Cameco Corporation (NYSE:CCJ) RBC Capital Markets 2020 Global Mining and Materials Virtual Conference November 16, 2020 9:45 AM ET
Tim Gitzel – President and Chief Executive Officer
Conference Call Participants
Andrew Wong – RBC Capital Markets
With us today we have from Cameco CEO, Tim Gitzel. Thank you for joining us, Tim. The uranium market has seen — yes, thank you. The uranium market has seen a lot of action this year. And Cameco actually, I think has been in really solid financial position basically at near zero net debt. And so, I think it’s a great time to catch-up on the story. Tim, I think you’re — once you have some opening remarks first. And then we’ll jump into Q&A. If anyone from the audience has any questions, you can type it into the question box and then we’ll pass it on. So, Tim, why don’t you take it?
Super well, Andrew, thank you very much and good morning everybody with you. Today, I hope you and your families are doing well through this pandemic both mentally and physically. We said here, there’s no playbook for the year, we show up every morning that we see what’s in front of us and we invest in and I’m really happy that team has done a really good job through the Cigar Lake down for a while. [Indiscernible] with all of the precautions that we need to do so we’ll keep we’ll keep doing that, but it’s not easy times.
And it’s actually your team at RBC for putting on this conference, we did refer very much to be face-to-face with you in-person for a while yet. And so, we’re going to have to get used to this format. And so hopefully, I can get to get our message out through this medium today. I prepared a few comments. After that, I’d like to just run through and give you a little bit of a flavor of what’s going on what we’re thinking about here Cameco and then we’re delighted to have some quick questions.
At the end of the same story for us, despite the COVID and everything else that’s going on, what gets us up in the morning is knowing that despite COVID elections and everything else going on in the world population continues to grow, we’re at seven point something billion today expecting another 2 billion people on the planet. In the next in the next couple of decades, a billion of those people today don’t have access to electricity and 2 billion more come onto the planet that one need deserve than are going to get on having electricity.
And what we’re seeing different now is, it’s not just any electricity, they want clean electricity, they want carbon free electricity and that’s the plant. And so, these are two blocks that really we’re seeing a big move to a foundation of energy sources in the world innovation piece, and I was going to give everybody a test this morning and just say tell me how many countries, states, provinces companies, big ones commitment become carbon neutral by pick year date 2030, 2040, 2050 even China 2060, and diamond about fraction of the world fossil fuel generated.
And it’s just enormous asset in front of us. Two-thirds of China’s electricity is from fossils today and by 2060, they’re going to be carbon neutral. I mean, just to say, the goal is enormous. Plus we heard that the other day and I think you’ve heard us on a conference call say, in Florida they want to have 25 million electric vehicles on the road by 2030. And there’s no use putting those on if you’re going to fire them with coal-fired electricity, if you’re going to charge them with coal-fired electricity.
And so, that challenge is out that, put some numbers on that, and we think and we heard from some Chinese scientists that that would require about 200 reactors in China alone just to power those vehicles. And so, you can see the size of the challenge, 200 reactors that’s 100 million pounds of uranium for a year for China. Today, they have a boat 50% or 25 to 30 million pounds and that’s going to go up ironically and we are waiting for their five year plan or 14th five-year plan, which you think will focus on nuclear.
So those pieces are out there. Rest of the world is still moving in at 453 reactors another 50 under construction. I was looking at your numbers presented in morning, before I came in to report I read a very good report, draining demand to grow from 171 where it is today to somewhere 100 in nine years, not long from now. And I think we look at that. If you look at, there’s over 700 million pounds of uranium still procure that are out there that has to be purchased from somebody. And so, the U.S. is number 716. So, you had another year, which isn’t long from now and you’re over a billion over a billion pounds this year.
So, supply this year at about 120 million pound and 171 demand that you are going to have a deficit this year because of the shut down due to COVID in other words. So, these are just some of the things that of get us excited that in the morning, you’re not seeing any investments in new mines right now and nobody is [Indiscernible] cut U.S. read U.S. read trade tech, read anybody, do your own studies, that’s have new mines at 30 bucks aren’t going to go. And so, nobody’s really investing in anything new.
So, I’d say, these are things that keep us on our track on our strategy and keep us doing what we said we would do. And so, what did we say we would do, first we said, we’re going to protect our employees. We’re going protect our employees and the communities around them. It wasn’t easy to take down safe guard. Right now, we’re operating well with a whole bunch of employees in place but — we’re seeing the numbers, especially Northern Saskatchewan with a bit of concern.
On the operational side, we’ve implemented this over the last, what is it under five years now. It was 2016 when we first took down Rabbit Lake in the U.S. pull back it. And then in 2017, we made the big decision to take down McArthur Key completely, which was probably one of the toughest decisions in my career, but what is the 70 pounds in the ground that sort of come out. On the marketing side, we’re purchasing and Grant in his team I think they’ve purchased over 50 million pounds in the last couple of years.
So, you add this together and you get close to 140 million pounds that Cameco has been responsible for either taking off the market, putting into long-term contracts or leaving the ground. And so, we think we’ve done a fair bit of the heavy lifting and we’re prepared to do more to improve. We have been there — we think disciplined on our sales. We haven’t been dumping material at the market and buying and putting into long-term contracts and we’re patient.
We’re patients, you’ve heard us say we’ve got a pipeline with some of our bigger customers off market mostly where the big ones are coming back and saying, we’re looking into the 2020s and it gets a little shaky about mid-decade as to where the [Indiscernible] Rangers are going off. And the great comment that’s going on at the Olympic dam is not going to stand anytime soon. It could take you right to the end of the decade. You’ve got 18 million pounds a Cigar that would — that was the end of the decade.
And so, you could make an argument that somebody should be investing now because it takes us forever to get new ones on, but there’s no market for it. And so that’s the kind of the dilemma we’re in right now. And so we’re working through that. We had some, when talking about this off market deals, we have history with that, we have history — I was there in 2010 in Ottawa signed with the Chinese $15 million there in Ottawa, in 2015 with Prime Minister, Modi in Harper, where we signed another big deal with the Indians. And then Navistar 2018 another base, so these are big chunky deals we call them agreements that take a long time to put in place, but when they do, they run for 5, 10, 15 years. So we’re working on some of those.
Financial side, I’ll just say this about their finances were in good shape. The balance sheet strong credit, our team for keeping this company in very strong shape, be able to self manage, you will see run on the debt market. And not long ago, we refinanced for debt to those who do not even the next year, but in 2022. We still have very good favorable rates. And we reset that maturity to 2027 at 103% coupon rate, which we thought was very helpful for the Company. And so, we’re good, we’re good in that respect as well, company is strong.
And the last point I’ll say, and I’ll turn it over to Andrews on the ESG front. Very important now we spend lots of time with our shareholders and now on ESG, and how we’re doing on the sustainability front. And I would just say that’s in our DNA, at Cameco has been for many years. We’ve always put the emphasis on people on indigenous communities on the environment, and the fact that our product produces no greenhouse gas, when it’s used in react fugit that.
So we’re optimistic — it’s tough, it’s tough every day, you have to be cheerleader for several people every day instead of going but company’s strong. And I like how the industry is shaping up for us and I think there’s some really good days to come.
So, Andrew, I stop there, and then turn it back over you.
Q – Andrew Wong
Yes, no, that’s great. And that helps, I guess frame the story I think for Cameco. So let me start with just on the Company side. As a company, like you just mentioned, you’re in a really good position with very low to almost net debt zero, low cost production already to start off at MacArthur. So not to simplify things to watch, but what’s the strategy going forward is a strategy basically to wait for uranium prices to improve and just keep everything going until that happens. Or are there other strategic actions that you could take as a company in the meantime?
Well, if you look at the way we’re setting the table now, we’ve unfortunately had to take our big assets down MacArthur Key is down. And that’s hard to describe everything in the world shouldn’t be down at the moment. But until we can refill our contract portfolio, then we’re going to keep it down. And so, you have to teach us this or you’re going to make it in any market, we’ve got the McCarter, we’ve got Cigar, and we’ve got Inca, all tier one hole in the low teens, the mesh class.
So, if I paint a picture for you going forward to where we positioned the Company is to refill our contract portfolio at prices that are acceptable, that reflects the cost of production, and you see him I think, Triva and Trade Tech has put out some numbers that kind of show where that might need to be getting closer that that’s, that’s so you can refill your contract portfolio in that in that region, area code.
And then, you see, he could produce probably £25 million to £30 million at low cost. That’s a good day for Cameco. At the same as our fuel services division is running, we’re up running harder there. We’re running full speed at this. And we suddenly play out in conversion where for years, we were in the desert, and we were just giving this stuff away. All of a sudden, some shutdown and that bunch of supplies taken and then all of a sudden people said, Oh, where’s the food come from?
We went from $5 conversion today $20. And so, we will we see that in uranium? We don’t need to I mean, the spot price today is 30 and term price is 35. Yes, it has to go higher, but it’s quadrupling isn’t necessary. So, if the Company and I look forward, and you can refill a contract for portfolio, our asset uranium run our fuels services. CFM has got great contract actually proves them will be in good shape. Cameco will do very well.
Good. Okay. ESG also I think has become a very hot topic this year. It has come up over the last couple of years, but especially this year, I feel like and Cameco I think is an interesting position. I think if you provide fuel for zero carbon, nuclear power, but nuclear does obviously come with the traditional reservations that come with nuclear. Can you just talk about how Cameco stacks-up against your peers on ESG and blenching Cameco to better highlight the Company as an ESG investment and the Company’s contribution to that zero carbon future?
Yes, well, as I said in the opening comments that the whole world now is looking at electrification and decarbonisation, what are those two words and then watch the commitments is my test to watch the committee’s to be a carbon neutral or whenever, 10-years, 20-years to catch your own problems. You say, we’re going to be carbon neutral by 2030. Today, we have 75% of electricity, coal-fired with some gas. That’s a huge transition even for a small problem like this.
So, what’s the question say? Well, more when mills hauls more solar? Yes. But they’re going to look at SMRs now. So nuclear is very common to all of those conversations you’ve heard in the Canadian Federal Minister Seamus arena said we are not getting to neutral by anytime without involving nuclear. That is just some hope. Again, we’ve seen the move. I’ve been in the business for 30-plus years. We’re either at the top or we go off the cliff for a while, but eventually you come people look at the options and say nuclear has to be in the picture.
You have asked about ESG for us, so that’s a mental safety clear, no greenhouse gas waste to deal with. Yes, absolutely, but so far in the 50 years, we’ve been nuclear, but we are managing the waste and there are long-term solutions that are being put in place. Some countries more advanced than others, but we have a solution. On the people, the social side, we’ve always had a people policy at our mines, where we’ve been known as the largest industrial employer of indigenous people in Canada for many years, some 45%, 50% of our employees up north are from indigenous communities where there’s not a lot else to do, like I can tell you that not all industries.
So, that’s been a bonus here. We look out after people. We have a people policy. We put their health and safety first and we’re moving heavily into diversity of our employees and pay equity. All of those things are important. And then, on the governance side, watch the reports that come out, you’ll see we’re near the top as far as governance goes. We have a strong board, independent board, diverse board that ESG in our sustainability. And so, we think it’s a real competitive advantage for us and we talk to our investors to about find same thing.
Okay. It looks like we have a couple of questions. So, why don’t I take some of those right now? Some of them line up with what I wanted to ask anyway. So, on the CRA front and obviously it was disappointing for you when the CRA appeal to the Supreme Court. Can you talk about as much as you actually can say how you feel about, what the outcome like? And being obviously had two favorable rulings from two previous courts on your side. Now what’s the status of just getting that $300 million back and if you do get it back, what would you be doing with that in your much better financial position?
You have to — tonight. I’ll give you two of them. The extreme disappointment I guess would be the first one. I just think because he was CRA playing fast and loose with the rules and with the careers employees by going yet again and after two clear decisions from the court and two appeals so two courts for judges the unanimous say Cameco did the right thing. I can tell you, we would have done the right thing. This case is now 10 years old in the story is 20, but that’s not how we run. The things that are accusing us of that’s not how we run the Company, and I think the court agrees with that.
So, that’s where it is. We’ll see where it goes where they applying or they apply for leave that be a few months before. So, the Supreme Court whether they’ll hear the leave application. So, we’ll wait for feeling ready to fight on. I can tell you that, my resolve is not one respect. In fact, I think, in the first two rounds have helped all of us and our employees feel confident and comfortable right side of this, and we’ll take it at the end. We’ll get right to the end. And so that’s yes, they’re sitting on a lot of our money in financial capacity. I think about $303 million of cash and another $500 million in the embedded letters of credit to plus the amount of costs.
We’re obviously applying to get all of those back now with the two wins we’ve had, but of course, that will get drawn into the court decision as well. And I was successful or not, you can imagine this year we’ll be saying, well, let’s just wait the whole thing gets resolved and push the money onward supposed to go. So, that’s where we believe we’re going to win one place there — you’ll get our surplus cash back there. And if that’s at a time when the market is improving and running that’s days for Cameco.
There will be questions to ask at that time. We will talk about returning money to shareholders, or when we’ve always said, we’re not ever going to be the bank account for our shareholders that’s not what we want to people. But right now, we have to be prudent with that case, hanging out there. We see if there are other at some point, we’re going to have to invest in a new project and so we’ve got a couple of realtors in Australia without Cigar face to the markets that. So that’s coming out again into crystal ball that one for you, but I can tell you if we’re going to fight on with this CRA and make sure justice prevails and we get our money back and can move on.
Okay. Why don’t we turn a little bit to the market because obviously that’s going to be top of mine for a lot of people, and just when I talk to people in the industry, utility side, producers, consultants, I’d say it’s pretty unanimous most — the vast majority of people that say that the price is probably going higher. And I understand the reluctance to be the first one to step into the market for utility. So what catalysts need to happen for those utilities to come into the market and actually start being more active in the term market? What series of events might we be looking for?
Well, I can think and not to blame everything on COVID, but it is something anybody anticipated. I think everybody’s been distracted by COVID. Can you keep your plants open? Have you got the people? How do you deal with your plants? Are plants going to be running? How much efficiency is going to be required? That’s for clearly in 2020, we’ve seen that all over the place. So I think a lot of utilities are sending us an inventory. That’s why we carry inventory.
Let’s dip it into our inventory. If you order this material on the spot market, let’s just pull off a bit on the spot market and not make the long-term commitment until you have some more visibility as to what is going on. So that COVID I’d say, at least in the U.S., you look at the trade actions, the election, maybe with the trade actions, the 232, which morphed into the nuclear fuel working group. The Russian suspension agreement, there’s been Iran sanctions and all that stuff’s been hanging out there too, which is a bit of anybody.
As long as there is no real sense of urgency or we’re really running short pounds. They’re willing to take a little bit more risk. And I think we’ve seen that from some of the supply reporters to say, yes, inventories are down. They have to be down. We haven’t been producing. And there hasn’t been a lot of buying. I think we’ve seen I think is about 40 million pounds this year on the term market, which is when you’re consuming 170, that’s hardly report.
And then you see, probably double that on the spot market, but we will tell you half that churn 25 of it is what we bought. And so you just say, it was something else doesn’t take you back again to those numbers for the next nine years. There’s 700 some more to be procured. And they’re not going to come from where come from that and they’re not coming from Cameco. And so I think it’s tightening up and there’s pathways convergence and sense of nervousness or maybe a no bid on it on an RFP with the get people interested to bid more in the market.
And we try — when we go out, looking for as grant often says, we look for market price at time of delivery, and nobody wants to give us they want to pay today’s price escalated. Because that would tell us that they’re a little bit more nervous about the future and that the price is going to be in the future it is today. And so that gives us some optimism and we’re patient. We still have a decent portfolio of contracts. I think we have 20 million pound sold per year over the next five years, not even but working on adding to that.
So yes, I think 2020, you can’t do that as a normal, you hear a lot of strange things happening. But I think you can get things starting to normalize ’21. And he’s looking into their coverage or what we used to keep the three years of stock or two years now one year, we better build that back up, and they’re feeling nervous. And by the way, where is it coming from, and as movie are intended, that’s can also we’re patient, we’re optimistic and I entered the market to be 10 people in the way we’re going, it’s just not a sustainable market.
All right. And I think I heard earlier this year, there were some RFPs from utilities, they pulled them back because they because they didn’t get the pricing that they wanted or the terms of that they wanted that. So, is that something that you guys are seeing as well and is that sort of activity that that may be happening?
We’ve seen stuff and I’m sure it still is a buyer’s market. They can go out there and put that out and see what they get for bids. And if it’s a couple of hundred thousand dollars, people can put those in and put them out there and some sellers are willing to sell it today’s spot price escalated and sell, but there’s not very much of that to say you see by the numbers on the on the terms by £40 million is not a lot of pounds, probably the lowest.
And what we’re meant to remember, Stephen Lewis does seem to kind of 23rd working there was just nothing transacted on the term markets. And we haven’t kept up on the term market. The first and third market, normally, so many percent have been on the market. So, that’s going to have to catch up at some point. And when I got into the middle of the decade, and see where elections coming from next year that is quite frankly, right. From the supply there are two sort of crawl on the abilities.
And so let’s see, and I’m not talking about me any lot who kind of runs have had a bit of a cataclysmic, of course, in the early Cigar Lake flood in any given time from full ’01 or ’02 to ’05 or ’06 for the Chinese buying. And oh, don’t worry Cigar Lakes coming with 80 million. And then we that one went underwater, that really blew the price. And then we thought in 10th again, June of 10th when we as came back to normal price was 42 a pound which was okay if the.
And the Chinese came in and bought 150 pound million in one month, June, 50 monthly from the Kazakhs, 50 from the French and then the price went to 72 very quickly, so the price goes when you visit the events and people get nervous. Then everybody tries to squeeze through the door. Price went up to 72, right, and we’ve been living almost 10-years now post Fukushima.
So, it a strange market, but there has to be tension in the market, and we haven’t seen it post Fukushima. Just because, they took 54 reactors down and you were still producing uranium, like they were still on the planet operating and might be back within six months to a year or in 9, 10 years. You’ve got 9 and more operating, 16 approved and only a couple dozen more to come, but we’ll see all that stuff.
Right. Okay. And, I mean, you mentioned China and China was a pretty, pretty big part of the catalyst questioning uranium prices up last time. They’ve been really active in the market. They’ve also built up a bit of a stock pile. They have some production in other countries now, like an Africa. What approach you think China will take towards the market over the next decade? You obviously have a lot of reactors and need uranium, but they also have some of their own.
We need to watch what they do. They’ve pretty much said, they’re done what they said they were going to do [Indiscernible]. They said they’re building reactors. They said they were putting down 58 units by the end of 2020. I think they’ll only have 51 and 52 and people fall at a crisis. So, we’ve got another 10 under construction. At a height, they didn’t start any new ones, while they were trying to get their first. I wouldn’t call that the real unsuccessful event. I think having 50, 51 or 52 running with 10 more under construction is a good result and lots more to come.
And again, the President just put carbon neutral by ’26. I can tell you, you won’t get even close to that unless you go nuclear or electrification of the transportation system. Where the electricity come from, so they said they would do. They said they have three-prong approach. They would do, but it’s not very much. And we always hear about 2000 tons, 5 million pounds. I think that goes into their own or and they keep that for themselves in China. They said, they’d go out into the world and produce. And they’ve done that. We’ve seen stuff clearly on economic interview, but built it anyway, but that’s how they say. They don’t want to be beholden to the outside world for all of their materials.
So, who’s picked up grossing? So, I think that brings probably 10 or 15 million pounds to them. But then they have to go out and buy the rest and produce the rest. Yes, they bought a lot in the past to fill their cup for which they need are known to do. But if they build up the way they’re talking about building up more in the cupboard. They don’t worry about 2021 or 2022. But when you get to the middle of the decade and beyond, and they’re bringing on new reactors, they say six to eight a year. Those things are going run for 60 years.
And I’ll tell you there is no more McArthur River in 60 years. Unfortunately, there’s no Cigar Lake in 60 years and there is no [Indiscernible]. So that tells me at some point, the market has to pick information and move it forward and process. And the sooner it does that and starts thinking and our Board starts thinking about where’s my next thing, what’s their next game because we were no [Indiscernible] 7 to 9 to bring new production on. And that’s the part that we did to get, but we can’t at these prices. So, there is an inflection coming and hopefully it’s sooner rather than later.
Okay. That’s great. I think that’s all the time you have today for our chat, but if there are any questions that are coming in we have to pass them along. And thank you very much, Tim, for joining us today and all the best.
Thank you, Andrew, thanks to you and RBC. And we appreciate the work you do and all the best everybody, and please stay safe and healthy.