Cameco Corporation

Thank you for standing by. This is the conference operator. Welcome to the Cameco Corporation Second Quarter 2020 conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. I would now like to turn the conference over to Rachelle Girard, Vice President, Investor Relations, Treasury, and Tax. Please go ahead, Ms. Girard.

Thank you, operator, and good morning, everyone. Welcome to Cameco's second quarter conference call. Like last quarter, we are doing things a little differently again. Recently, we've been experiencing some challenges with our phone lines and have had a large volume of dropped calls. As a result, we are again planning to conduct the QA portion of the call in a listen-only mode. There has been a lot going on, both for the company and the industry, and we recognize there is significant interest and limited sources of information for our investors. Therefore, we want to ensure that we are able to clearly and reliably communicate with the investment community. We have been proactive with our communications during this period, conducting numerous conference calls, both with individual investors and via virtual roadshows, conferences, and sell-side hosted investor calls. We have collected questions from our sell-side analysts and have augmented that list to include the common questions we have been hearing during our outreach with the investment community. To help with the understanding of the information, we have organized the questions to focus first on the market, then the impact of the market on Cameco's performance, and then finally some more specific Cameco factors. As always, we will make ourselves available to speak to you after the call should your questions not be addressed on this 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 to submit a question tab on the webcast, and we will be happy to follow up after this call. With us today on the call are Tim Gitzel, President and CEO, Grant Isaac, Senior VP and CFO, Brian Riley, Senior VP and Chief Operating Officer, Sean Quinn, Senior VP, Chief Legal Officer and Corporate Secretary, and Alice Wong, Senior VP and Chief Corporate Officer. Tim will begin with comments on our strategy and the market, After, we will move to the Q&A portion of the call. If you join the conference call through our website event page, there are slides available which will be displayed during the call. The slides are also available for download in a PDF file through the conference call link at CAMACO.com. Please note that this conference call will include forward-looking information which is based on a number of assumptions and actual results could differ materially. Please refer to our annual information form and MD&A for more information about the factors that could cause these different results and the assumptions we have made. With that, I will turn it over to Tim.

Well, thank you, Rochelle, and welcome to everyone who has joined us today. I hope you and your families have been able to remain safe and healthy during these unprecedented and challenging times. The COVID-19 pandemic has had a significant impact on people and economics around the world. We at Cameco have also felt the impact with the proactive shutdown of our operations, which have come at a significant cost to our bottom line in the second quarter. That said, we at Cameco are well positioned financially with a very solid balance sheet. Further, our strategy remains intact and we continue to meet all of our committed deliveries to our customers. Our ability to do so was strengthened by the successful restart of the Blind River Refinery and the Port Hope UF6 conversion plant in May. And we're happy to announce that, providing it is safe to do so, we expect our position will be further strengthened by the planned restart of Cigar Lake in September. Let me say a few words about our perspective on the uranium market. We believe that world uranium supply continues to be at risk as a result of the threats posed by the pandemic, both this year and next. And second, that demand is beginning to emerge on market, something we've all been watching and waiting for. So the market is showing resilience and price seems to have reset. Spot prices are up close to 35% since the start of the unplanned supply disruptions this year. And TradeTech's production cost indicator sits at $44.50 US per pound, and UXC's five-year price is at $38.75 US per pound. And of course, from a company perspective, I have to highlight that we had another victory in our CRA dispute. The Federal Court of Appeal decided unanimously in our favor at the end of June. So there's been a lot going on. Let's dig into some of the details. I want to start with our plan to restart Cigar Lake in September. It's our biggest news, like the successful restarts at Blind River and in Port Hope. It's an example of our success in proactively managing the risks of the COVID-19 pandemic. We are very pleased to be able to make this announcement. It's good for Cameco from a financial perspective, from a risk management perspective, and it's good for Northern Saskatchewan. Having Cigar Lake running was always a part of our 2020 plan. On the financial front, our strategy relies on having low cost pounds from Cigar Lake in our cost structure. These low cost pounds help offset the cost of our strategy on the operational and marketing fronts. However, the COVID related shutdown of Cigar Lake has increased our costs. Our care and maintenance costs are up $37 million as a result of the proactive shutdown of our various operations, including Cigar Lake. and we're required to purchase more uranium than we had anticipated at the beginning of the year. Given the 35% increase in the spot price of uranium, these additional purchases come at a higher cost than our produced pounds. As a result, we expect our average unit cost of sales will be higher than we expected at the start of the year. From a risk management perspective, Cigar Lake Restart will allow us to continue to meet our deliveries in a market where prices have risen due to the increased demand and the thinning of available supply. And it's good for the communities in northern Saskatchewan who depend on the operation for employment, business development, and community investment. We will obviously continue to actively monitor the public health situation and will take a measured approach with all of our restart activities. The health and safety of our employees, their families, and their communities continue to be the priority focus of all of our plans, and we will align these plans with the guidance of the relevant health authorities where we operate. We expect it will take approximately two weeks to get back into production. While it's good for Cameco to restart Cigar Lake, the restart does not change the fact that there remains tremendous uncertainty about uranium supply as the pandemic continues to cause unplanned supply disruptions added to the planned supply discipline that has already been undertaken. So the restart of Cigar Lake will not be the savior for the market. We will not make up lost production this year. And while we are targeting our share of production to be up to 5.3 million pounds in total for 2020, there are risks to that target. The restart and continued operation will be dependent on our ability to establish and maintain safe and stable operating protocols along with a number of other factors, including the availability of the necessary workforce and how the COVID-19 pandemic is impacting northern Saskatchewan. And the COVID-related shutdown creates potential risk to Cigar Lake's production rate in 2021 as well, caused by delays and deferrals in project work, including lower capital expenditures. Since Cigar Lake production is for term contracts, not for the spot market, No additional spot supply will result from the restart. Then consider that COVID has impacted JV Inkay's production and all other Kazakh production in 2020. We also expect that the COVID-19 related disruptions will impact the volume of material we'll purchase from Inkay this year. There's been a resurgence in the number of cases of COVID-19 in Kazakhstan, and it is having to reintroduce lockdown measures. Kazatomprom, making the health and safety of employees a priority, announced a one-month extension to the already three-month reduction in wellfield development activities at all its uranium mines in Kazakhstan. It expects to gradually increase mine site staff levels in August, if it is safe to do so. Until Kazatomprom can restart these activities, it is not clear to us what the impact on our purchases from Inkay will be this year. Also, due to the importance of wellfield development in maintaining ISR production levels, it is indicated that the longer the disruption continues, the greater the likelihood the production impact could extend beyond 2020 to 2021 in Kazakhstan. And don't forget that the MacArthur River Key Lake operation remains in an indeterminate period of shutdown, requiring market purchases to make up the curtailed production. So as a result of the planned reductions in our production from MacArthur River Key Lake, combined with the unplanned reductions at Cigar Lake and Inkai, we'll have to rely more heavily on the spot market in 2020. We were active on this front in the second quarter. We purchased a total of 14.7 million pounds at an average price of $31.30 US per pound. The majority of these purchases were spot market purchases. It also means we have some purchasing yet to do. And depending on the ultimate production impact of the COVID-19 pandemic related disruptions on our 2020 supply, potential 2021 supply, and on how market dynamics develop, we may also begin purchasing for 2021 this year. Despite the disruptions to our business related to the COVID-19 pandemic, we expect our business to be resilient. We remain committed to our strategy, which is why, on the operational front, McCarthy River Key Lake remains shut down indeterminately. Our deliveries to date have not been materially impacted, nor do we expect they will be. It is true that, as a result of our strategy, we have become reliant on market purchases of uranium to meet our delivery commitments, but that is a deliberate choice we have made. It potentially cost us more in the near term and we have been upfront about the impact our purchasing activity is expected to have on our margins. Now the COVID-19 pandemic is magnifying that impact. So why did we make the choice to rely on the market for supply? Because we believe that over the long term it will add significant value for our shareholders and other stakeholders and it will allow us to operate in a sustainable manner for years to come. It's true that as uranium prices increase, purchases become relatively more expensive than production. However, as long as the near-term cost of purchasing is less than the added value we expect to capture under our strategy, we are better off purchasing. Where does that added value come from? Well, first, it comes from preserving our Tier 1 assets. As prices rise, it comes from delivering into the market-related contracts in our existing contract portfolio at higher prices. And we believe higher prices set up the conditions necessary to allow us to layer in new long-term contracts at prices that recognize the value of our Tier 1 assets. This is how we build long-term value. We preserve Tier 1 assets to deliver into a long-term contract portfolio. To strengthen our strategic resolve, we have been disciplined. We have made prudent and deliberate decisions to shore up our balance sheet. As a result, we have the tools we need to deal with the current uncertain environment. We are well positioned to self-manage risk. We have almost $880 million in cash and a $1 billion undrawn credit facility, which we don't anticipate we will need to draw on this year. And we believe our risk has been substantially reduced with the unanimous Federal Court of Appeal decision in our favor. The decision is great news for Cameco, for our investors, for our employees, and for other stakeholders. I once again want to thank our legal counsel, our expert witnesses, consultants, and the many people at Cameco who worked hard on our case. Your efforts are appreciated. And I want to thank our shareholders and other stakeholders for your ongoing support and trust throughout this dispute. The Court of Appeal ruling further confirms that we followed the letter and intent of Canadian laws and it upholds the cost award received from the Tax Court of Canada. This case only applies to the 2003, 2005 and 2006 tax years where the total tax reassessed was $11 million half of which we have already paid and expect will be refunded. Under this decision, the three years will now have to be reassessed in accordance with the ruling. And remember, we were awarded $10.25 million for legal costs incurred and up to $17.9 million in disbursements. However, the timing of the refund and payment of the cost award is still uncertain. The Crown has the right to seek an appeal to the Supreme Court of Canada but the Supreme Court must agree to hear the appeal. If an appeal is sought and granted, we estimate it will take about two years from the date of the Federal Court of Appeal decision for the Supreme Court to rule on the matter. While the ruling only applies to the three years noted, we believe the principles in the decision apply to all subsequent years. Those principles do not give the CRA the right to shift all of chemical Europe's income back to Canada and apply Canadian statutory tax rates, interest and penalties. We will be asking the CRA to accept the ruling and to apply it to all subsequent tax years and to return our financial capacity. Our position has prevailed at every stage of the legal process. If the CRA feels the laws are not written in the way they want, they need to approach the government to change those laws moving forward, not continue to pursue the same flawed arguments. As we noted in our MD&A, CRA is currently holding $303 million in cash and $482 million in letters of credit that belong to us. Let me be clear, we will be asking to have the liquidity returned so that we can sustainably manage and invest in our business for the long-term benefit of our stakeholders. We want to continue to do our part to help rebuild the economy. Some jurisdictions are slowly starting to open, but given the human and economic effects of COVID-19 globally, it's going to take a concerted effort to do so safely and to begin the recovery process, and each one of us will have to do our part. Governments and central banks around the world have put fiscal and monetary policies in place to help stimulate and rebuild the economy. They recognize that financial flexibility and liquidity are vital to investment, growth, and recovery. The impacts of COVID-19 are unprecedented, but as I said before, we expect our business to be resilient. Why do I say that? As you know, for many years now, in the face of an uncertain uranium market, we began implementing our strategy on three fronts, operational, marketing, and financial. On the operational front, we have cut costs, and in 2016, we began curtailing uranium production, reaching a point in 2018 where our annual production was well below our annual delivery commitments. Therefore, in our strategic planning activities, we have spent time thinking about and planning for different production scenarios. We've modeled the potential impact of these scenarios on our business, so we are prepared to deal with this unplanned event. There are a couple of other things I want to highlight that we believe strengthen the resiliency of our business. On the demand side, nuclear is very clearly back in the policy toolbox due to its carbon-free attributes. Since 100% of our products go into producing clean, carbon-free electricity, we are a growing part of the solution to the clean air and climate change crisis. And now, in the face of a public health crisis, we believe nuclear is once again proving its worth due to some of its key safety and reliability attributes. First and foremost, it is baseload. It will run reliably 24 hours a day, allowing hospitals, care facilities, and other essential services to continue to operate uninterrupted. In addition, nuclear reactors are designed to operate for long cycles without the need to refuel. They carry strategic inventories to guard against supply disruptions. They have a number of backup systems for safety and reliability, and fewer people are required at site to run the operations. In the current environment, all of these characteristics make nuclear power a logical choice, and it is why the International Atomic Energy Agency recently reported that although electricity demand has declined in the near term, the proportion of nuclear power has increased relative to fossil fuels. So as I said earlier, our customers will need uranium. In contrast, on the supply side, things are less certain. The COVID-19 pandemic has disrupted global uranium production, magnifying the supply curtailments that have already occurred in the industry due to the lack of production economics. The industry is reliant on supply that has become highly concentrated both geographically and geologically. This concentration has given rise to a number of trade issues over the past few years, including the Section 232 investigation in the U.S., the Nuclear Fuel Working Group, the review of the Russian suspension agreement, and Iran sanctions. And right now, it's the Russian suspension agreement that is the trade issue perhaps capturing the most attention, particularly that of our customers. The Russian suspension agreement imposes an import quota on Russian uranium products equivalent to 20% of annual U.S. reactor demand, and it is set to expire at the end of 2020. U.S. Department of Commerce initiated negotiations to extend and amend the agreement to at least 2040 and to reduce U.S. utility dependence on Russian-sourced uranium products. If the agreement is not extended by the deadline of October 5, 2020, the Department of Commerce may eventually place final anti-dumping duties on imports of Russian uranium products. In addition, there are efforts being driven by the U.S. domestic uranium industry that would impose limitations on the import of Russian uranium products to the U.S. These trade issues have raised concerns over the role of state-owned enterprises and have placed an increased focus on the importance of supporting the regional supply of critical minerals, including uranium, from independent commercial suppliers like Cameco. Therefore, on balance, we think the risks to supply are greater than the risks to demand, which is why today the uranium spot price is up almost 35% since the start of the COVID-19 supply disruptions. Inventories, which have been blamed for low prices in our industry, are coming into greater focus as a result of the unplanned supply disruptions. As a result of the disruptions to production, we are seeing an acceleration of the destocking that was already underway in our industry. For years, we've been hearing about large inventories of uranium, but we'll now get a sense for the mobility of these inventories. As history has taught us, and as we have seen in the conversion market, though inventory in our industry may appear high, its mobility tends to be inversely related to price, which can further exacerbate supply disruptions. And even if there is a large destocking of inventory as a result of the production disruptions, these are one-time volumes that will be cleared from the market, and in the meantime, it may allow us to make our purchases more cheaply. Over time, we expect this will create a renewed focus on ensuring the availability of long-term productive capacity to fuel nuclear reactors. And we expect this renewed focus on security of supply will provide the market signals producers need and will help offset the near-term costs we may incur as a result of the temporary disruptions to our business. As I said earlier, in this uncertain time, we expect our business to be resilient. Our decisions are deliberate, driven by the goal of increasing long-term value. We will continue to do what we said we would do, executing on our strategy in a manner consistent with our values, We are responsible, commercially motivated supplier with a diversified portfolio of assets, including a tier one production portfolio that is among the best in the world. I'm proud to say that at Cameco, we are doing our part to make a difference. We're providing the fuel needed to power the nuclear reactors that are part of the critical infrastructure needed to ensure hospitals, care facilities, and other essential services are available to us during this pandemic. But perhaps more important is our more than 30-year commitment to protecting the health and safety of our employees, their families, and their communities, and supporting local business development. And in these uncertain times, it'll be critical that we continue to work together to build on the strong foundation we have already established. So thanks for joining our call today. And with that, we will move into the question and answer portion of the call, which, as Rochelle mentioned earlier, is in a listen-only mode.