Cameco Corporation

Thank you for standing by. This is the conference operator. Welcome to the Cameco Corporation first quarter 2021 conference call. As a reminder, all participants are in a 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 and 0. I would now like to turn the conference over to Rochelle Girard, VP Investor Relations, Treasury and Tax. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to Cameco's first quarter conference call. Today's call will focus on the trends we're seeing in the market and on our strategy, not on the details of our quarterly financial results. As always, our goal is to be open and transparent with our communications. 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 Submit a Question tab on the webcast, and we will be happy to follow up after. 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. Sean Quinn, Senior Vice President, Chief Legal Officer and Corporate Secretary. And Alice Wong, Senior Vice President and Chief Corporate Officer. I'm going to hand it over to Tim to talk about the growing demand for nuclear power, the uranium market fundamentals, and about Cameco's strategy to add long-term value. After, we will open it up for your questions. 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 question and answer 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. 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'll turn it over to Tim.

Well, thank you, Rochelle, and welcome to everyone on the call today. We appreciate you taking the time to join us. I hope you and your families are doing well. Last quarter, I talked to you about our excitement for the future of our industry and about the opportunity for nuclear power to play a pivotal role in the transition to a net zero carbon economy through both traditional and non-traditional uses. I also talked about the excitement we have for the role that chemical can play in that future as we execute on our tier one strategy, which includes production discipline, marketing discipline, and conservative balance sheet management. I have to say that over the course of the last few months, there has been nothing to dampen our enthusiasm, and in fact, there have been a number of developments that continue to support our optimism. I'll get into those in a bit, but I'm going to provide a recap of what I said were the three main drivers for our optimism. First, demand for nuclear power is becoming more certain, as the megatrend of increasing electrification while phasing out carbon-intensive sources of energy continues to take hold around the globe. Second, uranium supply is becoming less certain as years of persistently low prices have led to planned production curtailments, lack of investment, the end of reserve life for some mines, shrinking secondary supplies, and trade policy issues. And finally, that our long-term strategy positions us very well to sustainably deliver long-term value. let's start with a macro view the fundamentals for energy as I said previously we are seeing today a mega trend focused on increasing electrification well at the same time achieving massive decarbonization goals this mega trend has led to a mega challenge that challenge being threefold first to bring safe clean and reliable baseload electricity to about one-third of the population who currently have no access or limited access to electricity. Second, to clean up and replace our existing sources of electricity with a safe, clean, reliable, affordable, and carbon-free option. And finally, to transition away from the current use of thermal sources of energy for things like transportation and heating. This mega challenge of increasing electrification is occurring precisely while countries and companies around the world are fixated on reducing their carbon footprint. Many have announced net zero carbon targets, and many more are expected to follow. Country after country is recognizing that in a world where 85% of our electricity still comes from fossil fuel sources, there's no clear pathway to sustainably achieve both electrification and decarbonization without nuclear in the toolbox. As I noted earlier, over the last few months, there's been further support for nuclear's role in the clean energy transition. In Europe, we've seen nuclear move another step closer to being included in the EU sustainable finance taxonomy. A rigorous scientific full life cycle assessment from the joint research center concluded that there are no scientific arguments supporting the exclusion of nuclear energy from the taxonomy. The European Commission then proposed a supplement to current legislation that, if passed, will confirm nuclear as sustainable. In addition, in France, the French Nuclear Safety Authority granted a 10-year extension to the operating lives of 32 of EDF's nuclear power plants. Conservatively, this could equate to at least 100 million pounds of additional uranium demand not previously accounted for. Over in China, the Nuclear Energy Association confirmed that the country's 14th five-year plan targets 70 gigawatts of nuclear power operating by 2025, an increase of approximately 20 gigawatts from 2020, with another 50 gigawatts under construction. It also indicated China could reach up to 120 gigawatts in operation by 2030 as part of its plan to be carbon neutral by 2060. This would translate into annual consumption of about 60 million pounds of uranium per year. In Russia, Rosatom announced a target of 24 new reactors that will be needed by 2045 to increase Russia's share of nuclear to 25% of the energy mix. This would add another 12 million pounds of annual demand to Russia's requirements. And at the recent Global Leaders Summit on Climate hosted by the United States, Aggressive plans to reduce carbon emissions and achieve net zero carbon goals over the next 30 years were discussed, and many commitments were made. For example, in the U.S., where nuclear energy is increasingly recognized as a major source of carbon-free, scalable energy, the President announced a goal to cut up to 52% of U.S. greenhouse gas emissions by 2030, leveraging existing nuclear energy and advanced reactor technology in its clean energy initiatives, and he's promised to make the electricity system fossil fuel-free by 2035. Japan has revealed plans to cut carbon emissions 46 percent from 2013 levels by 2030, maintaining its target for nuclear to provide 20 to 22 percent of its generating capacity. Furthermore, we're seeing momentum building for non-traditional commercial uses of nuclear power, such as the development of small modular reactors and advanced reactors. Nuclear is also the only low carbon source that can produce heat that, along with its traditional uses, can be used to produce clean hydrogen and fresh water. We're also seeing company after company announce net zero carbon targets. They recognize there is increasing scrutiny on their environmental performance. Investors are beginning to price climate-related risk into their capital allocation decisions. Investors are not only looking to invest in those companies that can demonstrate improved environmental performance, they will look for those companies that are positioned to do it profitably and sustainably. Unlike in the past, companies will be accountable for where the energy to fuel their operations comes from, We like to think of it as electron accountability. And they'll have to make decisions that are economically sound to attract investment. When you look at levelized costs of nuclear compared to other low carbon sources, nuclear energy is that solution. It's the most cost effective way to provide low carbon, dispatchable, 24-7 electricity. So the outlook for nuclear is very bright. Increasing demand for nuclear means increasing demand for uranium, which brings us to the second factor that I said is driving our growing optimism. Demand for uranium is rising at precisely the same time that supply is becoming less certain. One of the indicators we look at to illustrate the opportunity is uncovered requirements. We know that utilities have not been replacing what they consume annually under long-term contracts. This has led to a growing wedge of uncovered uranium requirements. That wedge is now bigger than it was back in the early 2000s, which was another period of complacency. There are only a couple of sources for this information. If we look, for example, at UXC, which tends to be the most conservative view, they show that global cumulative uncovered uranium requirements are about 1.4 billion pounds to the end of 2035. If we back that up to when it's needed to be contracted, produced, and delivered, the challenge is to buy 1.4 billion pounds by 2030. That would require 140 million pounds of long-term contracting per year starting in 2020. Last year we saw 50 million pounds placed under long-term contracts, so that demand is piling up in a future window. Keep in mind this is just traditional demand we're talking about. It does not consider any of the alternative uses of nuclear I talked about earlier. We're also seeing increased demand for uranium from financial players and junior uranium companies who recognize that statistically the current uranium price has a much greater likelihood of going up than down. And this view is supported by the fundamentals. The growing uncovered requirements are occurring at a time when there are some big question marks about where the uranium will come from to fuel the world's expanding nuclear fleet. Damaco's supply curtailments alone, both planned and unplanned, along with our purchasing activity, have resulted in at least a 145 million pound swing in the supply fundamentals since 2016. Since the end of 2020, we've seen two long-term producing mines come to the end of their reserve life. The loss of the Ranger mine in Australia and the Commonac mine in Niger will further reduce supply by about 7 million pounds per year. And our Cigar Lake mine is done about eight years from now. So right in that 10-year contracting window we're talking about. That's another 18 million pounds per year gone. Given the timelines it takes, we should be investing now to replace that lost production, but at today's prices, that makes zero sense. In addition, as a highly trade-dependent commodity, government-driven policies can be particularly disruptive for the uranium market. Due to persistently low prices, we've seen planned supply curtailments, lack of investment, the end of reserve life for some mines, and shrinking secondary supplies all of which have been amplified more recently by unplanned supply disruptions due to the COVID-19 pandemic. Consequently, primary supply has become concentrated. It's concentrated geographically with about 80% of primary supply coming from countries that consume little to no uranium and nearly 90% of consumption occurring in countries that have little to no primary production. And it is highly concentrated by producer with about 70% of primary production in the hands of the top five producers and about 80% in the hands of state owned entities. So we believe that in the current market, the risk to uranium supply are far greater than the risk to uranium demand. These are the fundamentals that get us up in the morning and why we remain a pure play supplier of the uranium fuel needed to produce clean, carbon-free base load electricity. Which brings me to the final factor driving our optimism, our strategy, and why we remain committed to doing what we said we would do. Let me remind you what it is that we said we would do. First and foremost, and this is where it starts for us, we're focused on protecting the health and safety of our workers, their families, and their communities. We're doing that. Every day we make decisions about how best to manage our operations and protect and support our workforce through the pandemic. In December, the trends we were seeing in the COVID-19 pandemic caused us to proactively pause Cigar Lake production for a second time as concerns about the availability of workers in critical areas was increasing. During the temporary shutdown, we put further COVID-related protocols in place. Combined with our on-site testing facility and the vaccine rollout in the province, we have the confidence to restart the mine in April, with greater certainty that the mine will be able to operate safely and sustainably. We will continue to monitor the situation in our communities and will have regular dialogue with public health authorities. Pandemic or no pandemic, the health and safety of our workers will always be our priority. We will not hesitate to take further action if we feel our ability to operate safely is compromised. Second, apart from the COVID-19 disruptions to our operations, we have not wavered from the execution of our strategy. There are three fronts on which we are executing our strategy, operational, marketing, and financial. On the operational side, we have implemented our planned supply discipline, cutting production well below our delivery commitments, This includes the curtailment of production at Rabbit Lake, our US assets, and of course at the MacArthur River Key Lake operation. As I said earlier, these actions have left a lot of pounds in the ground and kept them off the market. Consequently, we've been purchasing material on the spot market to meet our committed deliveries. In addition, we've shown sales discipline, sticking to our value strategy. We've been strategically patient. We take a portfolio approach to building our contract book. And much like building an investment portfolio, it's a balanced approach that manages risk and return. We like to layer in contracts where appropriate. We want to ensure we support the operating costs of our assets while not committing our tier one pounds too far in the future under contracts that won't generate an appropriate portfolio return. And we do not want to exhaust our tier one assets in a low price environment. And we're seeing our patience pay off. In April, we successfully finalized and executed a number of sales contracts, which had been under negotiation, adding 9 million pounds to our long-term contract portfolio, which together with recent long-term contracting totals almost 60 million pounds. And we continue to have a large pipeline of uranium business under negotiation. In fact, we continue to see off-market interest growing, and historically, It has been a leading indicator of broader demand for long-term contracting. We're having conversations with our biggest and best customers. These customers recognize the long-term fundamentals. They want access to long-lived tier one productive capacity from commercial suppliers who have a proven operating track record. They understand that from a security of supply perspective, today's prices do not reflect production economics. They recognize the first mover advantage gained from securing their future access to our Tier 1 pounds today as opposed to in the future. And we have some competitive advantages. We have significant idle Tier 1 capacity that is fully licensed and fully permitted that will be among the first pounds to meet the growing demand in the market. We're an independent commercial supplier and provide our customers supply diversity from state-owned enterprises. With substantial Canadian productive capacity, we can help de-risk their future supply from trade policy exposure. And emerging is the focus on ESG matters, which is great news for us. The Cameco serving the interests of our stakeholders has always been at the heart of what we do. Long before there was a focus on ESG issues, because it's the right thing to do, and we recognize the significant business value it adds. Our board, Our employees, contractors, communities, suppliers, customers, governments, and our providers of capital expect us to manage this company in a long-term, sustainable fashion. We're very proud of our over 30-year commitment to protect, engage, and support development of our people and their communities and to protect the environment. The uranium fuel we supply plays a significant role in contributing to greenhouse gas mitigation efforts in Canada and abroad. In Canada alone, this uranium fuel provides greater than 30% of the province of Ontario's electricity every year, avoiding more than 5 million tonnes of carbon dioxide from being emitted. Considering only the Canadian emissions avoided resulting from the use of nuclear power in Ontario, we like to think of ourselves as Canada's first net zero mining company. So we are well positioned to meet our customer needs. And finally, on the financial side, we've been very deliberate in shoring up our balance sheet. At the end of the first quarter, we had negative net debt with $1 billion in cash and a $1 billion undrawn credit facility. As such, we have the financial capacity to self-manage risk and maintain our strategic resolve. Before I move on from the strength of our balance sheet, I do want to address what the Supreme Court of Canada decision means for us. First and foremost, it means that this dispute is fully and finally resolved for 2003, 2005, and 2006, and that Cameco's marketing structure and behavior through this period were in full compliance with the Income Tax Act. In other words, Cameco followed the law, and it was the CRA and its reassessments that were offside. And as stated many times with this decision, we believe CRA should move quickly to resolve all subsequent years and return to us the $303 million of cash they are holding and release the $482 million in letters of credit that are tied up as security for all years. While this dispute's been before the courts, we've been accused of not paying our fair share of taxes. Now that this matter is no longer before the courts, it gives me great satisfaction to know that the court system in Canada has unequivocally confirmed that we did pay our fair share of taxes. But there are elements of this that are not fair. It's not fair that we have to continue to wait for an indeterminate period for the CRA to make the decision to return our cash and credit capacity. And it's not fair to see Cameco disparaged in the recent federal budget document as engaging in inappropriate profit shifting in light of what various court judgments actually say. Cameco has contributed to the health and safety of individuals around the world. We participated in the Megatons to Megawatts program that saw the dismantling of more than 20,000 nuclear weapons, converting 500 metric tons of highly enriched uranium into low enriched uranium for use as fuel in nuclear reactors. And we're proud to be part of the venture that makes Canada the world's leading supplier of cobalt-60 for medical applications and other gamma technologies, demonstrating the tremendous benefits the nuclear industry delivers to Canadians and others around the world. GammaCo has contributed millions of dollars for community and infrastructure projects in northern Saskatchewan, including schools, housing, recreation facilities, Since 2009, we've invested nearly $10.5 million in support of infrastructure improvement projects in local communities, which have been targeted at youth, health and wellness, including mental health, education and literacy, and community development. We're a leading industrial employer of indigenous peoples in Canada, providing well-paying jobs in northern Saskatchewan for over 30 years. We've helped establish and grow businesses in northern Saskatchewan by procuring almost $4 billion in services since 2004. We've reinvested billions of dollars in Canada, building mines and mills and filling voids in programs for some communities. So we take great exception to any claim that what we have done is in any way unfair when it is in accordance with the law. The facts show that Canada has benefited greatly from the profits we have generated, and this distraction should be resolved immediately. Setting this issue to the side, I'm happy to say that we're performing well on all three strategic fronts. However, there are costs to our strategic decisions, which are reflected in our financial results. But the good news is this does not represent the run rate of our business, and we expect much better days ahead once we return to a tier one cost structure. We're taking the steps today and incurring the costs we expect will allow us to restart our tier one assets with more flexibility in the production rate, to eliminate the care and maintenance costs incurred while our tier one production is suspended, and to benefit from the very favorable life of mine economics they provide. We're confident in our ability to transition through this period and capture demand that will provide leverage to higher prices. And we have concluded that we have the right vision, strategy, and values to deliver long-term sustainable value. Our vision, which is to energize a clean air world, recognizes that we have an important role to play in enabling the vast reductions in greenhouse gas emissions required to achieve a resilient net zero carbon economy. As we seek to achieve our vision, we're committed to doing it in a manner that reflects our values. Those values have not changed. They have always guided our actions and they place a priority on safety in the environment, on building and supporting a flexible, skilled, stable, and diverse workforce, on behaving with integrity and leading by example, on promoting equality and acting to eliminate racism wherever it exists, and on pursuing excellence in all that we do and inspiring others to do the same. Our decisions are deliberate. We are a responsible, commercially motivated supplier with a diversified portfolio of assets, including a tier one production portfolio that is among the best in the world. We're well positioned to take advantage of a market where demand for nuclear power, both traditional and non-traditional, is growing, where we believe the risk to uranium supply is greater than the risk to uranium demand and where we believe our strategic decisions and strategic patience provide us with resiliency in the face of unprecedented challenges and will result in the rewards that will come from having low cost supply to deliver into a strengthening market. So thanks for joining our call today and operator with that we would be happy to answer any questions.