Cameco CIBC Whistler Conference Transcript
2014 CIBC Whistler Institutional Investor Conference Cameco Corporation Presentation Transcript
Date:
Thursday, January 23rd, 2014
Time:
12:10 PM ET
Presenter:
Grant Isaac, Senior Vice-President and Chief Financial Officer
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.
TOM MEYER, CIBC (MODERATOR): I’m pleased to announce that our next speaker is from Cameco Corporation. It’s Grant Isaac, Senior Vice President and CFO. Grant, if you’d like to come up and present?
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GRANT ISAAC (SENIOR VP AND CFO): Well, good morning. Thank you for giving us a bit of your time in what is undoubtedly a very hectic conference schedule for you, and obviously competing with the beautiful scenery and wonderful ski hills. So, I just want to take a few minutes to help you see the world through our eyes, understand the dynamics, as we see them in the uranium space. I only have six slides in this presentation but we do have a much longer deck available at the back, in the hallway there, as well as on the website, of course. The six slides are deliberately pulled out to really reinforce three key messages, and if you don’t mind, I want to start with those messages, give you an opportunity to think about them and really challenge whether we’ve convinced you or not that those appropriate messages to draw from our presentation.
The first key message that we’re trying to articulate in this presentation is that the long-term fundamentals for the uranium space are very good, and it’s really because our market is in transition from what has historically been a supply-driven industry to what is truly becoming a demand-driven industry, and this actually bodes very well for existing producers like Cameco.
That’s not to say the short-term is not uncertain. It is. There is a lot of fog right now in our market and a lot of it has to do with, obviously, the events in Japan and the unfolding of those events in Japan that has created a very thick fog that makes it difficult to see, makes it difficult to navigate, but this fog affects the timing of the transition – not whether it will happen or not, but
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it affects the timing of the transition – so, certainly there is short-term uncertainty. It impacts the when – not the if – of our transition to very favourable long-term fundamentals.
Of course, no surprise, the third message that I want to leave you with is that we’re very well positioned to not only weather the uncertainty, perhaps take advantage of some opportunities that present themselves during the uncertainty, but be very well positioned to leverage what we think are great long-term fundamentals.
So, those are the three key messages. Let’s see if I can convince you and, hopefully, leave lots of time for Q&A, as well, Tom, we would appreciate hearing from you.
Obviously, I have to put up this slide. It’s a reminder that the presentation contains forwardlooking information. This information is based on a number of assumptions and results could differ materially. We have a number of documents that highlight those assumptions and highlight those risks, including our MD&A and our Annual Information Form and, of course, brand new documents coming out within two weeks on both those fronts, so it’s a very tail end of a quiet period right now for us.
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When we talk about the long-term fundamentals being strong, one of the ways we try to articulate it is with this slide here. This is our net new reactor count slide. You can get into a pretty good debate about whether this is the most appropriate way to talk about new nuclear because, of course, if you’re counting reactors and not gigawatts, you may mislead yourself a bit. For example, you could have two small reactors shut down, one larger reactor open and it looks like on a net basis, you’re down reactors, but on a gigawatt basis you may in fact be even, if not up. But, by and large, this is a very good slide for articulating the growth that we see. And what’s behind it? What’s behind it is a growing global population: 7 billion today, going to 9 billion by 2050, and with that growing population, of course, is growing demand for electricity. In fact, today, of the 7 billion people on the planet, nearly 2 billion are without reliable access to electricity and many of those 2 billion without access to electricity at all.
The demand for electricity has been growing quite sharply. From 1980 to 2010, it tripled and from 2010 to 2035, electricity demand is expected to double again and it’s important to emphasize the type of demand that’s growing here. We’re not talking about incremental additions to the grid. We’re talking about electricity demand in regions that are still in the business of installing 24-hour baseload power, that 24-hour power that’s required to have a healthcare system, a transportation system, communications, education system. All of that stuff that requires that 24-hour reliable power is really the driver behind the growth here as opposed to an incremental addition to the grid competing in an emergent market and Western Europe, for
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example, or in the United States. That’s not what’s happening here and it’s reflected in these numbers and where you see that big growth demand.
So, as we look out, we see the potential for 90 net new reactors by 2022. It sounds like a big number, but I think it’s important to point out that very last column there, “Under Construction;” of those 90 net new reactors, 70 are under construction today. You can go around the world and you can see reactor sites where there are construction and operating licences, all the permits in place, big concrete’s being poured, the forging’s being installed, these are real projects underway today and this is growth that we have not seen in our industry since the late ‘60s, early ‘70s.
As you go through that table and look at the different regions, I would draw your attention to the column that says “Operable 2013” and it has a number of 432 at the bottom of it. That translates, from a uranium point of view, into about 170 million pounds of annual consumption. When you slide over a couple of columns and you go down “Operable by 2022” and it says 521, that translates into about 220 million pounds of annual uranium consumption. So, therein you see the challenge: demand growing from 170 million pounds of uranium equivalent to 220 million pounds of uranium in what is a very short period of time in our industry, given the longer cycles for development that we typically see in the uranium space.
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So, if that’s the long-term demand slide, the next one we want to put up is the long-term supply slide. What you see here is a very real gap that exists between the consumption of uranium and the primary production. In fact, this is a longstanding feature of our industry. Since 1985, consumption of uranium has exceeded the primary production of uranium and the gap has been filled by secondary supply. So, when I said at the outset that ours is a market that is transitioning from what has historically been a supply-driven industry to what is a demand-driven industry, it’s really at the heart of that imbalance.
When you think about nuclear power and its beginnings, there was talk about too cheap to metre. There was an idea that there were going to be thousands of nuclear reactors around the world producing power, and, as a consequence, a lot of uranium was explored for and it was found, but it wasn’t left as inventory in the ground, it was dug up. So, it was mined, it was milled and stuck in all sorts of inventories around the world, which have found their way back to the market over time and that supply has driven our market, as opposed to primary production.
One of the most notable sources of secondary supply, the one that a lot of people are familiar with, was the agreement between the United States of America and Russia to downblend material destined for nuclear warheads, to convert that back into uranium appropriate for power production and sell that into the United States. That was called the Highly Enriched Uranium, or HEU, deal. We like to think about that in mining terms to articulate just how much secondary supply has been lost to the market. It was 500 metric tons of highly enriched UF6, which translated into a 400-million-pound mine, producing 24 million pounds a year, and mine life was up in December of 2013. Last deliveries happened in December, left the Port of St. Petersburg, arrived in Baltimore. There’s so little to celebrate in the near term in the uranium space right now, that we had people saying goodbye to the ship in St. Petersburg in December and then we also had people watching it arrive on the docks in Maryland. But it was a very important signal because this is a secondary supply that the market was really counting on; 24 million pounds a year. To give you an idea how much – that’s more production than McArthur River, the largest uranium mine in the world – that’s lost to the market. So, as the demand grows in our market and secondary supplies fall off, the challenge of going from 170 million pounds a year to 220 million pounds a year is going to fall more heavily on primary production than it has in the past. This is obviously, very exciting for us.
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Of course, with more primary production, it carries more risk. Secondary supplies that are already mined, milled and sitting in an inventory come to the market easier and if we’re talking about any incentive to bring primary production in, you’re going to need a price that not only incents going after that type of production, but also deals with the risk of that primary production, because, quite frankly, the HEU agreement was one of the most reliable sources of uranium for the last 15 years. So, together, this long-term demand and long-term supply dynamic clearly indicates to us that this is a market in transition. It’s going to be driven more by demand fundamentals. That is obviously very exciting for us and very exciting for primary producers.
But all of this does not belie the fact that there is uncertainty in our market. That uncertainty really has to do with the events in Japan and it has to do with a couple of features that exist in our market right now.
If you think about our utilities, our customers that we deal with, in typical times they come to the market about five years before they need the material. It gives them lots of time to secure the uranium concentrates, have it lined up to be refined into UO3, find a conversion service to turn it into UF6, find an enrichment service, and then have it fabricated for their specific use in their reactor. Five years gives them lots of time and, as a result, what we end up with is quite a discretionary period right now in our market. We’re in a market where you have the overhang of the Japanese situation, questions about their restart, questions about their inventory accumulation and what that’s going to mean for the market. And in the meantime, you have fuel 7
buyers that are very comfortable with their supply situation out until about 2017. So, at the moment, very discretionary in the market; very little long-term contracting.
The interesting data point for us for 2013 is this: we would have anticipated, given the growth that’s in our industry, somewhere in the range of 180 million to 200 million pounds of uranium that had been contracted on a forward basis in 2013. That would have made sense. In 2013, as the dust settles and the accounting is coming in from the trade reporters, it looks like it’s about 20 million pounds, an order of magnitude less than what’s expected and I think the reason is rather simple. I think you have the fuel buyers, on one hand, in their corner believing it’s a priceoff situation in the near term because of the uncertainty in Japan, and you have the producers, by and large, in their corner saying that’s a price function that’s driven by one-time volumes, driven by discretion in the short term, but it does not reflect the prices required to ensure the annual supply of uranium 2017 and beyond precisely when you need it and that, in fact, is driving a bit of a stalemate. Producers on one side, customers on the other, and very little term transactions in the middle, so what is happening is very discretionary spot transactions. So, in a 170-million-pound market, 100,000 pounds at a time being transacted on the spot, and you see that drifting uranium price as a result.
So, the short term is challenging. If we define it as fog, what are looking for as we drive through that fog? Well, we’re looking for a couple of signposts. Obviously, we’re looking for the restart process in Japan; get a little more certainty or clarity around that. I’m happy to get into more detail on that in the Q&A period but essentially, you know, the regulator is in place, the regulations are codified. There are six utilities representing 16 reactors that are currently in the restart process, no decisions have been made yet, and once those decisions are made, they’ll give us insight about the pathway for Japan to go back to consuming uranium. That is important. And secondly, once they start consuming uranium and producing power, the question will be what will they do with their very large inventory positions that they’ve built up right now? These are two pretty important data points that we need to understand when we think about the market transitioning.
But interestingly, it’s precisely this discretionary downward drift of the uranium price that’s making that long-term fundamental even better, because projects that we thought we were going to be competing against, 2017 and beyond, projects that we thought we’re going to be producing pounds in the market are being delayed; they’re being deferred, if not outright 8
canceled. So, the amount of supply destruction, if you will, that’s occurring right now as a result of these prices is actually making the long-term fundamentals even brighter. So, it’s a foggy near term, but the future is actually getting brighter as a result of it.
So ultimately, then, what are we up to in the midst of this? Well, you know, it’s prudent when you’re driving through the fog to slow down and so we’ve done that. It’s not prudent to stop. That’s not usually a safe thing to do in the fog. So, we’ve slowed down. We’ve slowed down so we can watch those signposts and not miss them, as they pertain to Japan and as they pertain to long-term contracting. We want to make sure that, as a company, we’re positioned to that long-term fundamental that we think is really favourable, but to do it in a disciplined way. We’ve pulled back what had been a very ambitious growth strategy for us pre-Fukushima, a strategy to double our uranium production. We’ve pulled back to focus only on the tier-1 assets in our portfolio and not just that, but the tier-1 assets where we can leverage brownfield infrastructure. The goal there, of course, is to be prepared and positioned for that market when it starts to deliver some incentive pricing.
In the meantime, we’re a company that has very significant protection from our contract portfolio through this period. We’re heavily committed out to 2016. That gives us a lot of certainty and clarity on what our revenues look like. These are contracts that were signed well before Fukushima and, as a result, it’s giving us an average realized price above the market prices that you saw on the previous slide. 9
In addition, no surprise, like everybody else, cost control is a very important thing that we’re doing right across our CapEx space, our OpEx space, as well as our general expenses. And as that growth comes back, it gives us an opportunity to really pull back on some of those evaluation spends as well. So, we look at our existing operations, McArthur River/Key Lake, the largest uranium complex in the world, producing true tier-1 uranium for us, an absolutely wonderful asset. Rabbit Lake is an asset in northern Saskatchewan, as well. It’s been producing uranium for many, many years. We have in-situ recovery operations in both the US in Inkai and our major development project, which is Cigar Lake – and I’m happy to spend a bit of time talking about that in the Q&A – suffice it to say, this is a project that we know defines our operational reputation; it has been challenged over the years, it is a technically complex mine, but we’re happy to say the construction at the mine level is complete, the commissioning at the mine level is what’s underway right now and what we’re waiting for is the preparation of the mill, which is operated by Areva, to accept the slurry from Cigar Lake. So, very exciting for us to have that development project so close. And then we have a couple of projects that we put into our bullpen, as we called it, and we simply said the market is not rewarding anybody for investing in these projects right now. They are good projects, but they’re not ones that we will advance so we’ve deferred the evaluation expenses and the CapEx associated with that until there’s incentive prices.
So again, just to emphasize, we believe that we’re very well positioned to withstand the shortterm uncertainties in the market as a result of our contract portfolio and we believe that the developments that we can execute on in our existing operations and obviously, bringing on Cigar Lake, position us very well for the long-term fundamentals as our market does transition to a true demand-driven market.
So, with that, I did promise Tom there’d be lots of time for Q&A, so if we can turn to that now, that would be terrific.
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TOM MEYER, CIBC (MODERATOR): For the Q&A session, I’d like to open it up to the audience. Any questions from the field? My first question to you, Grant - the buyers of uranium are on the sidelines. Do you have a strong sense of exactly what they see? My first twist on this is do you believe they think they see additional of quasi-HEU coming out of the background and into the market to offset the normal expected decline in that original deal with the US?
GRANT ISAAC (SENIOR VP AND CFO): Well, it’s our view that there is no additional HEU material and that we think that’s pretty well understood in the marketplace and it’s one of those rare times where I don’t think you even have to take my word for it, the data are there to support what contracting is going to be like once there is a return to long-term contracting in the absence of HEU.
In the summer of 2010, we saw a bit of a uranium price spike. We saw uranium price came off its highs in 2007 down to, on a spot basis, about a $40 resistance level and it bounced in that period for a considerable amount of time and then in 2010, it began to rise again quite quickly, and as did the term price. The driver there was the Chinese fuel buyers. They showed up in the long-term market to begin to procure material for their construction programs that were underway; construction programs that are not consuming uranium yet today, but will be kind of 2015 and beyond. And as they moved into the market to start acquiring that material out in that period, the fuel buyers in the existing customer base, recognizing 11
that the new entrant is moving in and buying up supply in the absence of big scope and scale material, like HEU, moved into the market very quickly and in a very short period of time, the spot price went from 40 to 70, the term price went from just under 50 to 74. That momentum continued right up until the earthquake and tsunami in Japan, and what happened at that time is the fuel buyers stepped out of the market with questions, concerns, about what was going to happen with Japan. Japan’s roughly a 20million-pound consumer of uranium on an annual basis; that’s a big chunk of supply, and if you doubt, you know, that the reactors are coming on line, you wonder what’s going to happen with that – the fuel buyers had just been through contracting at $70 – stepped out under the belief that this was a price-off. They’ve been rewarded for stepping out as the prices come off and I think right now, they just find themselves in a position where they’re not ready to call the floor. You don’t want to be the fuel buyer who calls the floor too early and sees a bit of a rush back into the market, and so the fuel buyers are being rewarded for waiting. And the producers, I think by and large, the big producers are saying, “We can probably outlast you, because we know you’re going to need the material. We know you’re putting compression on your own front end, in terms of contracting uranium concentrates and having it ready at your reactor when you need it. We know you’re compressing that period.” We look at it from the point of view we’re heavily committed out to 2016. Our view is we can probably wait.
TOM MEYER, CIBC (MODERATOR): Okay. Any questions from the audience?
AUDIENCE PARTICIPANT: (Inaudible)
GRANT ISAAC (SENIOR VP AND CFO): In case folks didn’t hear, there’s a question about our contracting strategy going forward. As a company, in the past we’ve had what we call a 60/40 contracting strategy: 60% of our contracts on a term basis, referencing the spot or term price at time of delivery—so, real exposure to the market. And 40% of our contracts fixed-price contracts, and a fixed-price contract, just to give people a sense of it if you’re not familiar, if we were negotiating a fixed-price contract today, you pretty much start at the long-term price, which is $50, and the negotiation is not about starting there, the negotiation is about how it escalates over time, and so it becomes quite a fierce negotiation about what the true escalator should be.
Obviously, in this period, our bias is towards market-related contracts, but I think it’s probably fair to say that the first fuel buyer that calls a bottom to the market is going to try to lock in that bottom by offering a fixed-price contract, and the question for us will be, “Do we even bother participating” because we would prefer to have market exposure. So, you might walk away from one contract, you might walk away from a 12
second fixed-price contract, but ultimately, you know, when the third, fourth and fifth buyer shows up, there’s not going to be any material to contract and at that point, you should be able to say, “This is going to be a market-related contract, isn’t it?” So, we want that exposure going forward. We believe the fundamentals are there to favour it. So, we’re not desperate to part with material at today’s $50 long-term price. That does not seem to be the price required to bring on the future production that’s needed.
TOM MEYER, CIBC (MODERATOR): Grant, just to expand on the contracting strategy going forward, I think you made a very important point with respect to HEU reliability of supply for the power or for the buyers. Does the strategy change now that HEU is out of the picture and you are a size producer? Does that give you contracting strength relative to, say, some of the smaller guys who are on the margin and may not be “reliable” enough for the utilities to contract in a strong way?
GRANT ISAAC (SENIOR VP AND CFO): Well, I think in general terms, the notion that our market is transitioning from what has been a supplydriven industry to what is a demand-driven industry and one where secondary supplies are not playing that market-clearing role in the same way that they have in the past, does give advantage to primary producers and that, obviously, is very exciting for us. We’ve never really had that as a company, and so to be in a position to say, “Look, more of the demand for uranium is going to be satisfied from primary production” is obviously is going to transfer some opportunity to the primary producers and we hope to be able to benefit from our size and from the quality of our assets in order to really position well for that going forward. You know, you always want to be leveraged to the commodity price and you are, but at the same time, you want to have additional production to sell from great margin assets, and that’s where that true price leverage and operating leverage meet and we’re all quite delighted when that occurs.
TOM MEYER, CIBC (MODERATOR): Any other questions from the audience? Cost-cutting initiatives, Grant, of Q3, I think was a big surprise for everyone and I think you guided into that, there is more to do, but is there much more to do as we look into ’14, ’15 and ’16 and beyond, whether it’s projects or with existing operations?
GRANT ISAAC (SENIOR VP AND CFO): Yes. Certainly, there’s a lot more to do and it’s a continual process. You don’t set a budget and say, “Okay well, there’s no need to continually look at this and continually look for efficiencies.” So, we’re obviously very hungry for finding all of those opportunities, but I would just say that 13
with respect to the surprise that I think that some people greeted our average unit cost of sales in Q3, it’s just as important to understand that the average unit cost of sales at our company is composed of a couple of different buckets. One of them being our purchase material, and that purchase material really benefited from some older legacy contracts that are not to be repeated, so that part is not really repeatable. Secondly, there was a bit of a unit effect on the produced material on a Q3-to-Q3 basis; we simply had more production in Q3 2013 than we did in Q3 2012 but the remainder of it was the true cost cutting. So, that’s the sustainable piece, that’s the repeatable piece, but I think it’s important to make sure that people aren’t looking at that Q3 number and thinking the whole whack is repeatable, because it’s not.
What’s going to happen with secondary supplies going forward or purchased material going forward is you can really think about that as it’s going to come into our balance sheet, or it’s going to come into anybody else’s balance sheet, at a discount to market. Gone are the days when secondary supplies are going to come at a deep discount to primary cost of production, those days are over. So, materials that are purchased are going to come closer to a market price.
TOM MEYER, CIBC (MODERATOR): Just quickly, on Cigar Lake, do I understand that Areva – I think they said they’re ready to start bagging product as early as Q2 – is that correct?
GRANT ISAAC (SENIOR VP AND CFO): So, our partner, Areva, had a few mitigation issues they needed to deal with at their mill that pertained to the evolution of hydrogen as part of the acid leach system, so they needed to put in some ventilation and purging systems at their McClean Lake mill. These are not novel systems to be concerned about, but they were long-lead items and so once they ordered them and planned them to be installed at their northern mill, it was causing a delay. They’ve assured us that at the end of Q2 2014, that they’ll be prepared to take slurry from the mine, from the Cigar Lake mine.
In the meantime, at the mine level, we’re going through the commissioning of all the mining circuits, all the mining pieces and I’m very excited with the progress on that but, of course, a little bit hesitant to fire the beast up, if you will, because what we don’t want to do is stockpile slurry at the McClean Lake mill. We need to be ready that’s going to be dealt with because there 14
is some storage there at the McClean Lake mill and, absolutely, those storage tanks will be filled up but, you know, I don’t think you really want to be storing slurry on the ground or anything like that, so we need to sequence that with the mill. So, as we know more, we obviously will disclose that and we’ll have a full update in two weeks when our year-end results are out, as well.
TOM MEYER, CIBC (MODERATOR): Just the novel design of Cigar Lake, the mining technique, you guys were sure that you tested it on non-ore material well in advance of getting into ore and you tested it on ore. It is a unique process. Maybe just a quick description of how that works for the audience.
GRANT ISAAC (SENIOR VP AND CFO): Sure, absolutely. So the system that we use at Cigar Lake, unlike McArthur River, for example – and just a bit of a background on that – McArthur River exists at a very unique spot in the Athabasca Basin where that stone bowl filled with porridge, if you will, the sandstone that’s very uranium rich, has a fracture in it and the uranium collected in that fracture, and at McArthur River, we’ve been above the ore body and below the ore body, but still in competent basement rock. That’s not the case at Cigar Lake; Cigar Lake is on a flat spot on that bowl and we have to mine it from below and the methodology that was chosen there was – somewhat ironically – a jet boring system introduced water to Cigar Lake and under very high pressure to cut out the ore, bring it down, the ore chips, in a water mixture, process it underground and pump it to surface as a slurry. The jet boring system certainly has a novel application in high-grade uranium where you have to make sure that the operators of those systems have all the radiation protection systems in place. This is very high-grade ore. We tested it in waste rock and then in December, we put out a press release to say that we were in ore with the jet boring system. So, this is a mining technique that is working; we’re delighted with the results we see and just very anxious to get the mine underway.
TOM MEYER, CIBC (MODERATOR): Okay. Thank you very much, Grant. That wraps it up for this morning. I’d like to thank Grant and Cameco for presenting and we’re going to take a short break and then reconvene at 10:00 a.m. with Hudbay.
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