CCJ - Cameco Corporation (CCJ) Presents at BMO Global Metals and Mining Conference (Transcript)
Cameco Corporation (CCJ)
BMO Global Metals and Mining Conference
February 28, 2022 1:30 PM ET
Company Participants
Tim Gitzel - President, CEO
Presentation
Unidentified Company Representative
Right, ladies and gentlemen, I'm pleased to welcome next on-stage Tim Gitzel, President and CEO of Cameco. Note we are restricted on Cameco, so, I can only provide Q&A that has come via the app. So please make sure you put your questions into the app, so we can ask some questions at the end. So, welcome, Tim.
Tim Gitzel
Well thank you very much, Alex. And good afternoon, everybody. Nice to be back in Florida. Nice to see everyone, I stopped in Tampa on the way down from Saskatoon. It was minus 30 when I left Saskatoon, it was plus 30 when I got to Tampa. So we're always grateful to BMO for getting us out of the freezing cold for a couple days in February. I want to recognize my colleague, Mr. McCaw who's here, I think for the first time. So, good colleague, CEO of Adam Prom here in attendance today, and you'll hear from him next. I think we do have a couple Cameco people in the crowd. I want to introduce him because you've seen him a hundred times, but, some of them have new positions. Dr. Grant Isaac is in the back. Grant, if you follow any of our conference calls, you'll know Grant is my sidekick.
We've been together for 12 or 15 years. And so he's got a new position as EVP, Executive Vice President at Cameco, he’s still our CFO. Rachelle Girard is here, is our Vice President of Investor Relations, and Leah Hipperson is in the back as well our Vice President, Treasurer, new Vice President. So welcome. Okay, well, let me give you a bit of an update on life in the uranium nuclear business. I think I can safely say that in all my time leading Cameco and in this industry, which is now accounting over four decades, I don't think there's ever been more exciting time for us in the industry and for our business. I'll give you a few reasons why I could say that, and I'll start at the company level.
2022 was a important year for us. It's a year we were able to return to stable operations at Cigar Lake, through covid, we were up, we were down. We start stop. We start really tough on our operations, not easy to manage, but, and same at Port Hope, our conversion facility, you know, at Port Hope, same thing, covid, we were always looking after the best interest of the employees and had to start and stop. We're through that. I knock on wood, if there was some, that we can keep our operations going now in a steady, stable rate. At Cigar Lake, we added stability. We added another, just under 5% interest to our already important stake at Cigar Lake. So we're at 50% and now we're just about 55% in the midst who one of our partners decided to move on.
And we were delighted. I can tell you delighted to take their share of Cigar Lake. We'll take another share, an extra share of tier one assets anytime we can get it. Another huge move for us in 2022 was the restart of MacArthur River Key Lake. And I don't have to tell you, I told you the tough story over the years, the 10 or 12 or 15 years we've been coming up here doing this about having to shut down operations in Northern Saskatchewan, the largest high grade mine and mill in the world, putting a lot of people out of work, putting a lot of hurt on the northern economy in Saskatchewan. But it wasn't much fun. This was much more fun when we were able to announce a restart, Ed MacArthur. And I can tell you it's up and running now, and we're super proud of that venture. And then of course let me talk about the interest we picked up in- - on October 11th, we announced our 49% interest in Westinghouse that we bought, those assets don't come for sale very often. We had chance with a really strong, solid partner, Brookfield, to pick up a share of Westinghouse. And I can tell you that deal from the day we signed, looks better and better every day for us. So 2022, a very busy and transformative year for Cameco and then let's not forget the 80 million pounds of contracts long-term uranium contracts, we signed 17,000 ton of conversion contracts added to the portfolio. I think that's most contracts we have ever signed in one year and it's probably the biggest contract year we have ever had.
Of course, we think this will serve our business well going forward for many, many years, allow us to sustainably operate our assets and generate full cycle value isn't that full cycle value. I'd say it quickly, but it's important full cycle value for our company and at the same time providing reliable fuel for our customers for a long, long time. So we think these moves that we made in 2022 will be a bit the transformative for our company and really create some new opportunities for Cameco.
Of course, we had post news, post Q4 news and that was the major supply agreement that we signed with the Energoatom, which we announced earlier this month, again, just a great example of one of those growth opportunities. When we get this one finalized and there's just legal work to do on it. We could see Cameco provide sufficient volumes of uranium and conversion to meet all of the Ukraine's nuclear fuel needs through 2035, so a 12 year contract. This one was more than financial for us. This this was something we wanted to do. We wanted to stand shoulder-to-shoulder with our Ukrainian partners in the situation they are in. It's a great contract for us and hopefully will be great for them and allow them to have some security of supply of nuclear fuel many, many years to come. The contract itself has a potential to supply about 67,000000 pounds of uranium over 12 years, and as I say it's a single largest supply contract in Cameco's history. So we think this is another great piece for Cameco and a great reason to invest in Cameco.
I'll come back to our plans for 2023 and beyond in more detail in a few minutes, but I want to look back at 2022 from an industry perspective. And of course, there was a geopolitical event that we can't forget, and that really shook our business listed kind of to the core, I would say. And of course, that's the Russian invasion of the Ukraine at the end of February. And I think it's brought in structural change in our business. And you are seeing a realignment of the way countries and companies operate now and by their nuclear fuel that they need going forward.
And so that's at a time, when the world itself is looking for energy solutions that can solve three very significant challenges. They need to provide clean energy. They need to provide secure energy and that energy security is huge now, and affordable energy. And as our Canadian Natural Resources Minister said to us a few months ago, there is no solution for tackling the global climate crisis and the world energy crisis that doesn't include nuclear energy. I think he is right. I think the debate is over on that and we need to move forward. And that's great news for both our industry and for Cameco.
So 2022 was a real transformative year for our company. We thanks to the, I'd say, strategic and deliberate decisions our team made over the past decade, are really conservative financial management. We think our company extraordinarily well positioned to benefit and prosper for many years now, many, many years to come. We also think we are well protected from the macroeconomic headwinds that we see out there today. Today, we have a strong balance sheet. We have got a growing durable contract portfolio and our customers' nuclear power plants are part of the -- an integral part of the critical infrastructure needed to guarantee the availability of 24 hour clean electricity around the world.
But as always, can you hear me say this every time, you hear me at Cameco, we will always take a balanced and disciplined approach. So as we begin 2023, we are really excited about the opportunities for growth ahead of us with the increasing demand for safe, clean, reliable and affordable nuclear power. Around the world today, there are 57 reactors under construction, another 9 of those or 9 of those that we believe could reach commercial operation this year and we are expecting that number or more every year to come online for years to come and that's not including the SMRs.
Almost every day, we see an announcement coming from somewhere, someone, supporting either the prevention of early reactor retirements, which is important for us, that's even better than building a new unit, because it's there already and they need fuel from the fuel suppliers around the world. We see life extensions of the current reactor fleet. We are seeing that in many countries now adding another 20 years to what they thought was maybe a 40 year life spent, now being 60, 60 year life spent, maybe now being 80. Again, almost better than a new build because it exists already and it needs fuel right away. And of course, we are seeing a lot of new reactor programs.
We are seeing momentum for building SMRs and advanced reactors, and also for non-traditional commercial uses of nuclear power. You hear it probably in other rooms here talk about using nuclear power for hydrogen, for ammonia production, for district heating and nuclear-powered shipping among other things. And we know a lot of companies and countries that are pursuing projects in these areas. As a result, for us, that means growing demand for nuclear fuel, uranium, conversion and other pieces in the near, medium and long-term. So it's easy I think to conclude that, the future for nuclear looks pretty bright.
Of course, we know that, if it's going to be right, that means more supply is going to be needed and that therein lies the challenge. I think, low prices have led to growing supply concentration by origin and a growing primary supply gap. And secondary supplies that we have talked about for the last 20 years that have kind of saved the industry, have now been drawn out of the market. I think U.S. put out a article saying, there are no inventories that they are gone. Secondary supplies don't last, they're not there, they're gone. And so you add that to a desire to reduce reliance on Russian fuel supplies and you've got some issues in front of you.
Regarding Russia today, Russia currently supplies about 39% of the enrichment market, about 27% of the conversion market and I think about 14% of the uranium market. So they are big, big players. And I think the utilities we talked to at least are considering what they are going to do going forward, looking at scenarios ranging from abrupt stoppage of Russian supply to a gradual phase out. And while the supply uncertainty, I would say, isn't yet driving contracting at a replacement rate. I think we saw 113 million pounds transacted on the term market last year, that's not replacement rate. That's quite a bit, but that's not replacement, and we haven't seen it probably for the last 10 or 12 years. So that at some point has to come to pass. So we're seeing utilities beginning to pivot toward procurement strategies that certainly more carefully weigh the risks to supply, including origin risk, where they're getting their material from. As I said last year, we saw about 113 million pounds of long-term contracting. We believe that this could be the case going forward and will give companies in the business a lot of opportunities. One thing that's super exciting for us at Cameco is that and it's a thing that kind of differentiates us from some others, is that we don't have to build new capacity to capture growth in the market. Our growth is expected to come from brownfield, leverage our existing suite of tier one operating assets. We just need to take the assets we have and turn them back on and ramp them back up.
And this is for Cameco at least the position we haven't enjoyed maybe ever, or certainly not in the last cycles. So we're also excited about, I mentioned it earlier, the strategic partnership we have with Westinghouse, with, along with our partner Brookfield Renewable. We think we found the right partner, the right target and our timing is good. And so we're super excited about that. An acquisition that'll allow us to extend our base of reach from uranium conversion, heavy water fuel into other areas of the nuclear fuel cycle. And so like us Westinghouse has assets that are strategic, proven, licensed and permitted and located in geographically attractive areas around the world. And so we think together with them, we're going to be very successful in growing our business.
So we, with the continued improvements in the market and our growing long-term contract portfolio, we've updated, you'll heard on the, our Q4 call probably that we updated our production plans for 2023 and beyond. I think it's set out on the slide with more than 180 million pounds of uranium and over 55,000 ton of UF-6 conversion under long-term contracts, we're getting the message from our customers that they realize that they need to be in the contracting business. And they're looking at the significant challenges I think the supply side is now throwing at them for their fuel going forward. And hopefully and I think some of the numbers prove it out. They see the value in securing access to secure proven tier one assets that are in politically attractive jurisdictions. So, in fact, our, those are our numbers, those don't include the Ukrainian deal we made. If you add that our commitments are about 250 million pounds total, and over 80,000 tons of UF-6 conversion when you include all the integral atom requirements.
So then we decided it no longer makes sense from a Cameco point of view. We had supply discipline in place. So you said, we don't need that any more to the extent we had it at MacArthur River. And so we were going to hold MacArthur River to 15 million pounds going forward. We'll ramp up there this year, and then we're going to move to 18 million pounds where we were before we shut down. Same with Cigar Lake. You'd heard us say we were going to reduce the production at Cigar Lake from 18 million pounds down to 13.5 million pounds. Again, we've decided we're not going to do that. We have the contracts in place to make that production and that'll be our guiding principle. That's our North Star. We will not produce until we have contracts in place and homes for those pounds. And we do have homes for those pounds.
So as a result in 2023, our plan is to produce 20.3 million pounds of uranium for our own account from McArthur and Cigar and we'll increase that 24.4 million pounds in 2024. But that's not the extent of our Tier 1 supply availability or growth. We can go even higher than that, if we took advantage of all of the expansion opportunities from our Tier 1 assets, our annual share of uranium, supply could be in the range of 32 million pounds. And if you added some of our Tier 2 production centers like Rabbit Lake in the U.S. you could get to 36 million to or 38 million pretty quickly. So we have got leverage there.
So in addition to expanding our uranium production, we are also working on expanding our Port Hope conversion production or UF6 production. We have got an absolutely growing book of long-term business, conversion prices are at historic highs, mostly due to the squeeze that was put on the conversion market over the last 5 years and then add in that the Russian situation. We are now at Port Hope targeting 12,000 ton a year by 2024, which is really pushing the pedal down at Port Hope.
So the improving market fundamentals are growing contract portfolio for with uranium and fuel services and our plans for increased production are obviously setting us on a path that provides a line of sight to significant improvement in our financial performance going forward. We have got a lot of experience operating in this industry. We understand that to provide long-term value and provide supplier reliability for our customers, we need to build, and this is our guiding light, we need to build permanent homes for our production under long-term contracts, before we start to pull the pounds out of the ground. So we are going to continue to make strategic supply decisions in all segments of our business and in accordance with our customers' requirements.
Another bonus for us is that, with substantial Canadian productive capacity, our supply meets increasingly stringent ESG requirements, which is so necessary in today's environment. It provides diversity from SOEs and helps to alleviate utilities' future supply of origin and trade policy risks. Then on the financial side, our strategy is to ensure that, we have a solid balance sheet and have the ability to self manage our risk and I think we have been very cautious about that and stuck to that plan for many, many years. At the end of the year, including proceeds from an equity issue we did, in connection with the Westinghouse deal, we have today we have $2.3 billion dollars in cash, we have a $1 billion debt facility and $1 billion undrawn credit facility. So the balance sheet is strong. We expect to see significant improvement in our cash flow as we go along, thanks to the planned ramp-up in production at our uranium facilities McArthur, Key Lake and at the Port Hope US6 conversion facility.
As well, we are seeing higher prices. Higher prices are being discovered through an improving market, which are going to flow through to our existing contract portfolio and further contribute to improving our financial performance. And with an inventory of unencumbered Tier 1 and Tier 2 pounds in the ground, rising prices will also create the opportunity for us to negotiate new long-term contracts with obviously appropriate pricing mechanisms, commitments that are going to underpin the long-term operation of our productive capacity.
Something we don't talk about very often, but it's out there, we don't get any credit for it, are the advanced uranium projects and the exploration assets in our portfolio. We believe that these resources rival any particularly when you consider the proximity of these resources to our existing facilities. We expect these resources will add value well beyond the current price cycle. And just to remind you, we are more than just mining. We are not just mining, we have investments across the nuclear fuel cycle and refining and conversion, conduit fuel fabrication for heavy water reactors, where we're continuing to lock in business and a lot of it going forward. We are positioning Cameco to respond to the growing need for uranium fuel by exploring opportunities that we expect will further our participation in the nuclear fuel value chain opportunities, like global laser enrichment that you have heard us talk about, a third generation enrichment technology. And of course, we have the 49% or we will have the 49% interest in Westinghouse as soon as that deal closes, which we expect sometime midyear.
So these opportunities align with our commitment to manage our business responsibly and sustainably and to increase our contribution to global climate change solutions. We are optimistic about the growth in demand for nuclear power, both traditional and nontraditional. We are optimistic about the growth in demand for nuclear fuel products and services. And we are optimistic about the opportunity for Cameco in capturing long-term value across the nuclear fuel chain and supporting the transition to a net zero economy.
You've heard me say this a 100 times, but we will continue to do what we said we would do. We are aligning our production decisions with our contract portfolio and the market fundamentals. We are being strategically patient in our marketing activities, and we are conservatively managing our balance sheet to ensure we can execute on our strategy and self manage risk. This strategy has positioned us well over the years to take advantage of the fundamentals I spoke of earlier.
And our closing statement on every quarter goes like this, 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 now for over 30 years. We have determined that our strategy of operational flexibility, supply discipline and financial discipline will allow us to achieve our vision of energizing a clean air world. And it's a strategy that we expect will deliver long-term value in a market, where demand for safe, secure, reliable and affordable, clean nuclear energy is growing.
So thank you for your attention. Those are my formal comments. I'll stop there and I'll sit down with Alex and perhaps take some questions. Thank you.
Question-and-Answer Session
Q - Unidentified Analyst
Great. Thanks, Dave. Right, I'll start with this question. So how -- well, can you comment on the ramp up of McArthur? And then the second part of this is, how do you decide production levels at your existing assets? And when will you have to consider greenfield investments?
Tim Gitzel
Yes. So just on McArthur, how's it going? It's going well. We are happy with the ramp-up, the way it's going. We actually started before last year. We went on a kind of a digitization and robotics kick. We needed to upgrade the mill. The Key Lake mill was built in '83 and needed some refreshment and so we were working on that that allowed us to hire some people that we knew we would keep on. So we have been ramping up through 2022. You saw we put some pounds on the board in 2022. But now in 2023, we are getting to a regular run rate. Our plan is to produce 15 million pounds at McArthur Key in 2022.and ramp up to 18. So that's going quite well. We're quite happy about that. Greenfield, I think you mentioned, I can tell you we won't be doing greenfield.
That's the beauty of our program, we don't have to. I was in front of the regulator in Ottawa on Thursday last week. She had a meeting of CEOs and she was going through the CEOs and all of the licenses that they need and construction licenses and operate. And she came to me and she said, how come you're not on the list? I said, cause we don't have any. We did all that. All our stuff's been on care and maintenance. We just have to restart our stuff. So it's a great position to be in, in a market like this. We will time our production to go with our sales and grants in the backwards after the sales. We're not producing to spray it into a spot market or to put it on the shelf or an inventory. We'll have the sales first, then we'll produce into it.
Q - Unidentified Analyst
So with regards to the Inigo Atom contracts, can you comment on the, on any financial mitigation features, should those assets become compromised?
Tim Gitzel
We obviously thought of that. You know, right now, the Ukraine, integral atom has 15 units. Six of them are the upper Asia units that are under Russian control at the moment. So obviously we won't be supplying them at the moment. But the other nine aren't. And so, you know, we believe in the Ukraine, the CEO, CEOs are friends of ours, Petro Kotin. We've been dealing with them. I think we went over in 2018 and 2020 Grant met with them. We've sold them some materials, smaller amounts of material on the spot and or short, more short term. But then they came to us after the Russian invasion, and obviously they're turning their back on the Russians and wanted a Western supplier. And they said will you take it all?
Will you take all of our uranium and all of our conversion to 2035? And assure us? And with the caveat that, right now they only have nine reactors, but we're, so it became, yes, it's a great financial deal, it's a great commercial deal, but it was a little bigger than that. We wanted to support them as well. And we weren't worried that we'd, you know, that, well, we might not be able to deliver some pounds and we'll be stuck with pounds. We're not worried about that for one second. We can place those pounds or we won't produce them. We'll have enough visibility going forward. So we thought it was the right thing to do. I could tell you our employees loved it. People stopped me on the street and thanked us for doing that. So it became almost more than just a commercial deal with the Ukraine.
Unidentified Analyst
Okay. When do you expect to see SMR demand have a meaningful impact to the market?
Tim Gitzel
Yeah. By the end of the decade, for sure. You know, there's a lot of exuberance around the SMR field and you've seen it again at that meeting with the regulator, she said she had, right now the Canadian regulator has, regulator, has nine different SMR varieties in front of her for licensing. I mean, that's almost too many. Like, we're not building that many different kinds in Canada. Not in the short term. And so it's becoming where we almost have to pick and choose. But the big one is Darlington. OPG's got Darlington. They picked the GE Hitachi model 300 megawatt. It's kind of a mini-me, if you like, from their bigger boiling water reactors. That's going to be the first one up. They're going to build one.
Our own province of Saskatchewan has embedded people in OPG because we want to build the next four in Saskatchewan then OPG wants more. There's I think X energy, new scale are building on the West Coast in the US. We know Rolls Royce is building units in the UK. China and Russia are probably a bit ahead of us, so it's coming. I've seen numbers that are massive, number 300 SMRs over the next 25 years. And in the US. So it's coming. We need to get the first ones done. We have to do them right and get them on time and then I think you will see a lot more.
Unidentified Analyst
Great. Well, unfortunately, we are up against the end of the time, but thank you very much.
Tim Gitzel
Thank you. Thanks, everybody. Thanks for coming.
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Cameco Corporation (CCJ) Presents at BMO Global Metals and Mining Conference (Transcript)