webcast participants are asked to wait until the Q&A session before submitting their questions as the information they are looking for may be provided during the presentation. I would now like to turn the conference over to Rachelle Girard, Vice President, Investor Relations. Please go ahead.

Rachelle Girard: Thank you, Operator, and good morning, everyone. Welcome to Cameco’s third quarter conference call. With a very busy international travel schedule this quarter, our quarterly board meetings were held offsite rather than at our corporate office in Saskatoon. With us today on the call are Tim Gitzel, President and CEO; joining the call from Vienna, Austria; Grant Isaac, Executive VP and CFO; Heidi Shake, Senior VP and Deputy CFO; Brian Reilly, Senior VP and Chief Operating Officer; Sean Quinn, Senior VP, Chief Legal Officer and Corporate Secretary; and Alice Wong, Senior VP and Chief Corporate Officer. I’m going to hand it over to Tim in just a moment to discuss the current nuclear market environment, how today’s market compares to previous cycles and how it provides the basis for Cameco’s improving prospects.

After, we will open it up for your questions. As always, our goal is to be open and transparent with our communications. Therefore, if you have detailed questions about our quarterly financial results, or should your questions not be addressed on this call, we will be happy to follow up with you after the call. There are a few ways to contact us. You can reach out to the contacts provided in our news release. You can submit a question through the contact tab on our website. Or you can use the Ask a Question form at the bottom of the webcast screen, and we will be happy to follow up after this call. If you join the conference call through our website event page, there are slides available which will be displayed during the call. In addition, for your reference, our quarterly investor handout is available for download in a PDF file on our website at cameco.com.

Today’s conference call is open to all members of the investment community, including the media. During the Q&A session, please limit yourself to two questions and then return to the queue. Please note that this conference call will include forward-looking information, which is based on a number of assumptions and actual results could differ materially. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we make today, except as required by law. Please refer to our most recent annual information form and MD&A for more information about the factors that could cause these different results and the assumptions we have made.

With that, I will turn it over to Tim.

Tim Gitzel: Well, thank you, Rachelle, and good morning, everyone. We appreciate you joining us for today’s call. I’m pleased to start today’s call by announcing in addition to Cameco’s executive team. Effective November 1, Dominic Kieran will be joining Cameco as Global Managing Director of our subsidiary in the United Kingdom. Dominic brings extensive international executive experience in the nuclear fuel, chemical and broader technology industries, which will enhance the skill set of our strong and experienced leadership group. His wide-ranging expertise will help facilitate Cameco’s growth across the nuclear value chain. Dominic brings over 20-years of leadership experience to Cameco. Most recently he served as Chief Executive Officer with Babcock Nuclear.

Previously he was with Urenco for 15-years in increasingly senior leadership roles, including Chief Commercial Officer and gained a wealth of experience from his diverse responsibilities. We look forward to having Dominic join our Cameco team. As Rachelle mentioned, I’m joining today from Vienna, Austria, where tomorrow I’ll be attending meetings of the IAEA’s Standing Advisory Group on Nuclear Energy. Mr. Rafael Grossi, the IAEA’s Director General, appoints group members from governments, research institutions, and the nuclear industry to advise the agency on nuclear power and fuel cycle activities and provide guidance on matters concerning capacity for long-term energy security. This trip adds to what has been a very busy fall. Back in Canada, I met with Ukrainian President, Zelenskyy and Prime Minister, Trudeau in September, followed by a trip with a Cameco delegation in October to the head office and operations of Energoatom in Kyiv, reinforcing our commitment and support for Ukraine’s energy independence.

We also joined the OECD’s inaugural Roadmaps to New Nuclear Conference in Paris, where government and industry leaders met to build leadership and cooperation in nuclear energy. These are all proud moments for us at Cameco that highlight the impact our work is having around the world. Our invitation to these types of influential meetings highlights our credibility as a company and our well-respected position in the nuclear fuel market. And they provide us with unique insight and the opportunity to be in the room where important policies are discussed in support of the global nuclear industry. It’s an industry that is getting significant attention today and that’s being recognized for the numerous benefits and advantages it can offer to the global energy supply and to energy security.

This past quarter we saw players from all facets of the nuclear sector congregate in London for the World Nuclear Association’s annual symposium where the atmosphere was more optimistic than it’s been for over a decade, maybe ever. With over 40-years in this industry, I feel well qualified in saying, yes, we’ve seen enthusiasm in past cycles. However, at the symposium this year, there was a sense of urgency that I can’t say we’ve experienced before. Each time the market has entered a period of transition, stakeholders look back at previous cycles to highlight similarities and common threats in an attempt to predict the duration and durability of the positive momentum. If you follow the industry in Cameco through the 2000s, or if you’re one of the exceptional few that might have been paying attention even earlier than that, you would have heard us talking about things like potential long-term demand growth, or supply pressure building on the horizon, or the level of financial interest in buying physical uranium.

We are of course seeing those similarities right now, but with the added element of urgency, I think there is much more to the story this time. So for today’s call, rather than our customary approach of highlighting industry developments in the context of Cameco’s strategy, I thought we would provide our view of what sets the current industry environment apart from previous cycles, pulling the various factors together into one discussion. And in doing so, I want to emphasize how Cameco, as one of the leading suppliers in the industry, is also evolving to maximize value while addressing the urgent call to action. Let’s consider the durability of demand, first in the context of climate change. Some will argue that the climate crisis isn’t new as it’s been part of the conversation for decades now.

But what’s different today is that urgency. It’s no longer just a model on paper with academics running computer simulations. Increasing average global temperatures and the fires and floods that are becoming more and more frequent can’t be ignored. The evidence continues to point to our carbon-based energy systems as a key contributor to the problem. This has led to electron accountability and proposals by countries and companies for achieving net zero targets taking center stage. And today it’s clear, achieving those targets does not happen without nuclear power. That itself is a notable difference, but it goes even deeper. This time policymakers are not shying away from proposing nuclear as a key part of their energy mix, some even reversing their previously anti-nuclear stance.

The WNA sessions in London that I mentioned open with U.S. Member of Congress Chuck Fleischmann and the U. K. Under Secretary of State and Minister for Nuclear and Networks, Andrew Bowie on a panel where they discussed today’s bipartisan support in government. That certainly differs from what we’ve seen in the past and it forms what might be considered a solid base of support for demand growth using clean, reliable, secure and well-established nuclear technology. Its growth is starting to move beyond Asia, which has been the key component of the industry growth story since the late 2000s. Asia’s nuclear expansion obviously remains very important today, but the broader interest and level of potential growth has expanded and is now much more global.

Beyond that base of demand growth, another emerging difference in today’s demand profile is the potential deployment of new nuclear reactor designs with a number of small modular reactors and small advanced micro-reactors in development. These represent a clean energy source that, would be more accessible in terms of output that better matches small, or modest local demand. They’re expected to have better cost and schedule control, by way of factory production. And they can also address needs beyond electricity such as applications for industrial heat, desalinization, or hydrogen production. Big industrial energy consumers are not waiting, for those government decisions and policies I just mentioned. They are moving much more quickly. A number of private companies, are taking action and announcing their own plans, to support the expansion of clean nuclear energy in the years, to come using those promising new technologies.

Another big difference that won’t be news to anyone, is on the geopolitical front. The tension and uncertainty are increasing daily. Events like Russia’s invasion of Ukraine and a coup in Niger leaves countries re-evaluating their energy security and who, they want to rely upon to supply fuels, avoiding dependencies such as Russian gas. That evaluation of security is being done in the context of their carbon footprint and electron accountability, which leads to consideration of nuclear to a degree, we have not seen for nearly a half century. And while countries need secure and dependable energy supply, they also want it, to be clean. Political views and policies generally represent the will of the people and it’s clear that, public opinion is changing as well.

We’re seeing a social shift happening like never before. Nuclear energy is an undeniable part of the social conversation. There’s vocal support from diverse and sometimes unexpected sources, sources like social media influencers, Hollywood personalities, and even long-time nuclear protesters like Bono of U2, which is last month admitted that although he has campaigned against nuclear energy for a long time, his view has flipped to support nuclear amid the climate crisis. Taken altogether, the overarching differences we’re seeing this cycle contribute, to that full cycle demand growth you’ve heard us talk about. Previous bullish cycles were typically underpinned by demand that was more or less out in the future and in the longer term segment, of the forward demand curve.

This time we are really seeing that durable demand growth across the full cycle. In the near term we have financial interests, buying physical uranium in a way that is much different than in the past. Financial participants, are not acting as a marginal buyer and seller purchasing today and selling tomorrow, when the price rises by a few cents. Instead, they are providing better transparency by buying material at the market and with limited redemption capabilities, providing a better sense for the intrinsic value of uranium in the near-term. Additionally, we have some real end user near and midterm demand. That demand is coming from several fully depreciated, safe, operable reactors. Reactors that were slated for decommissioning due to the economics of broken electricity markets are now being saved for their significant low carbon and secure energy benefits.

And it’s coming from reactor life extensions, again thanks to the security, and low carbon advantages and recognition that there’s no equivalent clean baseload alternative. In the long-term portion of the cycle, demand growth is coming from more traditional new builds, as well as the emergence of the advanced reactors, SMRs and microreactors, which have the potential to add significant demand in the coming decades. In the WNA’s updated fuel cycle report released in September, demand is looking more robust than ever, averaging growth of 3.6% annually compared to 2.6% in the previous 2021 report. And that only includes a very light and conservative estimate for demand to fuel those SMRs and new nuclear designs. Geopolitical tensions and energy security concerns, are also changing the demand picture.

A number of new markets seeking fuel from reliable suppliers and safe jurisdictions, have opened up to create full cycle contracting opportunities, especially in Eastern Europe. So, those are some significant differences in the context of demand. But what about supply? Well, the uranium market has had its share of supply challenges in past cycles, but the difference today is that the supply picture, is more uncertain than ever. First and foremost is primary supply. As demand grows and the mines are depleted, there is no Kazakhstan equivalent source of supply, waiting on the sidelines somewhere, to meet that growing demand into the 2030s. Even the existing uranium coming out of Kazakhstan, is not going to be splashing around in the market, as it has in the past.

Because Adam Prom has stated that under their value strategy, production now has a home in their long-term contract book. A big reliable supply source is simply not going, to materialize and the pockets of potential production that could be added, to the supply stack carry significant Greenfield risk. With no clear emerging primary supply, we have to look at the sources of secondary supply, which have been filling the gap. But the shock absorbers of the past, are not what they used to be either. So far this year, industry-wide, there has been nearly 144 million pounds committed under long-term contracts, which is a level we’ve not seen in 10 years, indicating the market remains on track to replacement rate contracting. These signposts provide a signal that inventories in all forms have been run down and there is certainly no megatons, to megawatts program in the works to ease the pressure.

Also on secondary supply, there is an ongoing shift to replace Russian fuel supply services and create more capacity in the enrichment segment, of the fuel cycle, by moving from underfeeding to overfeeding. I won’t get into the technical aspects of underfeed, overfeed, but the punchline is that it means less secondary supply going back into the market from enrichers. In fact, similar to the story of rebuilding a depleted inventory beyond run rate requirements, overfeeding has an exaggerated impact on supply tension, by not only reducing secondary supply, but creating secondary demand. So primary and secondary supply of the natural uranium needed at the very start of the fuel cycle is declining. Then there is the matter of actually moving that supply through the cycle.

Nobody will say that moving class 7 nuclear material around the globe has ever been easy, but it’s clearly facing new risks and challenges, as a result of geopolitics. However, the uranium supply story does not end there. Stakeholders have recognized that much more than natural uranium is needed, to build a nuclear fuel bundle. The services – refining, conversion, enrichment, deconversion, pelletization, and fuel fabrication, are getting more attention than ever, and the degree to which they are interdependent complicates the typical supply-demand analysis of a commodity. And those other segments of the fuel cycle are also facing challenges. Based on lessons learned, we are seeing a new common theme across producers and services, at all stages of the cycle.

Suppliers have been clear, they are not going to front run demand with uncommitted supply. If they’re going to add back, expand, or build new production or processing capacity, they need contracts and commitments from end users, to support their investments. That has not been a central consideration in the past. As we hold those contracting conversations with customers, to lock in long-term value, it’s also important to consider today’s pricing environment. We’ve never been this early in the cycle with prices as high as they are today. That’s a significant factor that some might be thinking, could hamper the momentum, but it isn’t. That’s because of the improving electricity prices rising faster than front-end fuel prices, which has rarely, if ever, been the case for us in nuclear.

That means customers can better tolerate, the realities of sustainable fuel pricing and focus on shoring up inventories to help ensure security of supply. So, all those differences in today’s nuclear fuel cycle from both the demand and supply perspective mean that Cameco, as a diversified nuclear fuel supplier, has more opportunities in front of us than ever. And compared to the Cameco of previous cycles, we’re different as well. This time, we don’t have big capital intensive Greenfield mines under construction. As we see demand come to the market, we have multiple Tier 1 licensed, permitted and approved assets we can bring back to capacity and expand. In fact, the Canadian Nuclear Safety Commission just awarded us 20-year license extensions at McArthur River and Key Lake, which is double the term of our previous license.

And at Rabbit Lake, we received a 15-year license extension. We believe that our commitment to protecting the health and safety of our people and the public and to protecting the environment is reflected in the extended duration of the licenses. And as we add contracts to our portfolio for the delivery of uranium in the years to come, we also have several already built and permitted Tier 2 assets where costs and economics are established and proven. These are all sources of proven and reliable supply from a preferred jurisdiction. And of course it doesn’t end there. We have what we believe are some of the best advanced exploration projects and most prospective land positions in the business. Today we are more focused on our core expertise, having divested interests in gold and power generation, and as a pure-play nuclear investment we are very well positioned to maximize value.

There’s improved recognition of the importance and interdependence of the entire fuel cycle beyond uranium as a core commodity. This means that our long-established and reliable fuel services division, as well as our investment in global laser enrichment and its next generation enrichment technology are being highlighted for their strategic importance. And I’m not using the word strategic in place of economic. We’ve been invested across the fuel cycle since inception and I think those assets are more valuable to us today from a financial perspective than they’ve ever been. Considering our uranium and fuel cycle assets together from an investment perspective, we offer exciting upside exposure to an in-demand commodity at a time when supplies have never been more uncertain.

And at the same time, we offer the stability and protection of an impressive long-term contract portfolio representing a stream of earnings and cash flow that provides exposure to rise in prices. And our pipeline of contract discussions continues to grow. And with our partner Brookfield, we continue to work toward closing our acquisition of Westinghouse by the end of the year. That transaction is very well aligned with our pure-play nuclear strategy. With several parts of that business being more stable and less tied to the ups and downs of the commodity, it’s expected to complement our high quality Tier 1 uranium and fuel services assets. Cameco’s valuation should therefore reflect a scarcity premium. No other publicly traded uranium company offers similar exposure to that durable, full cycle demand growth across the fuel cycle that’s occurring in the nuclear industry.

So I think it’s clear the drivers that supported the positive momentum of cycles in that past are important factors in today’s environment. However, the urgency and the differences impacting demand and supply and the strategy Cameco has pursued over the past decade has made us a different company today than we’ve been in the past. Combining these factors set up this cycle to be more exciting than ever. The improving market conditions coupled with our strategic decisions are also benefiting our financial performance. We’re seeing improvements in our earnings, gross profit and cash flow, which was evident again this quarter. And we expect our financial performance to improve further as we continue our transition back to a Tier 1 run rate. Cameco’s strategy of contracting discipline, production discipline and risk managed financial discipline is set within the context of the transitioning market environment we’re currently in.

With $2.7 billion in cash, $1 billion in total debt, and a $1 billion undrawn credit facility, our balance sheet remains strong. We will retain our conservative financial management to support our balanced and disciplined contracting and supply decisions, providing us with the ability to self-manage risks and retain the capacity to pursue value-adding investments like Westinghouse. Before moving into our Q&A session today, it is with an enormously heavy heart that I acknowledge and remember Ian Bruce, a dear friend, valued colleague, and Cameco’s long-time board chair who tragically passed away at his cottage in Ontario on October 16. I’ve worked with Ian since he joined our board more than a decade ago and on behalf of the entire Cameco family, I extend our deepest condolences to Ian’s wife Darlene and his family and many friends and loved ones.

His business acumen, personal and professional advice, overall leadership, and most importantly, friendship were absolutely invaluable to Cameco, and his absence during yesterday’s Board discussions was notable. Ian was excited about nuclear energy and the company’s future and he was extremely proud to be part of the Cameco team. He will be profoundly missed. So thank you for your interest today and we are happy to take your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Orest Wowkodaw of Scotiabank. Please go ahead.

Orest Wowkodaw: Hi, good morning. Grant, I was hoping we could get some color on what’s happening with contracting. Obviously, the uranium price has moved up a lot, even in the last three months. And I’m wondering if you’re seeing what kind of behavior you’re seeing from your customers, whether the higher price movement is actually engaging them to sign more contracts or whether you’re seeing them pulling back and alternatively how’s Cameco approaching this behavior and are you continuing to pull back in terms of signing contracts in hopes of better terms with respect to higher floors and ceilings down the road. Just wondering sort of what that engagement looks like right now.

Grant Isaac: Yes, Orest, great questions, great place to start. There have been a lot of opportunities to be with customers in the last couple of months. The WNA symposium that Cameco – that Tim referred to as well as the recent NEI conference in Charlotte. There still is a very pervasive urgency in the market. That urgency is reflected in improving contracting rates. We now are looking at year to date across the industry, excuse me, about 145 million pounds contracted. That is much higher than it had been in each of the last 10 years, starting to approach that durable replacement rate contracting. I would say in general it is a broad-based demand recovery. It reflects demand from those who might have thought they had been shutting down a reactor early coming to the market, those who are now pursuing life extensions for reactors that might have been retired after their initial license extension, and then of course its demand for those who are building new.

It also has a very important regional focus, and that is the emergence of Central and Eastern European customers into the Western supply piece, which is a demand that is new and is quite frankly competitive with the demand that we used to see from Western Europe from North America, Canada, the U.S., as well as parts of Asia. So it is broadly based. I would say that there are some utilities that have been more aggressive than others in shoring up their longer-term supply. Probably no surprise those who are on the front-end of rising electricity prices and energy security have moved quicker. I would say that is characteristic of Western European utilities, as well as Central and Eastern European utilities. The good news Orest, is that some have yet to come to the market.

And so when Tim refers to the situation where we’re in the early innings of a contracting cycle. It is because we know there are pockets of demand, bigger utility customers yet to come. All of this suggests to us we are absolutely in the right position as Cameco to be strategically positioning our contract portfolio for higher prices, being biased towards market-related long-term contracting that will reference prices at time of delivery out into the future. We have been more selective in ensuring that we’re getting that exposure to a rising price environment. We lead the market with respect to the construction of floors and the construction of ceilings, this is for us exactly where we want to be. Sorry for the long answer, I just wanted to cover it in its full dimensions.

Orest Wowkodaw: Okay, thank you for that. And just as a follow-up, the Kazatomprom announced a pretty aggressive 2025 production target a few weeks ago, going to 80 million pounds from somewhere in the 55 million pounds to 60 million pounds. Should we anticipate, like how does Cameco think about that strategy? I mean you obviously have a lot of curtailed capacity both in terms of still Tier 1 expansion potential but also with respect to your Tier 2. What do you need to see to further increase your production plans?

Grant Isaac: Yes, let me just make a comment on the Kazatomprom announcement because I think across the industry certainly on the uranium supply side not a lot of surprise I think just a general expectation that is, Kazatomprom has pivoted to a strategy that’s very similar to Cameco’s, which is you build the homes under long-term contract and then you call for more production. They’ve been successful in building long-term contract homes. I think a lot of people had noted some of the volumes that they had committed to, to go into China, for example. So it’s pretty clear they need those pounds as part of commitments they’ve already entered into. So that is a very big departure from the Kazatomprom of the past, which had produced a lot of material, held it as uncommitted primary production, and then was required to sell it through a spot market not capable of absorbing those volumes.

So not a lot of surprise that those announcements were made and of course the backdrop for achieving those increased production numbers is performance on the operating side and you see a lot of risks being raised by Kazatomprom with respect to challenges in their supply chain, the types of things, asset supply for example, drilling, availability, the types of things that make achieving those production targets difficult. So I hope folks weren’t surprised by that announcement or weren’t surprised to the negative. Kazatomprom is very consistent with the commercial strategy because Kazatomprom been following. With respect to Cameco, we remain in supply discipline. We have seen these markets before. We believe these are the early innings of a robust contracting cycle.

We’ve never been at this stage of a contracting cycle at these prices. It suggests that we want to be leveraged with our in-ground production, our in-ground inventory to higher prices. So what we need to see is an urgency of supply translate into an urgency of demand. We just need to see more demand in the market. That demand in the market is going to restore true production economic pricing, the type of pricing required to be considering in a meaningful way, the restart of Tier 2 production, for example, and then after that, of course, real investment in Greenfield. Because we’ve seen these markets before, we can be strategically patient. We are not in a rush to produce material that doesn’t have a home requiring us to either build an inventory or sell it into the spot market, neither of which have been supportive of value for our owners and we just won’t do that.

Orest Wowkodaw: Thanks, Grant.

Tim Gitzel: Thanks for your question, Orest. Sorry, I wasn’t ignoring you. We got cut off for a minute, but we’re back.

Operator: Our next question comes from Ralph Profiti of Eight Capital. Please go ahead.

Ralph Profiti: Thanks, operator. Good morning, Tim and Grant. Is there a specific window of time where you can refer us to, with respect to your comments about sort of future demand being more near term, right? Is this equal across all tenors or is there a specific window say within two to three years or sort of three to five years that may be of particular interest to highlight for us?

Tim Gitzel: Grant, why don’t you carry on with the marketing piece in the market?

Grant Isaac: Yes, when you think about that near-term demand, we’re often referring to those who are running reactors may have been planning to shut them down early, but then the policy condition changes for them to be saved. And so, if you – just think in the recent past, some examples would be the Diablo Canyon units in California or perhaps the Byron and Dresden units in Illinois. And why we call this near-term demand is, because the reality for the utility that’s been operating those units, is not only have they not been procuring run rate material, they’ve probably been drawing down their inventory that was assigned to those units. And so, when those units are extended, we often see two very distinct types of near-term demand.