Cameco Corporation

Thank you for standing by. This is the conference operator. Welcome to the Cameco Corporation second quarter 2022 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 and zero. I would now like to turn the conference over to Rochelle Girard, Vice President, Investor Relations and Treasury and Tax. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Cameco's second 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 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 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'll be happy to follow up after this call. With us today on the call are Tim Gitzel, President and CEO, Grant Isaac, Senior Vice President and CFO, Brian Riley, Senior Vice President and Chief Operating Officer, Alice Muong, Senior Vice President and Chief Corporate Officer, and Sean Quinn, Senior Vice President, Chief Legal Officer and Corporate Secretary. I'm going to hand it over to Tim 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've joined 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 canaco.com. Today's conference call is open to all members of the investment community, including the media. During the QA 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 will turn it over to Tim.

Well, thank you, Rochelle, and good morning, everyone. We appreciate you joining us on our call today. I hope you're getting some time off to enjoy the summer. I want to start today by reflecting on a recent essay from UXC. There are two reasons for this. First, it drove home a number of the themes you've heard us express for some time now about the fundamentals of the uranium market. In a world that increasingly recognizes the important role nuclear energy will play, demand for uranium fuel is going up, inventories are going down. And in a market that is bifurcating due to geopolitical concerns, Western capacity is lagging. Those themes aren't new. However, the second reason I raise it is that we believe the conclusion to the essay sent the wrong message. It said this, let's just hope nuclear fuel supply availability does not derail nuclear energy's latest promising advance. This statement implies that the responsibility for maintaining the growing momentum for nuclear power rests with the supply side of the industry. We believe that responsibility is misplaced. The reality is there's a simple solution to the looming supply challenge. The SA should have concluded by driving home the point that the responsibility and solution for the looming supply challenge rests with the demand side. Utilities need to recognize it's time to exercise the power of their procurement to avoid a supply crisis that could, as they stated, derail nuclear energy's latest promising advance. And this is true right across the fuel cycle, from uranium production to conversion and enrichment. Those of us who have experience operating in this industry understand that a responsible producer does not invest in new capacity without line of sight to having a long-term profitable commitment that creates a permanent home in which that fuel will be used. Cameco's strategic and deliberate decisions over the past decade are a great example of this. Driven by the signals our customers have given us, we've taken a balanced and disciplined approach. Our decision to proceed with the next phase of our supply discipline, which is now well underway, is in direct response to the procurement decisions by some really forward-thinking utilities. These utilities want a line of sight to the future supply needed to fuel their reactors and ensure the continued reliability of electricity supply from nuclear power. Their contracting decisions provided us with the signals and certainty we needed to begin the process of increasing production, but more is needed. Our current plans do not entail a return to our full productive capacity. As a result, the company remains in a supply discipline mode, which positions us extraordinarily well in this rapidly changing market. We will continue to make responsible supply decisions in accordance with the signals our customers are sending. Let's look at the market fundamentals in a bit more detail, starting with demand. We have talked before about how the benefits of nuclear energy have come clearly into focus with the durability that is being driven by the accountability for achieving the net zero carbon targets being set by governments and companies around the world. With 90% of the world's economy now covered by net zero targets, Attention is turning to the challenge of cleanly and reliably solving the problems of energy poverty, energy replacement, and energy growth. Adding to that challenge is solving the energy crisis experienced in some parts of the world, while pivoting away from reliance on Russian energy without jeopardizing net zero commitments. Therefore, not surprising that concerns about energy security are amplified and at the top of the list for many governments creating further pressure to reexamine their energy policy decisions. Policymakers and business leaders around the world are recognizing that energy policy must balance the objective to achieve a clean energy profile with the need for affordability and security. Too much focus on intermittent, weather-dependent renewable energy has left some jurisdictions struggling with power shortages and spiking energy prices, or a dependence on Russian energy supplies. The good news for us is that in their quest to restore balance or pivot away from Russia, many are turning to nuclear. Nuclear power fits nicely at the center of the policy triangle, providing safe, reliable, affordable, carbon-free baseload electricity while also offering energy security and independence. which is why, in addition to all of the developments I noted last quarter, we saw a number of supportive initiatives and announcements this quarter, which we outlined in our MD&A. Suffice it to say, we're seeing governments and companies turn to nuclear with an appetite that I'm not sure I've ever seen in my four decades in this business. Therefore, it's easy to conclude that the demand outlook is durable and very bright. But supply is quite a different picture. For some time now, we've said that we believe the uranium market was as vulnerable to a supply shock as it has ever been due to persistently low prices. Low prices have led to growing supply concentration by origin and a growing supply gap. And unlike in the past, we don't have the same stock of secondary supplies to fill the gap. After years of drawing on these one-time sources, the secondary supply capacity is now declining significantly into the future, and productive capacity is not poised to respond. In taking the challenge of filling that gap to a whole new level with the continued conflict in Ukraine, there's also growing uncertainty about the ability to continue to rely on nuclear fuel supplies originating or transporting out of Russia. whether as a result of sanctions or because of conflicts with company values. Currently, the global nuclear industry relies on Russia for approximately 14% of its supply of uranium concentrates, 27% of conversion supply, and 39% of enrichment capacity. Utilities are now faced with considering and planning for a variety of potential scenarios ranging from an abrupt end to Russian supply to a gradual phase-out. The market was confronted with one of these scenarios in late June. Amendments to Canadian sanctions caused the owner of a Canadian shipping vessel to conclude it would be in violation of Canadian laws if it were to load and deliver enriched uranium product scheduled for pickup in St. Petersburg. While an exemption by the Canadian government has resolved this issue for now, It highlights the tenuous nature of reliance on Russia or Russian ports for supply. It's one of the reasons why last quarter we decided to avoid using Russian rail lines and ports to move our share of Incas production to our Blind River facility. Instead, we are delaying our deliveries from Kazakhstan while we work with our partner to enable shipping via a trans-Caspian route. We do not have a confirmed date for when the first shipment could proceed, However, we have the ability to mitigate the risk with inventory, long-term purchase commitments, and product loans if necessary. It's still early days, but we're already seeing some utilities beginning to pivot toward procurement strategies that more carefully weigh the origin risk. They're working their way through their fuel supply chains to determine where there are vulnerabilities. As a result, we have temporarily seen their focus shift from securing uranium to the more immediate need in their supply chain for enrichment and conversion services, where Russian capacity plays a much bigger role. But make no mistake, we expect uranium will follow. After all, it is the product to which all services are applied. With more than 45 million pounds in new uranium contracts added to our portfolio since the beginning of the year, 2022 has already been a contracting success. and we continue to have a significant and growing pipeline of contract discussions underway. However, for the moment, we too are focusing our efforts on capturing the record high conversion prices under long-term contracts in our fuel services segment. And with what we expect will be more uranium demand ahead of us, we will continue to exercise strategic patience. The primary driver for our contracting activity is always value. We like the leverage our current uncommitted in-ground inventory provides us to the further market improvements we expect to see. So let's talk more about Cameco and what we are up to. 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 energy transition, and even more so in a world where origins matter. With demonstrated tier one assets, strategic tier two assets, and a focus on vertical integration, we've taken a balanced and disciplined approach to our strategy of full cycle value capture. As I just noted, on the contracting front, we've been balanced and disciplined in layering and volumes where it makes sense for us, and in building a diversified customer base. We're also taking a balanced and disciplined approach to our supply decisions, The next phase of our supply discipline, which involves not only MacArthur River Key Lake, but starting in 2024, Cigar Lake, is balanced with our contract portfolio and where we think the market transition is currently at. Even though we've seen considerable pricing pressure resulting from the geopolitical uncertainty, we will not change our production plans. We will not front-run demand with supply. We need good long-term contract homes in our portfolio, and we need to see further improvements in the uranium market before we make changes to our production plans. And I think we've shown we can be trusted when we say we will remain disciplined. Finally, while we're talking about balance, we've shown balanced financial discipline. We will retain our conservative financial management to support our continued balanced and disciplined contracting and supply decisions. Having said that, we will deploy capital where it makes sense. Increasing our ownership share of Cigar Lake from 50% to just over 54% made sense, and I can tell you we'll take those pounds any day. Cigar Lake is one of the world's best and most prolific Tier 1 production assets on the planet. It's a proven, permitted, and fully licensed mine in a stable jurisdiction. that operates with the tremendous participation and support of our neighboring Indigenous partner communities. And of course, we know it very well because we operate it. At the MacArthur River Mine and Key Lake Mill, we continue the process of transitioning from care and maintenance to operational readiness. The current workforce at these sites is now approximately 670, including employees and long-term contractors, with a view to achieving about 850 prior to the start of production later this year. Our operational readiness activities are transitioning from construction to early stage commissioning of our mining and milling circuits at MacArthur River and Key Lake. Critical automation and digitization projects at the Key Lake Mill are being tied into existing infrastructure. In addition, asset condition assessments and subsequent repair and reassembly of all equipment is now winding down. However, we've seen some delays to our work schedule at the Key Lake Mill. We have encountered some challenges with respect to the availability of critical materials, equipment, and skills. In addition, after four years on care and maintenance, we've experienced some normal commissioning issues as we work to safely and systematically integrate the existing and new assets with updated operating systems. We've adjusted our schedule to accommodate the slower wrap-up at the mill and anticipate first production will be deferred until later in the fourth quarter this year. As a result, our revised plan is for up to 2 million pounds of production this year. It's yet another good reminder for the demand side of our industry about the challenges of bringing on supply in the current environment. However, the slower ramp-up at the Key Lake mill has been offset at Cigar Lake. We've been successful in catching up on development work and production at Cigar Lake, and we're expecting production of 18 million pounds on a 100% basis. Therefore, with the additional production at Cigar Lake and the risk mitigation measures we have in place, we expect to deliver on all of our commitments, and therefore, we don't need to rush the process at MacArthur River Key Lake. This is just one of the advantages that being a multi-asset, multi-jurisdictional producer affords us, and that makes us a stable, reliable, and long-term source of supply to ensure the reliability of our customers' reactor fleets. So what's the result of our disciplined actions? The solid balance sheet and the ability to self-manage risk. At the end of the second quarter, we again were in a negative net debt position with $1.4 billion in cash, about $1 billion in long-term debt, and a $1 billion undrawn credit facility, and this doesn't include the $778 million owed to us by the CRA. Once production at the MacArthur River Key Lake operation resumes, we expect to begin to see a significant improvement in our financial performance. As production achieves a reasonable level, we will no longer expense operational readiness costs to cost of sales, and we'll be able to source more of our committed sales from lower cost produced pounds. As we saw again this quarter, the higher prices in the currently improving markets are beginning to flow through our existing contract portfolio. And with an inventory of unencumbered pounds in the ground, rising prices will also create the opportunity to layer in new long-term commitments. commitments with appropriate pricing mechanisms that will underpin the long-term operation of our productive capacity. We've also continued to utilize some of our long-term purchases. We put these arrangements in place as a means of risk mitigation. We'll balance this activity with our spot market purchases. As such, we expect to maintain the financial capacity to execute on our strategy, capturing long-term value while self-managing risk, including from the global macroeconomic and geopolitical uncertainty we're seeing today. 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 for downstream fuel services. And we're optimistic about the incumbency opportunity for Cameco in capturing long-term value. Therefore, we will continue to execute on the next phase of our supply discipline strategy, and more importantly, we'll continue to do what we said we would do. 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 context of a looming supply and origin gap, There's a potential pathway for them to add value for us in the future. But we will continue to be very disciplined in our evaluation on that front. And just as a reminder, our interest extends beyond just mining. We're vertically integrated across the nuclear fuel cycle with refining, conversion, and fuel fabrication. As utilities look to secure access to nuclear fuel supplies in jurisdictions that are stable, reliable, and politically dependable, We will also look to continue to build our fuel services contract book. And we're looking to expand our reach. For example, through our fuel manufacturing capabilities and investment in global laser enrichment, we're exploring fabrication of new fuels, including high assay, low enriched uranium, or Hallyu. And you can clearly see the benefits of Cameco being involved with ventures like this. Thanks to our reputation as a reliable fuel supplier and a long history of cooperating with the U.S. government on various projects, the technology has the opportunity to participate in the growing commercial opportunity for enrichment capacity in the U.S. It's why GLE was able to navigate the regulatory process in the U.S. and gain access to the DOE tails material. And it's why utilities like Constellation Energy and Duke Energy We're willing to sign letters of intent to collaborate with GLE to help diversify the U.S. nuclear fuel supply chain, including measures to support GLE's deployment of Silex laser enrichment technology in the U.S. 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 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. 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 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 energy is growing. So thanks for your interest today and we're happy to take any questions you might have.