Cameco Corporation

Thank you for standing by. This is the conference operator. Welcome to the Chemical Corporation first quarter 2023 conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will 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 then 0. Webcast participants are asked to wait until the Q&A session is over or started 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, Vice President, Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to Cameco's first quarter conference call. I would like to acknowledge that we are 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, Executive VP and CFO, Heidi Schake, Senior VP and Deputy CFO, Brian Riley, Senior VP and Chief Operating Officer, and Sean Quinn, Senior VP, 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. After this, we'll open it up for your questions. 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 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'll turn it over to Tim.

Well, thank you, Rochelle, and good morning, everyone. Hope everyone is doing well. We appreciate you joining us on our call today. Let me start today by saying how excited we are about the opportunities for growth ahead of us with demand for clean, reliable, secure, and affordable baseload electricity coming from across the globe. In fact, I'm not sure there's ever been a better time to be a pure play investment in the growing demand for nuclear energy. And that is exactly how we have positioned Cameco. From the results we published earlier today, which are clearly beginning to demonstrate the strength and purpose of our strategic decisions, to the continued support we see developing for nuclear power around the world, our optimism just continues to grow. I have to tell you about an event I attended about a month ago, the Prime Minister Trudeau, President Joe Biden dinner, which took place in Ottawa. I think the related meetings and public statements that followed exemplify with little doubt the scale and scope of the opportunity that's in front of us. At the dinner, the two leaders talked about, among other things, the critical role of nuclear energy and the importance of nuclear collaboration between Canada and the US. It was almost hard to believe, like a dream come true. Nuclear energy would never have made top billing at a meeting between our countries even a few years ago. So it gives you a sense of just how important nuclear power and the fuel cycle to support it have become and how critical Cameco's role is to achieving this North American vision. In fact, I sat between Canadian Natural Resources Minister Jonathan Wilkinson and U.S. Secretary of Energy Jennifer Granholm, where we continued the discussion around Cameco's role in North American nuclear energy security. The dinner was followed up by the joint statement between the US Department of Energy and Natural Resources Canada on nuclear energy cooperation. I don't know if you've read it yet, but I can tell you it is really positive and puts nuclear power front and center. It's the kind of signal from government that our industry has been waiting for for a long time. And while the statement was largely focused on North America, it went even further. It addressed the need to work together globally as the world grapples with providing clean, reliable, affordable, and secure energy. Furthermore, at the recent G7 meeting in Japan, five of the G7 nations, Canada, United States, United Kingdom, Japan, and France, have created an alliance to leverage their respective civil nuclear sectors. This agreement will support the stable supply of nuclear fuels, as well as the nuclear fuel needs of future advanced reactors. Almost every day in the news, you will find more examples of that same sentiment being expressed. Whether it's the improving public opinion for nuclear power, changing policy decisions in support of nuclear, or market-based solutions being pursued, there's increasing evidence of the strong momentum for nuclear. Evidence that supports full-cycle demand growth for nuclear power and the uranium fuel required to run the reactors. So the positive fundamentals you've heard us talking about for nearly a decade are no longer just a long-term story. They're right in front of us, and the picture is stronger than ever. We're seeing the reversal of early reactor retirement decisions, which represents unexpected near-term demand. And as some utilities look to replace Russian fuel in their supply chains, we're seeing new markets opening up, markets where our company was previously unable to compete, such as Central and Eastern Europe. This is adding further pressure to the already tightening near-term market. In the medium term, additional demand is coming from life extensions for existing reactor fleets. Although today's focus is on energy security and fuel diversity, governments are not losing sight of their clean air and net zero carbon targets. Those who are lucky enough to count operating and fully depreciated nuclear plants as part of their base load generation are recognizing that those assets are more valuable than ever. And then there is growth in the long term, which is coming in the form of new builds, expansions to existing reactor programs and higher nuclear energy policy targets, and construction plans for small and advanced nuclear reactors, plans that are becoming more concrete every day, all of which is pointing to what we believe are truly transformative tailwinds for our industry, tailwinds driven by the focus on clean energy, by an energy crisis, and by the geopolitical realignment of energy markets. In the past quarters, we've spent a lot of time focusing on the vital aspects of supply and demand because about 95% of the questions we have been getting were focused on the market. There seemed to be little interest in what Cameco was up to because we had almost everything shut down. However, those fundamentals characterized by durable full cycle demand growth against the backdrop of an uncertain supply picture are now pretty well understood. Now that we're restarting some of our operations and expanding at others, we're seeing the interest shift back to understanding how we're positioning Cameco to benefit from the tailwinds that are developing. What a difference a year has made. The question on everyone's mind now seems to be, how quickly can you respond with more production? However, I think we've been very clear. For us, it's not about volume. It's about maximizing value. The key to our production planning and potential future growth decisions is long-term utility procurement. Contracting comes first in all segments of our business. As we've said time and time again, nuclear is a long-term market and spot activity is discretionary. That said, price and availability of uranium products and services in the near term does have an impact on the market's assessment of how much uranium is available across all time horizons. And near-term scarcity makes everyone think longer term, setting the right context for a new contracting cycle, which is now well underway. Once we have finalized contracts in hand and know when and where our material is needed, we will then make the appropriate sourcing decisions to satisfy those delivery commitments. We have over three decades of experience operating in this industry. We understand that to create long-term value, and provide supply reliability for our customers, we must build homes for our production under long-term contracts before we pull it out of the ground. A bit unusual for a mining company, but then again, we're more than mining. And a bit unusual for a commodity, but then again, uranium is unlike most other commodities. We continue to be balanced and disciplined in layering in contract volumes where it makes sense for us while building a diversified customer base. For the past couple of years, the volumes we have placed under long-term agreements have exceeded our annual delivery volumes. The most recent supply agreements we finalized in new markets in Eastern Europe are great examples of the type of contracting opportunities we're seeing. We are incredibly proud of the pivotal role that we at Cameco will be able to play in helping these countries gain energy independence. As a result of our contracting success, today we have about 215 million pounds of uranium and more than 70,000 tons of UF6 conversion under long-term contracts. Delivery under these contracts spans more than a decade, some contracts up to 2040. The average annual delivery volume in our uranium segment over the next five years is 26 million pounds. And many of these contracts are market-related, providing us with exposure to an improving market. In addition, we have a large and growing pipeline of business under discussion, which we expect will help further build our long-term contract portfolio and guide our future production planning. This contracting success is expected to allow us to sustainably operate our assets and generate full cycle value for Cameco, providing our customers with access to the fuel they need to operate their reactors. However, while Cameco is enjoying replacement rate contracting, the nuclear industry overall has not yet achieved that milestone. So utilities' uncovered requirements continue to grow. With our experience in every commercial cycle, we believe this indicates we are still in the early stages of the market transition that is underway. And we know that additional demand must come to the market. Therefore, we are remaining patient in order to capture as much long-term value as possible. We remain very selective in committing our unencumbered Tier 1 in-ground uranium inventory and UF6 conversion capacity under long-term contracts. We want to maintain additional exposure to future improvements in the market. As a commercial supplier, our decisions have uniquely positioned the company to capitalize on the increasingly undeniable conclusion that nuclear power must be an essential part of the clean and secure energy transition. And with heightened security of supply concerns and geopolitical uncertainty stemming from Russia's ongoing war in Ukraine, Cameco's nuclear fuel supplies are highly coveted. With demonstrated tier one assets, strategic tier two assets, and investments across the fuel cycle, we've taken a balanced and disciplined approach to our strategy of full cycle value capture. We believe there is significant opportunity for Cameco to grow as we help new and existing customers de-risk their fuel supply needs. But what's really exciting for us is that we do not have to build new capacity to compete for this business. We have brownfield expansion capacity. We just need to turn up the best-in-class assets we already have, a position we have not enjoyed in previous price cycles. In the context of significant growth opportunities for nuclear power, we're also excited about our strategic partnership with Brookfield Renewable to jointly acquire Westinghouse Electric Company. Our excitement stems from being able to extend our reach in the nuclear fuel cycle at a time when there is tremendous growth on the horizon. Our planned investment in Westinghouse is an investment in assets like ours that 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 and downstream services from their existing footprint. The team here is working toward closing the Westinghouse investment, which is still expected to occur in the second half of this year. Once it closes, we'll be able to provide more details on the exciting prospects we see for that business. This brings us to our production decisions. Our production plans are balanced with our contract portfolio and where we think the market transition is currently at. We will not front-run demand with uncommitted supply and risk being exposed to a discretionary spot market. We've seen other companies pursue a spot market strategy many times in the past and every time it failed. It only served to transfer value from shareholders' pockets into the pockets of utilities, traders, or other intermediaries. Any company that understands our industry has learned the lessons of the past. They understand that in the near term, there is very little uncovered demand. You just have to look at UXC's uncovered requirements in 2023 and 2024. They're very small. Contracts being signed today aren't for in-year demand. They're generally for requirements starting in 2025 and beyond when uncovered requirements start to grow. However, If you wait until then to contract, you'll miss the contracting cycle. The demand will already be covered under long-term contracts that are being signed today, and your production will be exposed to a small discretionary spot market. So Cameco won't ramp up production to meet spot demand. We align our production plans with our long-term commitments, and I think we've shown we can be trusted when we say we will maintain our discipline. Let me just take a minute to discuss where we're at with the next phase of our supply discipline. As we announced last quarter with the contracting success we have had, we've changed our production plans from a year ago. We now plan to ramp up at MacArthur River Key Lake to produce 15 million pounds this year and 18 million pounds in 2024. At Cigar Lake, we plan to produce 18 million pounds this year and to maintain production at 18 million pounds in 2024. But that's not the extent of our Tier 1 supply growth. As we see uncovered requirements translate into additional contract commitments, we also maintain the ability to expand and extend production from our existing Tier 1 assets. If we took advantage of all of these opportunities, our annual share of Tier 1 uranium supply could be about 32 million pounds. As for our Tier 2 assets, we plan to keep those on care and maintenance unless we can secure long-term contracts that provide returns similar to what we can currently achieve on our Tier 1 assets. In addition to our plans to increase uranium production this year and in 2024, we're also working on expanding production at our Port Hope UF6 conversion facility. To satisfy our growing book of long-term business at a time when conversion prices are near historic highs, we're targeting annual production of 12,000 tons by 2024. But as is the case across all industries and jurisdictions right now, there are challenges. Inflation, the availability of personnel with the necessary skills and experience, the impact of supply chain challenges on the availability of materials and reagents, and global transportation challenges all contribute to elevated risks which we must continue to carefully manage. With improving market fundamentals plus our growing contract portfolio for both the uranium and fuel services and our plans for increased production, our strategy has set us on a path that provides line of sight to a significant improvement in our financial performance as we return to our tier one cost structure. And you can see this is starting to play out in our first quarter results as we expected it would. Our strategic decisions are translating into better earnings and cash flow as higher uranium prices flow through our existing market-related contracts and as we begin to deliver into higher-priced UF6 conversion contracts. We are no longer incurring care and maintenance costs or operational readiness costs at MacArthur River Key Lake. And as our production increases and our purchased volumes decrease, We're relying more on our lower cost production to meet our delivery commitments. We will retain our conservative financial management to support our continued balance and disciplined contracting and supply decisions. As you know, the financial aspect of our strategy is to ensure we have a solid balance sheet and the ability to self-manage risk. At the end of the first quarter, including the proceeds from an equity issue to support our planned acquisition of a 49% share of Westinghouse, we had $2.5 billion in cash, about $1 billion in long-term debt, and a $1 billion undrawn credit facility. And this doesn't include the $79 million U.S. dividend we just received from J.V. Inkei or the $86 million cash refund CRA just sent us on account of its revised reassessments for the 2007 through 2013 tax years. The refund from CRA was cash we had to pay on account of taxes previously reassessed on income earned by our foreign subsidiary from the sale of non-Canadian produced uranium. Based on the information CRA provided to us, we had actually expected to receive $89 million But nothing surprises us anymore when it comes to the CRA. They informed us that they apparently made an error in their calculations that was not in our favor. Unfortunately, this is serious business, which is what makes it so frustrating. We still expect them to return $211 million in letters of credit. Of course, that assumes their calculations were correct, which I'm not sure is a safe assumption, but it's all we have. So while we're happy to be getting some of our cash and security back, our broader tax dispute saga with the CRA does continue, and you can dive further into the details on that in the Q1 MD&A. Our decisions at Cameco are deliberate. We're a responsible, commercially motivated supplier with a diversified portfolio of assets, including a Tier 1 production portfolio that is among the best in the world. And we're more than just mining with investments across the nuclear fuel cycle. 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 includes contracting discipline, supply discipline, and financial discipline, will allow us to achieve our vision. a vision of energizing a clean air world and thereby delivering long-term value in a market where demand for safe, secure, reliable, and affordable clean nuclear energy is growing. So thanks for your interest today, and we are happy to take any questions.