Cameco Corporation

Thank you for standing by. This is the conference operator. Welcome to the Chemical Corporation third quarter 2022 conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. Webcast participants are asked to wait until the Q&A session before submitting their questions, as the information they are looking for may be provided during the presentation. I would now like to turn the conference over to Rochelle Girard, VP, Investor Relations, Tax and Treasury. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Cameco's third quarter conference call. I would like to acknowledge that we're speaking from our corporate office, which is on Treaty 6 territory, the traditional territory of Cree peoples and the homeland of the Metis. With us today on the call are Tim Gitzel, President and CEO, Grant Isaac, Senior Vice President and CFO, Brian Riley, Senior Vice President and Chief Operating Officer, Alice Wong, Senior Vice President and Chief Corporate Officer, and Sean Quinn, Senior Vice President, Chief Legal Officer, and Corporate Secretary. I'm going to hand it over to Tim in just a moment to discuss how the improving growth outlook for nuclear power is translating into an improving growth outlook for Cameco, and then Grant will discuss our recent announcement to acquire Westinghouse. After, we will open it up for your questions. We've allocated an hour for this call. However, as always, our goal is to be open and transparent with our communication. Therefore, if you have detailed questions about our quarterly financial results or should your questions not be addressed on this call, we will be happy to follow up with you after the call. There are a few ways to contact us. You can reach out to the contacts provided in our news release. You can submit a question through the contact tab on our website or you can use the ask a question form at the bottom of the webcast screen and we will be happy to follow up after this call. If you join the conference call through our website event page, there are slides available which will be displayed during the call. In addition, for your reference, our quarterly investor handout is available for download in a PDF file on our website at Cameco.com. Today's conference call is open to all members of the investment community, including the media. During the Q&A session, please limit yourself to two questions and then return to the queue. Please note that this conference call will include forward-looking information, which is based on a number of assumptions, and actual results could differ materially. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we make today, except as required by law. Please refer to our most recent annual information forum in 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.

Well, thank you, Rochelle, and good morning, everyone. We appreciate you joining us on our call today. Two weeks ago, I started my call by saying that nuclear energy is back in durable growth mode, and that Cameco is back in durable growth mode, growth that will be sought in the same manner as we approach all aspects of our business, strategic, deliberate, disciplined and responsible. I'm pleased to say that we're seeing the growth in our industry translate into improving financial performance as the exposure to increasing prices in our contracts across the fuel cycle flows through to our average realized prices. And even more important, we're seeing that industry growth translate into growth in our book of business as we responsibly build homes for our valuable tier one assets. business that maintains significant exposure to rising prices for us. This is exciting because, as you know, we're still operating well below capacity, and our continued contracting success is setting us up for further growth as it lays the foundation for our transition back to a Tier 1 run rate. It's a good reminder of why we believe that Cameco remains the best way to invest in the recovery in the uranium market. Thanks to our strategic and deliberate actions and our conservative financial management, we are well positioned. Well positioned for the nuclear fuel cycle tailwinds driven by the focus on clean energy, by an energy crisis, and by the geopolitical realignment that's occurring. We're also well protected from the current macroeconomic headwinds. We have a growing, durable contract portfolio, and our customers' nuclear plants are part of the Critical infrastructure needed to guarantee the availability of 24-hour electricity to run hospitals, care facilities, and other essential services. With $1.3 billion in cash on our balance sheet at the end of September, improving fundamentals for our industry and our business, and our decision to prepare MacArthur River Key Lake for production, our plans give us line of sight to a significant improvement in our future financial performance. So I'm going to start by talking about Cameco and the success we're having in an improving market. Then I'm going to turn it over to Grant, who's going to walk you through our strategic partnership with Brookfield Renewable to acquire Westinghouse and why we expect it to augment the core of our business, expand our ability to compete for more business, and offer more solutions to our customers across the nuclear fuel cycle. In July, when we reported our second quarter results, we noted that we'd added a total of 45 million pounds to our uranium contract portfolio since the beginning of January. Two weeks ago, we indicated that number had grown to 50 million pounds. We also noted that in our fuel services segment, where pricing is at historic highs, since the beginning of January, we had secured 7 million kilograms of uranium as UF6 under long-term contracts. Contracts that will underpin the operation of our Tier 1 assets and that we expect to benefit from for many years to come thanks to our strategic patience. This quarter we have provided a further glimpse into our pipeline of contracting discussions because it has us pretty optimistic. Our discussions range from initiation to accepted and awaiting finalization. We're pleased to report that we're having good success in our discussions. In addition to the 50 million pounds I noted earlier, we have had another 27 million pounds of long-term uranium business accepted. While the contracts are not yet finalized, the key terms including pricing mechanism, volume, and tenor have all been agreed to. In addition, we have had 7.5 million KGU of additional conversion business accepted, which is also being finalized. Once all contracts are finalized, the total volume of uranium successfully contracted since the beginning of this year is expected to be about 77 million pounds, and the total volume of conversion contracted is expected to be about 14.5 million KGU. That's a lot of contracting, and that's a credit to our team. While the finalization of these contracts may or may not occur in the calendar year, it demonstrates that we are having significant success with our discussions. This success is expected to secure long-term value for Cameco and allow us to sustainably operate our assets and therefore provide our customers with access to the fuel they need to operate their reactors. We believe the key to our success is our ability to offer customers access to reliable assets across the fuel cycle. Assets that are existing, proven, Tier 1, licensed, permitted, and in geopolitically attractive jurisdictions. So why are we so excited about this contracting activity? Well, it's because that's what we've been patiently waiting for. It demonstrates how well Cameco is positioned to grow. Our growth is expected to come from Brownfield Leverage, our existing suite of Tier 1 operating assets. We do not have to build new capacity to capture the value. We just need to turn up the assets we already have, a position we have not enjoyed in previous price cycles. And of course, with the planned joint acquisition of Westinghouse, we're excited about being able to extend the base of our reach in the nuclear fuel cycle at a time when there is tremendous growth on the horizon for our industry. We are extending our reach with assets that, like ours, are strategic, that are proven, that are licensed and permitted, and that are located in geopolitically attractive jurisdictions. Assets that we expect will be able to participate in the growing demand profile for nuclear energy from their existing footprint. And assets that are expected to provide new opportunities for our existing suite of uranium and fuel services segments. Finally, we are excited because we've said all along it is utility procurement that provides the signals we need to make the production planning decisions that will get us back to operating at our tier one run rate. While we're getting closer to that day, we are not there yet, but every pound helps. And while it has already been a successful year of contracting, our pipeline of uranium and conversion negotiations remains large. We expect to see more long-term demand to come to the market. So it's clear that utilities are increasingly recognizing the value in securing access to Cameco's strategic, proven, licensed, permitted Tier 1 assets that are located in geopolitically attractive jurisdictions to meet their fuel supply needs. So let's talk about where we're at in the next stage of our supply discipline as we progress toward the eventual return to our Tier 1 run rate the restart at the MacArthur River Mine and at the Key Lake Mill. We believe that this is one of, if not the best suite of uranium assets on the planet, assets that are proven, low cost and long lived. At the mine, all process circuits have been commissioned and the critical mining equipment and initial production areas have been prepared and are ready to go. And trucks are now hauling ore slurry to the mill. We've talked a lot about the significant upgrades we've made at the mill. We've implemented and installed a number of automated systems and incorporated a number of digital technologies that we expect will make the asset more flexible, more efficient, and even safer than before. We expect the first produced pounds to come out of the mill not too long from now, and I can tell you that is a day that we will celebrate, so stay tuned on that. As I said earlier, our plans, which include the return to production, sets us on a path that we expect will significantly improve our financial performance. We'll be able to source more of our committed sales from lower cost produced pounds, and we get out from under the operational readiness costs we've been expensing. And of course, all those pounds have a home in our committed contract portfolio. With our experience operating in this industry, we understand that to create long-term value and provide supply reliability for our customers, we must build a permanent home for our production before we pull it out of the ground. Without line of sight to having a long-term profitable contract to deliver into, uranium shows up in the spot market, which has neither the size nor the transaction frequency to absorb uncontracted primary production. This oversupply in the spot market puts downward pressure on price, which negatively impacts producer profitability and therefore creates a threat to the long-term security of supply for customers. It happened in the last price cycle. And those producers who thought they would wait and sell all their material in the spot market very quickly learned that it's a flawed strategy. They may have sold a few hundred thousand pounds at the peak, but they rode the price right down to where their operations were no longer sustainable, whereas our average realized price outperformed the market throughout the trough. So we will continue to make strategic supply decisions in all segments of our business and in accordance with the signals our customers are sending. I also want to remind you of the why behind what we do. that being the increasingly important role for nuclear power in achieving the objectives of providing clean energy, of providing secure energy, and of providing affordable energy. The heart of nuclear power's return to the energy policy toolbox is the reminder that energy decisions must achieve all three of these objectives at the same time. When energy policy decisions are determined based on these three objectives, it quickly becomes evident that nuclear power fits nicely at the center. Nuclear power provides safe, reliable, affordable, carbon-free baseload electricity while also offering energy security and independence. Suffice it to say, we're seeing governments and companies turn to nuclear with an appetite that I'm not sure I've ever seen in my four decades in this business. Therefore, it's easy to conclude that the demand outlook is durable and very bright. But supply is a different picture. Low prices have led to growing supply concentration by origin and a growing primary supply gap. Along the way, the secondary supplies that have played such a crucial role in our industry have been drawn out of the market. And taking the challenge of filling that gap to a whole new level is a desire to diversify away from Russian supply in nuclear fuel supply chains. Currently, the global nuclear industry relies on Russia for approximately 14% of its supply of uranium concentrates, 27% of conversion supply, and 39% of enrichment capacity. Utilities are now considering and planning for a variety of potential scenarios ranging from an abrupt end to Russian supply to a gradual phase-out. It's still early days, but we are already seeing some utilities beginning to pivot toward procurement strategies that more carefully weigh the origin risk. We believe we are well positioned to help our customers de-risk their fuel supply needs, and this has us very optimistic. We're optimistic about the growth in demand for nuclear power, both traditional and non-traditional. We're optimistic about the growth in demand for uranium and for the downstream fuel services. and we're optimistic about the opportunity for Cameco in capturing long-term value. Our decisions at Cameco are deliberate. We're a responsible, commercially motivated supplier with a diversified portfolio of assets across the nuclear fuel cycle, including a Tier 1 production portfolio that's among the best in the world. We're committed to operating sustainably by protecting, engaging, and supporting the development of our people and their communities and to protecting the environment, something we've been doing now for over 30 years. Our strategy, which emphasizes strategically aligned contracting, operationally flexible supply, and financial discipline, will allow us to achieve our vision, a vision of energizing a cleaner world and thereby delivering long-term value in a market where demand for safe, secure, reliable, and affordable, clean nuclear energy is growing. So with that, I'm going to turn it over to Grant.

Thank you, Tim. Good morning to all who have joined us today. I want to follow Tim's spotlight on our contracting activity with a spotlight on our recent announcement to acquire Westinghouse. Obviously, since we don't own it yet, there really are significant limits to what we can disclose about a private company, especially one currently owned by a private equity firm. But what we can do is to outline our expectation for this acquisition after it closes. We have six key expectations. First, we expect Westinghouse, like Cameco, to benefit as nuclear power is forecast to double over the coming decades. Growth and demand comes from several sources. Existing reactors save from early shutdown. Existing reactors undergoing life extensions to operate for materially more decades. New markets for fuel products and services, like Eastern Europe, as a result of the unprecedented geopolitical realignment. And of course, new builds of large, of small and of micro reactors. A durable demand outlook that we believe is the best ever. Second, we expect this acquisition to enhance our ability to compete for this improving nuclear demand. As nuclear demand improves, proven suppliers have an enhanced ability to compete for that demand. At Cameco, We believe we are the very best way to invest in the recovery of nuclear fuel demand because we have always been invested in the fuel cycle, valuable, licensed, existing capacity in geopolitically important jurisdictions where participation in the industry is closely regulated. The MacArthur River Mine and Key Lake Mill, the Cigar Lake Mine, the Blind River Refinery, the Port Hope Conversion Facility, Port Hope Fuel Manufacturing are all examples of such valuable assets. assets with brownfield organic inside the fence line growth characteristics, meeting growing demand without the immediate need for greenfield investments, which are particularly challenged given current inflationary and supply chain pressures. At Westinghouse, conversion, fabrication, and manufacturing assets managed by a world-class team have the very same characteristics of meeting growing demand from brownfield leverage. We expect an enhanced ability to compete at a time when the Western nuclear fuel cycle needs to provide reliable and secure uranium conversion enrichment fabrication parts and service solutions to nuclear power plants that are absolutely critical in dealing with today's dual energy and climate crisis. In other words, this acquisition does not reduce our exposure to improving uranium prices. We expect it to enhance our exposure to improving uranium prices. Third, we expect distributions from our investment in Westinghouse. Westinghouse is a stable and predictable core business generating durable cash flows and is well positioned to compete for growing nuclear demand. With a long-term contract portfolio like Cameco's, we expect Westinghouse to not only be well positioned to compete for growing nuclear demand, but also well protected from any current macroeconomic headwinds as utility customers run their critical nuclear power plants. This durable and growing business is expected to allow Westinghouse to self-fund its approved annual operating budget to maintain existing capacity and to service its financial obligations. The expected result is de-risked cash flows from this investment. Fourth, we expect this strategic and transformative acquisition to be accretive, accretive to our cash flows, given that the stable and predictable core business generates durable cash flows and is well positioned to compete for growing nuclear demand. And for the same reason, accretive to our earnings after customary purchase price allocation accounting and adjusting for differences between US GAAP and IFRS reporting standards. And accretive to our net asset value, given we have added to our existing asset base additional valuable strategic licensed and permitted existing capacity in geopolitically important jurisdictions. Fifth, we expect that Westinghouse's existing long-term debt level will have no negative impact on Westinghouse's core business or growth potential. There are two critical questions to ask about Westinghouse's long-term debt. The first question is whether the debt level, or more precisely, the debt service cost, is expected to negatively impact the annual business plan and objectives of Westinghouse? The answer is no. We expect that given the stable and predictable core business of Westinghouse, it will be in a position to self-fund its approved annual operating budget, including servicing its financial obligations. The second question is whether the debt level is expected to negatively impact market growth opportunities. The answer, again, is no. We expect that Westinghouse will remain a critical supplier of essential nuclear fuel and service solutions to growing nuclear power markets around the world. Over time, as nuclear demand grows and as Westinghouse realizes opportunities to grow, the debt metrics will improve. Sixth, we expect that as we navigate by our investment grade rating and equity account for this joint venture, the increase to our debt leverage metrics as part of financing this transaction will be temporary. We expect that our financial performance will improve significantly as increased prices and increased contracting translate into uranium and fuel services production shifting from extreme supply discipline plans towards more production. We expect that our tier one cost base will be restored as we eliminate care and maintenance costs, operational readiness costs, and the higher cost of purchasing material. At closing, we expect the accretive Westinghouse transaction to add to our financial performance. And I should point out that the additional debt results in a total long-term indebtedness similar to where we were prior to retiring our 2019 maturities, which was before the recovery in the uranium price. And while MacArthur River and Key Lake were still in care and maintenance, our outlook has improved significantly since then. The result is that we expect only a temporary impact to our debt leverage metrics, as we navigate by our investment grade rating and equity account for this joint venture investment. And Tim, I would just add two final observations, if I may. We are delighted to partner with the outstanding team at Brookfield Renewable, led by Connor Teske. Together, we have structured a strategic joint venture combining their extensive experience and expertise in clean energy transition and production with our extensive expertise and experience in the nuclear fuel cycle. A partnership where Westinghouse's key decision items, such as strategic plans and operational budgets, are reserved matters requiring both Brookfield Renewable and Cameco to support the decisions. A partnership that we expect to be a platform for growth as nuclear demand grows. And finally, I think that everyone who has invested in the nuclear fuel cycle has at least at one point asked themselves why other investors have not taken notice of the fact that the investment case for Western assets in the nuclear fuel cycle has never been stronger, or ask themselves why there is not more investment capacity and scale in this exciting and critical clean energy space. We too have asked that question. What I would observe is that the past couple of weeks has demonstrated to me that this is precisely the type of transaction that generates the broader investor interest we have wondered about. From a broader energy perspective, Brookfield Renewable, for example, has just clearly signaled to their global base of clean energy investors that nuclear power has a central role to play in the transition to net zero, and that the nuclear fuel cycle is absolutely critical to achieving that net zero transition. From an industry perspective, we are providing investors with upstream exposure to valuable and strategic mining and milling assets, downstream exposure to valuable and strategic fuel service assets, and ultimately, leverage to improving prices and the growing cash flows and earnings that come from responsible long-term contracting across the nuclear fuel cycle. Perhaps this is the moment when a broader group of investors takes notice of nuclear energy. With that, back to you, Tim.

Great. Thanks for that, Grant. And with that, Operator, we're happy to answer any questions.