Cameco Corporation (NYSE:CCJ) Q1 2024 Earnings Call Transcript

Cameco Corporation (NYSE:CCJ) Q1 2024 Earnings Call Transcript April 30, 2024

Cameco Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. This is the conference operator. Welcome to the Cameco Corporation First Quarter 2024 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. Following the introductory remarks, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Rachelle Girard, Vice President, Investor Relations. Please go ahead.

Rachelle Girard: Thank you, operator. Good morning, everyone. Welcome to Cameco’s first 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 people and the homeland of the Métis. With us today are Tim Gitzel, President and CEO, joining the call today from Washington, D.C.; Grant Isaac, Executive VP and CFO; Heidi Shockey, Senior VP and Deputy CFO; Brian Reilly, Senior VP and Chief Operating Officer; Sean Quinn, Senior VP, Chief Legal Officer and Corporate Secretary; and Dominic Kieran, Global Managing Director of Cameco UK Limited. I’m going to hand it over to Tim in just a moment to briefly discuss the momentum that continues to build behind nuclear energy and how the continued execution of our strategy and transition back to our Tier 1 cost structure has positioned us to benefit from the tailwinds.

After, we will open it up for your questions. Today’s call will be approximately 1 hour, concluding at 9:00 a.m. Eastern Time. As always, our goal is to be open and transparent with our communications. However, we do want to respect everyone’s time and conclude the call on time. Therefore, should we not have time to get to your questions during this call or if you have detailed questions about our quarterly financial results. We will be happy to follow up with you after the call. There are a few ways you can contact us with additional questions. 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 that 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 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.

Tim Gitzel: Well, thank you, Rachelle, and good morning, everyone. We appreciate you taking the time to join today’s call. As Rachelle mentioned, I’m joining the call remotely from Washington, D.C., where this afternoon, I’ll be attending the Energy Transition Metals Summit hosted by the Northern Miner. In the days to come, we will also be meeting with some of the key policymakers here at D.C. to discuss current and future industry fundamentals. And importantly, we’ll talk about how we’re going to translate to significant government and public support with the expansion of nuclear power generation into meaningful actions that generate tangible results to the benefit of the entire planet. As Cameco and as an industry, we are ready to respond to the global need for carbon-free, reliable and secure nuclear energy for decades to come.

We’ve said it several times over the years and it’s worth repeating. Our invitation to symposiums and high level discussions now taking place around the world is a testament to Cameco’s deep understanding of how the nuclear fuel market works and acknowledgment of the strong relationships we’ve established over several decades of experience. Let me tie together a few key themes today before we get to your questions. First, nuclear is being recognized by governments, power suppliers and industrial power consumers as a carbon-free energy source that is key to Net Zero and energy security. On that basis, Cameco, along with our investments in Westinghouse and Global Laser Enrichment is key to the nuclear industry and therefore key to the path to Net Zero.

And within that broad positive demand context and in the face of uncertain supply, our strategy and experience provides us with unmatched leverage to add significant long-term value, while ensuring strong downside protection. And our results so far in 2024 remain on track for delivering that value and establishing that protection. So thinking back to this time last year, we were highlighting 18 months of growing momentum and interest in the nuclear space and in Cameco. And I can absolutely say that now 12 months later, the interest and positive outlook have only improved. I would even qualify that further and say it has improved significantly. First, it’s improved based on the impact of the global emphasis on clean energy. We believe nuclear power is essential for the ongoing clean energy transition.

If the world is going to meet its Net Zero targets, we need carbon-free baseload and dispatchable power that can be located where it’s needed and is always available and consistently reliable. I don’t need to tell you that nuclear is one of, if not the only energy source that meets all of those requirements. And we don’t just need a bit of it, we need a lot of it. From a sustainability and scientific perspective, both the international community and large power consuming industries are calling for a tripling of nuclear energy from where it is today. And if we are to follow that path, it means a very significant increase in the number of new builds on the horizon, translating into significant value across the fuel cycle and reactor life cycle.

Next, the outlook has improved based on today’s focus on secure energy. Nations must ensure that their critical energy infrastructure and fuel supplies are not excessively reliant on risky jurisdictions, unreliable partners and unstable actors and again, nuclear checks those boxes. Fuel supplies and services for nuclear energy are sourced from multiple safe jurisdictions and suppliers in the Western world, and the nature of the fuel itself allows for long-term inventories and storage. So not only can you keep years of reloads behind a reactor, but that reactor can provide carbon-free and reliable energy for months without refueling, giving governments and utilities a runway to adapt should circumstances change. And finally, keeping both clean energy and energy security in mind, the outlook is more positive in the context of the current debate around AI, data centers and the considerable energy needs that are coming with the rapid evolution of technology.

I recently read that using generative AI to provide search results in the same way we use Google requires a ten-fold increase in power requirements, 10 times. And gone are the days of rolling out new technology without worrying about future potential runway environmental impacts. Companies driving the technology forward are doing so while keeping carbon footprint and 24/7 reliability top of mind. And again, nuclear is the clear winner. You don’t even have to take my word for it. We’re seeing both industrial power users and tech sector experts voicing support for nuclear energy. With some now taking action and signing agreements to ensure their facilities can access zero carbon and reliable nuclear energy now and into the future. Clean and secure electrons are on the critical path for the generative AI development, putting nuclear and chemical on the critical path to the digital revolution and strategic reindustrialization.

So grouping all that together, it is clear that we need to deploy zero carbon, global and secure energy production to move the world forward and the world is now acknowledging the benefits of nuclear. I attended the inaugural Nuclear Energy Summit a couple of months ago, which took place in Brussels with Presidents and Prime Ministers from 32 countries. The goal was to join forces to back supportive measures in areas, including financing, regulatory cooperation, technological innovation and workforce training, enabling the expansion of nuclear power to help boost energy security, address climate change and meet our collective Net Zero targets. Because, as I said, without nuclear, there is no Net Zero. Without nuclear, there is no global and secure energy.

And without nuclear, the next generation of energy-intensive technologies could result in increasingly detrimental environmental impact. Nuclear is key to addressing those challenges, and that’s where Cameco comes in, playing a key role in current and future power generation. We believe that at Cameco, we have the right strategy, the right people and the right assets to deliver long-term value along with our investments in Westinghouse and Global Laser Enrichment, we expect to benefit significantly from the tailwinds. From the front end of the fuel cycle and through the reactor life cycle, from fuel supply to plant services to new build and advanced reactors. We’ve never been in a better position with licensed and permitted brownfield assets in safe, sovereign jurisdictions and the capacity to grow to meet our commitments.

So the future looks bright. Turning briefly to the quarter. Our first quarter performance was as expected, highlighting the benefits of aligning our operational, marketing and financially focused strategy in a market where we are seeing that persistent positive momentum for nuclear energy like never before. The run rate at our operations is on pace to meet our annual production guidance. Operationally, our production results in the first quarter were strong and on track with our 2024 plans with production rates and total production costs in our Uranium segment continuing to reflect the transition back to our Tier 1 cost structure. In fact, we didn’t change our 2024 operational or financial guidance metrics in any of our business segments after the first quarter.

However, we can’t overlook the geopolitical events that have been amplifying global supply chain and transportation risks. Those risks have continued to have a significant impact on nuclear fuel procurement strategies and the fuel cycle, especially in terms of transportation, which is not getting any easier. It’s an elevated risk that we have a team focused on each and every day. And as it evolves, our stakeholders can be confident that, as always, Cameco will be transparent with our related disclosure. In the market, we continue to be selective in committing our unencumbered Tier 1 in-ground uranium inventory and UF6 conversion capacity. We don’t focus on the small irrelevant spot market. But on high quality term demand where the majority of uranium fuel and services are secured.

In Q1, we successfully layered in additional long-term contracts increasing our annual commitments to an average of about 28 million pounds per year from 2024 through 2028. Every contract we have reflects the sentiment and dynamics in the market at the time it is negotiated. So in today’s market, that allows us to take those price peaks and carry them into the future, creating value for years to come while maintaining significant downside protection for when the cycle turns. From a risk-managed financial perspective, our strong balance sheet and the expectation of strong cash flow generation tied to our contracting strategy guides our conservative capital allocation priorities. In 2024, that includes focused debt reduction and prudent refinancing plans.

As for our Westinghouse segment, results for the first quarter were as we expected, as guided in Q4. And we continue to expect our share of adjusted EBITDA from Westinghouse this year to be between $445 million and $510 million. It was and is a great investment where the prospects continue to improve and where we still anticipate EBITDA growth at a compound annual growth rate of 6% to 10% over the next five years. So I’ll stop there. Thank you for your interest today, and we are happy to take your questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Neil Mehta of Goldman Sachs. Please go ahead.

Neil Mehta: Yeah. Good morning, team and thanks for the time, and the big picture thoughts. I had a couple of specific questions. One on Westinghouse. You reiterated the annual guide, but the adjusted EBITDA did look a little softer in the quarter, a lot of that was on March. And so — can you just walk us through the seasonality of that business, what gives you conviction on the full year and any color you can provide on that segment?

Tim Gitzel: Yeah. Thanks, Neil, and thanks to you for your participation on Cameco. We appreciate it. Listen, I’m going to turn this over to Heidi Shockey, I think just to talk about the EBITDA in the quarter and for the year, and it was a kind of a special quarter in that regard with kind of the purchase price allocation work that had to go on there. So I’d just say, in general, I can tell you we’re delighted with the whole Westinghouse piece. It’s even better than we thought when we bought it, the potential there in all elements of their business is really good. And so yeah, there’s some accounting pieces that came up in the quarter. So Heidi, can I just push it over to you just to give us a little bit of an overview of Westinghouse on the quarter and the EBITDA and our guidance for the year there?

Heidi Shockey: Sure, Tim. Thanks. Yeah. There was a few accounting pieces that impacted our results this quarter for Westinghouse, the first of which, it’s really to do with the purchase accounting. So we had to fair value our assets and our inventory when we had the acquisition. And so generally, we’re going to see higher amortization on the asset balances and the intangible assets. On the inventory side, all the inventory that they held on the date of acquisition, would have been fair valued. And so as they sell that off, we won’t see any accounting margin on that. We still get the cash flow, of course, but the margin in terms of results is very low. A lot of that inventory will be sold off here in Q1, Q2, so you’ll see that diminish over time.

And then, of course, we had some acquisition related transition costs that also hit the quarter. And those were also kind of — will come off over the course of the year. But in terms of their operations, there’s also seasonality to their operations. So the outage season is in the year, typically near the end of the year, you’ll see higher results just really tied to that outage season where they do a lot of work for the utilities.

Neil Mehta: Thanks, Heidi. And Tim, the follow-up, big picture question, just on long-term price we’ve been tracking on your website, the term price kind of grinding here from 68 at the end of last year up to 77.50. And just your perspective on conversations you’re having with nuclear buyers and do you still see upward pressure on term price in your conversations?

Tim Gitzel: Yeah. Neil, I’m going to turn it over to Grant, who looks after the marketing shop in sales. But I can tell you, we are seeing it bump along. Well, it’s gotten more in bump along. If you go back a year or two, we weren’t anywhere near the kind of 75, 80 average 77.50 on the term price and we’re just — as Grant has said many, many times, I think, in the early innings of this game, you just see overall the — I mean, these conferences where you’re talking tripling nuclear power over the next 25 years. And you see some would say, well, that’s never going to happen. Okay, well, it doubled and you say, well, then we need all the uranium that we’ve got now and doubling it again. And so the pressure is going to be there on the price.

We haven’t hit a price, I think, an incentive price for new production. We’re not seeing a whole lot. We’re seeing a little bit coming out. So yeah, the pressure is going to be there for, I think, a long time to come. But Grant, let me turn it over to you, you’re the better expert on the market.

Grant Isaac: Yeah. Thanks, Tim. Neil, great question, and thank you for focusing on kind of that term market because that really is what to watch in order to figure out where this market is going. The term price remains in a constructive build. And that is very simply because we are seeing this continual pivot to more security of supply contracting. The contracting where utilities become increasingly concerned about the availability of future supply, that concern is reflected in some important contracting characteristics. You’ve heard me talk about them before. Number one is tenors go out. So utilities come to the market, and they’re looking for more material over a longer period of time. And then you start to see volumes going up, not just because more years are being added, but utilities are taking bigger bites out of each year.

And then, of course, we’re seeing time frames be extended, utilities looking for material well into the mid-2030s now, that is all reflective of this underlying security of supply pivot that’s occurring, it’s occurring because of the multifurcation of the market that’s going on. It’s occurring because of some of the production challenges you’re seeing with some uranium production. We continue to believe we’re in the early innings of it because if you add up the amount of contracting that’s in the market, it’s not even at replacement rate yet. So we just find it to be very, very constructive because to have an average term price of 77.50 when we’re not even at replacement rate yet, that’s a pretty good place for us to be and a great place for an incumbent producer with Tier 1 assets and brownfield leverage, a great opportunity for us to take advantage of that value capture.

So we’re feeling very, very constructive of that underlying market fundamental.

Neil Mehta: Thanks, Grant.

Tim Gitzel: Thanks, Neil.

Operator: Our next question comes from Ralph Profiti of Eight Capital. Please go ahead.

Ralph Profiti: Thanks, operator and good morning, everyone. Thanks for taking my questions. Tim or Grant, Inkai guidance of 8.3 million pounds, this is currently a tentative target, right, and under discussions. Can you talk a little bit about progress on securing sulfuric acid supply? And maybe one step further, is there any range of production volumes that you could potentially see that’s at risk in that guidance number? And just thinking about sulfuric gas shortages only, perhaps leaving out even more unpredictable logistical challenges. Any context around volume at risk would be helpful.

Tim Gitzel: Yeah. Ralph, it’s Tim. I’ll start because they just — Sean Quinn and I just came back from there, we were over there last week, had obviously meetings with the Kazakhs and joint venture partners. And obviously, sulfuric acid is an issue. It’s short, it’s tight. There’s other industries that are keeping the supplies they have and using them. They’re having trouble accessing their regular channels, sulfuric acid from the Russians and others because the Russians are sanctioned and not — it will produce like they were. So, their plan is to bring the Italians and to bring — to build a new plant. I’m not sure that’s even started. Yes. So I think we’re into this pickle for a couple years until that new plant gets built.

So I know Sean had direct conversations with the CEO of JV Inkai Kazatomprom. So Sean, do you have anything to add on — 8.3 was the best information we had when we put out our information, obviously. Sean, do you want to add anything to add to that?

Sean Quinn: Not a lot other than in our conversations with Kazatomprom, they’re getting more comfortable that 8.3 million is achievable this year. They’re obviously working hard on the sulfuric acid, both the supply and the logistics challenges that you mentioned. But really not much more detail than that other than I just — some increasing comfort that, that will be achievable.

Ralph Profiti: Okay. Got it. Thank you. And as a follow-up, I’d like to come back to something that Grant talked about, which is the supply pivot and how characteristics of these contracts are changing in terms of tenor, volume and time frames. And it sounds like that’s becoming perhaps more important than the actual volumes secured in the term market, which so far at 26 million pounds or so year-to-date is kind of sort of underwhelming when we look at what is replacement rate and what we did actually last year. Would that be a fair comment?

Tim Gitzel: Grant?

Grant Isaac: Yeah. Sorry, Tim. Ralph, I might characterize it by just saying more to come. When we evaluate the types of conversations that we’re involved in, in our pipeline, it is indicating a lot of security of supply interest, and we’re presuming it, it’s a leading indicator for what you might see in the term market. So we are expecting strong contracting volumes through 2024. If there are any delays, it might be reflective of perhaps two things. One is a bit of uncertainty around where some of these legislative efforts are going with respect to things like Russian supply. We’re very close to seeing legislation in the U.S. That legislation, I think, has been well planned from a utility supply point of view, unless, of course, the Russians retaliate to that legislation by restricting supply in the immediate term.

The market is not priced in that risk. But that’s maybe causing a bit of a pause or maybe a slowdown, I would say, in final negotiations for turn material out past that 2028 phaseout window. And the second thing is, don’t forget, we have a bunch of new customers as a result of this bifurcation, multifurcation in the market, customers and Central and Eastern Europe who were traditionally captive to Russian supply and not accustomed actually to buying components in a big way receiving instead of fabricated fuel bundle from the Russians. And there is a learning curve to go up as – for this demand to kind of learn how to buy the uranium and the conversion and the enrichment and the fabrication services as well as the outage services. So it’s kind of the learning effects of new customers combined with maybe this overhang of legislative of challenges or opportunities in the market, maybe causing a bit of pause, but the underlying security of supply sentiment is growing stronger and stronger route.

Ralph Profiti: Quite helpful. Thanks, everyone.

Tim Gitzel: Thanks, Ralph.

Operator: Our next question comes from Gordon Johnson of GLJ Research. Please go ahead.

Gordon Johnson: Hey. Thanks for taking my question, guys. Appreciate it. So just two questions. First, you guys talked about this just now with respect to the potential Biden ban of product coming in from Russia. But can you talk a little bit more about the actual impact here? Because it seems like it’s an executive order, it doesn’t take effect until 2028. So it seems like the real impact will be muted unless like you guys said the Russians react, but I just want to make sure I have that correct. If you could provide your insights and then a follow-up. Thank you.

Tim Gitzel: Well, Gordon, I’ll start and then Grant could chip in. But part of the reason I’m down here is to have those meetings first to see where that legislation is at, we’ll be going through the different secretaries to talk to the people in charge and just see where that’s at. I mean that has already had a chilling effect. It’s going to have even more of a chill when it gets passed. And so we talk about 2028 to all of you, you can still buy until then. If you’re looking at the market now, there’s not a whole lot of material available until then and most utilities are looking in that window. So Grant, I’ll pass it over to you to give your view on that.

Grant Isaac: Yeah. Very close to seeing a legislative ban. In fact, I believe if it wasn’t for one Senator, we would have seen a ban in place by now on the legislative side. Absent a legislative opportunity, Gordon, our strong sense is there might be an administrative action, as you mentioned, either at the Secretary level or even at the executive order level in order to codify the intent to shut out Russian supply by 2028. So let’s first talk about the potential impacts there. As we’ve mentioned a number of times, utilities have been largely, I would call itself sanctioning because of the underlying Russian suspension agreement, which was already sunsetting in 2028. So a lot of that forward contracting was already looking to avoid Russian supply.

But meanwhile, contracts that have been signed in the past were being delivered into. So there’s kind of two elements to a ban from a U.S. point of view. The number one is, when is the ban effective? Is it going to be effective sooner than 2028 or is that the date certain? And number two, what is the strength of the waivers that might be granted to utilities to take in supplies between now and 2028, for example. So if you have a strong ban but weak waivers, it might not have much of an effect. But if you have a strong ban and strong waivers, meaning that utilities really have to demonstrate that there is no other alternative for them to fuel their reactors. And it’s really in the national security interest and only then will they get a waiver for importing the Russian material.

Then that will really be a strong signal to focus on sovereign safe jurisdictions for supply. Now the final piece, and I already mentioned it, but it’s worth mentioning again is, all of this presumes it’s up to the west to the side, when the Russian material is done. And what we forget about is there’s the other side to that coin and that is the risk that if a ban comes in place and a ban would say strong waivers come in place, that the Russians don’t react by simply saying, you don’t want our material come 2028. I’ll tell you what you can’t have it now. That kind of voluntary export restraint on the part of the Russians has absolutely not been priced into the market and has not been anticipated in terms of future supply. And I would say you would have to go back and look at an analog like the Cigar Lake flood event to see that kind of shock that it would create.

So that piece really isn’t well thought through in the market. But the ban itself come 2028, the cell sanctioning. It has been kind of well planned, subject to strong waivers and subject to a Russian retaliation.