Cameco Corporation (CCJ) on Q4 2021 Results - Earnings Call Transcript
Operator: Thank you for standing by. This is the conference operator. Welcome to the Cameco Corporation Fourth Quarter 2021 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. I would now like to turn the conference over to Rachelle Girard, VP, Investor Relations, Treasury, and Tax. Please go ahead. Rachelle Girard: Thank you, operator and good morning everyone. Welcome to Cameco’s fourth quarter conference call. I would like to acknowledge that we are on Treaty 6 territory and the Homeland of the Métis. Today’s call will focus on the trends we are seeing in the market and on our strategy. 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. With us today on the call are Tim Gitzel, President and CEO; Grant Isaac, Senior VP and CFO; Brian Riley, Senior VP and Chief Operating Officer; Alice Wong, Senior VP and Chief Corporate Officer; and Sean Quinn, Senior VP, Chief Legal Officer, and Corporate Secretary. I am going to hand it over to Tim to talk about the long-term fundamentals for our industry, the current market dynamics and about Cameco’s strategy to add long-term value. After, we will open it up for your questions. If you have joined 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. Please refer to our 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 welcome to everyone on the call today. We appreciate you taking the time to join us. Hope it’s not too late to wish all of you a happy new year and I hope that you and your families are doing well. A year ago I spoke to you about our excitement for the future of our industry, the growth occurring in traditional and non-traditional uses of nuclear power and about our role in supporting the transition to a net zero carbon economy. And I can tell you, none of that has changed. In fact, the developments in our industry over the past year further support our belief that there is durability to demand that I am not sure we have ever seen in our industry before. And the fundamentals are pointing to a transfer of risk from the suppliers of uranium fuel to the users. The thinning of material available in the spot market and the growing uncertainty of supply has led to the recognition that uranium prices need to rise to reflect production economics. The economics that will be needed to ensure the availability of reliable and sufficient productive capacity to fuel the growing demand for carbon-free baseload nuclear electricity. We have seen a nearly 40% increase in uranium spot prices since a year ago and a 22% increase in the long-term price and that of course is good news for us. We believe that our actions have contributed to the growing security of supply concerns in our industry. As a result of our planned and unplanned production cuts, our inventory reduction and our market purchases, we have removed more than 190 million pounds from the market since 2016. As a commercial supplier, our decisions have uniquely positioned Cameco with demonstrated Tier 1 assets, strategic Tier 2 assets and vertical integration. To capitalize on the increasingly undeniable conclusion, the nuclear power must be an essential part of the clean energy transition. So today, I am pleased to tell you that with the improvements we have seen in the uranium market and the success we have had in putting 70 million pounds of new long-term contracts in place since the beginning of 2021, it is time. It’s time to claim our incumbency advantage and proceed with the next phase of our supply discipline decisions in alignment with our contract portfolio and the market opportunities. And it’s time to reward those who understand and have supported our strategy, which has laid the foundation to capture the value of the clean energy transition. Our plan in no way represents an end to our supply discipline. What we are contemplating for supply discipline still represents a much greater reduction any other producer has made. In fact, we are continuing with indefinite supply discipline. Therefore, we will begin the process of getting our Northern Saskatchewan Tier 1 assets operationally ready to achieve a production plan of about 28.5 million pounds combined in 2024 on a 100% basis. Our plan includes both McArthur River and Cigar Lake operating at less than licensed capacity starting in 2024. When you consider our idle Tier 2 capacity, about 40% of our productive capacity will remain subject to supply discipline in 2024. In conjunction with this plan change to our operations, we are also announcing a 50% increase to our 2022 dividend, which will be paid in December this year. So, why now you may ask? With all of our market experience, we are seeing the signposts that tell us it is time to prepare our proven Tier 1 assets for operational readiness and flexibility, because a market transition is taking hold. In addition to the over 160 million pounds we have under contract in our portfolio, we see a market where the fundamentals are shifting in our favor and we want to be ready. Let’s take a look at the fundamentals that motivate our strategic decisions. The benefits of nuclear energy have come clearly into focus with a durability that we believe has not previously been seen. This durability is being driven by the accountability for achieving the net zero carbon targets being set by countries and companies around the world. These net zero carbon targets are turning attention to a triple challenge. First is to lift one-third of the global population out of energy poverty by expanding the availability of clean and reliable baseload electricity. Second is to replace 85% of the current global electricity grids that run on carbon emitting thermal power with a clean, reliable alternative. And finally, the challenge is to grow global power grids by switching industries to electricity, such as private and commercial transportation, home heating and industrial heating, which are largely powered with carbon emitting thermal energy today. Additionally, the energy crisis experienced in some parts of the world has amplified concerns about energy security and highlighted the role of energy policy and balancing three main objectives providing a clean emission profile, providing a reliable and secure baseload profile, providing an affordable levelized cost profile. Too much focus on one objective has left some jurisdictions struggling with power shortages and spiking energy prices. There is increasing recognition that nuclear power with its clean emissions profile, reliable and secure baseload characteristics and low levelized cost has a key role to play in achieving decarbonization goals. Several nations like France, the United Kingdom and the United States are reaffirming their commitment to nuclear power by developing plans to support their existing reactor base and are reviewing their policies to encourage even more nuclear capacity. Several other European countries like the Netherlands, Czechia, Poland, Estonia, Slovenia and Serbia have emerged as candidates for new nuclear capacity. With this strong support for nuclear energy, the European Union has agreed in principle to include certain nuclear energy activities under a green labeling system in its taxonomy for sustainable finance. Its inclusion will identify nuclear power as a climate-friendly investment and could result in increased investment in nuclear power plants and may also allow a broader array of ESG focused funds to invest in other segments of the nuclear power industry, including mining. Even in countries with phased-out policies like Germany, Belgium and Spain, there is growing debate about the role of nuclear power with public opinion polls showing growing support for nuclear. The growth in demand is not just long-term in the form of newbuilds, it is medium-term demand in the form of reactor life extensions and it is near-term growth as early reactor retirements are prevented. And we are seeing momentum building for non-traditional commercial uses of nuclear power around the world such as development of small modular reactors and advanced reactors, with numerous companies and countries pursuing projects. So, it’s easy to conclude that demand outlook is durable and very bright. However, the uranium supply side story paints a much different picture. Persistently low prices have led to planned supply curtailments of existing productive capacity, development risks due to lack of investment in new productive capacity, and the end of reserve life for some mines. In the past, secondary supplies have filled the gap. But after years of drawing on these one-time sources, the secondary supply capacity is now declining significantly into the future. These fundamental facts are being amplified by unplanned supply disruptions caused by the COVID-19 pandemic and the related global supply chain and inflationary challenges that are interrupting the flow of goods and services in the uranium market. We have seen this both here in Canada and in Kazakhstan. And they are further intensified by the thinning of the spot market due to the interest in physical uranium by investors that are purchasing significant volumes of uranium and sequestering it, by the increasing ESG scrutiny of suppliers to ensure utility supply chains qualify as green, by the deepening geopolitical and origin risks driven by the increasing concentration of supply, and a trend toward regionalization to ensure the availability of critical minerals. Looking at where the market is today and what we are seeing, it’s easy to conclude that the current uranium market is more constructive than we have seen in a very long time. Either this improvement has been the alignment of productive capacity with the market cycle, something we as a responsible producer understand and have made a significant part of our strategy. I was motivated by the uranium market fundamentals. Our strategy of full cycle value capture has had a significant impact on the positive market dynamics we see today. We have been undertaking work to ensure we have operational flexibility. And we are aligning our production decisions with the market fundamentals and our contracting portfolio. And we have been financially disciplined. Indeed, I would argue the magnitude of our production cuts to well below our sales commitments, the resulting purchase activity to replace those pounds is unrivaled. The curtailment of our Tier 1 and Tier 2 assets have inventoried almost 115 million pounds of uranium in the ground since 2016, including our partners’ share, more than 115 million pounds of uranium that are worth much more in today’s market. In addition, with our spot and term purchasing, we have taken 56 million pounds of uranium out of the market since we began curtailing production. And in 2018, we drew our inventory down by about 20 million pounds. To step back for a minute and consider where the market might be today had we not taken these actions, had Cameco not acted strategically and decisively, almost 190 million pounds would still be above ground and trying to find a home in the market. The spot market would still be significantly oversupplied. Financial and other investors would not have taken notice of uranium. We have been through every market transition in our industry. And while having great assets is a necessary condition for creating long-term value. We know that it is not sufficient. We understand that the spot market is not the fundamental market in our business. It is a very thinly traded market, where small volumes can have an outsized impact on price. It is not where utilities turn to satisfy their long-term run-rate requirements. It is typically where they go for one-time discretionary volumes. Our experience has taught us that a responsible producer creates real value by building a long-term contract portfolio, a portfolio that supports the operation of productive assets and generates significant cash flow through the entire commodity cycle by having leveraged to greater returns as the price increases and that provides downside protection for periods of lower prices. In our business, there is no substitute for a full blown, utility driven long-term contracting cycle. A contracting cycle motivated by security of supply concerns drives value capture in the uranium fuel market as it did in the conversion market 2 years ago, as it did for us during the worst down cycle in the uranium business, when our average realized price outperformed the market and protected our balance sheet when others failed financially and had to be recapitalized and restructured destroying value for their owners. It’s why we are critical of those who promote a strategy to build productive capacity fully exposed to the spot market. Having been in this business now for over three decades, I can tell you that strategy simply doesn’t work. For those who are trying to create long-term sustainable value and it demonstrates a basic lack of understanding of the structure of our market. The higher prices discovered during a contracting cycle drive investment in higher cost sources of production, which due to the lengthy development timelines missed the contracting cycle and ramp up after demand has already been captured by the incumbent producers. The new uncommitted supply exposed through these small discretionary spot market sets in motion a price off cycle and becomes value destructive. Finally, after more than 10 years in a trough and through the deliberate and disciplined execution of our strategy, aligning our productive capacity with market opportunities, we are seeing the cycle form. As the spot market continues, the thin utilities are beginning to shift their attention to securing material for their uncovered requirements and not just in off-market negotiations. Increased interest in on-market long-term contracting is emerging as well. The request for proposals we are seeing, are directed at those producers who have proven and reliable productive capacity today and who have a track record of honoring commitments. The leading utilities understand that a Tier 1 asset is demonstrated, not just discovered and declared. They have learned from history they are relying on new development projects showing up on aggressive timelines and budgets promised is not a proven strategy. They understand that banking on a resource that still faces technical, regulatory stakeholder project than operating challenges in an inflationary supply chain challenges environment puts their future reactor operations at significant risk. As an independent commercial supplier, we can provide our customers with access to proven and reliable productive capacity. The substantial Canadian productive capacity our supply meets increasingly stringent ESG requirements. It can provide diversity from state-owned enterprises and help to de-risk utilities’ future supply from trade policy exposure. Let’s look in more detail at the plans we have for productive capacity. If you recall last quarter, I said that when the date comes to announce that the return to operating status at McArthur River/Key Lake is on the horizon. It will be undeniably positive news for Cameco and all of our stakeholders and we believe for the market. Well, today is that day. We are laying claim to our Tier 1 incumbency advantage as we further positioned the company to capture the value we expect to come from the growing demand for safe, clean, reliable and affordable nuclear energy. Increasing uranium prices and a growing contract portfolio are giving us line of sight to return to our Tier 1 cost structure. We are seeing the conditions develop that will allow us to deliver uranium from our proven assets under long-term contracts that we expect will create value and sustain a stable nuclear fuel cycle to support growing demand and we want to be ready. As a responsible producer, our production plan will remain aligned with the market. It entails a portfolio approach to our Tier 1 capacity in Northern Saskatchewan. We expect the investments we are making in digital and automation technologies will allow us to operate these assets with more flexibility. Flexibility is key to our ability to continue to align our production decisions with our contract portfolio commitments and opportunities. With about 185 million pounds added to our long-term portfolio since 2016, including 70 million added since the beginning of 2021, we have a solid base of contracts to deliver our plant production into, it is not destined for the spot market. The market-related contracts and our portfolio together with the large inventory of uncommitted pounds we have left in the ground give us plenty of exposure to further improvements in the market. To get started, we will begin the process to transition the McArthur River mine and Key Lake mill from care and maintenance to operational readiness to allow us to produce 15 million pounds per year on a 100% basis by 2024. That is 40% below the annual license capacity. Once the McArthur River/Key Lake operation reaches its planned production starting in 2024, it is our intention to pullback on production at Cigar Lake. Plan is to take production at Cigar Lake from 18 million pounds per year down to 13.5 million pounds per year on a 100% basis or 25% below its license capacity. It will take us some time to ramp up at McArthur River/Key Lake. We must complete some critical projects, perform maintenance readiness checks and recruit and train sufficient mine and mill personnel before we begin operations. Over the course of 2022 and 2023, we will undertake all of the activities necessary to ramp up to achieve our 2024 production plan. As a result, this year, we could produce up to 5 million pounds of uranium on a 100% basis at McArthur River/Key Lake. At Cigar Lake, we expect to produce 15 million pounds on a 100% basis, 3 million pounds less than its license capacity. Our production outlook reflects the expected impact of delays in development work at Cigar Lake in 2021 and the ongoing pandemic and supply chain challenges that are impacting the availability of materials, reagents and labor at all of our operations. However, we will work to minimize any disruptions to our operations this year. We expect that our operational decisions at McArthur River/Key Lake will have a significant and positive impact on our financial performance. As you know, the financial aspect of our strategy is to ensure that we have a solid balance sheet and the ability to self-manage risk. At the end of the second quarter, we were again in a negative net debt position with $1.3 billion in cash, $1 billion in long-term debt, and a $1 billion undrawn credit facility. Once production at the McArthur River/Key Lake operation resumes, we expect to begin to see a significant improvement in our earnings and cash flow. As production ramps up to the planned level, the operational readiness costs incurred will decrease. And we will be able to source more of our committed sales from lower cost produced pounds as well as the higher prices that are being discovered in the currently improving market will flow through our existing contract portfolio. And with an inventory of unencumbered Tier 1 and Tier 2 pounds in the ground, rising prices will also create the opportunity to layer in new long-term commitments with appropriate pricing mechanisms that will underpin the long-term operation of our productive capacity. With the court process in our dispute with the CRA confirming unequivocally, the Cameco consistently followed the rules and complied with both the letter and intent of the law, we still expect $295 million in cash and $482 million in letters of credit to be released to us. We just don’t know when. So, we continue to work on that. As such, we expect to have the financial capacity to execute on our strategy and self-manage risk, including from global macroeconomic uncertainty. Therefore, we are pleased to reward those who have supported our strategy. Our Board has approved a dividend of $0.12 per share to be paid in December, up from $0.08 per share in 2021. So, what does all this mean for Cameco? Well, it means we are optimistic. We are optimistic about the growth in demand for nuclear power both traditional and non-traditional. We are optimistic about the growth in demand for uranium and fuel services. And we are optimistic about the incumbency opportunity for Cameco in capturing long-term value across the fuel chain and supporting the transition to a net zero carbon economy. Therefore, we will embark on the next phase of our supply discipline strategy. We will continue to do what we said we would do. So what is it that we are doing? We’re aligning our production decisions with our contract portfolio and the market fundamentals. We are being strategically patient in our marketing activities. We are conservatively managing our balance sheet to ensure we can execute on our strategy and self-manage risk. And we are rewarding those who understand and have supported our strategy. This strategy has positioned us well to take advantage of the fundamentals I spoke of earlier. We have operating and idle Tier 1 assets that are licensed, permitted, long lived, and our proven operations that have expansion capacity. We have fully permitted and proven Tier 2 assets that don’t make sense at today’s prices, but when you think about them in the context of a looming supply gap, there is a potential pathway for them to add value for us in the future, but we will be very disciplined in our evaluation on that front. Thanks to our disciplined contracting strategy, we have had a contract portfolio that has protected us well during the worst down cycle in our business. As the uranium market improves further, our focus is shifting to securing homes for our in-ground inventory that has not yet been committed. We won’t chase the market down to win business and we won’t produce to dump uncommitted supply into a thinly traded spot market as we have seen some of our competitors do. The primary driver for our contracting activity is always valued. Therefore, as the market improves, we expect to continue to layer in volumes, capturing greater upside using market-related pricing mechanisms. However, we recognized there is a cyclicality to our business that is inevitable. That’s why as a responsible producer, we will also look to lock in value at higher prices to carry those higher prices through the next cycle. We also locked in significant value for our fuel services business in the recent price transition and conversion. And we are more than just mining. We are vertically integrated across the nuclear fuel cycle. We are refining conversion to fuel fabrication. Additionally, we are positioning Cameco to respond to the growing need for uranium fuel to generate safe, clean, reliable and affordable electricity by exploring opportunities to further our reach to accomplish the full nuclear fuel cycle. To our fuel manufacturing capabilities and investment in global laser enrichment, we are exploring fuel fabrication of new fuels, including high-assay low-enriched uranium or HALEU. We are also participating in the development of small modular reactors and have entered a number of non-binding arrangements to advance their commercialization and deployment in Canada and around the world. And we have an interest in the nuclear sustainability services, the back end of the fuel cycle, including aiding in the responsible cleanup of enrichment facilities no longer in operation. These opportunities aligned with our commitment to manage our business responsibly and sustainably and to increase our contribution to global climate change solutions. Our decisions are deliberate. We are responsible commercially motivated supplier with a diversified portfolio of assets, including a Tier 1 production portfolio that is among the best in the world. We are committed to operating sustainably by protecting, engaging and supporting the development of our people and their communities and to protecting the environment something we have been doing for over 30 years. We have determined that our strategy, which includes contracting discipline, operationally flexible supply discipline and financial discipline, will allow us to achieve our vision of energizing a cleaner world thereby delivering long-term value in a market where demand for safe, secure, reliable and affordable clean nuclear energy is growing. So with that, thanks for joining our call today. And operator, we would be happy to answer any questions. Operator: Thank you. We will now begin the question-and-answer session. The first question is from Orest Wowkodaw from Scotiabank. Please go ahead. Orest Wowkodaw: Hi, good morning. I am curious if we could get some more details on your plans to restart McArthur River. I know in the past, you talked about needing I guess to pre-sell the majority of the future pounds from McArthur. I am just curious if your philosophy there has changed or whether you are seeing enough with respect to re-contracting, including I guess, the 40 million pounds you have signed year-to-date of long-term book. But any additional color there in terms of what’s prompting you to restart early relative to the contract book? Tim Gitzel: Yes, Orest, it’s Tim. Thanks for the question. No change store strategy at all. We are doing exactly what we said we were going to do. And we have been saying it for years now that we are going to prudently manage the company in the best interest of our stakeholders. We won’t add to an oversupplied market. We are not going to produce for inventory. We have homes for our production. And so you have seen some of the sales commitments we have taken on in the last years, but especially in 2021 have allowed us to take a look at McArthur and decide we are going to move to the next phase of our disciplined strategy, which is to get that going. You see by 2024 we plan to continue to exercise discipline at Cigar Lake and at McArthur and so we have homes for our production worst. And so, we – I think everyday and I am looking at Grant, we talk about how many sales should we have now versus how much open non-commitments should we have going forward? We want to be open going forward. And we get people saying, well, you don’t have enough committed sales now and then you have others saying we have too many committed sales now. And so that’s both sides. And we think we have made – taken a really prudent approach to that, that we have homes for everything we produce, Orest. Grant, I don’t know if you want to add anything to that? Grant Isaac: Tim, I think it’s the absolute right message obviously. If there is a takeaway on the market side from Tim’s comments today and the message we want to leave in the market is that we are saying a transition is underway, a transition that is a security of supply-driven transition. And it’s not as bold to call as you might think because of course UxC and TradeTech, World Nuclear Association have been saying the same thing. But we are clearly seeing it underway. There are certainly really important indicators that suggest that’s the case. We are in the early innings of that transition. So for us, it is about balance and it is about discipline. So on the contracting side, Orest, it really is a measured patient approach to contracting success with a diversified base of customers building a best-in-class book going forward, but not being sold out. Now is not the time you want to have a volume strategy and trying to be pushing volume. So with experience in every market transition, let me just say we are exactly where we want to be. Orest Wowkodaw: Okay. And Grant, if I can follow-up, I mean, you’ve disclosed that you’ve sold, I guess or added 40 million pounds to your long-term contract book in the first month of this year. I mean, that’s more than the 30 million pounds of all of last year. Can you maybe give us some color on what’s changed as the calendars rolled forward here? Grant Isaac: Yes, couple of things, that I think are important to draw out and first of all, the backdrop is the fundamentals. You can’t escape that. The understanding that almost on a daily basis, the outlook for demand is improving. And almost on a daily basis, the outlook for supply is becoming more uncertain as we think about the risks to existing productive capacity and even greater risks to bringing on new capacity in a world where there still is a pandemic and that pandemic is creating absenteeism and productivity issues and supply chain issues and inflation and all of those other things. It’s just making that supply picture even more uncertain. And so there is a gap. And I think it’s just the general recognition that, that gap is getting bigger. And so we have been talking about for some time, our pipeline. And this is clear evidence that when we say in our pipeline between origination and execution, we have got a lot of pounds under discussion. This is clear evidence of exactly what we mean? So, some of this was contracting that, not just measured in months or quarters, but years. I mean, it was these were long discussions and long negotiations and others we are starting to see a bit of urgency. And we are starting to see folks come to the market quickly and look to do a deal quickly. And I would note three characteristics of this market that I think are important to draw out. Number one is we are seeing tenors increase. Back in the days when carry-trade was really defining the term price, we were seeing a lot of term business that was kind of inside that 2 to 5 year window where utilities quite smartly wanted to make sure that there was some carry-trade material in competition with produced material in that window. But now we are seeing the tenors stretch out, RFPs in the market and off-market contracts looking for more than 5 years of material, in some cases, 10 years worth of material. So, the market is stretching back into that classic term space, that’s super important fact. Number two, we are seeing volumes increased. We are seeing utilities come to the market and they are wanting to take bigger bites out of the market. So\, instead of several hundred thousand pounds, we are seeing several million pounds at a time being taken out of the market. So, tenors are increasing. Volumes are increasing. But probably most interesting is we are seeing timeframes increase. And by timeframes, I mean, the years in which production is being called for. In Q3, I referenced that some of our negotiations actually spanned the 2030s, all the way through to the end of 2039. We are seeing that in the market today. We are seeing utilities looking for production out in a window when Cigar Lake will be done, out in a window when according to their own disclosures, a heck of a lot of depletion has occurred in Kazakhstan, out in a window where demand is strong and supply is really uncertain. So, these are three really notable changes that I think are behind driving the completion of some of these negotiations were in a measured patient way we have had contracting success building that portfolio in a diversified way, but make no mistake, the goal here is not to sell out right now, because all of the fundamentals suggests there is a stronger price transition to come and we want to be part of it. Orest Wowkodaw: Excellent. Thank you. Tim Gitzel: Thanks, Orest. Operator: Next question is from Andrew Wong from RBC Capital Markets. Please go ahead. Andrew Wong: Hey, good morning. So maybe just following on a little bit from that line of discussion and maybe taking it from the other perspective, understanding you are not sold out, but then also the commentary sounds very bullish for the outlook over the next few years. Can you maybe just talk about the decision to add volumes now to your contract book, because obviously that was a lot of volumes that were added in January and Q4 versus maybe waiting a little bit longer? I understand these are contract discussions that you have over several years and it’s not as easy as just waiting. But can you just talk about the thinking around that strategy? Thanks. Tim Gitzel: Yes, thanks, Andrew. Let me get our market expert Grant to answer that. Go ahead. Grant Isaac: Yes. And I actually appreciate the pivot to that question, Andrew, because it really highlights the boundary questions that we get. There are those who ask us why contract to anything at all? Why don’t you just hold out, get all your production ready, how even produce some of it and inventory it and wait till the market is at $100 a pound and then sell it off? Well, that’s not how the uranium market works. Just by virtue of that strategy, the market would never achieve those prices. And then we get the other question, which is why don’t you sell more? Why don’t you have more under contract? And so those are the kind of boundary conditions. So, to those who say, why contract anything right now? We say well, this is how the uranium market works. It is not a spot market. It is not a market, where you have an opportunity on an annual basis to capture full global demand, because it recharges every 12 months. That’s not how the uranium market works. Uranium market works, where utilities come typically in ways and they look to layer in volumes and they push enough contracting that we hit not only replacement rate, but above replacement rate. And then when they have covered a lot of their demand going forward, they step out of the market and we enter those complacency periods. So for us, it’s about responding to the actual market and industrial structure of the uranium space, not to some mythical spot market assumption for creating value in uranium, because that’s been a failed strategy over and over again. So for us, it’s about building that balanced portfolio, we talk about it at great length in our MD&A, Page 20, just to just to flag it, please read it. Talking about this balanced portfolio, we build this best-in-class portfolio with a diversified customer base. This permits our supply decisions. So, we build the homes then we plan the supply. This also permits support for the long-term value of our assets and it supports significant financial performance. So, that’s the why we do it now? To the question, why not be sold out? Well, now is the wrong time to be sold out. We are in the early innings of a market recovery, the uncommitted requirements, 1.4 billion pounds of uranium to be bought over the next 12, 13 years according to UxC, of course, when you’re looking for the uranium component of it, you’ve got less time to buy, that’s a lot of demand that’s got to come to the market. A lot of that demand is going to come our way. A security of supply transition underway, I talked about tenors, volumes and timeframes increasing. Those are great indicators that suggest to us there is more value. So we want to be deliberately and strategically leveraged. And so this then mores over into our balanced contracting discipline is matched by our balanced supply discipline. So the main message to take away here is yes, McArthur/Key are moving to operational readiness. But the main message is that supply discipline is continuing indefinitely. Supply discipline is now including Cigar Lake. Supply discipline, on a planned basis is 40% or more of our productive capacity will remain in a disciplined position. And it requires further improvements in the market in order to see us move to increase that production. And along the way, as this transition happens, we remain over-contracted. We have more sales than we have sources of supply. So, we are still going to be a presence in the market purchasing. So for us, it’s about balance and it’s about discipline. And our experience with every cycle tells us this is exactly where we want to be. Andrew Wong: Great. That’s very helpful commentary. And then just a follow-up on the production costs in 2024, when Cigar and McArthur are up and running, I think Cameco has been doing some work to kind of improve the efficiencies there. So, it allows you to do partial ramp-ups, but obviously, like you might not get some of the economies of scale benefits. So, can you just talk about the costs in 2014 versus what we have seen historically? Thanks. Grant Isaac: Well, we obviously don’t have guidance on 2024 operating cost out there. But what I can tell you is that our Chief Operating Officer and his excellent team are looking at the life of mine technical report costs and say here is our marker. And so if I just remind everybody on the call that the technical reports that we have outstanding for McArthur, Cigar and Inkai on a Canadian dollar basis have operating costs at $14.75 per pound at McArthur, $15.98, so $16 per pound at Cigar, and less than $7 per pound at Inkai. So if you think about McArthur and Cigar, those are the targets that we are working towards as or better in an inflationary environment in an environment of difficult supply chain. Those are the targets that we are striving for. And you can imagine that we have laser focus on the economic performance of those incredible assets. Andrew Wong: Great. Thank you very much. Tim Gitzel: Thanks, Andrew. Operator: The next question is from Alexander Pearce from BMO. Please go ahead. Alexander Pearce: Great. Good morning, all. It’s great to see those contract volumes come through the last couple of months. I have got kind of two-part questions to those contracts. Obviously, you have got – you have stated your target previously is I think, 40:60 kind of fixed market related pricing portfolio. I just wonder maybe you could just comment on how that fits utilities kind of current preferences at the minute and what you have seen, are they both aligned? And then also maybe given the volume, you could just kind of comment on what we haven’t seen much volatility in the term price yet? Tim Gitzel: Well, to your first question about our portfolio, yes, we have talked about this 60:40 balance and I am glad you raise it, because it does. I think there is often confusion about what we mean there. We don’t mean we want a balance between market related and base escalated in any single contract or any single year. What we mean is that over the lifetime of the portfolio and full cycle when our market has gone through one of those security of supply driven contracting cycles, but also when our market has lived through those moments where fuel buyers cover a lot of their run-rate requirements and then they step back and we see those periods of complacency, which is just a natural function of the long-term nature of our market. That’s where we say we want to be balanced. So, what we need to think about in today’s context is our preference on our pricing mechanism relative to where we are in a cycle. And today, our preference is market-related. We see a cycle that’s starting to form some very important notable indicators, tenor, volume and timeframes that I talked about. The wedge, you have uncovered requirements, the supply uncertainty, all suggests that there is still price formation ahead of us. We want to be leveraged to that. So, our preference right now is very strongly market related as opposed to fixing in today’s price. But I would say we are misaligned with a general fuel buyer on that idea, because I think the fuel buyers around the nuclear space also recognize that the outlook for demand is improving and the outlook for supply is uncertain. And I can almost kind of prove this by just the approach to the market if we see fuel buyers wanting to lock in prices today, because they know the price is going to go up or if you think about it alternatively, we have a market related preference at Cameco. And if the fuel buyers believed the price was never going to go up or that it was at some sort of peak right now and it was only going to go down, we would have zero problem signing market-related contracts, because the fuel buyer would say, look, I know the prices is at or above its peak, it’s only going to come down. So, you idiots are taking all of the risk here in the market. So sure, we will sign a market-related contract and over to you. But that’s not the situation. They look at the fundamentals the same way we do. They see price pressure and they are looking to lock it in. And what we find is that the on-market competitive RFPs are greeted by some of the suppliers who are still willing to lock in that value. It’s not us, but others are. So, where we are having success is in these off-market pipeline discussions that we talked about, where there is an understanding that we need this market-related exposure in order to part with our material out into the future. So we are not fully aligned in the market. We are not at one of those full security of supply contracting cycles yet. We are in the early innings of one which is great news. But we are not fully there yet. And we see that in the data 75 million pounds of term contracting according to UxC, that’s less than half of replacement rate contracting. So a lot of upside, a lot of demand and that demand is going to bring with it price formation and we want to be leveraged to that price formation. So, that’s sort of how we look at that balance. It’s the pricing mechanism – our preference on the pricing mechanism is a function of where we are in the market today. Second part of your question was… Alexander Pearce: It was about why we haven’t seen much removing the term price like we have what’s in… Grant Isaac: Yes, yes, thank you. The term market obviously saw a very significant structural move in the fall as the – as we saw a lot of spot market buying, especially with the presence of financials and in particular, the Sprott Physical Uranium Trust, we saw lot of material coming out of the spot market that was pushing up the spot price, but more importantly, it was drying up the carry-trade. It was drying up those uncommitted volumes that didn’t have a home that were splashing through the spot market and became a source of utilities to say, hey, I don’t have to go into the term market, I will go into the spot market and find somebody to carry those pounds on an interest rate of low interest rate carry, those pounds began to dry up. So, we saw RFPs in the market that were really targeting producers and we saw producers I think sufficiently disciplined to see the term price push up into the force. Since then, I think the RFPs have been greeted with a little bit more aggression than we would take in this market, but it does reflect I think a couple of things. I think that a few of the producers in the market probably don’t have the same value focus we do and are a little more interested in volume. But also, I think that some of the participants on the sell-side of the market don’t have experience with every contracting cycle like we do. And I think the third issue is they don’t enjoy the off-market pipeline negotiations that we do. So, I think all of those things are a bit of a combination where the initial push, the response was, uranium needs to be priced with a 4 and we got there very quickly in the term market. And then we have seen some competition on the on-market RFPs to win that business, Cameco has not been very successful at all in any of that business, but others have been. And we just have to work through this. We just have to work through a few of these volume targets. But here is the good news, 1.4 billion pounds of uncovered requirements, that’s a heck of a lot of demand that still has to come into the market. Alexander Pearce: Thanks, Grant. That’s really helpful. Tim Gitzel: Thanks, Alex. Operator: The next question is from Greg Barnes from TD Securities. Please go ahead. Greg Barnes: Thank you. With all that being said, Grant, do you think you are capturing market share given the events of Kazakhstan and security supply being front and center too I think? Grant Isaac: Yes, this has been a trend for us. When you and others have asked over the years about this pipeline that we keep referring to, which of course, we are today here is the evidence of it. So trust us when I say that our pipeline continues to be very robust going forward. But when you have asked in the past, well, why would utilities be interested in that? The answer is a variety of reasons. I think over the years, we have seen a shift to focus on origins, because of trade policy concerns. I think that just the globalization trend in the nuclear fuel cycle is under a little bit of pressure, because of trade policy concerns, because of geopolitical concerns and that has been a factor. So we have seen the pursuit of certain origins and more diversity there. I think that for some of the customer base that we have dealt with off-market, it’s a function of bringing balance back into their portfolio. They may have used low prices as an opportunity to fill up on other origins and on other suppliers. And of course, we were very resistant to do any contracting through that window. And so, I think Cameco’s share of some of those utilities fell and then they needed us back in their portfolio. And then I think this ESGP, but let’s not underestimate that one of the things that many of our customers are targeting is the type of financing cost savings that come from green financing. But when you put yourself forward to achieve some of that green financing, you are being judged according to a set of ES&G criteria for which Cameco is super competitive on those criteria. I think we enjoy competitive advantages over others. And that’s also a factor. So there are a number of things coming together. And I think the geopolitical like you referenced this one, but it’s a number of factors that are coming together to drive this, this ability for us to at a measured and patient rate bring in some contracting success, but still retain the leverage to more of it that we see in the market. Greg Barnes: That’s great. Just back to Andrew’s question about the cost, it just seems odd to bring Cigar down, which obviously would be more economic to run at the full capacity and bring the costs around where at a lower rate it wouldn’t be as lower cost. So just how is that balance being worked out? Grant Isaac: Yes, I would think about that, that balance is a portfolio approach. I mean, obviously having one Tier 1 asset running and the other at zero is a very difficult economic proposition. So for us as we had success in building homes and as we retain leverage to that future demand that’s coming, it just makes sense to step back and say, okay, having McArthur at zero doesn’t make economic sense, but we can’t be done supply disciplined yet. So, we still have to be disciplined. So, it’s the balance between the two. It’s looking at the Northern Saskatchewan production as a cluster, if you will and balancing it with what the Kazakhs are doing in Kazatomprom. So for us, this is actually a very attractive scenario to have both assets included. An additional advantage with Cigar Lake, of course, is now the extension of what we have referred to as Phase 1. So, Cigar Lake joint venture is now looking at an opportunity to extend the life of that asset, not be forced into a decision about what to do with Phase 2 in a market that’s in the early innings of a transition, which of course is a good place to be and reserve some of those pounds for what we think is a better price scenario anyway. So for us on balance, think of it as a portfolio decision, a portfolio decision that allows us to begin to restore our Tier 1 cost structure, get out from under those care and maintenance costs at McArthur, but then run both in a very disciplined fashion balanced with the opportunities we are seeing in the market. Greg Barnes: Okay, great. Thanks, Grant. Operator: The next question is from Lawson Winder from BofA Securities. Please go ahead. Lawson Winder: Hi, good morning. Thank you for the update and some excitement in our morning with the new contracting announcement. Two questions for me. So first off, I think it would be really helpful to understand the nature of some of the contracting you have done beyond your realized conversion pricing table so beyond 2026. So clearly, in that table, there are a series of price caps. And that’s why at $140 you expect around $74 pricing, but when we look out beyond 2026, should we think of the blue sky in similar terms or are – is there more market related further out? And then along with that if you can provide any commentary in terms of the 70 million pounds of new contracting how that looks geographically as well as in light of sort of the type of contracting in terms of market versus fixed would be very helpful? Thank you. Tim Gitzel: Thanks Lawson. And Grant, on the contracting role, why don’t you keep going? Grant Isaac: Yes, absolutely. So great questions and thanks for recognizing that how our cable is constructed. And I want to spend a bit of time on that, because I think it’s really important and I think it’s a source of confusion for a few folks that find themselves commenting on Cameco inappropriately at times. So, the contracting nature, I said that the pricing mechanisms that we are pursuing, we have a preference for market-related right now. So no surprise, what we are really interested in is not market exposure out into the future. So, that’s one source of leverage. The second source of leverage is, of course, the pounds that we haven’t sold yet. And so remember that our table is constructed in a very specific way and it’s different than others in our industry. So, our table only shows our current commitments over the next 5 years sort of that lower wedge of what we are going to deliver each year over the next 5 years that is known to us. It does not reflect – the sensitivity in that table does not reflect the unsold pounds in any of those years. And so we see others in our market that will construct their price sensitivity table by assuming a top line sales number, for example. And so, the lower wedge is what they know they are going to sell. And then they just assume that every pound that’s not currently committed in those subsequent years is sold in spot. And that’s an easy way to construct a table. But we believe it’s pretty misleading. It’s pretty misleading, because as we constantly say, the spot is not the market. If you had a primary producer, who in years 4 and 5 were planning on selling over 70% of their production in some cases, as in the spot market, you would never achieve the higher prices that the table is supposed to be showing sensitivity to. So we don’t construct our table that way. So, that’s an really important thing to note. Secondly, of the contracting that we are having success with, a lot of it is falling outside that table. And that goes back to my comment about tenors and timeframes increasing. So we are seeing demand out beyond that 5-year window. So of course that’s not included in there as information. So, our table at any one point in time is like trying to take a snapshot of a moving train. And in this case, I would say a bullet train that’s going very fast. And we are kind of just trying to freeze it in time and give you an idea what that performance of the table looks like. So, we have a market related preference, and we want the market related portion of our committed sales to capture higher prices. But really, it’s also a story of the pounds we haven’t sold, which will be sold in we think a market that this is stronger transition. So, those two things together is actually how you measure our true sensitivity rather than assuming that table applies for all the pounds out in the future, even the ones that aren’t committed. So, that contracting table is, we think it’s the right way to construct it, takes a bit of work to understand it. But we appreciate when those folks make that investment and take the time. And it really does capture where that leverage point is going to be. On the 70 million pounds of contracting, just in terms of characterizing it, again, we build a balanced portfolio. So, you think about a number of things, pricing mechanism matters to us, not necessarily the price today, but the mechanism by which we are going to price those pounds, we have a preference for market related. So, our interest is not to price the pounds right now, it’s to price them in the market in which they are going to be delivered. And I would say that we have been very clear about that. And we have had success in making sure that there is that market related exposure for those pounds out into the future. But in a market like we are in today, you almost think about a breakpoint where over the next couple of years, if we saw demand right now in sort of ‘23, ‘24, ‘25, you will still have a bit of competition from some carry trade. And so you do see a bit of pricing in today’s markets in the early part of some of the contracting structures that have been successful in the market. And then you see a reversion to production economics afterwards or more market related indicators afterwards. That’s just how the uranium market works. You could hold your breath underwater and say, “Well, we are just not going to participate in this market.” But then you run the risk that you are going to let other important aspects of your balance portfolio walk by regional diversification, customer diversification, product diversification, what you never want to be in the uranium market is overweight one region, or one customer, or one product, you want to construct with the market as demand comes. But you want to retain the leverage that reflects your view of where the fundamentals are at. That’s how you build full cycle value from balanced contracting discipline. And then that informs your supply decisions. Now you plan your supply to meet where you built homes. That’s how value is created. Lawson Winder: Thanks for the comments. I would also like to get an idea for what the bullet train might look like in 2022, in terms of contracting. So, speaking to industry sources that we have indications are that contracting is expected to continue to be very strong for the remainder of 2022. And what would your expectation be, or what kind of guidance can you provide us in terms of additional contracting, that could be possible in 2022? Tim Gitzel: You are probably picking up significant optimism in our comments, and you would be right, in interpreting us as being optimistic on where the market is at. We know that in the uranium space contracting begets contracting. When there is very little contracting going on, it sort of confirms the view of some that they don’t have to worry about where uranium – their uranium supply is coming from in the future. But when you start to see contracting success, and when you start to see the future production not yet pulled out of the ground already being claimed, that tends to then motivate others to say, hey, I need to lay a claim to some of those pounds too. So, you don’t have to look any further back then in the uranium space. Then in 2010, when we saw the big new entrants to the market, the Chinese stepped into the term market for the first time. It wasn’t that the rest of the utilities were short material in 2011, 2012, 2013, 2014. It was that China stepped in to start contracting material largely 2014 to 2024 when the rest of them hadn’t kind of paid much attention to that window and when that triggered real contracting cycle to lock in volumes. So, I see nothing today that suggests that the current cycle is any different. So, we know contracting begets contracting as we have success. And I would note that, because Kazatomprom in a recent disclosure talked about the success they are having in contracting. These are all future pads that are being claimed, in a window, where there is a lot of uncertainty about supply. And the demand outlook is improving. So, we are quite optimistic on what the prospects for contracting are in 2022. We know that our own pipeline continues to be robust. And hopefully, with the results you see today, people trust us when we say that, so we are optimistic Lawson. Lawson Winder: Okay. Thank you very much. Tim Gitzel: Thanks, Lawson. Operator: The next question is from Brian MacArthur from Raymond James. Please go ahead. Brian MacArthur: Good morning. So my first question is, and I applaud for sure the price or volume strategy, but how do you probably take it maybe a little longer than your first thought, the care and maintenance costs build up every year? How do you think about that, when you go to customers now? So for instance, say, I thought originally, I want at $45 a pound and now it’s taken me 2 years longer. So, I have absorbed another $200 million and standby costs, do I tie and sell that same pound at $48 now a pound versus $45 to balance out shareholders getting an additional return for the longer way, is that how you sort of think about in the context of the market as well. And the second part of that is, with that in place spending, roughly $60 million for your Tier 2 assets and I get it, there is some diversification with source grid, which you talked about, how do you think about how long you are willing to do that, because obviously, those pounds won’t be quite as profitable coming forward? Grant Isaac: Yes. Great questions as always, Brian. Let me start with the first question on how we think about the sunk costs of care and maintenance versus price discovery in the market. And I would just say, we look at our strategy as an investment. Our supply discipline strategy was an investment in the future value of our assets. On a top line basis, the 140 million pounds, and 150 million pounds that we have left in the ground, since we started our extreme supply discipline, you would have priced it at what $18 a pound in the spot market at the time of making those decisions. And today, you are going to price it in the mid-$40s. That’s a very significant value capture. So, ours has been a very smart investment to leave those pounds in the ground, and wait for a window where they are going to be priced higher. So, that’s kind of how we think about the care and maintenance costs as an investment on the future value of our production. But in terms of pricing it, we have a market related preference, as opposed to a fixed price preference at the moment. So, we could engage customers on the basis of, well, here is where the fixed price would need to be in order to cover those sunk costs. But I would just say, we are probably a little greedier than that. We look at a market that needs a lot of new production to come, that new production needs a higher price signal, it needs a price signal that’s going to support Greenfield investment. We would actually love to achieve a lot more Greenfield investment pricing for Brownfield Tier 1 assets, because we love the margin prospects there, so less about kind of covering our costs and more about maintaining exposure to a market that we think prices need to rise to pay for the productive capacity that needs to be there. And we are happy to take those prices for proven permitted assets. And that’s kind of the way we look at the first part of the question. In terms of the Tier 2, obviously, we think about that there is a Super Bowl coming up and the team that wins has got to have both a good offense and a good defense. And we think about those Tier 2 assets in a very similar way, their optionality. We have seen in the past during security of supply contracting cycles. Remember, Brian, Rabbit Lake has been down before. And during the contracting cycle utilities were willing to pay prices that brought Rabbit back before taking the chance on Greenfield projects that all of the technical, all of the regulatory, all of the capital, all of the operating commissioning risks still were ahead of those projects. During the security of supply contracting cycle, we see utilities actually supporting proven permitted assets first. And so there is optionality there. But also, we have had the opportunity over the years probably depart with these assets. But if we started with these assets and they were in the hands of somebody who didn’t have a value strategy and we just turned them on and jam that material into the spot market. That would be the wrong move too. So, they factor into kind of that overall investments that we are making in the future value of the portfolio. So, there is offensive optionality. There is defensive protection when we think about those assets. Brian MacArthur: Great. Thanks. And maybe I want to just go to another comment that was made talking about and we have certainly seen secondary supply coming down, but looking forward, I think it was, we expect that maybe to go lower. And I am kind of curious, maybe I misheard that. Obviously, as price goes up, there is changing in underfeeding and stuff, too. But you also have this opportunity to possibly process some pounds through the U.S., feel you have tails and stuff. Are you including that material going forward in that statement that secondary is going down, or do you think box is going down or any comments on how you sort of see the secondary going the next few years in the context of the said your opportunities with secondary? Grant Isaac: Yes. I am going to jump in on this one and apologies to everybody on the call for monopolizing all the time on these issues. But with secondary supplies, this is a great part of the story, because remember, the price transition that occurred, go back to the Cigar Lake inflow events as a supply shock, or even the demand shock of 2010 that I already talked about the Chinese stepping into term markets for the first time. Those price transitions occurred when there was a heck of a lot of secondary supply still kicking around and a heck of a lot of inventory. But we actually don’t have that profile anymore. That HEU material is all gone. Some of those big sources of inventory have been chewed through. And that makes sense, because we have been consuming a lot of material off of existing contracts and not going back in the replacement rate. So, while secondary supplies have always historically filled the gap, the prospect of them playing that role going forward is greatly diminished. If you just look at the supply stack and whether it’s and you named a few, whether it’s the inventories that we see from governments that remember DOE inventory. I mean, there is a moratorium on that right now. And besides, if they were still trying to sell materials, there just isn’t much left anymore, it wouldn’t even be material in today’s structural gap between demand and primary production. The Western enricher underfeeding, you have heard me say for some time, now, this isn’t an underfeed story anymore. Yes, enrichers underfeed and they use some of that underfeed uranium to sell into term contracts supportive of their enrichment contracts, but we don’t see enricher underfeed in the spot market. It’s not a factor there. It’s not a source for. The reprocessing material, we just see that declining over the next 10 years. We are just chewing through that material. And then of course, that big black box of the material that comes out of Russia and whether it’s tails re-enrichment, underfeeding government stockpiles, no matter what it is just that entire supply just declines over the same window. So, you have got the secondary supplies that have always filled the gap in the market can’t fill the gap in the market the way they have before. And so when we look at the DOE re-enrichment of the U.S., we think of that more as not secondary supply. But actually, that’s a U.S. mine is in fact what it is. And that’s probably the best model to think about it. Brian MacArthur: AndCCJ Ratings Summary
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Cameco (CCJ) Upgraded to Outperform by RBC Capital with Price Target of C$75
RBC Capital Upgrades Cameco (CCJ) to Outperform
On May 2, 2024, RBC Capital upgraded its rating for Cameco (CCJ) to Outperform, signaling a positive shift in their assessment of the company's stock. This upgrade came with an increase in the price target from C$70 to C$75, reflecting a more optimistic view of Cameco's future market performance. At the time of this announcement, Cameco's shares were trading at $48.35, as reported by TheFly in their article "Cameco price target raised to C$75 from C$70 at RBC Capital." This upgrade by RBC Capital is a significant indicator of the confidence analysts have in Cameco's potential for growth and profitability.
The optimism surrounding Cameco is further supported by a report from Zacks Investment Research, which highlights the positive outlook Wall Street analysts have towards the stock. According to Zacks, the average brokerage recommendation (ABR) for Cameco stands at 1.33, positioning it between Strong Buy and Buy. This ABR is based on the recommendations of 12 brokerage firms, with nine recommending a Strong Buy and two recommending a Buy. This consensus among analysts points to a strong belief in Cameco's market performance and its potential for growth.
Cameco's stock has shown a promising trend, with a recent increase of 2.80% to $48.24, marking a significant change of $1.32. The stock has experienced fluctuations over the past year, trading between $26.15 and $52.64, but the current trends and analyst recommendations suggest a positive outlook for the future. With a market capitalization of approximately $20.94 billion and a trading volume of 2.39 million shares on the New York Stock Exchange (NYSE), Cameco is positioned as a notable player in its sector.
The upgrade by RBC Capital, coupled with the optimistic analysis by Zacks Equity Research, underscores the potential for Cameco's stock. The increase in the price target to C$75 from C$70 by RBC Capital, along with the strong buy recommendations from analysts, reflects a growing confidence in Cameco's market position and its ability to generate value for investors. As such, Cameco (CCJ) is increasingly being viewed as a stock to watch closely in the coming period, with potential for significant growth and profitability.
