Cameco Corporation

Thank you for standing by. This is the conference operator. Welcome to the Cameco Corporation's second quarter 2023 conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. Webcast participants are asked to wait until the Q&A session before submitting their questions, as the information they are looking for may be provided during the presentation. I would now like to turn the conference over to Rochelle Girard, Vice President, Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to Cameco's 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 Metis. With us today on the call are Tim Gitzel, President and CEO, Grant Isaac, Executive Vice President and CFO, Heidi Shockey, Senior Vice President and Deputy CFO, Brian Riley, Senior Vice President and Chief Operating Officer, and Sean Quinn, Senior Vice President, Chief Legal Officer and Corporate Secretary. I'm going to hand it over to Tim in just a moment to discuss how the improving growth outlook for nuclear power continues to drive an improving outlook for Cameco. After, we will open it up for your questions. 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'll be happy to follow up with you after the call. There are a few ways to contact us. You can reach out to the contacts provided in our news release You can submit a question through the Contact tab on our website, or you can use the Ask a Question form at the bottom of the webcast screen, and we will be happy to follow up after this call. If you join the conference call through our website event page, there are slides available, which will be displayed during the call. In addition, for your reference, our quarterly investor handout is available for download in a PDF file on our website at Cameco.com. Today's conference call is open to all members of the investment community, including the media. During the Q&A session, please limit yourself to two questions and then return to the queue. Please note that this conference call will include forward-looking information, which is based on a number of assumptions and actual results could differ materially. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we may make today, except as required by law. Please refer to our most recent annual information form and MD&A for more information about the factors that could cause these different results and the assumptions we have made. With that, I will turn it over to Tim.

Well, thank you, Rochelle, and good day to everyone. We appreciate you joining us for today's call. I hope everyone's enjoying the summer or winter months, depending on where you're tuning in from. With many people vacationing in July and August, it's typically a quieter time in the business community. However, I can tell you with absolute confidence that business for Cameco has not slowed down, nor has interest in the nuclear sector. The momentum that's been building over the past 18 months continues. Our financial performance, which reflects the expected quarterly variation in our contract deliveries this year, is benefiting from our strategic decisions with gross profit improving as we transition to our Tier 1 run rate. And we've seen an uptick in the breadth of new investor interest in Cameco. It really surpasses anything I've seen in my more than 16 years at Cameco. In addition to interest from our traditional resource investors, we're seeing interest from energy investors, clean energy investors, infrastructure investors, and generalists. We believe this increased interest reflects the recognition that Cameco is a proven, reliable nuclear fuel supplier that supplements Tier 1 mining assets with critical fuel service capabilities. And it is an endorsement of our strategy to capture full cycle value. It's also an acknowledgement that Cameco has a deep understanding of how the nuclear fuel market works and that we have the type of experience that gets us invited into the room when important policy decisions are being made about how best to support the nuclear fuel cycle. And of course, it's an appreciation of the compelling opportunity to invest in the growing demand for nuclear power and a clean and secure energy future. In fact, that growing demand has placed security of nuclear fuel supplies at the top of our customers' lists. With more than £118 million of long-term contracting industry-wide so far this year, we're happy to say we believe there is clear evidence that the broader uranium market is moving toward replacement rate contracting, the type of contracting necessary to promote the price discovery we've already seen in the enrichment and conversion markets, contracting and price discovery that will be needed to incentivize the investments in expanding existing supply and developing the new supply that will be necessary to satisfy growing long-term requirements. Let's look at the key driver for those growing requirements for nuclear fuel supplies and services, which is the increasing support for more nuclear power. All over the world, we're continuing to see government policies and corporate decisions that are generating positive news flow in support of strong growth for nuclear. Very importantly, those policies and decisions are being followed up with proposals, commitments, and actions. These are the type of activities necessary to support the broader nuclear fuel cycle, and re-energized nuclear power is a fundamental source of clean, secure, and low-cost energy. We don't have enough time on our call today to cover all the highlights from around the world, which really says it all in terms of the volume of good news. But there have been a few announcements that have caught our interest, especially right here in Canada. The nuclear power industry is witnessing support for adding new capacity and refurbishing existing capacity in Canada like never before, starting with Bruce Power, who, with support from the Ontario government, announced it will undertake an environmental assessment to add as much as 4.8 gigawatts of nuclear capacity to the almost 7 gigawatts it already has in place. The added capacity could make the Bruce site the largest nuclear complex in the world. The fact that additional large-scale nuclear installations using well-established technology are being considered in Canada speaks to the extraordinary industry and market transition that is underway. With respect to existing nuclear capacity, Ontario Power Generation announced that it applied for and received approval to extend operation of its Pickering reactor until 2026. In the meantime, at the request of Ontario government, it is now considering a refurbishment project for Pickering to keep safe, clean and reliable nuclear energy flowing from that facility for another 30 years. So that's positive local news on big traditional nuclear power demand. But as many of you listening today would know, small modular reactors, or SMRs, have also been capturing a lot of attention. In Canada, the province of Ontario is leading the way in that regard as well. It's working with Ontario Power Generation to begin planning and licensing three SMRs at the Darlington nuclear site. These SMRs are in addition to the initial SMR project at Darlington for which site preparation and licensing activities are already underway. And those are just a few of the highlights from right here in Canada. Internationally and moving faster than policy makers are big commercial consumers of power who are making firm plans for investments to support carbon free nuclear power to help achieve their net zero commitments. For example, at the end of the second quarter, Microsoft signed an agreement with nuclear energy producer Constellation Energy to bring a data center in Virginia closer to operating 24-7 on 100% carbon-free electricity. That's in addition to a previous clean energy credit deal that Microsoft signed with OPG in Canada late last year, which is expected to support those ongoing SMR deployments I mentioned earlier. Also, Brookfield Properties announced its plan to power its portfolio of U.S. office space, totaling about 70 million square feet, utilizing only zero emissions electricity by 2026. Set to begin the transition to clean electricity supply in 2024, Brookfield's plans include an evolution to direct purchasing of clean power, including from nuclear. Those are just a handful of examples of the ongoing positive sentiment being publicly expressed through both government policy announcements and private sector initiatives that are driving full cycle demand growth. You can find several more in our MDMA. This full cycle demand growth is driving increased requirements for the uranium and various services required to fabricate fuel and run reactors. However, it's important to remember that demand doesn't drive just in time spot purchasing interest from customers as is often seen in other commodities. As always in the nuclear industry, customers are looking to secure supply on a much longer term time horizon. They're seeking supply solutions today that guarantee their reactors run well into the next decade without a costly risk of interruption. And the risk that the required supplies and services might not be available when they are needed is becoming more significant every day. With demand growth looking more robust than ever and with the industry expectation that by 2030 both primary and secondary supplies will not be sufficient, the industry needs to invest in more capacity. But expanding or building new capacity across the fuel cycle will take time. In May at the World Nuclear Fuel Markets Meeting in The Hague, It was clear that all of the major producers across the fuel cycle have learned the lessons of the past. Presentation after presentation expressed a similar sentiment that in order to solve the urgency of supply, there needs to be urgency in demand. It was clear the major suppliers are not prepared to take the risk of expanding or bringing on new capacity without long-term contracts to support their investments. I've been around this industry for a long time and involved in every one of the new uranium projects developed in the Athabasca Basin in northern Saskatchewan since the late 1970s. Let me tell you from experience, bringing on a new project anywhere is not easy, despite some of the promises being made by those who have never done it. And today, the calls to increase uranium conversion and enrichment capacity are happening in a complex global environment. An environment where supply chain issues, general inflation, skilled labor limitations, rising interest rates, and increasing regulations and ESG standards are not making it easier or cheaper to build new assets or even operate existing assets. In addition to production challenges, let's not forget that geopolitical uncertainties are leading to concerns about origin of supply. Some utilities are seeking to exclude Russia in their future contracting decisions, and there's always the ongoing risk of formal sanctions. Then, tied to the origin risk, there was a recent reminder that moving nuclear material around the globe to various points in the fuel cycle is also more difficult than it once was. Concerns with the ability to obtain insurance coverage for shipments out of Russia surfaced. While the issue appears to have been resolved for now, these are shipments that are absolutely required. Any delays could be very impactful on the market. Depending on the magnitude and length of delay, we believe it could be a shock event akin to the Cigar Lake flood in 2006. And let's not forget that the Trans-Caspian corridor still isn't a reliable delivery route for uranium from Central Asia to the West. After one shipment earlier this year, which was actually a delayed shipment from last year, we have not received any further uranium via this route in 2023. However, we expect transit of our 2023 production from JV Inkei to begin in Q3. Delays are a small problem for Cameco as we have other sources of supply to meet our commitments. but transportation could be a much bigger issue for the industry if these supplies can't make their way west. Chemical strategy of contracting discipline, production discipline, and risk-managed financial discipline is set within the context of the transitioning market environment we are currently in, a market that is expected to durably strengthen the long-term fundamentals for nuclear power and uranium supplies and services while emphasizing energy security and sustainability. And at Cameco, we recognize that to capture value from the opportunities that are in front of us, we must get two things right, volume and timing of our production. In terms of volume, we have to bring on production to meet growing demand, and we have to do it on time and on budget. Then, with respect to timing, we understand that it would be a strategic mistake to bring on production before we have contracts to deliver those pounds into. Let's look at the uncovered requirements curve to see why that's the case. It's true when you look out to 2030 and beyond, there are a lot of uncovered requirements and that is what gets us excited about the future. But it's really important to understand the structure of our market and how that demand will come to the market. Uncovered requirements in 2030 does not equate to in-year spot market demand in 2030. As I said earlier, utilities driven by security of supply want line of sight to the nuclear fuel supplies and services they need to keep their reactors running reliably and without the risk of costly outages. They will not rely on the spot market, which is small and discretionary, to purchase the run rate requirements of their reactors. Utilities are starting to contract now to cover their requirements 2030 and beyond, which is what we mean when we say we're in the long-term contracting cycle today. Customers are layering in long-term contracts with reliable suppliers who have supply with the right origin. So what that means is that by the time 2030 rolls around, utilities will have very little in-year requirements that aren't already covered under long-term contracts. Therefore, as has always been the case, they will have little need to participate in the spot market at that time. In fact, the spot market in 2030 will look similar to in-year spot demand this year, small and discretionary, far from a level that would support a significant volume of uncommitted supply coming out of the ground. Therefore, Cameco will continue to be balanced and disciplined in our contracting activity layering in contract volumes where it makes sense for us, while building a diversified customer base. We will remain selective in committing our unencumbered in-ground uranium inventory and UF6 conversion capacity under long-term contracts. But indeed, our book of business is growing. You can see that our average delivery volume from 2023 through 2027 has increased from 26 million pounds per year to 28 million pounds per year from last quarter, as we translate our previously announced accepted volumes into executed contracts. And that's only within the five-year window shown in the table. We also have delivery commitments that span more than a decade, some out to 2040. And we continue to have a large and growing pipeline of contracting discussions underway. Make no mistake, though, in our uranium segment, we are not looking to lock in today's prices. We're looking for market-related pricing mechanisms under our long-term contracts. That means that while these contracts support our production planning decisions, they will not be priced today, but rather will be based on the future price of uranium, and in some cases may include floor price protection and ceilings. We want to maintain exposure to the future incentive prices needed to promote investment in new supply to satisfy growing long-term demand. So while our approach to contracting gives us the ability to participate in further price increases, it also provides strong downside protection should headwinds arise in the macro or industry environment. And as uncovered requirements translate into additional long-term contract commitments, Cameco retains the flexibility at our existing Tier 1 assets, including the option to expand and extend production. If we took advantage of all of these opportunities, our annual share of Tier 1 uranium supply could be about 32 million pounds. As for our Tier 2 assets, we plan to keep those on care and maintenance unless we can secure long-term contracts that provide returns similar to what we can achieve on our Tier 1 assets. And our strategic contracting and production decisions are translating into better earnings and cash flow as we return to our tier one run rate. With $2.5 billion in cash, $1 billion in total debt, and a $1 billion undrawn credit facility, our balance sheet is strong. We will retain our conservative financial management to support our continued balanced and disciplined contracting and supply decisions. to provide us with the ability to self-manage risk and to provide us with the capacity to pursue value-added investments like Westinghouse. We expect Westinghouse will be able to participate in the growing demand profile for nuclear energy and downstream services from their existing footprint. The team here continues to work toward closing the Westinghouse investment later this year. Once it closes, we will be able to provide more details on the exciting prospects we see for that business, which, with the positive momentum in the nuclear industry that I outlined at the beginning of the call, are only getting better. So with the market transitioning to what appears to be replacement rate contracting, these are busy and exciting times for Cameco. As a proven and reliable supplier across the fuel cycle, we remain committed to operating sustainably. We will protect, engage, and support the development of our people and their communities, and protect the environment, something we've been doing for over 30 years. And our vision of energizing a clean air world keeps us focused on delivering long-term value in a market where demand for safe, secure, reliable, and affordable clean nuclear energy is growing. Before I conclude, I want to recognize some upcoming changes to our board of directors. Joining our board as of September 1st are Chief Tammy Cook-Searson, who currently serves as Chief of the Lac La Ronge Indian Band and is the President of Kitsaki Management Limited Partnership, and Dominique Meunier, who was the Executive Vice President in charge of New Nuclear and International Development for Ontario Power Generation prior to his retirement. The depth of knowledge of these two individuals will further strengthen our board and provide new and diverse perspectives. We look forward to the contributions that these two individuals will make to our board and to Cameco. One last thing before we get to your questions. Over the last several days, we've been closely following the evolving situation in Niger in Central Africa. As the former vice president of the mining business unit for Arriva, now Orano, I was responsible for the uranium mines in Niger for a number of years and during that time grew very fond of the country and its people. We find the situation in Niger today to be very concerning for the people of Niger and are certainly hoping for a peaceful resolution of the situation in the very near future. So with that, I will say thank you for your interest today and we are happy to take your questions.