Cameco BMO Conference Transcript
2014 BMO Capital Markets 23rd Global Metals and Mining Conference Cameco Corporation Presentation Transcript
Date:
Tuesday, February 25, 2014
Time:
12:10 PM ET
Presenter:
Tim Gitzel President and CEO
Caution about forward-looking information This presentation includes forward-looking information or forward-looking statements under Canadian and U.S. securities laws, including our expectations regarding future world electricity consumption, the number of net new reactors we expect to be built, our expectations regarding future uranium supply and demand, our future uranium production targets and forecasts, and our forecasts relating to mining, mine life, production, development and other activities. This information involves risk and uncertainty, including the risk that we face unexpected development and operating risks, the risk of disruption of our operations, and the risk of changes in regulation or public perception of the safety of nuclear power plants. In addition, we have made assumptions in drawing the conclusions contained in these statements, including assumptions regarding future demand for uranium, production levels and costs, mining conditions and our ability to continue our operations without any significant disruptions. Additional information about the material factors that could cause the results to differ materially, and the material assumptions we have made, are contained in our current Annual Information Form and our current annual MD&A, which are available on SEDAR. Forward-looking information is designed to help you understand management’s current views of our near and longer-term prospects, and it may not be appropriate for other purposes. We will not necessarily update this information unless we are required to by securities laws.
EDWARD STERCK (BMO CAPITAL MARKETS): So starting this afternoon I’d like to introduce Cameco, which is one of the world’s largest producers of uranium concentrate. And it has operations in Canada, the U.S. and Kazakhstan, and exploration properties in Australia and Niger. Cameco operates uranium refining and conversion facilities in Ontario and also owns NUKEM, a nuclear fuel trader based in Germany.
Here to give us an update on the company, please welcome Tim Gitzel, Chief Executive Officer.
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TIM GITZEL (PRESIDENT AND CEO): Well, thank you very much Ed, for that kind introduction. Good afternoon everybody, great to be back in beautiful Florida. For me now, not to be missed a BMO Conference—once again, most, as I said to Ed earlier, well organized and very productive. So we appreciate that. We also appreciate the opportunity to get out of Saskatchewan for a few minutes. When we left on Sunday afternoon, it was minus 40 degrees, that’s Fahrenheit, Celsius, same thing. It was plus 80 when we got here so that’s a bit of a temperature swing so I’m not sure we’ll go back.
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Before we get going too far, we’ve got some friendly reminders that our presentation includes, of course, some forward-looking information based on some assumptions, and that actual results, of course, could differ materially.
We just put out a new MD&A a few weeks ago, you might have seen it. If not, please have a look at that. As well, we put out our AIF just recently as well, so you can have a look at that.
Okay, so for those maybe in the crowd that are not as familiar with Cameco I can tell you that today we are, as Ed says, one of the world’s leading uranium producers, supplying, today, about 15% of the world’s uranium. We also provide the conversion services needed to produce nuclear fuel through our operations located in Port Hope and in Cobourg, Ontario, up in Canada.
Today, we have over 4,000 employees and contractors around the world in Canada, in Australia, Kazakhstan, and right here in the U.S. we have production in Wyoming and Nebraska. We have very strong operations. We have a strong contract portfolio and we are, we believe, very well positioned as a company to help meet the growing demand for uranium into the future.
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I see from looking around, I’ve met with some of you already over the last day and a half, and I know you’re very busy, so I’m going to try and get to the point and set out maybe the three key messages that I’d like to leave you with today if I could. For those of you that know us well and that meet with us and follow us often, you’ll know our messages haven’t changed a lot in the last while from what we’ve been saying.
So here’s the messages. First, the long-term story for our industry is a growth story. If you look at the supply demand fundamentals of our industry, and we’ll take a look at those a little bit later, you’ll see they’re very strong.
Second, we see our industry today continuing to grapple with some challenges and uncertainty in the short to medium term as a result of the Fukushima accident, that is now coming up on its third anniversary.
And third, I can tell you that at Cameco we have a great asset, a suite of assets, a very dedicated team of employees, and a strong strategic plan to grow our business profitably over time. That plan is designed to help ensure that we’re in a position to both weather the uncertainty and take advantage of improving market opportunities as they arise.
So I’m going to start with a little bit of the big picture and then I’ll take you through some of the important industry details and nuances, and finally I’ll talk a bit about Cameco’s place within that context.
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The big picture for us has to do with global energy, and, of course, electricity demand, which only continues to increase in step with the world population and development. Today, as you know, there are over seven billion people on the planet and that number is expected to climb to about nine billion people by 2050.
Linked to that rapid population increase are rapidly expanding economies like those economies that we watch, China and India and South Korea and Russia, and now countries in the Middle East that are consuming ever-increasing amounts of electricity. And in those cases we’re not talking about requiring incremental additions to the grid, we’re talking about installing huge baseload power, that fundamental 24-hour power that’s needed to power things like health care systems, like transportation systems and education systems. In short, most of the conveniences that we in the West often take for granted.
The end result is an expectation that energy consumption and electricity consumption will be 70% higher by 2035 than it is today. So governments and utilities around the world are adding to their electrical grids, and in many countries nuclear power is an important part of their energy mix.
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This becomes evident when we look at the level of growth in reactor construction around the world. Today, there are 433 operable reactors, that is reactors that are connected to a grid. We see that growing to 526 reactors over the next 10 years. That’s real growth. Seventy of those reactors are under construction today. Those reactors have received their licences, they’ve had concrete poured, and they’re installing forgings. This is real, visible, tangible growth at a level, as I say, that we haven’t seen probably since the late 1970s.
Of course, as a mining company, when someone says “more reactors” what we hear is “more uranium” because that’s what more reactors means for us. So, today, uranium consumption sits
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at about 170 million pounds a year. That consumption is expected to grow to about 240 million pounds over the next 10 years. That is an average annual growth rate of about 4%, that’s a pretty exciting story for us. And you can see why we think there’s such a strong growth story from the demand point of view.
Of course, the other side of the equation is supply. Already, today, there is a real gap that exists between consumption of uranium and primary supply. The practice isn’t new, this has been a long-standing feature of our industry. Since 1985, consumption has exceeded primary production, with the gap being filled by what you will know is secondary supply.
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The largest source of that secondary supply has been the material from the Russian – American Highly Enriched Uranium Agreement, or the HEU Agreement as we call it. That agreement, which saw over 20,000 nuclear warheads dismantled over the past 20 years, ended last year and is a significant loss of pounds on the market. If you think of it in mining terms, it would be like losing a 400 million-pound mine that has produced 24 million pounds annually over a 15year period. You can imagine the market impact of losing the pounds from that kind of mine.
Today, at Cameco we have, perhaps, what might be the closest thing to it, it’s a real mine, it’s called McArthur River. McArthur River is the world’s largest high-grade uranium mine, with average ore grades of about 16%, and in 2013 achieved the highest annual output from a uranium facility ever with 20.13 million pounds of production. We’re looking to increase McArthur, but even with that increased production from McArthur and the new Cigar Lake mine, which is coming onstream this year, we still won’t be able to replace the reliable 24 million pounds generated annually from the HEU Agreement over the last 15 years.
With the completion of the HEU Agreement, and with other sources of secondary supply continuing to draw down, we know that there will be a greater reliance on primary supply at a time when production is growing more uncertain. Over the last couple of years, we’ve seen future supply eroded as projects including our own are delayed or cancelled because they become uneconomic at today’s uranium prices. The longer this remains the case, the greater the gap between supply and demand could become.
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So you can see that the supply story over the long term is equally compelling, and combined with the demand side makes a pretty good reason, we think, to get excited about the future. But that’s not to say that our industry isn’t facing challenges in the near to medium term.
The events in Japan, as well as global economic slowdown, have had a significant impact on our industry in recent years, and the effects continue to linger. In 2013, market conditions deteriorated as Japanese reactors remained idle for yet another year, and as unexpected shutdowns occurred here in the United States and in South Korea. The resulting erosion of demand is clearly reflected in the long-term contracting volumes that we saw in 2013.
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In a normal year, a typical year, we would see somewhere in the range of 170 million pounds being committed under long-term contracts. In 2013, the volume came in at just 20 million pounds. That’s an order of magnitude less than usual, and an historic low. The really interesting part is that this is the time where we would expect fuel buyers to be in the market placing volumes under contract. Utilities usually fill their requirements about three to five years before they need the material, and I can tell you we’re well within that window now, and we believe that utilities’ requirements begin to open up significantly after 2016.
So what’s going on here you might ask? Well, a couple of things. First, even though the utilities are within the period they would normally be contracting, they’re not under any pressure today to do so. They’ve got time to wait it out and see if the price keeps going lower because of the uncertainty in Japan. Actually, it’s been a smart move because they’ve been rewarded for it with lower and lower prices. And on top of that, I can tell you no one wants to be the person that calls the floor too early and causes a rush back into the market.
The second thing going on is that producers like us have stepped back as well. Today, we have a strong contract portfolio that provides some significant protection through the period. We’re heavily committed out to 2017, and our average realized price has been above current spot prices. So why would we sign long-term contracts fixed at today’s prices? The answer is we won’t and we’re not. So the very low contracting we’re seeing is a reflection of this, what we call,
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“a cordial stalemate” between fuel buyers and uranium producers. Those are, we believe, the pieces that are contributing to and sustaining the challenges our industry continues to face, the “fog of uncertainty” as we call it.
The question many are asking is when that fog will clear, and that’s a difficult one to answer, but there are some signposts we’re watching. First, it won’t surprise you to hear, is reactor restarts in Japan. There haven’t been any yet, but there has been some movement. We see a pronuclear government running the country, we see a new regulator in place with safety regulations and standards that have been established, and we see a lineup of about 17 reactors waiting to be reviewed for restart. In addition, just today we understand that a draft of the new energy plan for Japan was released last night which confirms that nuclear energy will continue to be an important part of the energy mix in Japan going forward. So that’s a good piece of news. We’re hopeful there will be start-ups in 2014, but, like everyone else, we won’t know when or how many until they happen. This is a first-of-a-kind of process that we’re seeing happen in Japan and we’ll just have to see how it goes. As I said on our recent conference, call I have quit predicting restart dates; I’ve been wrong every time. That said, once restarts do begin, the next signpost will be how long it takes for the excess inventories to clear the market and when longterm contracting resumes in a significant way.
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And of course, the continued progress of reactors under construction, as well as additional construction starts, and the performance of supply—and I say “keep your eye on supply”—are all things that we’re watching closely as well.
But until we have that clarity, we need to take measures as a company, at Cameco, to ensure we not only weather the current uncertainty but also retain the ability to benefit when the market turns. That’s why you saw us recently eliminate our target of increasing production to 36 million pounds by 2018. That target made sense when we had a clear line of site to the demand growth in the market from the near term through to the long term. Lacking that clarity in the near term, we need to be able to adapt quickly as changes occur, and, frankly, pinning a 36 million pound target on the wall in a 35 dollar market just doesn’t make sense. At Cameco, we’re not saying we won’t grow, but we need to have flexibility and not be confined by a commitment to a fixed target in a fixed time frame.
This is in line with our long-held focus on creating shareholder value. Value won’t necessarily come from just adding volume, but rather adding the right volume at the right time. We’ve outlined our plans in more detail in our latest MD&A, but we do plan to continue providing an annual production outlook, and we plan to continue to focus on our tier one assets. Like at McArthur River where we will continue to work to expand production to 22 million pounds a year by 2018. Over in Kazakhstan, we just recently got approval from the government to increase our production at Inkai to 5.2 million pounds, and we’ll continue to produce as we did last year at
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that level. And, we plan to ramp up Cigar Lake production to 18 million pounds by 2018. With respect to our other operations, and decisions on those will be made, like all of our operational decisions, with an eye to prevailing market conditions and to profitability. So that’s our plan going forward.
For 2014, our target is to increase production to between 23.8 and 24.3 million pounds. You can see the breakdown among the operations on this slide. And you can see the reason that we have a range this year is the forecast for Cigar Lake. Initial production this year has been targeted at 2 to 3 million pounds total or 1 million to 1.5 million pounds Cameco’s share. That range we’ve put in there captures a number of operational unknowns, like production rates at the mine, and the rate at which the mill can ramp up once the modifications are completed. Those are the kinds of things that come with an initial production year.
I can tell you today that things at the mine are progressing well. First production from the mine is expected this quarter, and we have been jetting in ore. At the mill, our partners at Areva tell us that upgrades are also progressing well and they’ll be ready to begin processing ore by the end of the second quarter. So we’re very close and we’re certainly looking forward to seeing some packaged pounds come out of that project later this year.
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In the end, our primary goal is to achieve results and deliver value for our shareholders. I think we’ve proven year after year our capabilities in that respect, even in the context of challenging market conditions. We’ve increased our focus on efficiency and cost control, resulting in reductions to our CapEx and OpEx spend, as well as our general expenses. In 2013, we achieved record production, record revenue and record average realized price. We had strong adjusted net earnings and we delivered on our guidance.
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So, to conclude this afternoon, I want to return back to my three original points. First, the longterm story for our industry is a growth story, the supply/demand fundamentals for uranium remain very strong.
Second, our industry is grappling with uncertainty in the near to medium term. I say to you: keep an eye on Japan, keep an eye on uranium supply and keep an eye on return by utilities to longterm contracting.
And finally, let me assure you that Cameco has a plan to continue to grow profitably and to take advantage of market opportunities as they arise. So thank you all for your interest, for your attendance today and I’d be delighted to answer any questions you might have. Thank you.
EDWARD STERCK (BMO CAPITAL MARKETS): Thank you very much. I might just start with a question from the app. You’ve obviously backed away from your double U strategy to expand production to 36 million pounds. We have seen some other announcements regarding supply discipline or the shutting down of operations due to operating costs and the current uranium price environment. Have you had much feedback from utilities in terms of their response to these changes?
TIM GITZEL (PRESIDENT AND CEO): No, we haven’t had much response from the utilities. You know, I think, as I said, pinning a 36 million pound target on the wall and saying we’re going there isn’t the right strategy in this
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market. And we’re not alone. I see others in the crowd that are making moves. And so $35 is just not a sustainable market for some operations and certainly not a market which would incentivize any of us, I think, to move forward with production.
EDWARD STERCK (BMO CAPITAL MARKETS): Thank you. A question down here, it’s Mike Schramer (ph.), coming down to you.
AUDIENCE PARTICIPANT: You mentioned that long-term contracts fell to 20 million pounds last year. Any guess as to what the average price from those contracts was?
TIM GITZEL (PRESIDENT AND CEO): Well, there was so few I don’t know, and I don’t think they were ours so it would probably be in line with the long-term price as published.
AUDIENCE PARTICIPANT: Which would be – right now?
TIM GITZEL (PRESIDENT AND CEO): The long-term price, it’s published, is 50.
PETER MYERS (BMO CAPITAL MARKETS): Thank you. It’s Peter Myers from BMO. The restarts in Japan, the process that they have to go through, is it industry, regulatory, what’s the presumed process they actually have to go through to restart?
TIM GITZEL (PRESIDENT AND CEO): Yes, so that’s been quite a process. If I back you up to probably December of 2012 is when it started, when the Noda government left and the Abe government, on a pro-nuclear ticket. They said, “we’ll put in a strong regulator, we’ll put in a strong regulatory process and standards; any utility that wants to start up a reactor or run a reactor will have to meet those standards, and so – and we’ll do that by July of 2013.” They did all that: 17 reactors in the queue today being reviewed. We heard at the start it would be about six months, maybe six to 12, well we’re probably eight months in now the review going on. A few pieces, in the meantime, an election in © 2014 Cameco Corporation
Tokyo that I think was positive for nuclear. There was some more prefectural elections. Last week I think you saw the Minister of Government in Japan asking about when we might expect some news on that, and then last night we saw the draft policy that includes nuclear. So things are lining up nicely as they go along. It’s just taking longer than we thought it would. We thought – I can tell you I was completely wrong when I said there would be reactors operating by the end of last year, there’s not. So we’ll see what happens this year but that’s the process, approval by the regulator, I think, the federal government, and then there’s a prefectural approval as well which is not to be taken for granted.
AUDIENCE PARTICIPANT: If you could just talk us through your balance sheet and if you’re spending less on new projects, is there the potential for capital returns at all or what’s the structure of the balance sheet like now?
TIM GITZEL (PRESIDENT AND CEO): Well, you know, we’re just coming off a fairly healthy spend at Cigar Lake last year. We had a healthy spend there again this year at McArthur River, so our capital, and we disclose it, is coming down. We’re just adjusting our Bruce Power interest as well, which leaves some cash in the house. We’re very prudent. We want to maintain our investment grade rating. We have a dividend that has to be paid, and, quite frankly, we’re hoping that the market tells us that we should be investing more money in new projects. So we’ll watch to see how that is. We believe we have some great projects ready to go and we’d love to get them going, but not in this market. So our Board looks at capital allocation and if we don’t have something to invest in we would look at returns.
AUDIENCE PARTICIPANT: The economics and dynamics in Kazakhstan, devaluation on the one hand and the uncertainty of supply on the other how do you size all that?
TIM GITZEL (PRESIDENT AND CEO): In Kazakhstan?
AUDIENCE PARTICIPANT: Yes. © 2014 Cameco Corporation
TIM GITZEL (PRESIDENT AND CEO): Well, Kazakhstan, that’s a miracle country. When I look – I was looking on the way down – a third of the world production, a little bit more even, today comes out of Kazakhstan. Ten years ago it was close to zero. So you wonder where we’d be without Kazakhstan. You know, they ramped up very quickly with the French, with Canadian, with American, with Chinese technology, people and cash to a point now where there’s – I think they produced 22,500 tons last year, a third of the world production comes out of there. We’ve heard from Dr. Shkolnik that he plans to maintain production at about that level and I think we believe him on that. So Kazakhstan, a great place to do business. We have a great joint venture with the Kazakhs and I know others do as well. The question is how high can they ramp up if things get better, and I think they could probably do a few more thousand tons without too much difficulty, but they’re not going to solve all of those issues going out, going forward. The devaluation of the tenge surprised us a little bit, I think. We didn’t realize that. But, that said, it didn’t really change or move the needle for us. We’re seeing labour costs go up fairly healthily in Kazakhstan so I don’t think it will change anything on the production side.
EDWARD STERCK (BMO CAPITAL MARKETS): With the shift towards more strategic ownership of uranium mine capacity, for example – Rosatom buying Uranium One, how do you think this impacts the supply-demand balance, and is the market tighter than the numbers suggest?
TIM GITZEL (PRESIDENT AND CEO): Well, I can tell you at conferences like this it’s hard to get four of us together for a round of golf, there’s not a lot of players left that trade on the market. But we are facing the sovereigns, whether it be the French, the Russians, Kazakhs, Chinese, but you know I think there’s room for an independent player like us. I don’t think it’s going to change the supply-demand fundamentals. If we’re right on our demand assumptions – and we see 93 net new reactors over the next 10 years – 70 are under construction today so you can pick your own number. But that takes you from 170 million pounds of demand to about 240, and today we’re at about 160 million pounds of production. There’s a gap there, and one thing we’re notoriously not good at is bringing on new production in a timely manner. So the longer we wait to pull any investment decisions, the longer it’s going to be to bring that production on. So that’s why we stayed short to medium term, still material floating around, HEU, the Japanese thing not resolved yet. But © 2014 Cameco Corporation
once that clears up, then if you go back to the straight supply-demand fundamentals, it looks pretty good and we’re going to need some new production coming on.
EDWARD STERCK (BMO CAPITAL MARKETS): So I guess the follow-up question to that would be what is the catalyst to bring the utilities back?
TIM GITZEL (PRESIDENT AND CEO): Yes, I don’t know. We’ll see who wants to be the first in. I think right now, as I say, they’ve been rewarded sitting on the sidelines. I think the price went down $0.10 again on Monday. So there’s just not any anxiety in the system, no tension in the system at this point. I think if the Japanese do get their fleet started it’s not going to move the supply-demand needle in the short term, but it’s going to change the psychological needle saying that material is frozen now – okay, we’re not going to see that all come washing onto the market. So that you can put that aside and say now what, now what do the market fundamentals look like and then it starts to get more interesting.
DANNY MCCONVEY (ROSSPORT INVESTMENTS): Danny McConvey, Rossport Investments. The Kazakh production, the nature of it, I guess you have some of it in the U.S. as well, is there – over five or 10 years – is there going to be a reduction from each well or something? How does that production work and how does it get depleted and could there be a surprise in 10 years’ time that they’re not able to --?
TIM GITZEL (PRESIDENT AND CEO): Yes, I think some fields are better than others. It’s certainly – well, you don’t want to stop drilling for very long because it’s just – it’s like a swarm you’ve got to just keep drilling your way to new production. And so I can only speak for our own Inkai project, we have significant resources there, reserves and resources that we think we can keep producing from for many years. What’s limiting us today is licence term. So we have certain licences in place to a certain time period. After that you either re-negotiate them or you stop. And so that’s more the limiting factor maybe than some of the reserves and resources. And I know some of our competitors have the same issue. So – but you know, there is a curve on all of the wells that you get production coming up and then over time it comes off and you have a requirement to take it down to a certain level so –
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DANNY MCCONVEY (ROSSPORT INVESTMENTS): You’re going to have to leave these wells first, I would assume, so as you go on to the other ones does it get more difficult or more --?
TIM GITZEL (PRESIDENT AND CEO): Yes, well of course we’re miners and we always start right in the heart of it and – you know I – you’d have to go project-by-project in Kazakhstan to see. Some are better than others. I think some are higher costs. You see that even from the public disclosures from some of those in the past. But there’s significant reserves there and I think they’ll be a big player for a long time.
EDWARD STERCK (BMO CAPITAL MARKETS): We’ve probably got time for one last question if – if there’s no more from the floor. Perhaps just one last one from the app then, what is your strategy for M&A? You’re one of the few potential acquirers and the recent asset sale which probably should – I think they mean Bruce Power gives you more cash to play with.
TIM GITZEL (PRESIDENT AND CEO): Yes, we moved fairly quickly after Fukushima. We were fortunate to be in a position to take a piece of the Millennium ore body from Areva that’s right next to our Key Lake Mill that was very strategic for us and we like that one. We also had an opportunity in WA to pick up the Yeelirrie asset from BHP who were moving off of that site, we really like that one going forward. So, today, we have in our portfolio something like 1.2 billion pounds reserves and resources so we’re pretty – we’re in pretty good shape in that regard. So, quite frankly, we’re not looking to add another 100 million pounds at the back end of that. So we’re quite content where we are. We’d love to be able to invest in some of our bullpen projects going forward but the market today isn’t telling us to do that.
EDWARD STERCK (BMO CAPITAL MARKETS): Excellent. Well, thank you very much indeed for your presentation today.
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