Cameco Corporation (NYSE:CCJ) Q4 2023 Earnings Call Transcript

Cameco Corporation (NYSE:CCJ) Q4 2023 Earnings Call Transcript February 8, 2024

Cameco Corporation reports earnings inline with expectations. Reported EPS is $0.21 EPS, expectations were $0.21. 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 Fourth Quarter 2023 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] 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 their presentation. The Q&A session will conclude at 9 a.m. Eastern Time. I would now like to turn the conference over to Rachelle Girard, Vice President, Investor Relations. Please go ahead.

Rachelle Girard: Thank you, operator, and good morning, everyone. Welcome to Cameco’s fourth 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. With us today are Tim Gitzel, our President and CEO; Grant Isaac, our 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; Alice Wong, Senior VP and Chief Corporate Officer; and Dominic Kieran, Global Managing Director of Cameco U.K. Ltd. I’m going to hand it over to Tim in just a moment to briefly discuss the current nuclear market environment, our 2023 performance, and how it provides the basis for Cameco’s plans and outlook for 2024.

After, we will open it up for your questions. Today’s call will be approximately one hour concluding at 9 a.m. Eastern Time. As always, our goal is to be open and transparent with our communication. However, we do want to respect everyone’s time and conclude the call on time. Therefore, should we not have time for your questions during the 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 to 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 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 joining us for today’s call and a belated Happy New Year. Our fourth quarter conference calls always provide a great opportunity to discuss the past year’s developments in the uranium and nuclear fuel markets. It’s also a good time to touch on a few annual highlights that demonstrate how well our strategy is performing and to provide some insights into our current expectations for the year ahead. So that’s the outline I’ll follow today. This past year, we’ve been consistently talking about the positive market momentum, so I think I can be fairly brief on that side of things. We spent a great deal of time on our calls, in our presentations, and on our webcasts talking about our optimism and positive view of the constructive market conditions we’ve seen throughout 2023.

And we are absolutely maintaining that enthusiasm moving into 2024. Those listening today that tuned in for a few of our calls and presentations prior to 2020, would be very familiar with the phrase positive long-term fundamentals. I say somewhat tongue-in-cheek that we use that message more than just a few times to reinforce our optimism through the lowest points of the market cycle. Back when we initially made that statement, we certainly couldn’t forecast the timing of a market transition. But we remained convinced that once the excess uncommitted primary supply and mobile inventories cleared the market, and as demand continued to grow, our industry would recover and our company, would be stronger than ever. So now, as we watch the uranium contracting cycle shift closer to a replacement rate level, I can say with confidence that we have entered the early part of that long-term window, we’d been talking about.

And those fundamentals we were referring to, they are even more positive than we had anticipated. On the demand side, we used the term durable at every opportunity as we believe it accurately describes and effectively differentiates today’s fundamental demand picture from previous cycles. The previous peaks in our market have typically lasted for weeks, while the valleys have lasted for years. That was the case when the excitement about uranium and nuclear was driven by one or two discrete events. A mine shaft failure, the end of the megatons to megawatts program, a flooded mine in development, Chinese contracting that absorbed significant supply. Those types of events all added speculative, shorter-term, momentary pressure to supply and demand.

However, in today’s environment, the uranium market is certainly having more than just a moment. Instead, we’re seeing full-cycle growth in the near, mid, and long-term with broad interest in nuclear energy like never before. And it’s being driven by global scale factors that are widely expected to persist for years to come. Geopolitical tension is prompting governments all over the world, to reevaluate energy security and enact policies to reduce risk and eliminate reliance on unstable jurisdictions. And as they do so, climate change and electron accountability remain top of mind, which truly puts nuclear in the spotlight. There’s a growing consensus that there is, no net zero without nuclear, and 28 countries have now signed on to an international declaration that calls for a tripling of nuclear energy capacity by 2050.

The EU, U.S., U.K., Canada, France, and Japan, are just some of the jurisdictions, where bipartisan support is translating to political action, with a few already introducing financial incentives to back nuclear development. As a result of this support, we are seeing life extensions, reactor refurbishments, and a call for new builds to provide secure, reliable, and clean base load power. And we have a technological evolution on the horizon as well, with SMRs and advanced reactors extending the use case for nuclear, beyond just electricity, further strengthening the outlook for growing demand. So demand is durable, and growing with more support than ever. So how does that stack up, against the supply side fundamentals? Well, that’s where significant uncertainty remains.

The geopolitical tensions that are pushing the reevaluation of energy security are also adding negative pressure to supply, resulting impact on mining activity, fuel cycle services, supply chains, and global transportation continues to create significant challenges. Last week we saw a tangible impact on supply, resulting from those challenges when our Kazakh 2.16 partner, Kazatomprom, revised their expected 2024 production volumes down in response to limited access to acid and development delays. We’re now working with Kazatomprom to determine the impact on our share of 2024 production from JV Inkai. Supply chain challenges combined with ongoing mine depletion, declining and finite secondary supplies, and a decade of underinvestment in exploration and mine capacity amid low market prices has led to what is a very tight market today, something that is expected to persist into the next decade.

So considering both demand and supply, I think we can safely reiterate that strong long-term fundamentals is still a message that continues to resonate, creating the full cycle growth, we’ve been talking about. Looking back at the very difficult supply discipline decisions, we had to make and the strategy we put in place in the context of that persistent, positive long-term view. I can now say it was all to prepare us for today’s market, and for the second half of this decade and beyond. We at Cameco have maintained a disciplined approach to managing the financial, contracting and operational facets of our strategy during those tough times. We did what we said we’re going to do, which positioned us well to capture full cycle demand with a supply pipeline that was only going to respond to real end-user demand as it evolved.

And considering customer fuel requirements into the future, we knew that the focus had to return to the long-term market, because as always, the total volume of requirements, is far greater than what is available in the near-term spot market. It evolved quickly just as we predicted it would, and our patients and our experience are paying off with positive results. We saw a significant improvement in our financial performance metrics in 2023, thanks to higher sales volumes and higher realized prices in our uranium and fuel services segments. This drove improved net earnings, adjusted net earnings and cash from operations, which all more than doubled in 2023, compared to the year before, and with a significant increase in adjusted EBITDA. And our continued discipline and our tried and tested long-term contracting strategy, helped to mitigate risks related to our capital decisions and mining plans.

Our strategy is designed to allow us to align production decisions, with our customer needs and the commitments in our contract portfolio and ensures we don’t add excess supply and capacity when there’s no demand in the market. We understand that to generate full cycle value, we can’t be mining on spec. We must build a home for our pounds years ahead of time before we pull them out of the ground in order to avoid having to sell material into a thinly traded and discretionary spot market. That means in today’s contracting cycle, we can link the pounds that we previously left in the ground to the long-term contractual commitments that are being negotiated today. And those contracts are being executed in the context of a significantly improved market environment, generating value for Cameco as we deliver into them now and in the years to come.

We ended 2023 with a healthy contract book and total long-term commitments of 205 million pounds of uranium with 37 customers worldwide. That total commitment level of over 200 million pounds only represents about 20% of our current reserve, and resource base, providing us with plenty of exposure, to improving demand from our customers, as they look to secure their long-term needs. To deliver on those commitments, we must continue to plan for the sourcing of the uranium we need well ahead of time. In the near and mid-term, we always start with our expected production from MacArthur River, Key Lake, Cigar Lake, and Inkai. We can then draw material from our inventory and with the licensed storage facilities that we operate, we have secured the ability to borrow product under the terms of some of our storage agreements.

Additionally, we have the ability to pull forward long-term purchase arrangements that, we put in place in a much lower price environment. Our marketing team can also source material, from market purchases. While those purchases would be more expensive than, our production and other available supply, our strategy and long-term portfolio positions us to benefit when there is increased near-term demand, for scarce nuclear fuel supplies and services. However, when it comes to sourcing for the longer term, based on our existing contract portfolio and the contracting momentum that is building in the market, we do expect to need more than our current annual production volumes. That includes the more than 130 million Tier 1 pounds that we’ve left in the ground, when we shifted into supply discipline from 2016 to 2022.

As a major producer, we don’t often discuss our pipeline of reserves and resources. But when we consider that pipeline in the context of the more than 200 million pounds we’ve committed under long-term contracts that, include escalated prices and escalated floors and ceilings, we have an exposure rate of about 80%. That means we have about 800 million pounds of current in-ground inventory that is not contracted or priced, representing future potential value. That’s part of a very deliberate strategy. As a proven and diversified producer, Cameco is well positioned to add long-term value. And, since we are always adding to a contract portfolio that provides upside participation and downside protection, we expect development of future production from that in-ground inventory will be funded by the cash flow from product sales, not from dilutive equity raises, or significant debt leverage.

Thanks to our discipline and our improving financial performance, we consider the next steps in our strategy and start to invest in our Tier 1 capacity. We now have an updated Cigar Lake technical report that we expect to release sometime in March, which includes the conversion of over 40 million pounds of our share of indicated resources to probable reserves, extending mine life at Cigar to 2036. And, we’re undertaking a study to evaluate the work, timelines and investment required to expand the MacArthur River mine and the Key Lake Mill from 18 million pounds of annual production today, up to the licensed capacity of 25 million pounds, our share being 70%. If we took advantage of all Tier 1 growth opportunities, our annual share of Tier 1 uranium supply, could be about 32 million pounds.

But, beyond our Tier 1 assets, we also continue to assess the future need and economic potential of our fully licensed and permitted Tier 2 assets. Those assets remain on care and maintenance today, but they provide another layer of optionality when it comes to sourcing material for long-term commitments. And remember that unlike a declared or untested asset owned by a developer making promises, our Tier 2 assets are demonstrated assets with an operational history and known costs, and they’re in the hands of a proven producer, putting them in a much lower risk category. As one of the world’s largest producers, we don’t realize any benefit from the voluntary public disclosure of our advanced project work at Millennium, [Yaleri] and Kintyre or from our ongoing exploration successes.

But there too, we continue to make progress and evaluate future prospects that align with market demand and our long-term contract sourcing requirements. We’ve provided a bit more background on our exploration framework in our MD&A this year, because it’s not widely known that we have discovered numerous Greenfield prospects and deposits over the years. And those discoveries are underlying the very attractive land position on the most prospective trends, all right in our backyard of Northern Saskatchewan, where we have well-established industrial and mine support infrastructure, and where our exploration activities continue. Beyond uranium mining, our contracting success and financial strength is also allowing us to grow and enhance the value of our fuel cycle assets and other investments.

Similar to our mining assets, we won’t increase fuel services production or capacity until we see customer commitments. Thanks to that disciplined approach, we have the capacity to grow at a time when customers are avoiding Russian supplies and services, and the market has identified a significant need in the conversion and enrichment stages of the fuel cycle. To meet those growing commitments in our Fuel Services segment, we are increasing our 2024 UF6 production at Port Hope to 12,000 tonnes, which would represent a record production level for the facility, exceeding the record production levels we set in both 2022 and again in 2023. We’ve now contracted 75,000 tonnes of UF6 conversion with 33 customers worldwide, which we expect to underpin the operation of our Port Hope conversion facility for years to come.

We also have a 49% interest in global laser enrichment, which holds the exclusive license to deploy a third-generation uranium enrichment technology. Subject to its continued progress towards commercialization, if successful, GLE could have the ability to help meet the evolving enrichment needs of the industry, from re-enriching depleted uranium tails to producing commercial low-enriched uranium, for the global reactor fleet in operation today. To delivery of high-assay, low-enriched uranium for the SMRs and advanced reactors of tomorrow, GLE represents a significant opportunity for Cameco, to participate in every stage of the fuel cycle. We’re also excited to have added a 49% share of Westinghouse to our portfolio of investments in 2023. Westinghouse is a well-established and critical business to the nuclear power industry, which gives us more exposure to the light water side of the nuclear fuel cycle, while adding potential growth opportunities related, to their conventional and advanced reactor sales.

We expect our share of adjusted EBITDA from Westinghouse in 2024, to be between $445 million and $510 million. And we believe the business is well-positioned for long-term growth, driven by the expected increase in global demand for nuclear power. Over the next five years, we expect Westinghouse’s adjusted EBITDA, to grow at a compound annual growth rate of 6% to 10%. But even with the significant acquisition in Westinghouse, we have maintained the capacity for further investments, should value-adding opportunities emerge. Our balance sheet remains strong, with $567 million in cash, approximately $1.8 billion in total debt, and a $1 billion undrawn credit facility. In our Uranium segment, we expect this past year’s strong financial performance to continue in 2024.

We will continue to transition to our Tier 1 cost structure, and deploy the capital and other expenditures we believe are necessary, to meet our commitments and position the company for continued, sustainable growth. Growth that will be pursued in the same manner that, we approach all aspects of our business – strategic, deliberate, disciplined, and with a focus on generating full-cycle value. And with a continued focus on the environmental, social, and governance side of our business as well, where we are very proud of our track record. We integrate ESG principles and practices into every aspect of our business, from our corporate objectives and our approach to compensation to our overall corporate strategy, risk management, and day-to-day operations.

As part of our low-carbon transition plan, we created tailored decarbonization pathways in 2023, for each site we operate to support the achievement of our 2030 greenhouse gas emission reduction targets. We also completed an analysis of climate change scenarios at our Northern Saskatchewan and Ontario operations, to better understand how changing climate conditions could impact our employees and our assets in the long-term. I encourage you to read through our annual MD&A where we go beyond just performance highlights. In it, you will see a much more detailed picture of our strategy, how we operate, and importantly, insight into the uranium and nuclear fuel market, a market that is unlike any other. So thank you for your interest today and we would be happy to take any questions.

Operator: [Operator Instructions] The first question comes from Ralph Profiti of Eight Capital. Please go ahead.

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Q&A Session

Ralph Profiti: Good morning, Cameco team. Thanks for taking my questions. Tim, in the evaluation of MacArthur River up to 25 million pounds, when will this work be completed? Assuming things being taken into consideration include issues from September 2023, including your supply chains, skilled labor, as well as some of the special technical considerations. Do you see a potential scenario where Tier 2, whether it be U.S. ISR or Rabbit Lake, may be more desirable than MacArthur River production? Because those production centers may not be as constrained.

Tim Gitzel: Yes, morning Ralph. Thanks. Nice to hear from you. We are just starting the MacArthur Key evaluation work now. We are seeing a market that we think might need those pounds going forward. Those are probably the best pounds on the planet that are not in production yet. So, we are starting our work on what we need to do to de-bottleneck at the Key Lake Mill. The mine is running well today and we know it can produce at that level. So, we are starting the work. Obviously, we are not going to produce on spec. Grant has said that a 100 times. We produce in the contracts that we have. So, we will get that work going and like I say, we are going after that before we go after any Tier 2, I think, project that we still have in care and maintenance.

But don’t rule those out either, Ralph, because those are on our batting lineup further down the list. But first, as we said in our quarter here, we are going to look at de-bottlenecking MacArthur and Key. So, we can get those to ’25 and then that extension, don’t underweight that extension of Cigar Lake to 2036. That is a huge move and it really sets us up well for the future.

Ralph Profiti: Okay. Understood. Yes, thanks for that color. I also noticed in the uranium sensitivity table that the leverage to 5% change in uranium to revenue is quite low this year. I am just wondering what is going on with the contract book versus the realized price guidance and why we are seeing that sort of diminished leverage versus previous years. And it seems like this is a function of the contract books, maybe perhaps hitting more of those ceilings, or perhaps even up flexing on the part of customer discretion?

Tim Gitzel: Yes, Ralph, Grant is our very best expert on that. So, Grant, do you want to take that?

Grant Isaac: Yes, I think – it is a great question, Ralph. And let us be really clear that we set a strategy that supports short-term price discovery in order to create long-term value. And what I mean by that, is it is categorically the wrong way to think about a uranium producer, as saving production for the spot market in order, to maximize near-term leverage, to the spot market. And the reason for that, we said over and over again, and people really need to understand this, the spot market is small, it is discretionary, it is non-fundamental, and it is low-quality demand. If Cameco produced and showed up and tried, to sell pounds into the spot market, it would not be discovering higher prices. The opposite would happen. The market would realize that we would be showing up with uncommitted primary production and the market would back up.

And do not take my word for it. Look at what happened in the days when Paladin, for example, was a spot market seller or Kazatomprom was a spot market seller. That strategy has been proven to be a colossal failure over and over again. So what matters is the non-discretionary, fundamental, high-quality demand of the term market. But make no mistake, Ralph, we do not miss these market moves. We just capture them and build them into the forward contract book. You have heard me say over and over again, we prefer market-related contracts right now. A move like this in the spot market, which we do not sell into, because we do not want to undermine that move in the spot market, allows us to then price market-related contracts forward on a much more attractive basis than we did before the spot market move.

And I will just give you an example. When Uranium pushed over $100 per pound, Cameco does not immediately go, how do we sell into the spot market? We go, how do we translate that kind of spot market quick move into forward value? So a market-related contract that we would write today and give to a utility probably has a floor tucked right up at today’s long-term price, escalated, and probably has a ceiling in the 120s, escalated. That is how we capture the value of a spot market move. Those who want to play the spot market show up with uncommitted primary production. They put pressure on it, in a thinly traded market it goes down, and they ride it back down. What we do is, we take those moves we build it into the contract portfolio going forward.

It’s a strategy that sustains near-term price discovery and helps bring that long-term price back up to a sustainable production economic level. So with all that context, no surprise, contracts that we entered into a number of years ago, where if they were at a $70 ceiling a few years ago, would have been a really attractive ceiling. We might be hitting those ceilings in a market-related today. For example, or if there was some base escalated portion. It is good news that this is occurring. It means the market is going into a security of supply contracting cycle. It means our supply discipline strategy is working. It means the forward value capture is growing. And then, of course, I want to reference the comment Tim made, which, folks, 20% of our portfolio of reserves and resources is contracted.

80% is not. That’s 800 million pounds of uranium to be priced in a much better environment now. So, we never miss these moves. We build these moves into long-term contracts, long-term cash flow and earnings. That’s what’s happening.

Ralph Profiti: That’s helpful, Tim and Grant. Thanks very much. Great context on the strategy. Thanks again.

Tim Gitzel: Thanks a lot, Ralph.

Operator: The next question comes from Andrew Wong of RBC Capital Markets. Please go ahead.

Andrew Wong: Hi, good morning. Thanks for taking my questions. Can you just talk about your confidence level on production returning to nameplate in 2024 and just some of the longer-term projects for Cigar and MacArthur? I think previously the messaging was that, those projects may not be looked at until the volumes start getting contracted and the demand was there. So now that work is starting on those projects, does that mean that those volumes are starting to get some contracting activity?

Tim Gitzel: Thanks, Andrew, for the question. Yes, so just how confident are we on production for this year? We put out 18 million pound forecast for each of those sites, and we’re very confident that we’ll make that. We have got some more operating experience at MacArthur and Key every month that goes by. It gives us another view on how it’s going, and I’d say the last two months have been very good. I’m looking at Brian Reilly, our production has been very good, very steady. We’re working out some of the bottlenecks or kinks that you have with a restart. So, we’re really happy with the way things are going there. Same at Cigar. You know, well-established mine. We’ve been operating there for years. We moved into that new war zone.

We’re getting that under control. The mill had some hiccups, and they’ve got that under control. So yes, we’re very confident in our forecast for 2024. And going forward, yes, as I said earlier, we won’t produce on spec, but we will get those assets ready to go at MacArthur Key, and once Grant and his team have contracts in front of us that call for that production, we will move those forward. We’ll move the production up at MacArthur Key. And so, there’s a timing thing and things don’t just happen overnight. We want to be ready when that happens, and the contracts we sign, those long-term contracts that Grant was referencing earlier, they don’t start deliveries for a number of years. So we’ve got time to get things ready. We’ve got dry powder, and when the time comes, we’ll be ready to go.

So, we really like our positioning.

Andrew Wong: Okay. Great. And maybe for Grant, the contracting strategy makes a lot of sense. Could you maybe just talk about how the contract book and price sensitivity table would look like, beyond the years that are in that table, maybe into like the late 2020s and early 2030s, where you might get more of that leverage, to the rising price environment that we’re seeing today?

Tim Gitzel: Yes, absolutely designed for leverage to that rising price environment. I mean, really important to emphasize, we are still in supply discipline. We are not calling the top of the market. This is not peak demand going on in uranium yet. We’re in the early stages of this contracting cycle, early stages that suggests it’s the right strategy, to be very disciplined with our supply. We’re thinking about moving the Tier 1 to full capacity like Tim talked about, but we haven’t made that decision yet with respect to MacArthur Key, and we haven’t even started talking about the Tier 2s. And if we put that altogether and said, what would our annual capability be, that’s about 38 million pounds of annual production. And you see in our guidance table, 22.4. So Cameco is not calling peak demand here, or peak price discovery in the uranium business.

We’re still in supply discipline. We’re still in supply discipline, because we think when we look at the uncovered requirements wedge, a lot of demand, non-discretionary fundamental demand needs to come to the market. We want to be exposed to that. So it isn’t about selling out the volumes. It’s about placing volumes under terms and conditions that make sense to us today. So that is that market related exposure that I talked about. That is really dramatically improving floors and ceilings that are both escalated by the way. And of course, a long-term price that’s now $72 U.S. per pound. And that itself is base escalated if you agree to any of those contracts. So as you see going forward, we would look to move beyond that contract table, which only accounts for about 20% of our volume.

In fact, that committed sales table is less than that. It’s only about 13% of our volumes, because it’s just the next five years. So we have 80% of those volumes that aren’t yet sold yet. It’s a good thing. Prices are going up. We want that exposure to future prices. And when you think about our reserves and resources that aren’t yet priced, that have that pure exposure to the uranium price, those are reserves and resources that are in the hands of a proven producer. And many of those reserves and resources are adjacent to existing infrastructure, and you can take advantage of all those incumbencies. So this is exactly where a responsible uranium producer wants to be. Should be in a market that is entering a security of supply contracting cycle.