Cameco Corporation (CCJ) Presents at 2024 Raymond James International Investors Conference Transcript

Cameco Corporation (NYSE:CCJ) 2024 Raymond James International Investors Conference March 4, 2024 1:40 PM ET

Company Participants

Grant Isaac – CFO

Conference Call Participants

Unidentified Analyst

So Grant is going to give us a presentation today. And then we’re going to leave a little bit of time at the end for questions. So, I’ll turn it over to Grant.

Grant Isaac

Okay, great. Thank you very much. Obviously, thank you to Raymond James, for inviting us. We have been into this conference before. And I hope we can get invited back being in Orlando this time of the year, not Saskatoon, Saskatchewan, Canada is a very welcome reprieve for sure.

Also, thanks to Brian MacArthur, who, of course, is our analyst at Raymond James. And he does a fabulous job. He’s been covering the company for a very long time. He knows the story really well.

And when you look at his perspective on not just Cameco, but nuclear. He understands that, uranium is unlike a lot of commodities that it’s part of a, well, I would say a highly organized procurement process. And it matters what’s going on in the conversion space in the enrichment space in the fabrication space. And all of that comes together to create opportunity or not, in the front end of the nuclear fuel cycle. So obviously, thanks to Brian.

We were to be doing a fireside chat, and he’s not here. So you get a presentation. Sorry about that. But however, what we’ve done is built it around the questions that Brian normally asks us anyway. So hopefully, it’s a bit of a fireside chat perspective as well.

So I’ll skip over the forward-looking information, because I know you all read it. And what I want to start with is basically two facts. Fact number one, nuclear power is absolutely essential for clean energy. And fact number two, nuclear power is absolutely essential for secure energy. And those two things are pretty important right now.

Now the world has been reminded, as, as carbon has replaced radiation as the existential enemy, everybody should worry about. You got a technology that is baseload, 24-hour carbon free. And then in a world where energy security is a big deal, because we’ve seen what happens when nations bargain away their energy sovereignty, having those kind of carbon free 24-hour dispatchable assets that are also backed up by an inventory, and can run for prolonged periods of time without fuel arriving. It’s pretty powerful value proposition. This is all led to these two inescapable facts is all led to a recent pledge a COP 28 to triple nuclear power by 2050.

Now we can have a really long conversation about whether that’s even achievable or not, but the fact that nuclear is no longer a melting ice cube. In fact, people are talking about not just supporting the nuclear assets that exists today, but expanding them quite dramatically. It’s not a conversation folks were having a few short years ago, but it is amazing what a bit a clean energy focus insecure energy focus does for a sector like nuclear.

We are across the tail winds to the nuclear fuel cycle, and now with our investment in Westinghouse, we’re across the reactor cycle as well. We’re in every segment, we’re in the uranium segment, as you see from the left-hand side of this panel, with some Tier 1 assets, our MacArthur River Mine, our Cigar Lake mine, our asset and Kazakhstan, with some Tier 2 uranium assets, as well as being across the fuel cycle itself. We are in the conversion business. Westinghouse also can be in the conversion business. We have an investment in enrichment. And of course, in fabrication between what Cameco does and what Westinghouse does. We’re very involved in fuel fabrication.

And then you add to that Westinghouse’s reactor service business, and now a meaningful prospect of new build. And you see that we sit across the entire segment. And that’s a pretty exciting place for us to be at a time when the available options for customers are shrinking. Thanks to a market that’s bifurcating. Thanks to a market that’s worrying about where origins are coming from and where their fuel services are being procured.

We have never seen as robust a nuclear outlook as we’re seeing today. And we have never been in a better position with our incumbent advantages, our existing asset base across multiple segments and multiple jurisdictions. And what we try to offer our owners is a very simple value proposition, access to the durable cash flow and earnings that come from the recovery of the entire nuclear sector, and to translate that into durable contracts, durable cash flow, durable earnings, and for a great period of time over the next little while, without any greenfield investment risk. We think that’s a pretty strong value proposition.

Now what I don’t have time for is to go through the entire cycle. So what I thought I would do, is focus on the uranium portion of it. There’s a lot of lessons to be drawn for uranium that can come across the conversion space, the enrichment space, et cetera. And let’s face it, uranium receives a lot of attention in the nuclear fuel cycle, a lot of attention, because for many years, it was the only investable space really, in the front end. And lately, it receives a lot of social media attention. Social media attention that sometimes it’s entertaining, almost always wrong about how the uranium market actually works.

So what I thought I’d do is spend a bit of time today, helping you see the world through our eyes on how the market actually works, from the perspective of a publicly traded company that has an obligation to only put out accurate, not misleading information. So remember that when you think about access to some of that social media narrative, it’s often from people who don’t have an obligation to put out information that is accurate and not misleading. So there’s certainly no equivalency there.

If we’re going to talk about the uranium segment, let’s begin with demand. The demand fundamentals look great. And here’s the cheat sheet on how to track where demand is going in our industry. I mean, you can get into all of the narratives around the spot market, and what’s driving the spot market up what’s driving the spot market down, or you can look to just these two slides. And these two slides always give you a sense of, as we say, in Canada, where the puck is going with respect to the nuclear fuel cycle.

On the left-hand side of these slides is what we call the uncovered requirements curve. So what this is, is it matches what do utilities require to run their reactors against what have they already bought. And in this case, more gray space is better those wedges, the bigger they get, the more demand that has not yet shown its way into the market. This is demand that I would say is very high quality. It’s demand that can sometimes be delayed, it can sometimes be deferred, but it ultimately cannot be avoided, because if you’re not procuring this material, you’re not running a reactor, it’s as simple as that.

And the other thing to remember about uranium is it’s a product that has absolutely no substitute. So if you’re not buying uranium, you’re not running the reactor, there’s nothing else you can buy to run that same reactor.

Couple things to remember about the uncovered requirements on the left-hand side. The first and most important thing to remember is that requirements line, that black line that goes across the top is not the tripling case that I talked about earlier. That is the very conservative World Nuclear Association base case for nuclear requirements, I will show the tripling case in a minute. This is just the very conservative base case. And the way it’s constructed is, it’s a bottom-up perspective. We take reactor virus reactor all over the planet. And we count how much material is needed to run those reactors. We’re not talking really about inventory build. We’re not talking about tripling, we’re not talking about an SMR revolution. We’re just simply talking about the known reactor fleet.

There’s a few upsides the comm reactors that we thought were going to shut down that continue to run like Diablo Canyon, or the Byron in Dresden units in Illinois a couple years ago, that it’s near term requirements reflected in their reactors that we thought would be retired if they’re after their first license. So sort of the first 40 years that are now going through life extensions, well, that adds midterm requirements to this curve. And of course, we’ve got a lot of new build going on. But it’s a very conservative view of what’s required against what they haven’t bought yet.

So think about this as the stock of demand that has to come out, which adds up to 2.2 billion pounds of uranium that has not yet been bought by Utilities. So if you think about it, Utilities, if they brought a proportional amount of demand into the market, for the next 16 years, they would have to buy 140 million pounds per year collectively. They bought 160 last year, but that was up from loads of say 40 million pounds just a few short years ago. This is a very strong fundamental story. And it represents a stock and demand greater relative to requirements then we’ve ever seen at any point in our industry.

The second thing to note about this curve, on the left-hand side is there’s two uranium markets. There’s a spot market, and there’s a term market. In our industry, the spot market is basically material that’s procured to be delivered in the next 12 months. The spot market is small. Utilities, as you see from this curve, have about 10 million pounds per year that goes into the spot market.

So it’s called requirements, but it’s really the discretionary part of their requirements. If they need to shore up an inventory, or if they’re looking for some additional material for a future reload, they might find their way into the spot market. It’s a requirement, but it’s a discretionary requirements. So it’s a small market, it’s discretionary demand that can come and go. It’s non fundamental demand. And it’s all ultimately pretty low-quality demand.

And this isn’t just right now. You could erase those dates on the bottom of that curve. And you could start in 2030. And the curve will look exactly the same. Because there isn’t a reactor on the planet that has a fuel bundle that they’re loading into their reactor in 2024, or 2030, and that they need to buy uranium in 2024 or 2034. That uranium was bought a minimum two years ago, but usually a lot longer ago. So the uranium portion of it is, is bought well in advance of loading that fuel bundles. So as a result, Utilities have very little spot demand. So that’s an important thing to remember about the difference between the term and the spot market.

If we go over to the right-hand panel, if the stock of demand looks fundamentally good, the next thing you want to see is, what is the rate at which demand has been coming to the market. So think of this as the flow diagram. And what you see initially from this diagram is that Utilities since Fukushima, have actually been buying well below replacement rate. So they have been consuming off of old contracts, to run their requirements.

But they have not been coming into the market to acquire new material that even replaces what they’ve consumed. Why? Well, because the spot market was dramatically over supplied. And because the spot market was dramatically over supplied, Utilities were just taking advantage of that oversupplied surplus in the spot market, taking advantage of those producers who kept dumping material into the front end of that small market, and carrying that into the early years of their term demand. And they stepped out of the term market.

But obviously, there’s a couple of consequences for doing that. Because Utilities have been below replacement rate, uncovered requirements have been growing. So the wedge on the left hand side is as big as it is because replacement rate contracting hasn’t happened.

Secondly, there’s been no global inventory bill. There’s sometimes a lot made about the inventory position in uranium. But if you’re not at replacement rate contracting, if you’re not even replacing what you’ve consumed in year on a go forward basis, the gap needs to be filled by something. And that’s something has been the steady consumption of the global inventories the secondary supplies. And we’ll see that on a subsequent slide.

So that matters because you only have global inventory built if procurement is greater than requirements. What you see is procurement has been well below requirements.

The other thing to note about the panel on the right-hand side is exactly the point that we made earlier about the spot market. As Utilities focus their attention on security of supply contracting, a few things happened. One tenders of contracts go up. So in the post-Fukushima years, it was quite common for utilities to be signing really short contracts, two years to four years of deliveries that was it. And now as they’re going into security of supply, we’re seeing tenders go two years to seven years, 2 years to 10 years. That’s very good news for a producer because only a producer can satisfy demand out into that window.

Volumes are going up. Utilities are taking bigger bites out of each year. So it’s not just because years are being added, but bigger bites are being taken. So tenders are going out volumes are going up and timeframes are going out. If you’re a utilities, and you’re really well covered for uranium and your other segments. Till 2030, you’re still not feeling very comfortable, because you’re looking at the uncovered requirements curve and come 2030 you’ve got as much demand in the market as five MacArthur Rivers. That’s how much demand needs to be in the market for that 2030 window.

And you’re looking at the supply stack going, I wonder if there’s going to be five MacArthur Rivers there. So we’re seeing that security of supply ramp up. And we know in our market that that means Utilities will double down on the term market. They’ll actually turn their back more and more on the spot market so that small spot market will actually get smaller from a fundamental point of view, and more term demand will come to the market.

So why is this good news? It’s good news because real price appreciation in our segment happens when Utilities are at or above replacement rate. And we’re not even there yet. So one really interesting observation. We’ve never seen prices like this in the front-end of the nuclear cycle this early.

We’ve seen prices like this on the back end of a security of supply contracting cycle. When Utilities have been way above replacement rate for a couple of years. We’ve never been in this situation where we’re not even at replacement rate yet, we’ve already seen these prices. That’s reflecting that the setting in of the security of supply contracting cycle.

So I want to flip to from demand to supply, because it wouldn’t matter how the fundamentals of the demand look, if in fact, the supply response was poised to be stronger. Because it wouldn’t suggest there would be any price, momentum or price discovery in our market.

But we actually see a very, very different situation with respect to supply. So what I’ve what we’ve done here is we’ve added in to the base case requirements, the (Indiscernible 0:15:41) high case, which they put out at the World Nuclear Association. They put out this number a couple of years ago, reflecting where would nuclear need to be in order to achieve the 1.5 degree change. So the Paris Accords.

And then we’ve also layered in the tripling of nuclear power that was recently talked about a COP 28. So you can see just that whitespace, and that challenge just continues to grow for the supply side.

Second thing to note about this slide is that much like there’s two markets for uranium demand, a very small, low quality spot market and a very high quality large term market. There’s two markets for the supply of uranium. The first is the primary supply that comes from mines. Something very interesting about our industry is mine supply of uranium has not met global requirements for about 30 years.

Second thing to note is markets work. After years of really, really low prices in uranium exploration projects get cancelled, development projects get sidelined, Tier 3 assets get shut down, Tier 2 assets get shut down. And then ultimately, we had to take extreme supply discipline decisions, and we shut down the world’s best mine and mill for five years from 2018 to just recently when we restarted it. So that primary supply stack just simply isn’t poised to respond at today’s prices, to today’s growing demand.

The other thing about that primary supply stack, that’s important to remember, is what you see here reflects perfection. It was put together by Ux Consulting UxC. And really the assumptions behind it is every Tier 1 asset is producing at full capacity. Well, that’s not currently the case. At Cameco, we don’t even have our Tier 1s running at full capacity yet, because we’re still technically in supply, discipline mode, waiting for more of that demand to come to the market. Because Adam Prom, the largest producer globally is also in supply discipline mode.

And Tier 1 assets are not risk free. We’ve seen some disruptions to production that are not reflected in that supply stack. That supply stack assumes Tier 2s are coming back to the market. Well, we have a bunch of those Tier 2 assets. And we’re not even talking about bringing those back yet. So those shouldn’t be in there. Tier 3 is assumed to come back to the market. We’ve seen some plans to restart some Tier 3, but it’ll take time. And most importantly, that primary supply stack assumes a bunch of known development projects show up as greenfield projects on time and on budget.

Learning until you as the uranium business has not figured out something any other commodity hasn’t figured out. The likelihood of those projects being brought on time and on budget is actually quite low. And that’s just the reality of greenfield development too. A feasibility study is not as robust as a technical report on a material property that’s been running. And that’s just reality. So there is greater downside risk to that primary supply stack than there is upside risk.

Third thing to note about this slide is that secondary supplies are diminishing that historic shock absorber in our market has gone away. I remember years ago, we were talking to folks and they’d say, well, yeah, but it’s never really been just about primary production in uranium. Hasn’t there been all that secondary supply that keeps coming back to the market. And that has been true. You’d see in that slide. You don’t have to go back very far. Secondary supplies were accounting for 50 million pounds per year back in the days when Cameco was party to the HEU agreement, and we were taking down blended, highly enriched uranium out of Russia down blending it to commercial standards and selling it into the U.S. reactor fleet.

That was a 400 million pound mine producing 24 million pounds a year. It ended in 2014, end of 2013 and it’s gone. And there is no replacement. So you see a step change down in the secondary supplies. And then you see them continuing to dwindle simply because in those years where we were below replacement rate contracting, that supply had to come from somewhere. So the world has chewed through those secondary shock absorbers that have been there in the past to kind of deal with any shortfalls in primary production.

So I think the main punchline to this slide is clearly new production has to be incentivized. It has to be incentivized, if only to replace the missing secondary supply, let alone to grow to replace the demand in the market. And that’s just even in the base case scenario. We don’t need sky high tripling in order to see stronger prices to incent new supply. And what I would say is, as we look around the planet, prices aren’t there yet.

I mean, it prices are starting to incent Tier 1 to come back, not run at full capacity, but come back. We’re not seeing a real earnest effort and restarting idle Tier 2, and quite frankly, some projects that apparently are better than any of the existing Tier 1 are still not going anywhere, even in today’s price environment $75 uranium in the long-term market, and $95 uranium in the spot market. So we have a ways to go. Price discovery has to occur in order to start getting that supply going.

I’m not saying folks that the nuclear revival is in jeopardy. So I want I don’t want the conclusion to this slide be, well, why are we investing in any nuclear if there’s no fuel for it, but what I am saying is the days of $20 uranium are gone, the days of $40 uranium are gone, the days of $60 uranium are gone. What we need to see is higher uranium prices because higher prices will convert uranium resources into uranium reserves that will incent investment that investment will be deployed to create new supply and will be able to balance this excellent outlook from a demand point of view with supply. We’re just not going to do it with $20 uranium anymore. Those days are absolutely gone.

So, this doesn’t put in jeopardy nuclear, but it puts it puts the challenge on the supply side which has to be solved by more term contracting to simple as that. As more utilities come to the market term contract more, we’re going to see a much stronger price response. And that’s going to create the incentives in order to get the supply there.

This is really good news for a Cameco an incumbent producer, not even operating our current assets at full capacity. This is a good position for us to be in proven reliable supplier with brownfield leverage at a time when we know the market needs more supply.

So given what we now know about how the uranium market works, how the demand and supply come together, just a quick word on our strategy. So our strategy is very simple. It’s about focusing not on the small irrelevant spot market, the 10 million pounds a year in the spot market. But on the high quality 160 million pound in year demand and the term market. We build those term homes, through cycles-specific contracts. We like market related contracts right now that are going to be priced out at time of delivery into the future. And then we make production decisions. We then call for increased production after we’ve secured the homes.

And this results in four really important facts about Cameco. The first one is Cameco never sells below the market. Now this may seem like a controversial statement, because our average realized price for 2024 is currently below the spot market. But spot markets not the market. What I’m saying is any term contract that we’re entering into today, Cameco is not selling below the market. We are fully taking advantage of all of those incumbent competitive advantages that I talked about earlier. And we’re capturing the value of the best contracts in the market. Nobody is contracting for term contracts better than Cameco has. So we do not sell below the market.

Second thing is we never miss the market moves. A lot of people say well, don’t you wish you had some uranium to sell when uranium price at $106 a pound? No, I don’t. Because if I had uranium to sell, when it hit $106, first of all, it probably wouldn’t hit $106. Because the fact that I had uranium to sell would have been an overhang on the spot market. But even if it wasn’t, I would show up to sell 100,000 pounds. And maybe I could clear 100,000 pounds at $106. And then I show up with the next 100,000 pounds of market goes, where’s that coming from?

So maybe I get $104 for the next one. The third tranche of 100,000 pounds it’s below $100. And then you just walk the market down. Don’t take my word for it. Look at what happened because Adam Prom, look at what happened to Paladin in the last cycle trying to have that spot exposure, it just doesn’t work that way.

So we never sell below the market. We never miss the market moves because here’s the good news, when uranium price spikes up to $106 a pound, the floors in ceilings that Cameco can achieve in market related forward contracts jump as well. Because they jump with the sentiment in the spot market. So that’s an excellent value capture. We take spikes, we knock them sideways and turn them into multi-year cash flow and earnings. So that’s fact number two.

Fact number three is a little bit — I think it’s pretty obvious, but it needs to be emphasized. Cameco never oversupplies the market. So after our Q4, we haven’t heard a lot of folks say, well Cameco is going to look at expanding MacArthur River take advantage of its full Tier 1, market is going to be over supplied. I just finished explaining that we don’t call for new production unless we’ve already captured the demand. And to the extent that

Cameco strategy is being emulated by others, we’re in a much different environment, we see a Kazatomprom behaving the same way, Orano behaving the same way. The big actual producers are all saying the same thing we’ve always said, which is we need to see demand expressed into the market before we increase our production. So even in Kazakhstan, they’ve gone from having a huge supply of production with very few committed sales, to lots of committed sales and actually struggling with production. That’s very supportive for the market going forward. It’s very different than the last time.

And I would say the fourth fact that I’d leave you with. So we never sell below the market. We never miss the market moves. We never oversupply the market. And the fourth fact is, what we successfully do is we bring you exposure to an upside and incredible downside protection. So as this market continues to discover stronger incentive pricing, we will capture that and forward contracts better than anybody else does. But more importantly, should anything happen from a macro point of view or an industry point of view, we protect you from that.

Just go back and look at the years post-Fukushima, as the uranium price went all the way down to $17 per pound 17. Today, it’s $75 in the long-term market. As it went down to $17, our average realized price dramatically outperformed the market, to the point that we remained an investment-grade company through the lowest price off cycle in the history of the uranium market on a cost adjusted basis.

So our strategy based upon our approach gives you incredible upside participation, incredible downside protection, because we understand exactly how this market works.

So we jammed a lot at you. I’m happy to take a few questions. I think we have a little bit of time. Yes.

Question-and-Answer Session

Q – Unidentified Analyst

(Indiscernible)

Grant Isaac

Yeah, so for those who couldn’t hear the question is about utility contracting. And as you saw from and maybe I’ll just jump back to it. I’m going to the slide with the right-hand panel being the flow of demand. What you see is that utilities are bringing more and more demand into the market, they are focused more on security of supply than they were just a few handful of years ago.

As tenders go out as volumes go up. And as timeframes go up, it really turns the conversation back to producers only. So a Utility no longer has the choice to say find a financial intermediary to carry some pounds from an oversupplied spot market. Well spot markets way above the term market right now. So then, I would say the producers are in a lot stronger bargaining position. And as a consequence is Cameco, where we like to operate is in the term market, but not on the competitive RFP side.

We have our most success in what we call off market negotiations with Utilities. These are the bilateral negotiations with Utilities, where they come directly to Cameco. They know what we need in a contract, the types of terms and conditions that we’re looking for. So they might go into the market with an RFP and it might be bid by some of the state-owned enterprises quite aggressively. We’re okay to lose that business. Because it means we’re going to have one of these off-market bilateral discussions.

So tenders are going up, that market related exposure we want is easier to achieve. And of course, as the market price goes up, our ability to grab higher floors, higher ceilings, and lock those into long-term value improves.

Not every utility is feeling that kind of pressure, I would say there’s a group who had to respond very quickly post the Russian invasion of Ukraine, Central and Eastern Europe, parts of Western Europe. We’ve seen a lot of that demand hit the market. That was the early step ups in term demand volume. We have a set of utilities who maybe weren’t as exposed to Russia but we’re looking at it uncovered requirements and saying well with new entrants into western demand like Central and Eastern Europe, maybe I should put my oar in the water and make sure I’m laying claim to future uranium and conversion.

But there are a group of utilities who don’t believe that it’s an issue yet. They look at the Russian invasion of Ukraine and they say, well, hostilities will end and Russia will pay some sort of reparations and there’ll be invited back into the Nuclear Suppliers Group in a big way. And then all of these junior projects will come on, like they say they’re going to come on. So I’m not worried about it.

It’s quite frankly, not a bet I would be taking. And we’ve seen those folks before, kind of be the last movers. And then they’re the most marginal buyer at above replacement rate. And that’s when real value creation happens. So the market isn’t fully in gear yet, as shown by that number, 160 million pounds a term contracting. It’s been as high as 260 million pounds of contracting.

So the market has a ways to go and we just want to be strategically patient. Wait for that demand to be revealed, and then make the right production decisions on the back end of that demand, but not try to front run demand with supply. That’s never worked in our industry. Yeah.

Unidentified Analyst

(Indiscernible)

Grant Isaac

Yeah, so the key thing to remember about our financial performance is, because I’ve discussed it, the way I have that is, we layer in the contract homes first. And then we plan the production. We’re actually in the early stages of participating in this cycle. We’re coming out of a period where we had 70% of our production shut in as part of supply discipline. We’re bringing that production back, we’re still not even at full Tier 1 rates, let alone at Tier 2 rates. And so that ability to grab that value going forward, just continues.

So if you believe uranium prices are up into the right, then our financial performance will continue to go up and to the right. So we’re emerging from this very deliberate supply discipline strategy, back into much stronger earnings and cash flow, just from the uranium segment, similarly from conversion, and then of course, the fabrication aspect that Westinghouse participates in is really important.

Apologies, folks. I’m seeing that the next session is up. Thank you for your questions. Happy for you to follow up. Appreciate your time.