Cameco Corporation

Thank you for standing by. This is the conference operator. Welcome to the Cameco Corporation fourth quarter 2021 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 one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. 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 fourth quarter conference call. I would like to acknowledge that we are on Treaty 6 territory and the homeland of the Métis. Today's call will focus on the trends we are seeing in the market and on our strategy. 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 contact 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. 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, Alice Wong, Senior VP and Chief Corporate Officer, and Sean Quinn, Senior VP, Chief Legal Officer and Corporate Secretary. I'm going to hand it over to Tim to talk about the long-term fundamentals for our industry, the current market dynamics, 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 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. Please refer to our annual information form in MD&E 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 on the call today. We appreciate you taking the time to join us. I hope it's not too late to wish all of you a Happy New Year, and I hope that you and your families are doing well. A year ago, I spoke to you about our excitement for the future of our industry, the growth occurring in traditional and non-traditional uses of nuclear power, and about our role in supporting the transition to a net-zero carbon economy, and I can tell you none of that has changed. In fact, the developments in our industry over the past year further support our belief that there is durability to demand that I'm not sure we have ever seen in our industry before. And the fundamentals are pointing to a transfer of risk from the suppliers of uranium fuel to the users. The thinning of material available in the spot market and the growing uncertainty of supply has led to the recognition that uranium prices need to rise to reflect production economics. the economics that will be needed to ensure the availability of reliable and sufficient productive capacity to fuel a growing demand for carbon-free baseload nuclear electricity. We have seen a nearly 40% increase in uranium spot prices since a year ago and a 22% increase in the long-term price, and that, of course, is good news for us. We believe that our actions have contributed to the growing security of supply concerns in our industry. As a result of our planned and unplanned production cuts, our inventory reduction, and our market purchases, we have removed more than 190 million pounds from the market since 2016. As a commercial supplier, our decisions have uniquely positioned Cameco with demonstrated tier one assets strategic tier two assets and vertical integration to capitalize on the increasingly undeniable conclusion that nuclear power must be an essential part of the clean energy transition. So today I'm pleased to tell you that with the improvements we've seen in the uranium market and the success we have had in putting 70 million pounds of new long-term contracts in place since the beginning of 2021, it is time. It's time to claim our incumbency advantage and proceed with the next phase of our supply discipline decisions in alignment with our contract portfolio and the market opportunities. And it's time to reward those who understand and have supported our strategy, which has laid the foundation to capture the value of the clean energy transition. Our plan in no way represents an end to our supply discipline. But we are contemplating for our supply discipline still represents a much greater reduction than any other producer has made. In fact, we are continuing with indefinite supply discipline. Therefore, we will begin the process of getting our Northern Saskatchewan Tier 1 assets operationally ready to achieve a production plan of about 28.5 million pounds combined in 2024 on a 100% basis. Our plan includes both MacArthur River and Cigar Lake operating at less than licensed capacity starting in 2024. When you consider our idle Tier 2 capacity, about 40% of our productive capacity will remain subject to supply discipline in 2024. In conjunction with this plan change to our operations, we are also announcing a 50% increase to our 2022 dividend. which will be paid in December this year. So why now, you may ask? With all of our market experience, we are seeing the signposts that tell us it is time to prepare our proven Tier 1 assets for operational readiness and flexibility because a market transition is taking hold. In addition to the over 160 million pounds we have under contract in our portfolio, We see a market where the fundamentals are shifting in our favor and we want to be ready. Let's take a look at the fundamentals that motivate our strategic decisions. The benefits of nuclear energy have come clearly into focus with a durability that we believe has not previously been seen. This durability is being driven by the accountability for achieving the net zero carbon targets being set by countries and companies around the world. These net zero carbon targets are turning attention to a triple challenge. First is to lift one third of the global population out of energy poverty by expanding the availability of clean and reliable base load electricity. Second is to replace 85% of the current global electricity grids that run on carbon emitting thermal power with a clean, reliable alternative. And finally, the challenge is to grow global power grids by switching industries to electricity, such as private and commercial transportation, home heating, and industrial heating, which are largely powered with carbon-emitting thermal energy today. Additionally, the energy crisis experienced in some parts of the world has amplified concerns about energy security and highlighted the role of energy policy in balancing three main objectives. providing a clean emission profile, providing a reliable and secure baseload profile, providing an affordable levelized cost profile. Too much focus on one objective has left some jurisdictions struggling with power shortages and spiking energy prices. There is increasing recognition that nuclear power with its clean emissions profile, reliable and secure baseload characteristics, and low levelized cost has a key role to play in achieving decarbonization goals. Several nations like France, the United Kingdom, and the United States are reaffirming their commitment to nuclear power by developing plans to support their existing reactor base and are reviewing their policies to encourage even more nuclear capacity. Several other European countries like the Netherlands, Czechia, Poland, Estonia, Slovenia, and Serbia have emerged as candidates for new nuclear capacity. With this strong support for nuclear energy, the European Union has agreed in principle to include certain nuclear energy activities under a green labeling system in its taxonomy for sustainable finance. Its inclusion will identify nuclear power as a climate-friendly investment and could result in increased investment in nuclear power plants, and may also allow a broader array of ESG-focused funds to invest in other segments of the nuclear power industry, including mining. Even in countries with phase-out policies like Germany, Belgium, and Spain, there is growing debate about the role of nuclear power, with public opinion polls showing growing support for nuclear. The growth in demand is not just long-term in the form of new builds, It is medium-term demand in the form of reactor life extensions, and it is near-term growth as early reactor retirements are prevented. And we're seeing momentum building for non-traditional commercial uses of nuclear power around the world, such as development of small modular reactors and advanced reactors with numerous companies and countries pursuing projects. So it's easy to conclude that demand outlook is durable and very bright. However, the uranium supply side story paints a much different picture. Persistently low prices have led to planned supply curtailments of existing productive capacity, development risk due to lack of investment in new productive capacity, and the end of reserve life for some mines. In the past, secondary supplies have filled the gap. But after years of drawing on these one-time sources, the secondary supply capacity is now declining significantly into the future. These fundamental facts are being amplified by unplanned supply disruptions caused by the COVID-19 pandemic and the related global supply chain and inflationary challenges that are interrupting the flow of goods and services in the uranium market. We've seen this both here in Canada and in Kazakhstan. And they're further intensified by the thinning of the spot market due to the interest in physical uranium by investors that are purchasing significant volumes of uranium and sequestering it, by the increasing ESG scrutiny of suppliers to ensure utility supply chains qualify as green, by the deepening geopolitical and origin risk driven by the increasing concentration of supply, and a trend toward regionalization to ensure the availability of critical minerals. Looking at where the market is today and what we are seeing, it's easy to conclude that the current uranium market is more constructive than we have seen in a very long time. Key to this improvement has been the alignment of productive capacity with the market cycle, something we as a responsible producer understand and have made a significant part of our strategy. Always motivated by the uranium market fundamentals, Our strategy of full cycle value capture has had a significant impact on the positive market dynamics we see today. We've been undertaking work to ensure we have operational flexibility, and we're aligning our production decisions with the market fundamentals and our contracting portfolio, and we have been financially disciplined. Indeed, I would argue the magnitude of our production cuts to well below our sales commitments and the resulting purchase activity to replace those pounds is unrivaled. The curtailment of our Tier 1 and Tier 2 assets have inventoried almost 115 million pounds of uranium in the ground since 2016, including our partner's share, more than 115 million pounds of uranium that are worth much more in today's market. In addition, with our spot and term purchasing, we've taken 56 million pounds of uranium out of the market since we began curtailing production. And in 2018, we drew our inventory down by about 20 million pounds. To step back for a minute and consider where the market might be today had we not taken these actions. Had Cameco not acted strategically and decisively, almost 190 million pounds would still be above ground and trying to find a home in the market. The spot market would still be significantly oversupplied. Financial and other investors would not have taken notice of uranium. We've been through every market transition in our industry. And while having great assets is a necessary condition for creating long-term value, we know that it is not sufficient. We understand that the spot market is not the fundamental market in our business. It is a very thinly traded market where small volumes can have an outsized impact on price. It is not where utilities turn to satisfy their long-term run rate requirements. It is typically where they go for one-time discretionary volumes. Our experience has taught us that a responsible producer creates real value by building a long-term contract portfolio. A portfolio that supports the operation of productive assets and generates significant cash flow through the entire commodity cycle by having leverage to greater returns as the price increases and that provides downside protection for periods of lower prices. In our business, there is no substitute for a full-blown, utility-driven, long-term contracting cycle. A contracting cycle motivated by security of supply concerns drives value capture in the uranium fuel market as it did in the conversion market two years ago. as it did for us during the worst down cycle in the uranium business when our average realized price outperformed the market and protected our balance sheet when others failed financially and had to be recapitalized and restructured, destroying value for their owners. It's why we're critical of those who promote a strategy to build productive capacity fully exposed to the spot market. Having been in this business now for over three decades, I can tell you that strategy simply doesn't work for those who are trying to create long-term sustainable value, and it demonstrates a basic lack of understanding of the structure of our market. The higher prices discovered during a contracting cycle drive investment in higher cost sources of production, which, due to the lengthy development timelines, miss the contracting cycle and ramp up after demand has already been captured by the incumbent producers. The new uncommitted supply exposed to the small discretionary spot market sets in motion a price-off cycle and becomes value destructive. Finally, after more than 10 years in a trough and through the deliberate and disciplined execution of our strategy, aligning our productive capacity with market opportunities, we are seeing the cycle form. As the spot market continues to thin, utilities are beginning to shift their attention to securing material for their uncovered requirements and not just in off-market negotiations. Increased interest in on-market long-term contracting is emerging as well. The requests for proposals we are seeing are directed at those producers who have proven and reliable productive capacity to date and who have a track record of honouring commitments. The leading utilities understand that a Tier 1 asset is demonstrated, not just discovered and declared. They have learned from history that relying on new development projects showing up on aggressive timelines and budgets promised is not a prudent strategy. They understand that banking on a resource that still faces technical, regulatory, stakeholder, project and operating challenges in an inflationary supply chain challenged environment puts their future reactor operations at significant risk. As an independent commercial supplier, we can provide our customers with access to proven and reliable productive capacity. With substantial Canadian productive capacity, our supply meets increasingly stringent ESG requirements. It can provide diversity from state-owned enterprises and help to de-risk utilities' future supply from trade policy exposure. Let's look in more detail at the plans we have for our productive capacity. If you recall, last quarter I said that when the date comes to announce that the return to operating status at MacArthur River Key Lake is on the horizon, it will be undeniably positive news for Cameco and all of our stakeholders, and we believe for the market. Well, today is that date. We're laying claim to our Tier 1 incumbency advantage as we further position the company to capture the value we expect to come from the growing demand for safe, clean, reliable, and affordable nuclear energy. Increasing uranium prices and a growing contract portfolio are giving us line of sight to return to our Tier 1 cost structure. We're seeing the conditions develop that will allow us to deliver uranium from our proven assets under long-term contracts that we expect will create value and sustain a stable nuclear fuel cycle to support growing demand, and we want to be ready. As a responsible producer, our production plan will remain aligned with the market. It entails a portfolio approach to our Tier 1 capacity in northern Saskatchewan. We expect the investments we are making in digital and automation technologies will allow us to operate these assets with more flexibility. This flexibility is key to our ability to continue to align our production decisions with our contract portfolio commitments and opportunities. With about 185 million pounds added to our long-term portfolio since 2016, including 70 million added since the beginning of 2021, We have a solid base of contracts to deliver our planned production into. It is not destined for the spot market. The market-related contracts in our portfolio, together with the large inventory of uncommitted pounds we have left in the ground, give us plenty of exposure to further improvements in the market. To get started, we will begin the process to transition the MacArthur River mine and Key Lake mill from care and maintenance to operational readiness to allow us to produce 15 million pounds per year on a 100% basis by 2024. That is 40% below the annual license capacity. Once the MacArthur River Key Lake operation reaches its planned production starting in 2024, it is our intention to pull back on production at Cigar Lake. The plan is to take production at Cigar Lake from 18 million pounds per year down to 13.5 million pounds per year on a 100% basis, or 25% below its licensed capacity. It'll take us some time to ramp up at MacArthur River Key Lake. We must complete some critical projects, perform maintenance readiness checks, and recruit and train sufficient mine and mill personnel before we begin operations. Over the course of 2022 and 2023, we will undertake all of the activities necessary to ramp up to achieve our 2024 production plan. As a result, this year we could produce up to 5 million pounds of uranium on a 100% basis at MacArthur River Key Lake. At Cigar Lake, we expect to produce 15 million pounds on a 100% basis, 3 million pounds less than its licensed capacity. Our production outlook reflects the expected impact of delays in development work at Cigar Lake in 2021 and the ongoing pandemic and supply chain challenges that are impacting the availability of materials, reagents, and labor at all of our operations. However, we will work to minimize any disruptions to our operations this year. We expect that our operational decisions at MacArthur River Key Lake will have a significant and positive impact on our financial performance. As you know, the financial aspect of our strategy is to ensure that we have a solid balance sheet and the ability to self-manage risk. At the end of the second quarter, we were again in a negative net debt position with $1.3 billion in cash, $1 billion in long-term debt, and a $1 billion undrawn credit facility. Once production at the MacArthur River Key Lake operation resumes, we expect to begin to see a significant improvement in our earnings and cash flow. As production ramps up to the planned level, the operational readiness costs incurred will decrease and we will be able to source more of our committed sales from lower cost produced pounds. As well, the higher prices that are being discovered in the currently improving market will flow through our existing contract portfolio. And with an inventory of unencumbered Tier 1 and Tier 2 pounds in the ground, rising prices will also create the opportunity to layer in new long-term commitments with appropriate pricing mechanisms that will underpin the long-term operation of our productive capacity. With the court process in our dispute with the CRA confirming unequivocally that Cameco consistently followed the rules and complied with both the letter and intent of the law, We still expect $295 million in cash and $482 million in letters of credit to be released to us. We just don't know when, so we continue to work on that. As such, we expect to have the financial capacity to execute on our strategy and self-manage risk, including from global macroeconomic uncertainty. Therefore, we're pleased to reward those who have supported our strategy. Our board has approved a dividend of $0.12 per share to be paid in December, up from $0.08 per share in 2021. So what does all this mean for Cameco? Well, it means we're 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 fuel services. And we're optimistic about the incumbency opportunity for Cameco, in capturing long-term value across the fuel chain and supporting the transition to a net zero carbon economy. Therefore, we will embark on the next phase of our supply discipline strategy. We will continue to do what we said we would do. So what is it that we are doing? We're aligning our production decisions with our contract portfolio and the market fundamentals. We're being strategically patient in our marketing activities. We're conservatively managing our balance sheet to ensure we can execute on our strategy and self-manage risk. And we're rewarding those who understand and have supported our strategy. This strategy has positioned us well to take advantage of the fundamentals I spoke of earlier. We have operating and idle Tier 1 assets that are licensed, permitted, long-lived, and are proven operations that have expansion capacity. We have fully permitted and proven Tier 2 assets that don't make sense at today's prices, but when you think about them in the context of a looming supply gap, there's a potential pathway for them to add value for us in the future. But we will be very disciplined in our evaluation on that front. Thanks to our disciplined contracting strategy, we have had a contract portfolio that has protected us well during the worst down cycle in our business. As the uranium market improves further, our focus is shifting to securing homes for our in-ground inventory that has not yet been committed. We won't chase the market down to win business, and we won't produce to dump uncommitted supply into a thinly traded spot market, as we've seen some of our competitors do. The primary driver for our contracting activity is always value. Therefore, as the market improves, we expect to continue to layer in volumes capturing greater upside using market-related pricing mechanisms. However, we recognize there's a cyclicality to our business that is inevitable. That's why, as a responsible producer, we will also look to lock in value at higher prices to carry those higher prices through the next cycle. We also locked in significant value for our fuel services business in the recent price transition and conversion. And we're more than just mining. We're vertically integrated across the nuclear fuel cycle with refining, conversion, and fuel fabrication. Additionally, we are positioning Cameco to respond to the growing need for uranium fuel to generate safe, clean, reliable, and affordable electricity by exploring opportunities to further our reach to encompass the full nuclear fuel cycle. Through our fuel manufacturing capabilities and investment in global laser enrichment, We're exploring fuel fabrication of new fuels, including high assay, low enriched uranium or Hallyu. We're also participating in the development of small modular reactors and have entered a number of non-binding arrangements to advance their commercialization and deployment in Canada and around the world. And we have an interest in the nuclear sustainability services, the back end of the fuel cycle. including aiding in the responsible cleanup of enrichment facilities no longer in operation. These opportunities align with our commitment to manage our business responsibly and sustainably, and to increase our contribution to global climate change solutions. Our decisions are deliberate. We are 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. 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've been doing for over 30 years. We have determined that our strategy, which includes contracting discipline, operationally flexible supply discipline, and financial discipline, will allow us to achieve our vision of energizing a clean air world, thereby delivering long-term value in a market where demand for safe, secure, reliable, and affordable clean nuclear energy is growing. So with that, thanks for joining our call today. And operator, we would be happy to answer any questions.