CCO BMO 2017 TRANSCRIPT SLIDES
BMO Capital Markets 26th Global Metals & Mining Conference Cameco Corporation - February 28, 2017 Page 1
Presentation Transcript Cameco Corporation February 28, 2017 10:00 AM EST
Ed:
So we’re moving from the fertilizer industry to the energy industry with uranium. I’m pleased to introduce Cameco. Cameco is a Saskatchewan domiciled company with assets in Saskatchewan, in the U.S., in Kazakhstan. It produces around 32, I’m sorry, it produces 25-26 million pounds uranium, sells around 30 million to 32 million pounds of uranium every year. Presenting today we have the CEO, Tim Gitzel.
Tim Gitzel:
Thanks, Ed.
Ed:
(inaudible).
Tim Gitzel:
All right, good morning everybody. Thanks, Ed, for that kind introduction. Great to be here again in lovely Hollywood. Florida doesn’t usually take a lot of convincing to get us from Saskatoon to come to Florida in the middle of February. I think it was minus 20 yesterday morning in Saskatoon. So just want to say thanks to Ed and the folks at BMO for inviting us again. This is really a first-class conference and the turnout we get on the one on one’s and in these group meetings are really impressive. So thank you for that, Ed. All right, before we get started I just want the usual stuff, pass on our friendly reminder that we’ll be looking at a little bit of forward-looking information here based on some assumptions and that our actual results could differ. We just put out a brand spanking new MD&A recently. So you can look at that. We have an AIF out there with lots of information for you as well so you can take a look at that.
BMO Capital Markets 26th Global Metals & Mining Conference Cameco Corporation - February 28, 2017 Page 2 I want to spend the next few minutes if I can just giving you a brief overview of the current state of our industry. And then I’m going to talk about how we at Cameco are really trying to navigate through these. And I was searching for the word, I use interesting because it’s broad enough. These interesting times that we’ve been in. And it’s hard to believe maybe for some of you, but we are about ten days away I think from the sixth anniversary of the Fukushima accident. Of course that’s an accident that really determined the course of our business. It has determined it over the last six years, and has really driven uranium prices to what are today unsustainable levels. You’ve heard me say this before. You’ve probably heard our CFO, Grant, say it before and it remains the case today, current uranium prices are neither rational nor sustainable at the levels they’re at today. Even at the $25 level we saw recently this is, I can tell you, nowhere near the levels that we’re going to need as producers to get us interested in thinking about any kind of new production. And that’s production that we know is going to be needed in the next decade if we’re going to have a reliable supply of uranium for the reactors that are today operating and under construction. I have to tell you after a number of decades in this business I worry about that, and especially as we approach the end of the decade. And as you also might know, due to the complexities of our business we’re not exactly the fastest at bringing on any new production and new projects in a great mining jurisdiction like Saskatchewan or West Australia can take us eight to ten years to bring on. And today, we’re not investing even one dime in any kind of new production. So that’s a concern to us. When I look back a bit on the year that was 2016, I’d have to say market conditions in 2016 were probably about the most difficult I’ve seen in almost 30 years I’ve been doing this business. Uranium prices I think it was December 1st, hit $17.75 US a pound from the $73 level they were at the day before the Fukushima accident. So that’s the toboggan ride we’ve been on, $73 down to $17.75. It’s bumped a little bit since then. But we haven’t seen prices like that for 13 years in this business. And that’s what we’re having to live through. So tough times call for some tough measures, and we’ve taken those measures. Cameco you’ll remember April 26th, 2016, we made an announcement that we’re shutting down our Rabbit Lake operation. A long-running operation that’s been in operation since the ‘70s. Shut that down. We shut our Wyoming operations down. And we shut our Nebraska operations down as well. All together taking about 7 million pounds, or leaving about 7 million pounds a year in the ground. I’d have to say the response to that was fairly muted and we think the reason for that is that people know that we don’t play in the spot market with Cameco pounds. We put those into our long-term contracts. So these weren’t pounds that were going to find their way into the spot market. It wasn’t really until January of this year when the Kazaks, our friends, Kazatomprom, Askar Zhumagaliyev and his team decided that they were going to pull back on production. 10% cuts of production in Kazakhstan that the market paid attention. A country that today has 40% of the world production, a 10% cut is quite relevant. And we started to see some response to that. I can add to that after six years of some misery you see some of our major competitors in the space suffering significant financial difficulties. Looking to recapitalize in order to survive. So the hurt is now starting to show. These are some of the pieces we’ve been waiting for. We’ve been talking about it for years. I look around and see some of you. We’ve been saying on the supply side it’s sticky. Sticky at the top probably because of the long-term contracts we live under. But that over time as those contracts roll off there’s going to be some big hurt to put on the industry and we’re starting to see it now.
BMO Capital Markets 26th Global Metals & Mining Conference Cameco Corporation - February 28, 2017 Page 3 Again it just only reinforces, I think, our view that these low prices that we’re seeing today are not sustainable. And they certainly -- the longer we stay down they bolster our optimism for a better future for our industry. Let me be clear, and we’ve said it on our conference call and recently, our optimism is best described as cautious optimism. Even with the improved prices we’re seeing, as I said, we’re far from a true incentive price for any sustainable or new production. In fact, we’re probably not even in the ballpark where our tier one production is free from the pressure of further reductions. And obviously we’re -- I say this, very far from requiring any new greenfield projects that we might have in our portfolio. So there’s a long way to go still in the market. I can also say that no one, including me, probably was wrong if I was here and I was in 2012 saying that well we think it’s going to get better pretty soon. We think Japan will be coming on. We were wrong about that. This lower for longer has lasted. It’s been lower for longer than we thought even with Fukushima taken into account, and I don’t think we’re out of the woods yet. We’re watching. As you know, we say it. It’s going to be a combination of a few things. Japanese restarts, starting to see a little bit of encouraging news there. Continued Chinese build. They’re on track, 58 gigs by the end of the decade with another 30 under construction. That’s the good news story in the piece. And of course, we need to see the return of long-term contracting from the utilities. Lots of pounds built up that haven’t been contracted. We think they have to come back to the market. And when those do start coming in tandem we’re going to be moving to a better market. So those are good signposts, but until that happens we at Cameco we must and we will manage our business as if the difficult market conditions are going to continue. So that’s what we’re doing. 2016, not an easy year for us. We reduced our work force by about 20%. If you’ve ever done that, not an easy thing to do. Brought our cash costs back down to 2011 levels. Of course our financial objective in all of this is to maximize cash flow. And we want to maintain our investment grade rating which we think is really important so that we can self-manage risks that we will and might face going into the future. Risks like a market that stays lower for longer, litigation risks. Of course, you’ve heard of our CRA case that’s out there. We can add the TEPCO dispute now to that one. And we have refinancing risk. We’ve got some debt coming due in 2019 that we want to be able to handle ourselves. So very important for us. On the cash flow front, we’re pleased with where we’re at. We have good visibility into our cash generating capacity and we have good cash generating capacity. Thanks to the focus we put on our tier one low cost of operations we still have a very strong contract portfolio in front of us over the next five years that covers us. And then we’ve done a lot of restructuring and cost cutting that certainly has helped out as well. So what have we done? What’s been the strategic change for us over the last couple of years? Well, it’s really that refocus away from continuous production growth toward flexible production. That’s a change in our language. That can respond to market conditions and you know flexible for us means flex up and flex down, and you’ve seen us do both. In 2016, you saw us flex down. We curtailed our high-cost operations that I spoke about Rabbit and in the US. More importantly is our focus on our tier-one assets. We have some good ones. I can tell you lowest cost that provide us with a lot of value. We’ve also reduced significantly our operating and G&A costs. We’ve driven our CapEx down, I think you can see on the slide, by over 60% in the last couple of years. And our exploration spend has gone off the table. We’re down, I think, by about 75% or 70%.
BMO Capital Markets 26th Global Metals & Mining Conference Cameco Corporation - February 28, 2017 Page 4 So all of this possible because we are blessed with some very good assets. Three of the top ten uranium mines in the world, we think probably the top three of those. I’m just going to run through them quickly for you in case you’re not familiar them. With the McArthur River, Key Lake in Northern Saskatchewan in Canada the largest, longest running. We think the best operation in the world. It’s one that we’re very proud to have in our portfolio. It’s the largest high-grade uranium operation. And it’s been producing reliably, steadily for 15 years now. And it’s got a lot more runway in front of it. Kazakhstan, we are there. We are partners with Kazatomprom, Askar Zhumagaliyev and I are working together on that project, on other things as well. We signed an agreement last year in 2016. It’s an important agreement for us. Our leases they’re at the pleasure of Kazakhstan. Our leases were running out in 2023, 2024. We want to be there longer. We wanted to extend those and have the possibility to increase production, so we signed an agreement with Kazatomprom mid last year in Astana that extends our partnership through 2045. And gives us access to a lot more uranium, millions of pounds of uranium through those years. That said, I can tell you today in Kazakhstan a big change there. No appetite for increasing production in Kazakhstan. In fact, as you will have seen a recent announcement from the Kazaks that they plan to dial back production in the country by 10% in 2016. And people have asked me over the last few days, do you believe it? Are they going to do it? All I can speak for is our joint venture where we are dialing back. We’re not acidifying and developing well fields like we were last year and so there will be a 10% cut in our production. Finally, Cigar Lake our most recent shiny new penny, if you like, in our tier-one assets. Since we finally got it online in 2014, and you know we struggled with that. It has continued to, I can say, exceed our expectations. The ramp up is there now. We expect to reach full production capacity of 18 million pounds this year. And we’re very, very happy and those are very good pounds to have in our portfolio. So our operations are performing across the board very well. I can also tell you that in addition to our operations we’re very vigilant in trying to protect our balance sheet and maintain our investment grade rating. We’re cautiously optimistic about the future. And I say optimistic because it appears that some of the pain that we’ve seen over the last few years is finally starting to take effect and some of the sign posts, especially supply discipline, we’re starting to see some. Of course we need supply discipline as an impetus for strengthening uranium price. Yet, we remain cautious. Cautious because we know there are market challenges out there that can work to frustrate our efforts and to frustrate any recent uranium price increases. So at Cameco we want to be prudent. We take the prudent route that we are preparing for lower for longer should it continue, but we want to be also ready for the future and have pounds available, operating leverage we call it, that when the market does improve, and it could happen quickly that we have pounds available to put into the market. I’ll just say a word about the challenges, one of them came up unexpectedly and recently for us at the beginning of February we put out an announcement of our surprise. Disappointment at the notice we received from a customer called TEPCO. TEPCO a big electricity producer in Japan, Tokyo that they were planning to terminate the supply contract that they signed with us in 2009 based on force majeure. Not the first time we’ve seen this movie from a customer. We’ve been down this road before with several other utilities. And I can tell you we’ve been successful in all three of the ones we’ve been involved with defending the sanctity of our contracts.
BMO Capital Markets 26th Global Metals & Mining Conference Cameco Corporation - February 28, 2017 Page 5 I can tell you in the strongest words, we strongly disagree with their position and we’ll vigorously defend our position and pursue any remedies that we have to with them. That said, until it’s resolved obviously the dispute is going to impact our 2017 delivery volumes, realized price, and revenue. And we’ve set that out in our documents. We’ve also heard and we know that there’s some concern about contagion that other utilities might try the same. We haven’t seen it yet. Not that it’s not a possibility but we think our customers are loyal. For us a contract is a contract. We delivered into Japan in the 2006, 2007, 2008 period, probably levels $15 in the teens, $16 in a $90 market. We never missed one delivery, not even one. And so we expect the same from our customers. So we’ll work hard to defend our interests. With TEPCO we will not be very generous with our defense and we won’t be very compromising with respect to our legal position. So that’s also led us to take a close look at our sources of uranium supply. 2017, could make us look at changes to our inventory position, our production profile, and our purchasing activity. All of those effective the TEPCO situation. So I know it’s hard to see beyond the market weakness for some that’s persisted for six years. But as we go forward, I have to say we’re optimistic. I remain optimistic. We see continued growth in reactor construction around the world and that leads to more uranium consumption. I’ll just say what gets us up in the morning every day is that we know we live in a world that is driven by substantial and continued increase in demand for energy. It’s a world that not easy these days, as tricky as maybe some of us have ever seen it. A lot of economic uncertainty, political turmoil. The big part is global population today 7 billion people, 2 billion of them no access to electricity and we’re expecting another 2 billion by 2050 which is not that far from here. These people are going to need electricity. They’re going to need that large base load, 24 hour power to run their big healthcare, communication, education systems. And we think nuclear is going to play a big role in that. And of course it’s also a source of power that’s clean, and it doesn’t produce CO2 gases that are plaguing many countries. That’s why we see countries like China, India, South Korea, Emirates is just finishing up four units. Adding reactors to their grid. We had ten new units come online last year. That’s good news. I know a lot of people say well it’s a shrinking industry and no growth. Not true on the demand side. There is growth. There are new reactors. 57 under construction today. The majority of which are scheduled to come on in the next three to five years. So that’s important for us. If we didn’t see that demand growth it would be a different story. So more reactors. Of course, as I said, means more uranium. When we look at uncovered utility requirements over the next decade we see about 800 million pounds we think that has yet to be contracted for. Those are UX numbers. Those aren’t Cameco numbers. And we know that we’ll get some of that. Some of that demand is going to come to Cameco. So we’re positioning ourselves to be ready to take some of that demand. We have our strategy today focused on our tier one low cost assets that provide us with the most value. But we also want to be ready when the market does turn to have pounds available and we’ll do that as well. So we can’t do anything about the timing. We hear a lot about we believe your story, we like your story, when? When is it going to happen? And I wish I knew the answer to that piece. We don’t know when. And so in the meantime, we’re taking steps. We want to make sure we remain well protected under our contract portfolio. We have strong financial capacity to weather an uncertain market. And we want to make sure we maintain exposure to a market and have low-cost supply ready to deliver into what could be a rapidly rising market going forward. So with that, Ed, I’ll stop and I’d be delighted to take any questions you might have.
BMO Capital Markets 26th Global Metals & Mining Conference Cameco Corporation - February 28, 2017 Page 6
Ed:
Thanks very much, Tim. Let’s start and see if we’ve got any questions from the floor. In which case, I will take one from the app here. The CRA disputes you’ve mentioned it, can you provide an update on the timeline? And you know I guess (inaudible) the court case started in late last year. Does that change the timeline at all, or is there any kind of update that you can give us in terms of initial proceedings and so forth?
Tim Gitzel:
Yes, thanks, Ed. So of course the CRA case everyone’s aware of it. We did start the trial back last year. I think we’ve had about eight or nine weeks now of evidence going in. We’re happy with the way the evidence is going in. Of course it’s too early, and until you get a decision you don’t know what it’ll be. But they had a week of hearing last week. We think the trial is going to continue probably till summer of this year. And then they’ll take a pause, and then the lawyers will prepare their final arguments which will happen in September. And they’ll put those out. And then who knows after that. This is an important case, I can tell you. It’s not a Cameco thing. It’s not a uranium thing. It is that, but it’s more than that and I know there are others. I’ve seen many around and many have come and talked to me that are interested in how this is going to turn out. And so we think hopefully the judge will put some priority on it and give us a decision we say six to 18 months after final arguments in September. So probably not till next year sometime, but should have a decision sometime 2018. And then we’ll take it from there.
Ed:
All right. Is the potential recourse afterwards that either party could seek to contest the outcome, send it through to appeal or is this sort of a hard and fast whatever the outcome is that’s the --
Tim Gitzel:
Yes, and this is really complicated because they’re reassessing us back from 2003 to present. But the only years under examination right now are the years 2003, 2005, and 2006. So it’s relatively a small part. The other years have yet to be contested, and we’ve only been audited actually up to 2011. So you see from our disclosure, we run out the worst case scenario which we had the choice to do that or not to do that. We thought if we didn’t do it, everybody else would so we should do it. But the court will decide those three years, and then we’ll, I guess, look and see whether you can impute that decision to the other years. Bottom line is there’s no -- our board asks us every meeting is there one day when we’re going to have to cut a check for the full amount? And we say no, it’s going to drag out, unfortunately, over a number of years. So we’re into this for a while, Ed.
Ed:
Okay, thank you. And then just turning to the Kazakhs production cuts, my understanding is that most of that material, 5.3 million pounds, would probably have been going into the spot market. Are we seeing tighter spot market conditions? And is that having any effect on the interest in term contracting from utilities? Any uptick there?
Tim Gitzel:
Yes, we haven’t seen a lot yet. I think there’s a bit of a wait and see attitude going on with respect to that. You’re right, I think those pounds would find their way into the spot market from the Kazakhs. We’ve heard from some of the utilities well that sounds nice, but let’s wait and see. So I think the Kazakh’s report on the half year as to what their production is year over year. So it’ll be a big test to see if they’re actually down. But you know I’ll tell you, it’s a new sheriff, if you like, in town with Kazatomprom. He has brought in Western expertise, some advisors that used to work for us that are very aware and savvy on the market. And so we’ve seen from them increased production probably for ten years in a row. There’s must more and more and more. And now Mr. Zhumagaliyev said at the WNE in London
BMO Capital Markets 26th Global Metals & Mining Conference Cameco Corporation - February 28, 2017 Page 7 last September that that’s not the best strategy. That they should flatten it out and leave some of those pounds in the ground. And then we were surprised a bit to see that there was across the board cut of 10% that they announced in January. So good news. We’re seeing some supply discipline, and hopefully by at least the big players we think we led the way on that, Ed. Last year and now Kazatomprom so we’ll see what happens. Ed:
Thank you very much. And then you used the word policemen there in reference to Kazatomprom. I guess they’ve been pretty passive so far in terms of being engaged with the market in particular around things like (inaudible). Now I think they’re setting up a trading business. Do you think that they’ll be more proactive in defending pricing and so on?
Tim Gitzel:
I do. As I say, they brought in advisors. Mr. Zhumagaliyev has been in the chair for about 15 months. They brought in advice. We’ve seen some really strong moves from them already. They are looking at setting up a trading arm like the rest of us have so that you can be in and out of the spot market which is where often the price is set on really small volumes. And so I think they’re just setting that up now. And we’ve been in touch with them on that and they’ll be joining that club.
Ed:
And then obviously we’re here in Florida, so I guess we should probably ask the question. What if anything do you think Trump and Trumponomics might mean for the nuclear industry here in the US?
Tim Gitzel:
Well, we’re waiting for the Twitter feed on that one I have to say because honestly I don’t know. I sit on the NEI, that’s the Nuclear Energy Institute, that’s all the heads of the utilities Exelon and Entergy, and Duke and everybody. Just ten days before the election we had the two transition teams, the Trump transition team come in and the Clinton transition team. And I have to say I think everyone was sleeping through the Trump transition team presentation and everyone was waiting for the Clinton. We should have done it the other way around obviously. We should have paid more attention. The good news was pro-nuclear. They like the jobs and all the economic spin that comes with a plant. Looking to reduce regulations. Have put a new chair in at the NRC, all good moves. So I’d say pro-nuclear. But when you combine that with pro coal, pro oil, pro gas, we might get lost in the mix. So I guess waiting to see, Ed, what any pronouncements will be on nuclear.
Ed:
At the state level in the US, we’ve seen some pretty decent supports emerge Illinois and New York I think for nuclear power (inaudible) generation with some level of financial support similar to that provided to renewable. Do you think there’s a possibility of that being brought into other states as well?
Tim Gitzel:
I do. I do. I see First Energy is now playing that one in Ohio and Pennsylvania I think. Those are big decisions and I worry, I say as a North American I’ll make it that big, about our loss of leadership in the nuclear space. Twenty, 30 years ago, the US absolutely dominated internally and externally. And we’re losing some of that ground now big time. And so there’s some big philosophical questions as to whether nuclear remains a big part. You’ve got this big plants, a stable supply. The fuel costs is small. And today we’re seeing it. I mean we’re playing the game. We’re over in China all the time now. But China, 58 reactors by the end of the decade with 30 more under construction in the country. And they want to have 30 under construction outside the country. You go to the WNA, go to those meetings. It used to be all Americans, the French, a token Canadian at the meetings. And now it’s Russian, it’s Chinese, it’s Indian, it’s South Korean, and
BMO Capital Markets 26th Global Metals & Mining Conference Cameco Corporation - February 28, 2017 Page 8 even some of the Arab states now. So that’s just a philosophical. I worry about that. I think we need to regain our leadership position in the nuclear space. Ed:
Thank you. I think we’ve got a question at the back here.
Unidentified Participant: Thank you. Can I just pick up on the same (inaudible) from the likely changes to the tax arrangements with the Trump Administration. I’ve been a bit surprised that there hasn’t been more discussion about what is foreshadowed with not only reductions to the company tax rate but also suggestions or proposals that interest deductibility will no longer exist. That there will be immediate write offs in the year of capital expenditure and amortization or depreciation and a number of other measures which will quite significantly change the business environment. Already we’re seeing companies moving to strategic (inaudible) buy back bonds, work their way through in anticipation of those changes to the tax governance arrangements here. Throw into that the review of the Frank -- what’s the word? Tim Gitzel:
The Dodd-Frank?
Unidentified Participant: That’s it, the Dodd-Frank, sorry. Age is catching up with me. The Dodd-Frank Act, it does throw in a whole new perspective as to what are going to be some of the financial arrangements (inaudible). Do you have a view on that? Tim Gitzel:
Yes, we’re not very deep into that yet. We’re obviously watching closely. We’ve heard of this Border Tax. Obviously, we don’t produce much in the US anymore. We’ve shuttered our operations there, but we do sell a lot of our material probably 30% of our sales go into the US. So a Border Tax would be interesting. We’re looking at that piece through the NEI. We’ve got some Washington folks looking at that. I’ll tell you the other piece though is that the US consumes 50, 5-0, 50 million pounds of uranium a year to feed their reactors. They’ve produced two. So I mean who’s paying for what? The Border Tax we’ll see how that turns out. But yes like everyone else, it’s kind of day to day. We’re waiting to see what the policies are. So far we haven’t seen anything that affects us negatively or positively really. But it’s early in the administration so we’ll wait and see. Thanks.
Ed:
Excellent, well thanks very much, Tim. It was a fascinating presentation.
Tim Gitzel:
Thank you very much everyone.
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Presentation Transcript Cameco Corporation February 28, 2017 10:00 AM EST
Ed:
So we’re moving from the fertilizer industry to the energy industry with uranium. I’m pleased to introduce Cameco. Cameco is a Saskatchewan domiciled company with assets in Saskatchewan, in the U.S., in Kazakhstan. It produces around 32, I’m sorry, it produces 25-26 million pounds uranium, sells around 30 million to 32 million pounds of uranium every year. Presenting today we have the CEO, Tim Gitzel.
Tim Gitzel:
Thanks, Ed.
Ed:
(inaudible).
Tim Gitzel:
All right, good morning everybody. Thanks, Ed, for that kind introduction. Great to be here again in lovely Hollywood. Florida doesn’t usually take a lot of convincing to get us from Saskatoon to come to Florida in the middle of February. I think it was minus 20 yesterday morning in Saskatoon. So just want to say thanks to Ed and the folks at BMO for inviting us again. This is really a first-class conference and the turnout we get on the one on one’s and in these group meetings are really impressive. So thank you for that, Ed. All right, before we get started I just want the usual stuff, pass on our friendly reminder that we’ll be looking at a little bit of forward-looking information here based on some assumptions and that our actual results could differ. We just put out a brand spanking new MD&A recently. So you can look at that. We have an AIF out there with lots of information for you as well so you can take a look at that.
BMO Capital Markets 26th Global Metals & Mining Conference Cameco Corporation - February 28, 2017 Page 2 I want to spend the next few minutes if I can just giving you a brief overview of the current state of our industry. And then I’m going to talk about how we at Cameco are really trying to navigate through these. And I was searching for the word, I use interesting because it’s broad enough. These interesting times that we’ve been in. And it’s hard to believe maybe for some of you, but we are about ten days away I think from the sixth anniversary of the Fukushima accident. Of course that’s an accident that really determined the course of our business. It has determined it over the last six years, and has really driven uranium prices to what are today unsustainable levels. You’ve heard me say this before. You’ve probably heard our CFO, Grant, say it before and it remains the case today, current uranium prices are neither rational nor sustainable at the levels they’re at today. Even at the $25 level we saw recently this is, I can tell you, nowhere near the levels that we’re going to need as producers to get us interested in thinking about any kind of new production. And that’s production that we know is going to be needed in the next decade if we’re going to have a reliable supply of uranium for the reactors that are today operating and under construction. I have to tell you after a number of decades in this business I worry about that, and especially as we approach the end of the decade. And as you also might know, due to the complexities of our business we’re not exactly the fastest at bringing on any new production and new projects in a great mining jurisdiction like Saskatchewan or West Australia can take us eight to ten years to bring on. And today, we’re not investing even one dime in any kind of new production. So that’s a concern to us. When I look back a bit on the year that was 2016, I’d have to say market conditions in 2016 were probably about the most difficult I’ve seen in almost 30 years I’ve been doing this business. Uranium prices I think it was December 1st, hit $17.75 US a pound from the $73 level they were at the day before the Fukushima accident. So that’s the toboggan ride we’ve been on, $73 down to $17.75. It’s bumped a little bit since then. But we haven’t seen prices like that for 13 years in this business. And that’s what we’re having to live through. So tough times call for some tough measures, and we’ve taken those measures. Cameco you’ll remember April 26th, 2016, we made an announcement that we’re shutting down our Rabbit Lake operation. A long-running operation that’s been in operation since the ‘70s. Shut that down. We shut our Wyoming operations down. And we shut our Nebraska operations down as well. All together taking about 7 million pounds, or leaving about 7 million pounds a year in the ground. I’d have to say the response to that was fairly muted and we think the reason for that is that people know that we don’t play in the spot market with Cameco pounds. We put those into our long-term contracts. So these weren’t pounds that were going to find their way into the spot market. It wasn’t really until January of this year when the Kazaks, our friends, Kazatomprom, Askar Zhumagaliyev and his team decided that they were going to pull back on production. 10% cuts of production in Kazakhstan that the market paid attention. A country that today has 40% of the world production, a 10% cut is quite relevant. And we started to see some response to that. I can add to that after six years of some misery you see some of our major competitors in the space suffering significant financial difficulties. Looking to recapitalize in order to survive. So the hurt is now starting to show. These are some of the pieces we’ve been waiting for. We’ve been talking about it for years. I look around and see some of you. We’ve been saying on the supply side it’s sticky. Sticky at the top probably because of the long-term contracts we live under. But that over time as those contracts roll off there’s going to be some big hurt to put on the industry and we’re starting to see it now.
BMO Capital Markets 26th Global Metals & Mining Conference Cameco Corporation - February 28, 2017 Page 3 Again it just only reinforces, I think, our view that these low prices that we’re seeing today are not sustainable. And they certainly -- the longer we stay down they bolster our optimism for a better future for our industry. Let me be clear, and we’ve said it on our conference call and recently, our optimism is best described as cautious optimism. Even with the improved prices we’re seeing, as I said, we’re far from a true incentive price for any sustainable or new production. In fact, we’re probably not even in the ballpark where our tier one production is free from the pressure of further reductions. And obviously we’re -- I say this, very far from requiring any new greenfield projects that we might have in our portfolio. So there’s a long way to go still in the market. I can also say that no one, including me, probably was wrong if I was here and I was in 2012 saying that well we think it’s going to get better pretty soon. We think Japan will be coming on. We were wrong about that. This lower for longer has lasted. It’s been lower for longer than we thought even with Fukushima taken into account, and I don’t think we’re out of the woods yet. We’re watching. As you know, we say it. It’s going to be a combination of a few things. Japanese restarts, starting to see a little bit of encouraging news there. Continued Chinese build. They’re on track, 58 gigs by the end of the decade with another 30 under construction. That’s the good news story in the piece. And of course, we need to see the return of long-term contracting from the utilities. Lots of pounds built up that haven’t been contracted. We think they have to come back to the market. And when those do start coming in tandem we’re going to be moving to a better market. So those are good signposts, but until that happens we at Cameco we must and we will manage our business as if the difficult market conditions are going to continue. So that’s what we’re doing. 2016, not an easy year for us. We reduced our work force by about 20%. If you’ve ever done that, not an easy thing to do. Brought our cash costs back down to 2011 levels. Of course our financial objective in all of this is to maximize cash flow. And we want to maintain our investment grade rating which we think is really important so that we can self-manage risks that we will and might face going into the future. Risks like a market that stays lower for longer, litigation risks. Of course, you’ve heard of our CRA case that’s out there. We can add the TEPCO dispute now to that one. And we have refinancing risk. We’ve got some debt coming due in 2019 that we want to be able to handle ourselves. So very important for us. On the cash flow front, we’re pleased with where we’re at. We have good visibility into our cash generating capacity and we have good cash generating capacity. Thanks to the focus we put on our tier one low cost of operations we still have a very strong contract portfolio in front of us over the next five years that covers us. And then we’ve done a lot of restructuring and cost cutting that certainly has helped out as well. So what have we done? What’s been the strategic change for us over the last couple of years? Well, it’s really that refocus away from continuous production growth toward flexible production. That’s a change in our language. That can respond to market conditions and you know flexible for us means flex up and flex down, and you’ve seen us do both. In 2016, you saw us flex down. We curtailed our high-cost operations that I spoke about Rabbit and in the US. More importantly is our focus on our tier-one assets. We have some good ones. I can tell you lowest cost that provide us with a lot of value. We’ve also reduced significantly our operating and G&A costs. We’ve driven our CapEx down, I think you can see on the slide, by over 60% in the last couple of years. And our exploration spend has gone off the table. We’re down, I think, by about 75% or 70%.
BMO Capital Markets 26th Global Metals & Mining Conference Cameco Corporation - February 28, 2017 Page 4 So all of this possible because we are blessed with some very good assets. Three of the top ten uranium mines in the world, we think probably the top three of those. I’m just going to run through them quickly for you in case you’re not familiar them. With the McArthur River, Key Lake in Northern Saskatchewan in Canada the largest, longest running. We think the best operation in the world. It’s one that we’re very proud to have in our portfolio. It’s the largest high-grade uranium operation. And it’s been producing reliably, steadily for 15 years now. And it’s got a lot more runway in front of it. Kazakhstan, we are there. We are partners with Kazatomprom, Askar Zhumagaliyev and I are working together on that project, on other things as well. We signed an agreement last year in 2016. It’s an important agreement for us. Our leases they’re at the pleasure of Kazakhstan. Our leases were running out in 2023, 2024. We want to be there longer. We wanted to extend those and have the possibility to increase production, so we signed an agreement with Kazatomprom mid last year in Astana that extends our partnership through 2045. And gives us access to a lot more uranium, millions of pounds of uranium through those years. That said, I can tell you today in Kazakhstan a big change there. No appetite for increasing production in Kazakhstan. In fact, as you will have seen a recent announcement from the Kazaks that they plan to dial back production in the country by 10% in 2016. And people have asked me over the last few days, do you believe it? Are they going to do it? All I can speak for is our joint venture where we are dialing back. We’re not acidifying and developing well fields like we were last year and so there will be a 10% cut in our production. Finally, Cigar Lake our most recent shiny new penny, if you like, in our tier-one assets. Since we finally got it online in 2014, and you know we struggled with that. It has continued to, I can say, exceed our expectations. The ramp up is there now. We expect to reach full production capacity of 18 million pounds this year. And we’re very, very happy and those are very good pounds to have in our portfolio. So our operations are performing across the board very well. I can also tell you that in addition to our operations we’re very vigilant in trying to protect our balance sheet and maintain our investment grade rating. We’re cautiously optimistic about the future. And I say optimistic because it appears that some of the pain that we’ve seen over the last few years is finally starting to take effect and some of the sign posts, especially supply discipline, we’re starting to see some. Of course we need supply discipline as an impetus for strengthening uranium price. Yet, we remain cautious. Cautious because we know there are market challenges out there that can work to frustrate our efforts and to frustrate any recent uranium price increases. So at Cameco we want to be prudent. We take the prudent route that we are preparing for lower for longer should it continue, but we want to be also ready for the future and have pounds available, operating leverage we call it, that when the market does improve, and it could happen quickly that we have pounds available to put into the market. I’ll just say a word about the challenges, one of them came up unexpectedly and recently for us at the beginning of February we put out an announcement of our surprise. Disappointment at the notice we received from a customer called TEPCO. TEPCO a big electricity producer in Japan, Tokyo that they were planning to terminate the supply contract that they signed with us in 2009 based on force majeure. Not the first time we’ve seen this movie from a customer. We’ve been down this road before with several other utilities. And I can tell you we’ve been successful in all three of the ones we’ve been involved with defending the sanctity of our contracts.
BMO Capital Markets 26th Global Metals & Mining Conference Cameco Corporation - February 28, 2017 Page 5 I can tell you in the strongest words, we strongly disagree with their position and we’ll vigorously defend our position and pursue any remedies that we have to with them. That said, until it’s resolved obviously the dispute is going to impact our 2017 delivery volumes, realized price, and revenue. And we’ve set that out in our documents. We’ve also heard and we know that there’s some concern about contagion that other utilities might try the same. We haven’t seen it yet. Not that it’s not a possibility but we think our customers are loyal. For us a contract is a contract. We delivered into Japan in the 2006, 2007, 2008 period, probably levels $15 in the teens, $16 in a $90 market. We never missed one delivery, not even one. And so we expect the same from our customers. So we’ll work hard to defend our interests. With TEPCO we will not be very generous with our defense and we won’t be very compromising with respect to our legal position. So that’s also led us to take a close look at our sources of uranium supply. 2017, could make us look at changes to our inventory position, our production profile, and our purchasing activity. All of those effective the TEPCO situation. So I know it’s hard to see beyond the market weakness for some that’s persisted for six years. But as we go forward, I have to say we’re optimistic. I remain optimistic. We see continued growth in reactor construction around the world and that leads to more uranium consumption. I’ll just say what gets us up in the morning every day is that we know we live in a world that is driven by substantial and continued increase in demand for energy. It’s a world that not easy these days, as tricky as maybe some of us have ever seen it. A lot of economic uncertainty, political turmoil. The big part is global population today 7 billion people, 2 billion of them no access to electricity and we’re expecting another 2 billion by 2050 which is not that far from here. These people are going to need electricity. They’re going to need that large base load, 24 hour power to run their big healthcare, communication, education systems. And we think nuclear is going to play a big role in that. And of course it’s also a source of power that’s clean, and it doesn’t produce CO2 gases that are plaguing many countries. That’s why we see countries like China, India, South Korea, Emirates is just finishing up four units. Adding reactors to their grid. We had ten new units come online last year. That’s good news. I know a lot of people say well it’s a shrinking industry and no growth. Not true on the demand side. There is growth. There are new reactors. 57 under construction today. The majority of which are scheduled to come on in the next three to five years. So that’s important for us. If we didn’t see that demand growth it would be a different story. So more reactors. Of course, as I said, means more uranium. When we look at uncovered utility requirements over the next decade we see about 800 million pounds we think that has yet to be contracted for. Those are UX numbers. Those aren’t Cameco numbers. And we know that we’ll get some of that. Some of that demand is going to come to Cameco. So we’re positioning ourselves to be ready to take some of that demand. We have our strategy today focused on our tier one low cost assets that provide us with the most value. But we also want to be ready when the market does turn to have pounds available and we’ll do that as well. So we can’t do anything about the timing. We hear a lot about we believe your story, we like your story, when? When is it going to happen? And I wish I knew the answer to that piece. We don’t know when. And so in the meantime, we’re taking steps. We want to make sure we remain well protected under our contract portfolio. We have strong financial capacity to weather an uncertain market. And we want to make sure we maintain exposure to a market and have low-cost supply ready to deliver into what could be a rapidly rising market going forward. So with that, Ed, I’ll stop and I’d be delighted to take any questions you might have.
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Ed:
Thanks very much, Tim. Let’s start and see if we’ve got any questions from the floor. In which case, I will take one from the app here. The CRA disputes you’ve mentioned it, can you provide an update on the timeline? And you know I guess (inaudible) the court case started in late last year. Does that change the timeline at all, or is there any kind of update that you can give us in terms of initial proceedings and so forth?
Tim Gitzel:
Yes, thanks, Ed. So of course the CRA case everyone’s aware of it. We did start the trial back last year. I think we’ve had about eight or nine weeks now of evidence going in. We’re happy with the way the evidence is going in. Of course it’s too early, and until you get a decision you don’t know what it’ll be. But they had a week of hearing last week. We think the trial is going to continue probably till summer of this year. And then they’ll take a pause, and then the lawyers will prepare their final arguments which will happen in September. And they’ll put those out. And then who knows after that. This is an important case, I can tell you. It’s not a Cameco thing. It’s not a uranium thing. It is that, but it’s more than that and I know there are others. I’ve seen many around and many have come and talked to me that are interested in how this is going to turn out. And so we think hopefully the judge will put some priority on it and give us a decision we say six to 18 months after final arguments in September. So probably not till next year sometime, but should have a decision sometime 2018. And then we’ll take it from there.
Ed:
All right. Is the potential recourse afterwards that either party could seek to contest the outcome, send it through to appeal or is this sort of a hard and fast whatever the outcome is that’s the --
Tim Gitzel:
Yes, and this is really complicated because they’re reassessing us back from 2003 to present. But the only years under examination right now are the years 2003, 2005, and 2006. So it’s relatively a small part. The other years have yet to be contested, and we’ve only been audited actually up to 2011. So you see from our disclosure, we run out the worst case scenario which we had the choice to do that or not to do that. We thought if we didn’t do it, everybody else would so we should do it. But the court will decide those three years, and then we’ll, I guess, look and see whether you can impute that decision to the other years. Bottom line is there’s no -- our board asks us every meeting is there one day when we’re going to have to cut a check for the full amount? And we say no, it’s going to drag out, unfortunately, over a number of years. So we’re into this for a while, Ed.
Ed:
Okay, thank you. And then just turning to the Kazakhs production cuts, my understanding is that most of that material, 5.3 million pounds, would probably have been going into the spot market. Are we seeing tighter spot market conditions? And is that having any effect on the interest in term contracting from utilities? Any uptick there?
Tim Gitzel:
Yes, we haven’t seen a lot yet. I think there’s a bit of a wait and see attitude going on with respect to that. You’re right, I think those pounds would find their way into the spot market from the Kazakhs. We’ve heard from some of the utilities well that sounds nice, but let’s wait and see. So I think the Kazakh’s report on the half year as to what their production is year over year. So it’ll be a big test to see if they’re actually down. But you know I’ll tell you, it’s a new sheriff, if you like, in town with Kazatomprom. He has brought in Western expertise, some advisors that used to work for us that are very aware and savvy on the market. And so we’ve seen from them increased production probably for ten years in a row. There’s must more and more and more. And now Mr. Zhumagaliyev said at the WNE in London
BMO Capital Markets 26th Global Metals & Mining Conference Cameco Corporation - February 28, 2017 Page 7 last September that that’s not the best strategy. That they should flatten it out and leave some of those pounds in the ground. And then we were surprised a bit to see that there was across the board cut of 10% that they announced in January. So good news. We’re seeing some supply discipline, and hopefully by at least the big players we think we led the way on that, Ed. Last year and now Kazatomprom so we’ll see what happens. Ed:
Thank you very much. And then you used the word policemen there in reference to Kazatomprom. I guess they’ve been pretty passive so far in terms of being engaged with the market in particular around things like (inaudible). Now I think they’re setting up a trading business. Do you think that they’ll be more proactive in defending pricing and so on?
Tim Gitzel:
I do. As I say, they brought in advisors. Mr. Zhumagaliyev has been in the chair for about 15 months. They brought in advice. We’ve seen some really strong moves from them already. They are looking at setting up a trading arm like the rest of us have so that you can be in and out of the spot market which is where often the price is set on really small volumes. And so I think they’re just setting that up now. And we’ve been in touch with them on that and they’ll be joining that club.
Ed:
And then obviously we’re here in Florida, so I guess we should probably ask the question. What if anything do you think Trump and Trumponomics might mean for the nuclear industry here in the US?
Tim Gitzel:
Well, we’re waiting for the Twitter feed on that one I have to say because honestly I don’t know. I sit on the NEI, that’s the Nuclear Energy Institute, that’s all the heads of the utilities Exelon and Entergy, and Duke and everybody. Just ten days before the election we had the two transition teams, the Trump transition team come in and the Clinton transition team. And I have to say I think everyone was sleeping through the Trump transition team presentation and everyone was waiting for the Clinton. We should have done it the other way around obviously. We should have paid more attention. The good news was pro-nuclear. They like the jobs and all the economic spin that comes with a plant. Looking to reduce regulations. Have put a new chair in at the NRC, all good moves. So I’d say pro-nuclear. But when you combine that with pro coal, pro oil, pro gas, we might get lost in the mix. So I guess waiting to see, Ed, what any pronouncements will be on nuclear.
Ed:
At the state level in the US, we’ve seen some pretty decent supports emerge Illinois and New York I think for nuclear power (inaudible) generation with some level of financial support similar to that provided to renewable. Do you think there’s a possibility of that being brought into other states as well?
Tim Gitzel:
I do. I do. I see First Energy is now playing that one in Ohio and Pennsylvania I think. Those are big decisions and I worry, I say as a North American I’ll make it that big, about our loss of leadership in the nuclear space. Twenty, 30 years ago, the US absolutely dominated internally and externally. And we’re losing some of that ground now big time. And so there’s some big philosophical questions as to whether nuclear remains a big part. You’ve got this big plants, a stable supply. The fuel costs is small. And today we’re seeing it. I mean we’re playing the game. We’re over in China all the time now. But China, 58 reactors by the end of the decade with 30 more under construction in the country. And they want to have 30 under construction outside the country. You go to the WNA, go to those meetings. It used to be all Americans, the French, a token Canadian at the meetings. And now it’s Russian, it’s Chinese, it’s Indian, it’s South Korean, and
BMO Capital Markets 26th Global Metals & Mining Conference Cameco Corporation - February 28, 2017 Page 8 even some of the Arab states now. So that’s just a philosophical. I worry about that. I think we need to regain our leadership position in the nuclear space. Ed:
Thank you. I think we’ve got a question at the back here.
Unidentified Participant: Thank you. Can I just pick up on the same (inaudible) from the likely changes to the tax arrangements with the Trump Administration. I’ve been a bit surprised that there hasn’t been more discussion about what is foreshadowed with not only reductions to the company tax rate but also suggestions or proposals that interest deductibility will no longer exist. That there will be immediate write offs in the year of capital expenditure and amortization or depreciation and a number of other measures which will quite significantly change the business environment. Already we’re seeing companies moving to strategic (inaudible) buy back bonds, work their way through in anticipation of those changes to the tax governance arrangements here. Throw into that the review of the Frank -- what’s the word? Tim Gitzel:
The Dodd-Frank?
Unidentified Participant: That’s it, the Dodd-Frank, sorry. Age is catching up with me. The Dodd-Frank Act, it does throw in a whole new perspective as to what are going to be some of the financial arrangements (inaudible). Do you have a view on that? Tim Gitzel:
Yes, we’re not very deep into that yet. We’re obviously watching closely. We’ve heard of this Border Tax. Obviously, we don’t produce much in the US anymore. We’ve shuttered our operations there, but we do sell a lot of our material probably 30% of our sales go into the US. So a Border Tax would be interesting. We’re looking at that piece through the NEI. We’ve got some Washington folks looking at that. I’ll tell you the other piece though is that the US consumes 50, 5-0, 50 million pounds of uranium a year to feed their reactors. They’ve produced two. So I mean who’s paying for what? The Border Tax we’ll see how that turns out. But yes like everyone else, it’s kind of day to day. We’re waiting to see what the policies are. So far we haven’t seen anything that affects us negatively or positively really. But it’s early in the administration so we’ll wait and see. Thanks.
Ed:
Excellent, well thanks very much, Tim. It was a fascinating presentation.
Tim Gitzel:
Thank you very much everyone.
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