CCJ - Cameco Corporation (CCJ) BofA Securities Global Metals Mining & Steel Conference Transcript

2023-05-17 07:16:09 ET

Cameco Corporation (CCJ)

BofA Securities Global Metals, Mining & Steel Conference

May 17, 2023, 05:20 AM ET

Company Participants

Rachelle Girard - Vice President-Investor Relations, Treasury and Tax

Grant Isaac - Executive Vice President and Chief Financial Officer

Conference Call Participants

Lawson Winder - Bank of America Securities

Presentation

Lawson Winder

Our next presentation will diverge slightly from the industrial metals theme that we've had so far this morning to a company that plays a huge role in the global uranium nuclear fuel supply chain. So Canada based Cameco is the world's second largest producer of natural uranium. It is also one of the world's largest uranium converters and supplies the Canadian nuclear industry with all of its fabricated fuel bundles. So it's my pleasure to have with me here today from Cameco, Chief Financial Executive Vice President and Chief Financial Officer, Grant Isaac.

So Grant, I think you have a few slides that you're going to share with us today as in opening comments and I will turn the floor over to you.

Grant Isaac

Yes, perfect and hopefully this works. We'll do a little bit of a hybrid model here. Forward-looking information, get over that really quickly. For those of you who haven’t seen it, let me put in a bit of a plug for work that Bank of America just did on the necessity of nuclear, the nuclear necessity, I think is the way you titled it. For those who haven't seen it, please take a bit of time and look at it. It's an excellent piece of work that looks at the factors that are improving the demand outlook for the nuclear sector. We couldn't agree more, quite frankly. We see a very durable demand outlook setting up. What I wanted to do today was connect that a little bit to our industry being on the fuel side of it. What does it all effectively mean?

So if I took your report and translated it into one slide for us, it's that as the outlook for demand of nuclear power improves, so does the confidence of fuel buyers. And when the confidence of fuel buyers improves, they term contract, and when they term contract, it's a contagion effect. More of them term contract at the same time and as more and more of them contract, it drives prices. And so all you see here on the right hand side of the screen is the price effect that we're seeing because confident fuel buyers are benefiting from the fact that the outlook for nuclear power is improving. So have a look at Lawson's report. It's very good.

What does it mean for uranium? We hear a lot; the complaint that the demand side of the industry is really opaque. We don't disagree with that. It can be a little bit opaque, but here is the Cole's note. Here's the cheat sheet on what you have to look for as an investor to anticipate where demand is going in the uranium side of the nuclear fuel cycle. On the left hand side of the screen is just the uncovered requirements curve. This is the stock of demand that's out there. Utilities can delay, they can defer, but they ultimately cannot avoid buying this material. What's notable about the uncovered requirements curve is it's never been bigger.

You know, between now and 2040 2.2 billion pounds of uranium needs to be procured for the known reactor fleet. That includes the ones that are running, the ones that are being saved, Diablo Canyon, Byron, and Dresden units, the ones that are going through life extensions and the new builds. This does not include SMRs, for example. That would all be upside to this demand case. So this is just the known reactor requirements. It's big. This demand is coming to the market. So always keep an eye on that.

The uncovered requirements curve gets misinterpreted in two really important ways. The first is on the front end. Some people look at this curve and they go, okay, that's a lot of demand that's coming, but there's not much of it in 2023 and not much of it in 2024. So I'll come back later, I'll come back and I'll be interested in the uranium story in a couple years from now when there's real demand. This curve always looks like this because there is not a utility on the planet that runs their fuel purchasing just in time.

So the near-term is always super discretionary. But just because near term demand is very small and very discretionary, that doesn't mean price formation cannot happen today. The window of contracting that's open right now is largely 2025, 2026, well into the 2030s. And as that demand comes into the market, it creates price pressure today. So don't look at this curve and say, there isn't very much demand today. I can go away and I don't have to pay attention. Pay attention, because in the next couple of years, there's a lot of uncovered requirements that need to be satisfied.

The second way that this curve gets in misinterpreted is on the back end. Some folks who are pitching projects in our industry will say, I don't need to worry about positioning my project for the contract cycle, because look out in 2030, there'll be a 100 million pounds of demand. So I'll just wait. I'll build a mine and I'll wait and I'll sell it into the market when there's a 100 million pounds of demand in 2030.

The other thing that to re to remember is in 2030, this curve will look exactly the same. If you erased all those dates underneath and started in 2030 instead of 2023, 2030 will have very small discretionary demand. So somebody pitching you a project on the basis that they're not going to sell anything till 2030 because there's a 100 million pounds of wait, there will not be a 100 million pounds of demand in 2030. It will be contracted through. So it's a very big stock of demand.

The second thing you need to ask yourself is, what is the rate at which utilities are satisfying that demand? That's the right hand panel. So if the left hand panel is the stock, the right hand panel is the flow. And we just ask ourselves a very simple question in our marketing group. Is the market below, is it at or is it above replacement rate contracting? And as you can see from that chart, we are below replacement rate contracting. So utilities are consuming about 180 million pounds per year and they have not been buying 180 million pounds a year for over a decade, which means by definition they're chewing through inventories. They're chewing through secondary supply.

And the good thing about this curve is, it tells us uncovered requirements continue to grow as long as they're below replacement rate. So it actually suggests that the demand outlook gets strong. Every year they don't buy replacement rate, uncovered requirements go up. So this suggests to us there's more price formation out there as more demand comes. And the other thing to note is that real strong price formation in uranium occurs when utilities are contracting at or above replacement rates. So if you look at the years, like 2010 for example, the uranium price was $74 a pound. If you go back, if this chart went back to the '06, '07runup, you were $136 a pound. So we're not even at replacement rate already in a $54 market with a lot of demand left to come. That's pretty exciting for a company like Cameco.

Of course, it wouldn't matter if the supply side was posed to respond quicker, it wouldn't matter what the demand outlook looks like. On the supply side, it's a much different story. Turns out markets work. After years of really low uranium prices and advanced exploration projects being shelved and development projects being postponed, and tier three assets being shut down and tier two assets being shut down. And then ultimately tier one assets like McArthur River being shut down. The primary supply stack is not poised to respond to this improving demand outlook unless we see higher prices. And those who have followed this space for a long time are always quick to point out, but it's never been about just primary production in uranium, there's always this secondary supply.

Except this time, if you look at the secondary supply stack, by virtue of the fact that we have not been at replacement rate contracting the gap has been filled by something. And that something has been the exhaustion of those secondary supplies that we typically have counted on, whether that's producer inventory or utility inventory, or in richer underfeed capacity or say reprocessed uranium or down blending from Russia, those supplies are just not what they used to be. And they're not poised to fill the gap the way they were in the past, more supply is needed. But it's always important to remember the conditions under which you bring new supply. So anybody asking you to underwrite a supply project in uranium should be confronted with two really important questions. The first is, can you get volume right? Can you deliver on a product and on a project on time and on budget?

Now, it's hard to do these days, isn't it, with supply chain challenges, inflation regulations, ESG requirements. But in the uranium industry, you also have to get timing right, because what we've seen over and over again is previous price cycles have incented supply and the people behind those projects haven't done the hard work of building homes for that supply. That supply shows up when demand has already been through the market and now you're left trying to jam material through that undersupplied spot market or sorry, that small spot market that we saw on the previous slide, the near-term discretionary volumes.

That's value destructive. It's just a transfer of dollars from investors to the utilities. We've seen it before and we could possibly see it again, except this time it seems like investors are far more weary about the conditions for bringing on new projects. So the outlook looks good, the supply side is uncertain. As long as the supply side responds responsibly by building the homes for their production and not trying to jam it through the spot market, we should be in pretty good shape.

I'm just going to leave this panel up as we go into questions from Lawson. Our focus right now is to say we like the demand outlook, but the demand hasn't come to the market at full replacement rate yet. So we're still disciplined. We are not at full supply among our tier one assets, let alone even thinking about motivating our tier two assets. And we're taking advantage of our position across the fuel cycle, our position in conversion, our position in fabrication, both the heavy water reactors and of course now the lightwater reactors with Westinghouse. So we're fully invested across the cycle. We're involved in every market and every conversation about where nuclear fuel is coming from, from uranium all the way through to fabrication, we're seeing all of it and we like our position, but we're remaining disciplined. The last thing this market needs is for the supply side to front run the demand. So we're waiting for the demand to come. So it's a disciplined strategy. It's based on tier one leverage and it suggests a very bright future for Cameco.

Lawson Winder

Thank you very much, Grant. I'll return the compliment and say that I love all of your charts, particularly the one showing the requirements versus the spot and contracting volumes by year. That's a very telling story. Where I wanted to actually start was on your Westinghouse deal. I mean I think it's very transformational for Con for Cameco. It has the potential to alter the industry as well and create another Rosatom type in business in the industry. But let's just start from first principles and could you maybe discuss the rationale for the acquisition of 49% interest in Westinghouse Electric? And then where the businesses overlap? Because I think there's this perception that you guys are going downstream out of your sort of comfort zone. But the reality is you guys are already involved in that fuel services business in a pretty significant way in Canada.

Grant Isaac

Yes. Creating a Rosatom that doesn't take over other people's reactors, so a very different Rosatom. If you look at this fuel cycle picture, we have always been vertically integrated at Cameco. Cameco was the unholy child of a provincial Crown corporation that had exploration, mining and milling assets and a federal Crown corporation that had fuel fabrication assets, but on the heavy water reactor side, as you pointed out. So we've always been fully integrated and we've always known the value capture and the benefits that come from being across the fuel cycle for our customer base.

And of course, while uranium can be volatile and conversion can be volatile, fabrication tends to be a lot more durable, a lot more sticky, a lot more predictable, a lot more de-risked. But the heavy water fleet is only 10% of the global fleet. 90% of the global fleet is lightwater reactors for which we weren't in the fabrication business, but Westinghouse is in a major way. Westinghouse is the OEM and the fabricator for about half of the global lightwater fleet. They've got this incredible base of fabrication and reactor service contracts. They're growing in markets like we are, growing their market share in existing markets as well as penetrating new markets like Central and Eastern Europe, and giving us that benefit of vertical integration on the Lightwater reactor side, which we never had before.

In addition, Westinghouse has complimentary asset in the form of a conversion facility in the UK at a time when conversion is bottlenecked and at historic prices. And so after this closes, there'll be a very interesting conversation about what is the role for that conversion facility when conversion prices are so strong. And then Westinghouse has best in class, I would say, new build opportunities with both the AP 1000 as well as the AP 300, which they've just announced. So we really like where Westinghouse fits into the nuclear fuel supply chain. We really like the enhancement to our vertical integration. Very similar to our mining assets Westinghouse has a lot of brownfield leverage opportunity.

If you look at their three fabrication plants, one in the U.S., one in the UK, one in Sweden, they can grow with this market like Cameco can grow with this market with Brownfield leverage inside the fence line. None of those plants are running at full capacity like our tier one assets. None of those plants require greenfield investment in order to grow with this market for a very long period of time. I like the CapEx profile and the cash flow profile that comes from that type of expansion, that's brownfield inside the fence line, strategically aligned with our asset base, strategically aligned with our vertical integration strategy.

Lawson Winder

I'm gonna ask a followup question because it's a concern among investors who all like your Westinghouse deal. They're concerned that it may not go through because of [indiscernible] in China and the anti-competition review there. What is your response to that and how do you think about those concerns?

Grant Isaac

We have seen no show shoppers on any of the regulatory approval processes and in fact the Chinese approvals are done. So we are through all of the major markets, with the exception of the UK and the EU. We're just waiting to know whether we go through first or second level approvals there. Nuclear assets are mission critical to countries around the world today. They're clean energy and they're secure energy. So yes, an energy transaction attracts greater attention, but we're seeing nothing that is raising any risk concerns for us. There are no show stoppers.

Lawson Winder

That's fantastic and that's great news. Congratulations that the Chinese review is complete. Yes. Okay. I wanted to ask about McArthur River because this is a key sort of aspect of the whole Cameco story and that is, you shut this asset down in 2018 because of low prices. Since then, prices have responded and now you're restarting that asset and it's critical because it's driving lower costs at the same time as prices are rising. So it's leading to great margin expansion. Could you just give us an update on that ramp up for 2023 and when that asset gets to run rate. Yes.

Grant Isaac

Yes. We're really excited to have McArthur coming back. Obviously when you see Cameco increasing production in the uranium space, you never have to worry that we're bringing production on that could be chasing demand in the market and therefore pushing demand down. We only call for production after we already have a home for it. McArthur's production is already spoken for. That's why we're bringing it back to 15 million pounds, then 18, not 25. We'd need to see more demand in the market. How's the ramp up going? I would just say very well. The mine is in great shape, always was in great shape. Those who follow us closely know that in these underground mines, we use freeze technology, we freeze the ground before we mine it. The inventory of frozen ore is well over a 100 million pounds. It's ready to go. It's producing. There were no issues there.

At the Key Lake Mill we made a very important decision when we brought it down in 2018 to automate and digitize a lot of the mill. It was built in 1984. There have been a lot of innovations in those areas and we thought we can improve the mill, probably red, reduce the work workforce make it a more efficient, operationally excellent mill. And we just had the normal upset conditions that you would expect when you are putting a new operating system into a 1984 mill. But when the mill is operating, it's operating beautifully. So our guidance is for 15 million pounds this year, 18 million pounds next year. We will remain disciplined until we see more demand in the market as more demand comes and we capture that we'll contemplate taking McArthur River to 25 million pounds, which it's already licensed for. That's extraordinary. Brownfield leverage does not require any greenfield investment.

Lawson Winder

I'm going to canvas the audience for questions. Please, if you would like to ask a question, put up your hand and we'll make sure that we get a microphone. There's one. Yep, I see one right there. That's perfect.

Could you comment on the outlook first mod small modular nuclear? The reason why I ask the question is because of Dow Chemicals announcement, is that, are we at a point where people are seriously looking at this?

Grant Isaac

We are very bullish on the prospects for small modular reactors because of the ability to bring all of the benefits of nuclear power dispatchable, 24 hour carbon free to applications where a 1000 megawatts doesn't make any sense. So we think replacement of 300 megawatt thermal facilities with a nuclear power plant makes a lot of sense. That's the biggest decarbonization bang for the buck.

We think micro reactors in remote operations where you're competing with diesel, anybody who's run a remote operation off diesel knows you often consume more diesel positioning diesel at a remote operation than you actually consume at that site. So that case is really compelling, but we're also realists in the nuclear business. It just takes time to bring these kind of innovations. You didn't see SMR demand in our uncovered requirements because we think we're probably a good decade out before SMRs are making a meaningful contribution to uranium demand.

Having said that, we know that there's SMRs under construction. Darlington, Ontario Power Generation will build the BWRX-300. We know the X-energy reactor is going to get built in partnership with Dao. We know NuScale is building in Idaho. We know Rolls-Royce is going ahead in the UK. So by the end of this decade, we're going to have a bunch of models for which utilities, for which big industry can then start to decide what's the best application for them. So we're really bullish on it, but we are not going to be the folks sitting here saying SMRs are going to double uranium demand in five years. That's not going to happen either.

Lawson Winder

I don't see any other questions. So I'm going to ask one really tough question. What's the price of uranium going to be at the end of the year?

Grant Isaac

I see in the room the folks from the Sprott Physical Uranium Trust are here. They probably would have a better sense of where that could be. You're talking about the spot market of course. And it's important to remember we're not involved in the spot market other than we occasionally buy, but we don't sell into the spot market. We don't really pay attention to the spot market. But I will tell you it is thin when we go out to have to buy. There is not a lot of material in the spot market.

There isn't a lot of material of the right origin in the spot market. In a world where origins are mattering from a bifurcated point of view, the spot market is very thinly traded. There's increasing interest, especially physical interest in it. It would not take much to see a quick move in the spot market with just a little bit of demand. Our focus though, is on the term market. It really is. Those utilities looking for material for longer tenures, seven to 10 years, taking bigger bites out of the term market, that's our focus.

Lawson Winder

And in those ones, what pricing are you seeing on the fixed contract side?

Grant Isaac

Well, on the fixed contract side, we're now seeing $53, $54 per pound. Remember, it's really important to remember that the term price is not influenced by market related term contracts. So most of the contracting we do is market related. So despite the fact that TradeTech and Ux Consulting have their own forecast out there, they don't back their own forecast up into the reported term price. So actually, those folks out there that are willing to sell fixed price volumes are influencing the term price more than we are.

Having said that, the market is already at $53, $54, that's really putting the floor in the term price. That's probably the way to think about the term price. So as we enter the term market with market related exposure, with each contract we'll crank up the floors that are escalated. We'll crank up the ceilings that are escalated. The term contract gives you -- the term contract price gives you a very good idea where those escalating floors are from. That's incredible downside protection with a lot of upside participation.

Lawson Winder

Well said. Thank you very much. Thank you everybody for being here.

Grant Isaac

Nice to see you. Thank you.

Question-and-Answer Session

Q -

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Cameco Corporation (CCJ) BofA Securities Global Metals, Mining & Steel Conference Transcript