CCO BMO Transcript 03012016
BMO Global Metals & Mining Conference Cameco Corporation Presentation Transcript Date:
March 1, 2016
Time:
10:00 AM ET
Presenter:
Tim Gitzel President and Chief Executive Officer Cameco Corporation
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.
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ED STERCK (BMO): So I'm pleased to introduce Cameco. Cameco is one of the world's—well, it's the world's largest listed pure play uranium producer. It's got operations in Canada, the US, and Kazakhstan. It operates uranium refining and conversion facilities in Ontario and also in NUKEM, which is a nuclear fuel trader based in Germany. Here to give us an update on the company is the President and CEO, Tim Gitzel. Tim?
TIM GITZEL: Well thank you very much, Ed, for that kind introduction. Good morning, everybody. I'm delighted again this year to be back for another year. It doesn't take a lot of convincing for somebody from Saskatoon, Saskatchewan to come to Florida for a few days at the end of February and into March, even though we've had a little bit of climate change action in Saskatchewan as well. We often say we're not opposed to global warming up in Saskatoon. I note a couple of our Board members are here today, Catherine Gignac and Jim Gowans, so I just ask you to save your difficult questions for them at the end.
I want to just acknowledge BMO as well for inviting us. This is, I think, the 25th anniversary of this conference, and it's a real special event. It's an event we don't miss. We get to see a lot of people. The speed dating thing goes on, but it's really been useful so thanks, Ed, to you and BMO.
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All right, before we get started, I'll pass on our usual friendly reminder that we're going to include some forward-looking information here which is based on some assumptions and that results could differ materially. We just put out a shiny new MD&A. It's a lovely document. If you have a chance to read it, it's full of information about the company and the industry, so I'd encourage you to take a look at that.
So this morning I want to spend a few minutes giving you just a brief overview of, really, the current realities in our industry and talk about our company, Cameco obviously, how we're navigating our way through some of those realities. It really comes down in our minds to three things, and first—and it's a big deal for us—ten days from now, March 11, will be the fifth anniversary of the Fukushima accident in Japan, and I can tell you that through these five years 3
the nuclear industry has been a tough place and continues to be a tough place to be and a challenging place to be.
Second, and this is a statement of the obvious, probably, but we believe that with each passing day that goes by we're closer to an improved market, and we have a pretty clear line of sight to some pretty positive fundamentals that are going on in the industry over the long term.
Then, third, I would say just at Cameco we think we have a very strong—the right strategy in place, both to weather the current situation, the current challenges if they last longer, and as well to benefit when the market does call for more uranium, which we think will come soon.
So let's take a look at the long-term outlook, because ours is—as you know, nuclear is a long lead time industry, and that's really where the focus of our company is. I can say that when we look to the future it's a pretty positive picture. What gets us up in the morning and gets us going in the morning is that we live in a world that is driven by a substantial and a continued increase in world energy demand, which you can see on the slide. We live in a world today that faces a lot of challenges, economic uncertainty, political turmoil, and a global population of about seven billion people, two billion of which today have little or no access to electricity; and we're going to add another two billion people to the planet by 2050, and they're going to need electricity as well.
So they're—you see a growing need for electricity, which is more than just something to plug your iPhone into. It really improves the standard of living for many people in many countries. So 4
what's needed is this large-scale base-load electricity, 24-hour power that allows you to make things like health care, education, communication, and transportation systems run on a continuous basis.
So when countries around the world are looking at their options for base-load, we think nuclear electricity looks pretty attractive. It's an option that provides us large baseload electricity, not only reliably, but safely and affordably, and in a way that, today, important, avoids emitting greenhouse gasses and avoids adding to the air pollution that plagues many of the countries and cities around the world. That's why we see countries like China, India, South Korea, and now the Middle East adding nuclear generation to their grids.
Let me talk about China for just a minute. China leads the growth in nuclear. Today, China has 30 reactors in operation. They have 24 under construction and many more planned by 2025. Eight new reactors started up in China last year. The plan, their stated plan, is to have 58 reactors operating by 2020, with another 30 under construction at that time. So you can see the growth. The growth is real, the growth is rapid, and it shows no signs of abating. We're awaiting the next five- or ten-year plan for nuclear, which we think will be out some time in the next month or so.
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China, not the only market driving growth in our world. India, also pursuing an aggressive build program. Today, India has 21 operating reactors. They have six under construction and many more in the planning stages. It takes a little bit longer in India to get things done, but they're working with companies like Areva and Westinghouse and the Russians. So we think the future looks good, and of course again, massive power needs. They're going to need all the electricity they can get. Why is that? According to the United Nations, India is the fastest-growing population in the world, will overtake China as the most populous country by 2030. Today in India, about 1.2 billion people; 400 million, no access to electricity. So you can see their needs are massive.
So in terms of keeping up with energy supply, it's a tall order, but it makes India really important on the electricity scale and a country we've been following very close. We've been working on the Indian market at Cameco for many, many years, and we were delighted last year, Prime Minister Modi came over to Canada with then Prime Minister Harper. Our Premier, Brad Wall, and I shook hands, signed an agreement that sees us supply about seven million pounds of uranium to India over the next few years, and we're working on more, I can tell you. It was a good opening bid, a nice agreement that opens the door to us, and I think we're going to have a lot more access to that market in the years to come.
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Those are just a couple examples of the nuclear growth in the world, but it's happening in other places; other places, the United Arab Emirates, a place that you might not imagine. So as a result, the growth in reactor construction expected over the next number of years is at a level that we haven't seen for a long time, probably since the late '70s, early '80s. Today, around the world, 64 reactors under construction, and many continue to be brought online, including 10 new ones were brought online in 2015.
Now if you want to switch over and you want to talk about this in terms of financial numbers growth, US Department of Commerce estimates that the investment today in nuclear and over the next decade to build the reactors under construction is about $740 billion. That's a lot of investment, that's a lot of reactors.
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And, of course, in our world more reactors means more uranium. So today the world's fleet of 439 nuclear reactors consumes about 170 million pounds of uranium on an annual basis. Based on the reactors that we see under construction and planned, we expect that number, that consumption number, to grow to about 220 million pounds per year over the next decade, which equates to an average annual growth rate of about 3% per year. In mining parlance, and with the normal depletion curve for existing mines, that would equate to about three or four more Cigar Lakes being required over those same 10 years. And that's not a simple task, as we at Cameco can attest to. So you can see why we think there's such a strong growth story over the long-term from a demand point of view.
The other side of the equation, obviously the supply side, and historically uranium consumption has outpaced primary supply. This is a longstanding feature of our industry which has, over the years, been bridged by what we call secondary supply. But even those, we believe, are starting to diminish.
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The biggest source of secondary supply over the last years has been the Russian HEU Agreement, which brought about 24 million pounds of uranium per year to the market. That ended in 2013, and we know that because we were one of the principal beneficiaries of this agreement, and that was a significant loss of pounds to the market. So with the completion of that agreement and with other sources of secondary supply continuing to draw down, we know there's going to have to be greater reliance in the future on primary supply.
But therein lies the problem, or the dilemma, if you like. With a sluggish market, continued low prices over the past few years, there hasn't been a lot of incentive for companies like ours to invest in new production. In my view, no reasonable producer is going to invest big capital in the $33 market. So it's not surprising, then, as a result many new projects have been delayed and deferred and canceled, including some of our own. Add to that we are not an industry that's particularly known at being fast in bringing on new production. A new mine to bring on can be in the range of eight to ten years, when things go well. So in our view, and not long from now, at some point, the market's going to be calling for more uranium at a time when it could be difficult for producers to step up and bring on new production. We've seen this movie before. The result is that along with an encouraging demand story, we think there's a compelling supply story that goes with it.
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Of course, all of this has been complicated by Fukushima, and its effects on the market clearly have lasted longer than we thought. It's now, as I said earlier, almost five years since the accident. I don't think anyone expected conditions to last this long; certainly, we didn't at Cameco. That said, since I stood before you in this exact same place one year ago, we've made some progress. Commencing last summer, in August, the first re-starts in Japan occurred; Sendai unit number 1, then Sendai unit number 2, and now we have Takahama 3 and 4 on, so four units operating. The good news, the encouraging news, is that there's 22 more nuclear reactors in the queue at the regulator waiting to get approved to go forward. So we think that's good news and we're hopeful that the lessons learned from the process from the first four will help speed up the approvals for the others that are in the queue.
Another reason for a sluggish market has been the fact—we can't deny it—that some countries have moved away from nuclear or reduced their fleets. Germany, an example that always gets brought up. The day before Fukushima, they were extending the lives of their nuclear plants. Seventeen nuclear plants in Germany were going to run longer. Fukushima happened, and they took the opposite decision, deciding to phase out nuclear over time. So, today, eight units shut down, nine still operating in Germany, with plans to phase them out over time.
In other places, unexpected reactor closures. Here in the US is a good example. There've been some reactors taken down. It normally happens in electricity markets where reactors have become uneconomic, and that normally is a result of deregulation and, more specifically, the low price of gas in the United States. 10
Of course, global events play as well. Sluggish economy, geopolitical issues around the world, and really flat electricity demand around the world.
So, you know, as a result of all of this we've seen an erosion of near- to medium-term demand for uranium over the last couple of years, which has really allowed utilities to sit comfortably, enjoy low near-term prices, and defer making any long-term contracting decisions. Let me give you an example that's maybe easier. Typically, in a normal contracting year, we would see annual long-term volumes similar to consumption levels. So if the world's reactors annually consume about 170 million pounds, we'd expect to see something around 170 million pounds contracted on the term market. In 2013 only 25 million pounds were contracted. In 2014, 77 million pounds were contracted. In 2015, it was 80 million pounds. So you can see that equates to about a 65% reduction in normal long-term contracting over the past three years. My view is that this continued deferral can't last forever.
The interesting part about that is that this is the time we'd expect fuel buyers to be in the market placing future volumes under contract. Usually the utilities come to the market some three to five years before they need to load the fuel into their reactors, and today we're within that window, as we believe that utility requirements begin to open up after 2018. But as I said, that contracting isn't happening, at least it isn't yet.
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So utilities, as I say, have had the luxury of waiting it out to see if they're comfortable, there's enough uranium, waiting to see if prices will go even lower because of the oversupply, and they've been rewarded for that strategy over the last years with low prices.
That said, producers like us, like Cameco, we've stepped back as well. We are fortunate at Cameco to have a strong contract portfolio in place that provides significant protection for us through this period. We're heavily committed through 2018. Our average realized price has continued to outperform market prices. So I can tell you we sit at Cameco and say, with the market where it's at, with prices where they're at today, why would we lock in volumes at today's prices when we believe the market has to get better in the future. So given the long-term fundamentals that we're seeing, I can tell you we aren't in a hurry to lock in contracts or prices at today's levels.
So these are—those are just some of the pieces that are contributing to and sustaining the challenges that we've talked about over the last years. Just—you know, everyone asks when, when will it change. That's a difficult question and we don't really know the answer to that, but we do know what signposts we're watching and what could change it.
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First, we've talked about it already, it won't surprise you, is the pace of reactor restarts in Japan. We were obviously happy to see the first restarts in 2015, and we're watching closely to see how the restarts continue to happen throughout this year and into the future. As I mentioned earlier, there's 26 reactors. Four have made it through and are restarted; 22 more in the hopper, if you like, for the Japanese Nuclear Regulatory Authority. So overall we think this is a good news piece for the nuclear industry.
I can tell you companies like Tepco continue to participate. They're our partners at Cigar Lake. They continue to participate. They're exploring Saskatchewan. So they've spent, Japanese utilities, billions, tens of billions of dollars upgrading their facilities post Fukushima in Japan, so they're certainly behaving like it's going to be game on in Japan going forward.
Other things we watch for, the clearing of excess supply from the market, the return of long-term contracting in meaningful quantities in the market, certainly the continued progress of construction in countries like China and India and South Korea and the Middle East. Of course, as I've always said, keep your eye on supply. Watch the performance of supply. So we're watching all of those things and, you know, we hope to see changes soon in the market. But while we don't, we know it's going to be pretty challenging in our line of business.
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Let me talk just for a second about Cameco and our company and a bit of a change in strategy that we've had over the last while. We're very fortunate to have world-class assets at Cameco. We also think we have a good strategy in place to really weather the uncertainty that we've seen in the market and to be ready to benefit when the market does turn. If you've been following us, you know we're making a transition now to what we call our Tier 1 assets. We didn't always have that luxury in the past. We struggled with Cigar Lake and now we're moving forward with that. These are assets, of course, which return the best value to our company and to our shareholders.
Focusing on those assets with some uncommitted production going forward allows us to gain operating leverage as the market transitions, but it also—if you've got the lowest-cost assets, it provides protection in a, as our Board says, lower for longer situation which, of course, we want to protect from as well. So we know that the market will always pay for Tier 1 assets, and so those are the assets we're focusing on going forward.
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I'll talk about two of them that are located back up north in Saskatchewan in the Athabasca basin. And as you know, the Athabasca basin is one of the most prolific areas for uranium in the world. We're fortunate to have a strong strategic presence there. We have majority control and operatorship of two of the highest-grade deposits in the world, the McArthur River mine and now the Cigar Lake mine.
I'll say a few words about McArthur. It's our flagship operation, produced just over 19 million pounds last year, making it the largest uranium production centre in the world; our share, 70% of that, so 13.3 million pounds coming our way. Just to give you some context, if McArthur River was a uranium producing country, it would be the third-largest uranium producing country after Kazakhstan and Canada in the world. So a primary area of focus for us. Good news there, we're budgeted to produce about 20 million pounds. We have regulatory approval to go to 25 million, should we so desire, and so you can imagine what five million incremental pounds on the world's best uranium asset might be worth. So we're not going there yet. We're holding back; we're ready, but that is a nice piece of property for Cameco going forward.
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Cigar Lake, it's probably a bad news/good news story. You've heard us talk about it for years. It was discovered in '81 and we flooded it several times and have fought with it. I have to say last year was a bit of a game-changer for us in 2015. The year before we'd planned to produce some millions of pounds we didn't. So last year our budget was six to eight million pounds; we ended up producing 11.3, so that's great news. When you can have your big producers, lowcost producers, produce at that level, it gives you a lot more optionality, flexibility with your other assets. So Cigar Lake clearly on the rampup now. We've budgeted 16 million pounds for this year, and we're going to 18 million pounds, which is capacity, by—we'd said 18 by '18, now we're saying 18 by '17, so we're getting more comfortable with the mine.
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So that's a good news story. We have other operations. Rabbit Lake in Saskatchewan, that's been operating since about 1973, not in the Tier 1 category. Inkai in Kazakhstan, good production centre for us, partners with the Kazaks. Brings us about three million pounds a year. Properties in the US, the ISR technology that give us some diversity on geology, geography, and mining method, and just some options, if you like. So we're not looking at increasing production until we see better market conditions, and the good news is that when we do see those, we'll be ready to move relatively quickly.
We also have what we call the bullpen of projects, projects we've acquired over the years, the Millennium, Kintyre in Australia, and we've got—or sorry, Yeelirrie and Kintyre in Australia, the Millennium in Saskatchewan.
So in all you can see our chart. We have about 410 million pounds of proven and probable reserves, 377 million pounds of measured and indicated, about 381 million pounds of inferred. So we're in pretty good shape that way. The point I want to make is that we've got a lot of pounds ready when the market does turn and does improve. We're in good shape to go after it.
So that's really our plan for the future. In the end, of course, our ultimate goal is to provide strong results for our shareholders. I think we've tried to prove year after year that good markets and bad we can do that, even when things are really tough. That's partly a result of our contracting strategy that we've employed over the last number of years. We target a contract portfolio that has about 40% fixed price contracts that escalate over time, and we were fortunate to sign some of those on the last run-up. The other 60% of our contracted portfolio we like to 17
have at market price at time of delivery. It takes some risk, but you're more in the market. We often employ floors and ceilings, but that's what we like to do. It's worked for us. Is it perfect? We've had people do studies on it, none of them perfect, but it seemed to work well for Cameco. It's provided us good protection in tough times and some good upside when things got better.
The other piece, of course, associated with that is that our average realized price—we're not living on the $32 to $33 spot price today. Our average realized price is in the area of about US$45 today, and with our focus on Tier 1 assets, we can live in that world.
So the other side of the piece is cost and keeping control of costs, and I hear the other commodities say 18 months of really tough times. Five years for us now since Fukushima, so we've taken some really difficult steps, I would say, inside the company, reduced the workforce, leaned it up, and we're trying to be as tight as we can across all parts of the business so that we control the cost side of the equation as well. I can tell you we're never finished in that regard. We're always looking for cost savings across the company.
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So I'll conclude now. I have a couple things I just want to leave you with that might be relevant. I would say number one, the near term for the industry is challenging, and producers of all kinds are going to have to be evermore innovative and evermore efficient to weather the near-term uncertainty. We're doing that at Cameco. Number two, we're well-positioned to succeed. If things go we'll be real good, and if things, as our Board says, stay lower for longer, we'll be just fine in that environment as well. Probably the most important piece is number three, and that is that the long-term growth story is really the story for our industry. Population growth's a given. Increasing energy demand, a given. Nuclear energy, we think, will continue to play an important role in providing the world with safe, clean, reliable, and affordable electricity, and I can assure you at Cameco we'll be ready to participate in that.
So those are my comments for today. Thank you very much for your attention. I'd be delighted to answer any questions.
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ED STERCK (BMO): Thank you very much, Tim. So we've got some questions from the app sort of wrapped together. They're all from someone called Anonymous, so be prepared for pretty pointed questions. But...
TIM GITZEL: Probably our Board Chairman.
ED STERCK (BMO): Talking about the environment in terms of supply and demand, pricing, and so on and so forth, the disconnect between future demand projections and future supply projections, when do you think that tipping point's going to come when we see the market enter into undersupply and that begin to be recognized in the pricing and, you know, how much of a component of that is the secondary supplies that you mentioned? I guess we've got oversupply in terms of enrichment at the moment that's allowing for some under feeding. How does that all come together?
TIM GITZEL: Yes, because that's a deep question. I mean, if we knew the date we'd be probably out on the beach instead of in here. I guess if you take our numbers—and you take our numbers, you can take Ux numbers, you can take TradeTech numbers, today consumption about 170 million pounds. You can see that. You know how many reactors are operating, what kind they are, how much fuel they consume. Today, 170 million. You can see the ones under construction and 20
what's planned for the next 10 years, and so we say 170 million to 220 million. You also know what supply is out there. Now, we don't know what the behaviour of all the producers will be, but it's about 160 million pounds. But with normal—without investment that's going to trickle down until we think 140 million pounds. Pick your numbers. It doesn't have to be those numbers. That's a significant gap. That's the four Cigar Lakes that we talk about. We know, from experience, how hard it is to bring on new production. I can tell you, if you look at our CapEx, a year or two ago we were at $800 million; today we're talking $250 million to $300 million. We're not spending, other than sustaining capital.
Today, there's just a feeling with Japan, there's enough material, secondary supplies, that why would we enter into a long-term contract for the utilities, why enter into long-term contracts when we can pick some pounds on the nearer term at market, $33 to $35, and really punt the decision down another year to enter the long-term contracts? They're not worried. They're not concerned.
Now, at some point, when the reactors run for 30 years, 40 more years, people are going to stop thinking about 2016 and 2017, and say the Chinese keep building, the Japanese bring their units back on, other build, where's the uranium going to come from? If we believe Cameco's numbers, or Ux, something has to happen. There has to be a price response, we think, to incentivize companies like ours to invest in new production. We obviously haven't hit that yet, but when it turns from a sense of comfort to security of supply becomes—then you'll see some excitement in our business. When that is, I don't know. I wish I could tell you. I tell you that our company, in the meantime, we can weather the storm, if you like, but that moment has to come at some point given—you know, if you accept what's going on in the world. So we'll wait and see.
ED STERCK (BMO): Thank you. Now we've got a question from the floor here.
MALE SPEAKER: Thanks. Just, if you could give some colour on the increase in underfeeding with the Russians and where you see that moving forward, and also, do you expect any major declines in Kazakhstan which we haven't seen at all? 21
TIM GITZEL: Sorry, what was the second part, in Kazakhstan?
MALE SPEAKER: About the declines in the production, do you see them starting to decline or continue to—thank you.
TIM GITZEL: So, you know, the Russian—that's a bit of a black box. Under the HEU Agreement we knew exactly what was going on. There was 500 metric tons of HEU, highly enriched uranium, blended down, was a specific quantity. We got seven million pounds a year, Areva got seven, NUKEM got 2.4. That's how it worked. That ended in 2013. Since then, we know there's still some coming in from Russia. We don't know how much. We think it might be in the order of five million pounds a year from underfeeding. Urenco's doing some under feeding. The DOE's putting some secondary supply onto the market to pay for the cleanup of their old enrichment, Portsmouth/Paducah. So, you know, how much is there of the secondary stuff, 20 million pounds, 30 million pounds a year probably right now but, you know, we think that's going to run out at some point going forward, too.
So the primary producers are going to have to step up at some point and bring on new production, and if it's eight years—you know, if you said Tim, you should get that Millennium project going, that's a nice one, I'd say okay, we'll have first production in about 2025. Is that in time? Maybe, I don't know. But that's kind of the crunch we're coming to, I think, and so we'll see how long we can wait.
Kazakhstan, that's been a marvelous story: 10, 15 years ago—zero production there under the leadership at the time and it's changed a few times. They've gone up to where today at 23,000 tons, 60 million pounds they produce. Forty percent of the world production coming out of Kazakhstan. The good news—well, the good news is we have a piece of one of the projects. But the other good news is that they've flattened on—you know, the last three years they were increasing by 5,000 tons a year, now it's pretty flat. I think they went up about a thousand tons last year in production and holding pretty flat now. 22
MALE SPEAKER: (Inaudible 29:49).
TIM GITZEL: I think it'll be more flat. They're not investing. We know because we have other projects and they're not allowing—you can have 90%, they can have 10%. They kind of tell you how things are going. So they're not allowing a whole lot of new investment in capital. So flat, probably. If there's not a lot of investment, you might see a bit of a decline.
The other piece is that's a lot of uranium to be coming out of one country, you know, 40% of the world production. So it's a great place to be. We're happy to be there. But I think they're probably stabilizing at that level.
ED STERCK (BMO): Thank you. One quick question here and then...
MALE SPEAKER: (Inaudible 30:26). Are they building up normal pre-start inventory, or are they under building inventory, and what might that mean to demand?
TIM GITZEL: Yes, and that question circles mostly around China, who has this big program. We've been dealing with China—let me take you a little bit back on the China story, because it's the lead story, if you like, as far as that goes. Early 2000s they were just getting into nuclear, and we were watching and people were saying—really, are they really going to get into nuclear, are they going to build? They started building and announcing big builds, and then, of course, (inaudible 31:05) 2002, 2003, 2004 we saw some—the price gone from $10 up to, I think, $15, $17. We thought we were in heaven.
Then we flooded Cigar Lake, if you remember that one. The price went from about $20 to $134, $136 in July 2007. People said okay, the mine's not a loss. The price came back down into the—kind of the $40, $42 level in '09 and '10. June 2010, the Chinese came in, they bought 150 23
million pounds; 52 from us, 50 from Areva, 50 from the Kazaks. Price went $42 to $72 within, like, a month. Sat at $72 until March 10, March 11, 2011, Fukushima, off the cliff we went again. So the answer is yes, they've been building. That was an initial bump of uranium that they bought and put in the warehouse because of this aggressive program they've got. If you look at 2020, I said they'll have 58 reactors operating. That's about 30 million pounds of consumption a year. Never minding the first cores, that's 30—and then if they bring on eight per year, you need another four million pounds for—so do they have a big inventory now? Yes. But that's going to start going pretty quick, and I can tell you they're in the market. They're buying; they're extending; they're running their own projects, trying to get them going. They'll be a big player going forward.
ED STERCK (BMO): Thank you, Tim.
TIM GITZEL: Good. Thank you very much.
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March 1, 2016
Time:
10:00 AM ET
Presenter:
Tim Gitzel President and Chief Executive Officer Cameco Corporation
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.
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ED STERCK (BMO): So I'm pleased to introduce Cameco. Cameco is one of the world's—well, it's the world's largest listed pure play uranium producer. It's got operations in Canada, the US, and Kazakhstan. It operates uranium refining and conversion facilities in Ontario and also in NUKEM, which is a nuclear fuel trader based in Germany. Here to give us an update on the company is the President and CEO, Tim Gitzel. Tim?
TIM GITZEL: Well thank you very much, Ed, for that kind introduction. Good morning, everybody. I'm delighted again this year to be back for another year. It doesn't take a lot of convincing for somebody from Saskatoon, Saskatchewan to come to Florida for a few days at the end of February and into March, even though we've had a little bit of climate change action in Saskatchewan as well. We often say we're not opposed to global warming up in Saskatoon. I note a couple of our Board members are here today, Catherine Gignac and Jim Gowans, so I just ask you to save your difficult questions for them at the end.
I want to just acknowledge BMO as well for inviting us. This is, I think, the 25th anniversary of this conference, and it's a real special event. It's an event we don't miss. We get to see a lot of people. The speed dating thing goes on, but it's really been useful so thanks, Ed, to you and BMO.
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All right, before we get started, I'll pass on our usual friendly reminder that we're going to include some forward-looking information here which is based on some assumptions and that results could differ materially. We just put out a shiny new MD&A. It's a lovely document. If you have a chance to read it, it's full of information about the company and the industry, so I'd encourage you to take a look at that.
So this morning I want to spend a few minutes giving you just a brief overview of, really, the current realities in our industry and talk about our company, Cameco obviously, how we're navigating our way through some of those realities. It really comes down in our minds to three things, and first—and it's a big deal for us—ten days from now, March 11, will be the fifth anniversary of the Fukushima accident in Japan, and I can tell you that through these five years 3
the nuclear industry has been a tough place and continues to be a tough place to be and a challenging place to be.
Second, and this is a statement of the obvious, probably, but we believe that with each passing day that goes by we're closer to an improved market, and we have a pretty clear line of sight to some pretty positive fundamentals that are going on in the industry over the long term.
Then, third, I would say just at Cameco we think we have a very strong—the right strategy in place, both to weather the current situation, the current challenges if they last longer, and as well to benefit when the market does call for more uranium, which we think will come soon.
So let's take a look at the long-term outlook, because ours is—as you know, nuclear is a long lead time industry, and that's really where the focus of our company is. I can say that when we look to the future it's a pretty positive picture. What gets us up in the morning and gets us going in the morning is that we live in a world that is driven by a substantial and a continued increase in world energy demand, which you can see on the slide. We live in a world today that faces a lot of challenges, economic uncertainty, political turmoil, and a global population of about seven billion people, two billion of which today have little or no access to electricity; and we're going to add another two billion people to the planet by 2050, and they're going to need electricity as well.
So they're—you see a growing need for electricity, which is more than just something to plug your iPhone into. It really improves the standard of living for many people in many countries. So 4
what's needed is this large-scale base-load electricity, 24-hour power that allows you to make things like health care, education, communication, and transportation systems run on a continuous basis.
So when countries around the world are looking at their options for base-load, we think nuclear electricity looks pretty attractive. It's an option that provides us large baseload electricity, not only reliably, but safely and affordably, and in a way that, today, important, avoids emitting greenhouse gasses and avoids adding to the air pollution that plagues many of the countries and cities around the world. That's why we see countries like China, India, South Korea, and now the Middle East adding nuclear generation to their grids.
Let me talk about China for just a minute. China leads the growth in nuclear. Today, China has 30 reactors in operation. They have 24 under construction and many more planned by 2025. Eight new reactors started up in China last year. The plan, their stated plan, is to have 58 reactors operating by 2020, with another 30 under construction at that time. So you can see the growth. The growth is real, the growth is rapid, and it shows no signs of abating. We're awaiting the next five- or ten-year plan for nuclear, which we think will be out some time in the next month or so.
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China, not the only market driving growth in our world. India, also pursuing an aggressive build program. Today, India has 21 operating reactors. They have six under construction and many more in the planning stages. It takes a little bit longer in India to get things done, but they're working with companies like Areva and Westinghouse and the Russians. So we think the future looks good, and of course again, massive power needs. They're going to need all the electricity they can get. Why is that? According to the United Nations, India is the fastest-growing population in the world, will overtake China as the most populous country by 2030. Today in India, about 1.2 billion people; 400 million, no access to electricity. So you can see their needs are massive.
So in terms of keeping up with energy supply, it's a tall order, but it makes India really important on the electricity scale and a country we've been following very close. We've been working on the Indian market at Cameco for many, many years, and we were delighted last year, Prime Minister Modi came over to Canada with then Prime Minister Harper. Our Premier, Brad Wall, and I shook hands, signed an agreement that sees us supply about seven million pounds of uranium to India over the next few years, and we're working on more, I can tell you. It was a good opening bid, a nice agreement that opens the door to us, and I think we're going to have a lot more access to that market in the years to come.
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Those are just a couple examples of the nuclear growth in the world, but it's happening in other places; other places, the United Arab Emirates, a place that you might not imagine. So as a result, the growth in reactor construction expected over the next number of years is at a level that we haven't seen for a long time, probably since the late '70s, early '80s. Today, around the world, 64 reactors under construction, and many continue to be brought online, including 10 new ones were brought online in 2015.
Now if you want to switch over and you want to talk about this in terms of financial numbers growth, US Department of Commerce estimates that the investment today in nuclear and over the next decade to build the reactors under construction is about $740 billion. That's a lot of investment, that's a lot of reactors.
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And, of course, in our world more reactors means more uranium. So today the world's fleet of 439 nuclear reactors consumes about 170 million pounds of uranium on an annual basis. Based on the reactors that we see under construction and planned, we expect that number, that consumption number, to grow to about 220 million pounds per year over the next decade, which equates to an average annual growth rate of about 3% per year. In mining parlance, and with the normal depletion curve for existing mines, that would equate to about three or four more Cigar Lakes being required over those same 10 years. And that's not a simple task, as we at Cameco can attest to. So you can see why we think there's such a strong growth story over the long-term from a demand point of view.
The other side of the equation, obviously the supply side, and historically uranium consumption has outpaced primary supply. This is a longstanding feature of our industry which has, over the years, been bridged by what we call secondary supply. But even those, we believe, are starting to diminish.
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The biggest source of secondary supply over the last years has been the Russian HEU Agreement, which brought about 24 million pounds of uranium per year to the market. That ended in 2013, and we know that because we were one of the principal beneficiaries of this agreement, and that was a significant loss of pounds to the market. So with the completion of that agreement and with other sources of secondary supply continuing to draw down, we know there's going to have to be greater reliance in the future on primary supply.
But therein lies the problem, or the dilemma, if you like. With a sluggish market, continued low prices over the past few years, there hasn't been a lot of incentive for companies like ours to invest in new production. In my view, no reasonable producer is going to invest big capital in the $33 market. So it's not surprising, then, as a result many new projects have been delayed and deferred and canceled, including some of our own. Add to that we are not an industry that's particularly known at being fast in bringing on new production. A new mine to bring on can be in the range of eight to ten years, when things go well. So in our view, and not long from now, at some point, the market's going to be calling for more uranium at a time when it could be difficult for producers to step up and bring on new production. We've seen this movie before. The result is that along with an encouraging demand story, we think there's a compelling supply story that goes with it.
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Of course, all of this has been complicated by Fukushima, and its effects on the market clearly have lasted longer than we thought. It's now, as I said earlier, almost five years since the accident. I don't think anyone expected conditions to last this long; certainly, we didn't at Cameco. That said, since I stood before you in this exact same place one year ago, we've made some progress. Commencing last summer, in August, the first re-starts in Japan occurred; Sendai unit number 1, then Sendai unit number 2, and now we have Takahama 3 and 4 on, so four units operating. The good news, the encouraging news, is that there's 22 more nuclear reactors in the queue at the regulator waiting to get approved to go forward. So we think that's good news and we're hopeful that the lessons learned from the process from the first four will help speed up the approvals for the others that are in the queue.
Another reason for a sluggish market has been the fact—we can't deny it—that some countries have moved away from nuclear or reduced their fleets. Germany, an example that always gets brought up. The day before Fukushima, they were extending the lives of their nuclear plants. Seventeen nuclear plants in Germany were going to run longer. Fukushima happened, and they took the opposite decision, deciding to phase out nuclear over time. So, today, eight units shut down, nine still operating in Germany, with plans to phase them out over time.
In other places, unexpected reactor closures. Here in the US is a good example. There've been some reactors taken down. It normally happens in electricity markets where reactors have become uneconomic, and that normally is a result of deregulation and, more specifically, the low price of gas in the United States. 10
Of course, global events play as well. Sluggish economy, geopolitical issues around the world, and really flat electricity demand around the world.
So, you know, as a result of all of this we've seen an erosion of near- to medium-term demand for uranium over the last couple of years, which has really allowed utilities to sit comfortably, enjoy low near-term prices, and defer making any long-term contracting decisions. Let me give you an example that's maybe easier. Typically, in a normal contracting year, we would see annual long-term volumes similar to consumption levels. So if the world's reactors annually consume about 170 million pounds, we'd expect to see something around 170 million pounds contracted on the term market. In 2013 only 25 million pounds were contracted. In 2014, 77 million pounds were contracted. In 2015, it was 80 million pounds. So you can see that equates to about a 65% reduction in normal long-term contracting over the past three years. My view is that this continued deferral can't last forever.
The interesting part about that is that this is the time we'd expect fuel buyers to be in the market placing future volumes under contract. Usually the utilities come to the market some three to five years before they need to load the fuel into their reactors, and today we're within that window, as we believe that utility requirements begin to open up after 2018. But as I said, that contracting isn't happening, at least it isn't yet.
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So utilities, as I say, have had the luxury of waiting it out to see if they're comfortable, there's enough uranium, waiting to see if prices will go even lower because of the oversupply, and they've been rewarded for that strategy over the last years with low prices.
That said, producers like us, like Cameco, we've stepped back as well. We are fortunate at Cameco to have a strong contract portfolio in place that provides significant protection for us through this period. We're heavily committed through 2018. Our average realized price has continued to outperform market prices. So I can tell you we sit at Cameco and say, with the market where it's at, with prices where they're at today, why would we lock in volumes at today's prices when we believe the market has to get better in the future. So given the long-term fundamentals that we're seeing, I can tell you we aren't in a hurry to lock in contracts or prices at today's levels.
So these are—those are just some of the pieces that are contributing to and sustaining the challenges that we've talked about over the last years. Just—you know, everyone asks when, when will it change. That's a difficult question and we don't really know the answer to that, but we do know what signposts we're watching and what could change it.
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First, we've talked about it already, it won't surprise you, is the pace of reactor restarts in Japan. We were obviously happy to see the first restarts in 2015, and we're watching closely to see how the restarts continue to happen throughout this year and into the future. As I mentioned earlier, there's 26 reactors. Four have made it through and are restarted; 22 more in the hopper, if you like, for the Japanese Nuclear Regulatory Authority. So overall we think this is a good news piece for the nuclear industry.
I can tell you companies like Tepco continue to participate. They're our partners at Cigar Lake. They continue to participate. They're exploring Saskatchewan. So they've spent, Japanese utilities, billions, tens of billions of dollars upgrading their facilities post Fukushima in Japan, so they're certainly behaving like it's going to be game on in Japan going forward.
Other things we watch for, the clearing of excess supply from the market, the return of long-term contracting in meaningful quantities in the market, certainly the continued progress of construction in countries like China and India and South Korea and the Middle East. Of course, as I've always said, keep your eye on supply. Watch the performance of supply. So we're watching all of those things and, you know, we hope to see changes soon in the market. But while we don't, we know it's going to be pretty challenging in our line of business.
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Let me talk just for a second about Cameco and our company and a bit of a change in strategy that we've had over the last while. We're very fortunate to have world-class assets at Cameco. We also think we have a good strategy in place to really weather the uncertainty that we've seen in the market and to be ready to benefit when the market does turn. If you've been following us, you know we're making a transition now to what we call our Tier 1 assets. We didn't always have that luxury in the past. We struggled with Cigar Lake and now we're moving forward with that. These are assets, of course, which return the best value to our company and to our shareholders.
Focusing on those assets with some uncommitted production going forward allows us to gain operating leverage as the market transitions, but it also—if you've got the lowest-cost assets, it provides protection in a, as our Board says, lower for longer situation which, of course, we want to protect from as well. So we know that the market will always pay for Tier 1 assets, and so those are the assets we're focusing on going forward.
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I'll talk about two of them that are located back up north in Saskatchewan in the Athabasca basin. And as you know, the Athabasca basin is one of the most prolific areas for uranium in the world. We're fortunate to have a strong strategic presence there. We have majority control and operatorship of two of the highest-grade deposits in the world, the McArthur River mine and now the Cigar Lake mine.
I'll say a few words about McArthur. It's our flagship operation, produced just over 19 million pounds last year, making it the largest uranium production centre in the world; our share, 70% of that, so 13.3 million pounds coming our way. Just to give you some context, if McArthur River was a uranium producing country, it would be the third-largest uranium producing country after Kazakhstan and Canada in the world. So a primary area of focus for us. Good news there, we're budgeted to produce about 20 million pounds. We have regulatory approval to go to 25 million, should we so desire, and so you can imagine what five million incremental pounds on the world's best uranium asset might be worth. So we're not going there yet. We're holding back; we're ready, but that is a nice piece of property for Cameco going forward.
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Cigar Lake, it's probably a bad news/good news story. You've heard us talk about it for years. It was discovered in '81 and we flooded it several times and have fought with it. I have to say last year was a bit of a game-changer for us in 2015. The year before we'd planned to produce some millions of pounds we didn't. So last year our budget was six to eight million pounds; we ended up producing 11.3, so that's great news. When you can have your big producers, lowcost producers, produce at that level, it gives you a lot more optionality, flexibility with your other assets. So Cigar Lake clearly on the rampup now. We've budgeted 16 million pounds for this year, and we're going to 18 million pounds, which is capacity, by—we'd said 18 by '18, now we're saying 18 by '17, so we're getting more comfortable with the mine.
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So that's a good news story. We have other operations. Rabbit Lake in Saskatchewan, that's been operating since about 1973, not in the Tier 1 category. Inkai in Kazakhstan, good production centre for us, partners with the Kazaks. Brings us about three million pounds a year. Properties in the US, the ISR technology that give us some diversity on geology, geography, and mining method, and just some options, if you like. So we're not looking at increasing production until we see better market conditions, and the good news is that when we do see those, we'll be ready to move relatively quickly.
We also have what we call the bullpen of projects, projects we've acquired over the years, the Millennium, Kintyre in Australia, and we've got—or sorry, Yeelirrie and Kintyre in Australia, the Millennium in Saskatchewan.
So in all you can see our chart. We have about 410 million pounds of proven and probable reserves, 377 million pounds of measured and indicated, about 381 million pounds of inferred. So we're in pretty good shape that way. The point I want to make is that we've got a lot of pounds ready when the market does turn and does improve. We're in good shape to go after it.
So that's really our plan for the future. In the end, of course, our ultimate goal is to provide strong results for our shareholders. I think we've tried to prove year after year that good markets and bad we can do that, even when things are really tough. That's partly a result of our contracting strategy that we've employed over the last number of years. We target a contract portfolio that has about 40% fixed price contracts that escalate over time, and we were fortunate to sign some of those on the last run-up. The other 60% of our contracted portfolio we like to 17
have at market price at time of delivery. It takes some risk, but you're more in the market. We often employ floors and ceilings, but that's what we like to do. It's worked for us. Is it perfect? We've had people do studies on it, none of them perfect, but it seemed to work well for Cameco. It's provided us good protection in tough times and some good upside when things got better.
The other piece, of course, associated with that is that our average realized price—we're not living on the $32 to $33 spot price today. Our average realized price is in the area of about US$45 today, and with our focus on Tier 1 assets, we can live in that world.
So the other side of the piece is cost and keeping control of costs, and I hear the other commodities say 18 months of really tough times. Five years for us now since Fukushima, so we've taken some really difficult steps, I would say, inside the company, reduced the workforce, leaned it up, and we're trying to be as tight as we can across all parts of the business so that we control the cost side of the equation as well. I can tell you we're never finished in that regard. We're always looking for cost savings across the company.
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So I'll conclude now. I have a couple things I just want to leave you with that might be relevant. I would say number one, the near term for the industry is challenging, and producers of all kinds are going to have to be evermore innovative and evermore efficient to weather the near-term uncertainty. We're doing that at Cameco. Number two, we're well-positioned to succeed. If things go we'll be real good, and if things, as our Board says, stay lower for longer, we'll be just fine in that environment as well. Probably the most important piece is number three, and that is that the long-term growth story is really the story for our industry. Population growth's a given. Increasing energy demand, a given. Nuclear energy, we think, will continue to play an important role in providing the world with safe, clean, reliable, and affordable electricity, and I can assure you at Cameco we'll be ready to participate in that.
So those are my comments for today. Thank you very much for your attention. I'd be delighted to answer any questions.
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ED STERCK (BMO): Thank you very much, Tim. So we've got some questions from the app sort of wrapped together. They're all from someone called Anonymous, so be prepared for pretty pointed questions. But...
TIM GITZEL: Probably our Board Chairman.
ED STERCK (BMO): Talking about the environment in terms of supply and demand, pricing, and so on and so forth, the disconnect between future demand projections and future supply projections, when do you think that tipping point's going to come when we see the market enter into undersupply and that begin to be recognized in the pricing and, you know, how much of a component of that is the secondary supplies that you mentioned? I guess we've got oversupply in terms of enrichment at the moment that's allowing for some under feeding. How does that all come together?
TIM GITZEL: Yes, because that's a deep question. I mean, if we knew the date we'd be probably out on the beach instead of in here. I guess if you take our numbers—and you take our numbers, you can take Ux numbers, you can take TradeTech numbers, today consumption about 170 million pounds. You can see that. You know how many reactors are operating, what kind they are, how much fuel they consume. Today, 170 million. You can see the ones under construction and 20
what's planned for the next 10 years, and so we say 170 million to 220 million. You also know what supply is out there. Now, we don't know what the behaviour of all the producers will be, but it's about 160 million pounds. But with normal—without investment that's going to trickle down until we think 140 million pounds. Pick your numbers. It doesn't have to be those numbers. That's a significant gap. That's the four Cigar Lakes that we talk about. We know, from experience, how hard it is to bring on new production. I can tell you, if you look at our CapEx, a year or two ago we were at $800 million; today we're talking $250 million to $300 million. We're not spending, other than sustaining capital.
Today, there's just a feeling with Japan, there's enough material, secondary supplies, that why would we enter into a long-term contract for the utilities, why enter into long-term contracts when we can pick some pounds on the nearer term at market, $33 to $35, and really punt the decision down another year to enter the long-term contracts? They're not worried. They're not concerned.
Now, at some point, when the reactors run for 30 years, 40 more years, people are going to stop thinking about 2016 and 2017, and say the Chinese keep building, the Japanese bring their units back on, other build, where's the uranium going to come from? If we believe Cameco's numbers, or Ux, something has to happen. There has to be a price response, we think, to incentivize companies like ours to invest in new production. We obviously haven't hit that yet, but when it turns from a sense of comfort to security of supply becomes—then you'll see some excitement in our business. When that is, I don't know. I wish I could tell you. I tell you that our company, in the meantime, we can weather the storm, if you like, but that moment has to come at some point given—you know, if you accept what's going on in the world. So we'll wait and see.
ED STERCK (BMO): Thank you. Now we've got a question from the floor here.
MALE SPEAKER: Thanks. Just, if you could give some colour on the increase in underfeeding with the Russians and where you see that moving forward, and also, do you expect any major declines in Kazakhstan which we haven't seen at all? 21
TIM GITZEL: Sorry, what was the second part, in Kazakhstan?
MALE SPEAKER: About the declines in the production, do you see them starting to decline or continue to—thank you.
TIM GITZEL: So, you know, the Russian—that's a bit of a black box. Under the HEU Agreement we knew exactly what was going on. There was 500 metric tons of HEU, highly enriched uranium, blended down, was a specific quantity. We got seven million pounds a year, Areva got seven, NUKEM got 2.4. That's how it worked. That ended in 2013. Since then, we know there's still some coming in from Russia. We don't know how much. We think it might be in the order of five million pounds a year from underfeeding. Urenco's doing some under feeding. The DOE's putting some secondary supply onto the market to pay for the cleanup of their old enrichment, Portsmouth/Paducah. So, you know, how much is there of the secondary stuff, 20 million pounds, 30 million pounds a year probably right now but, you know, we think that's going to run out at some point going forward, too.
So the primary producers are going to have to step up at some point and bring on new production, and if it's eight years—you know, if you said Tim, you should get that Millennium project going, that's a nice one, I'd say okay, we'll have first production in about 2025. Is that in time? Maybe, I don't know. But that's kind of the crunch we're coming to, I think, and so we'll see how long we can wait.
Kazakhstan, that's been a marvelous story: 10, 15 years ago—zero production there under the leadership at the time and it's changed a few times. They've gone up to where today at 23,000 tons, 60 million pounds they produce. Forty percent of the world production coming out of Kazakhstan. The good news—well, the good news is we have a piece of one of the projects. But the other good news is that they've flattened on—you know, the last three years they were increasing by 5,000 tons a year, now it's pretty flat. I think they went up about a thousand tons last year in production and holding pretty flat now. 22
MALE SPEAKER: (Inaudible 29:49).
TIM GITZEL: I think it'll be more flat. They're not investing. We know because we have other projects and they're not allowing—you can have 90%, they can have 10%. They kind of tell you how things are going. So they're not allowing a whole lot of new investment in capital. So flat, probably. If there's not a lot of investment, you might see a bit of a decline.
The other piece is that's a lot of uranium to be coming out of one country, you know, 40% of the world production. So it's a great place to be. We're happy to be there. But I think they're probably stabilizing at that level.
ED STERCK (BMO): Thank you. One quick question here and then...
MALE SPEAKER: (Inaudible 30:26). Are they building up normal pre-start inventory, or are they under building inventory, and what might that mean to demand?
TIM GITZEL: Yes, and that question circles mostly around China, who has this big program. We've been dealing with China—let me take you a little bit back on the China story, because it's the lead story, if you like, as far as that goes. Early 2000s they were just getting into nuclear, and we were watching and people were saying—really, are they really going to get into nuclear, are they going to build? They started building and announcing big builds, and then, of course, (inaudible 31:05) 2002, 2003, 2004 we saw some—the price gone from $10 up to, I think, $15, $17. We thought we were in heaven.
Then we flooded Cigar Lake, if you remember that one. The price went from about $20 to $134, $136 in July 2007. People said okay, the mine's not a loss. The price came back down into the—kind of the $40, $42 level in '09 and '10. June 2010, the Chinese came in, they bought 150 23
million pounds; 52 from us, 50 from Areva, 50 from the Kazaks. Price went $42 to $72 within, like, a month. Sat at $72 until March 10, March 11, 2011, Fukushima, off the cliff we went again. So the answer is yes, they've been building. That was an initial bump of uranium that they bought and put in the warehouse because of this aggressive program they've got. If you look at 2020, I said they'll have 58 reactors operating. That's about 30 million pounds of consumption a year. Never minding the first cores, that's 30—and then if they bring on eight per year, you need another four million pounds for—so do they have a big inventory now? Yes. But that's going to start going pretty quick, and I can tell you they're in the market. They're buying; they're extending; they're running their own projects, trying to get them going. They'll be a big player going forward.
ED STERCK (BMO): Thank you, Tim.
TIM GITZEL: Good. Thank you very much.
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