Nuclear Power Related Media Thread, page-5481

The link to the transcript of the Cameco "round table" last night - the bit on GLE is at the end

https://seekingalpha.com/article/4725679-cameco-corporation-ccj-td-securities-annual-nuclear-fuel-cycle-and-next-generation-nuclear

Cameco Corporation (NYSE:CCJ) TD Securities Annual Nuclear Fuel Cycle and Next Generation Nuclear Roundtable - 2024 Conference October 8, 2024 11:35 AM ET

Company Participants

Grant Isaac - Executive VP and CFO

Conference Call Participants

Craig Hutchison - TD Securities

Craig Hutchison

Good morning. Our next speaker is Grant Isaac, Executive Vice President and Chief Financial Officer of Cameco Corp. Welcome, Grant.

Grant Isaac

Hi there. Good to see you, Craig.

Question-and-Answer Session

Q -Craig Hutchison

Thanks for joining us again for our 9th Nuclear Roundtable. So I want to sort of things off just with it -- which is broader macro question just with regard to term contract activity. I mean, it's obviously tracking below where it was last two years. Arguably, it's below where it needs to be in terms of replacement levels. As for [post-WNA] (ph), we have seen a little bit of a tick-up in terms of the contracting activity, especially in the spot market, but are you starting to see a shift in terms of urgencies to enter into long-term contracts, given all the issues we're having on the supply side?

Grant Isaac

Great place to start with demand, and I'll try to be brief, but I think there's a couple of really important points that we need to make. And of course, I noticed the title of this is Nuclear Fuel Cycle. And as I looked at the list, I think we're the only actual nuclear fuel cycle company right across the whole cycle. So we have lots of observations on what's actually going on in the market.

I would say, let's just start with the really, really good news, which is these tailwinds have never been stronger from a nuclear fuel cycle demand point of view. You've got the tailwinds of climate security, now wrapped around with the tailwinds of energy security, now wrapped around with actually national security. It's not uncommon that when you see countries talking about onshore of manufacturing and investing in data analytics and AI. They talk about it in a national security context, a national security context where electrons are the critical path item. That is great for nuclear, and it's absolutely great for the nuclear fuel cycle.

So there's no question that with all those tailwinds, you look at the year-to-date, 2024, long-term contracting volumes, and it seems a bit odd. It doesn't seem consistent with those tailwinds. Let me just give you a couple of reasons why I'm not overly concerned about it. First of all, what's going on in the market is not inconsistent with the normal contracting process. Remember, in the nuclear fuel cycle, fuel buyers typically don't start with uranium. They actually start downstream. They start with their inventory position and then they start with their fabricating service and then they go to enrichment, then they go to conversion. And only when they have those services lined up at just a handful of global facilities of which Cameco plays a massive role in those facilities, then they look for their uranium.

So it's not inconsistent that as the demand is growing, the focus is more downstream at the moment. And we see it in really strong enrichment prices and historic conversion prices. So let's just say it's not unusual that the demand hasn't fully found its way into uranium yet. It's usually the last piece of the puzzle. So that's not particularly odd. I would say, it's also not uncommon for fuel buyers to respond to volatility by backing up, right? And what I mean there is we saw the spot price come off quite a bit in 2024. It rushed ahead. We were in big backwardation. And then it came off. It came off because there are still foolish producers in the uranium industry who want to sell into the spot market or want to sell through traders. That creates volatility in a very small, thinly traded spot market. When that spot market comes off, fuel buyers believe that that should be a one-for-one mapping on their long-term contract discussions. And what I mean is, say spot price drops by $10, then the conversation with fuel buyers is, well -- shouldn't floors and ceilings drop by 10 bucks? Well, no.

The spot price being pushed down by very small volumes on the front end of the market has nothing to do with the appropriate price of long-term material to be delivered out into the future. So that's not uncommon for volatility to create a bit of a pause in the market. And then let's not forget, there's uncertainty out there. That uncertainty has to do with looks like we're moving towards a [firm ban] (ph) on Russian material. There's a transition window. That transition window is subject to waivers. We don't yet know how much teeth those waivers are going to have, how tough they're going to be. That creates uncertainty and it creates pause. So all of this is pretty easy for me to explain.

So let me step away from the industry and just say a few things about Cameco. First of all, we continue to see lots of activity. We're an incumbent producer, geologic, geographic diversification, lots of interest. We're also in a window where we're being really fussy. When the spot price comes off and there is downward pressure on floors and ceilings, we just step back. We don't need to place these volumes right now. We step back and say the price for future material is what it is and we'll wait if we have to. We think the fundamentals are very strongly on our side. Another really important point is you look at the gap between market-related contracts and base-escalated, right?

Market-related contracts, pricing, floors, low $70s escalated, ceilings, $130, $135 escalated. What's the midpoint of that range? It's three-digit uranium. So a few buyers that are agreeing to market-related contracts are already signaling three-digit uranium, but remember, market-related contracts don't influence the term price. Only those that are fixing the price today affect that. So that suggests to us, there's an understanding the price of uranium has to go up. We're prepared to be disciplined and to wait for that. We've never been at these prices on this part of a fuel contracting cycle before. We're not even at replacement rate. And we're at $80 uranium and a strengthening long term price and floors and ceilings that are pushing into the $130, $135. That's a pretty exciting place to be. And we haven't even seen the full brunt of that demand, as I've talked about, hasn't shown its way all the way into uranium.

And then I -- just the final thing, any demand not brought to the market in 2024, just means more demand is getting piled up. It's getting piled up in a window where there are increasing risks to primary and secondary supply. And history tells us that's suggestive of really strong price formation. So I hear this, you know, contracting volumes in 2024, but if we step back and unpack it, not inconsistent, not strange behavior from the utilities, and it actually is all suggestive of a very strong window of contract of going forward.

Craig Hutchison

Great. You already answered my second question on floors and ceilings, but if we go back to that, you said $70 kind of low side, and $130, $135. Is Cameco able to kind of push up that floor just given where your supply is coming from, safe jurisdiction in Canada, are you able to kind of push that floor up on your contracting? Because you guys have layered in new contracts over the past couple of quarters here.

Grant Isaac

The way the uranium market works is that demand comes into the market for future delivery. In today's term market, Cameco always leads the construction of the terms and conditions and the pricing. Why? Because we are an incumbent. Because we've got license permitted, proven, scarce strategic assets in sovereign safe jurisdictions. We've got multiple sources of supply. We have multiple tools to de-risk deliveries for utilities. We always lead the market. Nobody is getting better terms and conditions than Cameco is.

So as the market constructs up, it's because of our strategy, and it's because of our patience. That's the way the market -- we didn't design the market this way, but we figured out how it works.

Craig Hutchison

Okay. [Are you shifting] (ph) to MacArthur River. You guys made it pretty clear in your earnings call that you're not looking at potential M&A. Your first priority is to increase production of your tier 1 assets include expanding MacArthur River from 18 million to 25 million pounds. Can you just discuss kind of where you are in this evaluation process and what you need to see in terms of contract, long-term contract mean volume to support an expansion?

Grant Isaac

Yeah. We have been very clear that in the uranium market, long-term value is created by having the right marketing strategy, backed up by production from reliable assets, and that all backed up and supported by a conservative financial strategy that allows you to pull off the kind of discipline and patience required to capture full value in this market. So MacArthur River expansion, Cigar lake extension, what we do with our tier 2 assets, what we do beyond that is always subject to the quality of the demand that's found its way into the market. This is not a market of build it and they will come. As the Kazakhs proved through the big run up in the [06-07] (ph) window, if you build assets and don't have homes for the production, that is a recipe for value destruction.

So this cycle, you see Kazatomprom, with a very big committed sales portfolio that they have to deliver into. That is how you create sustained value. So from that lens, the quality of the demand just hasn't been there. Demand is building. But as you started with, we're not even at replacement rate contracting yet. We're not even above replacement rate contracting, which is always suggestive of really strong price formation. So Cameco is technically still in supply discipline. For as good as the tailwinds are, we wait to see those tailwinds translate into demand. Because we're still in supply discipline, we're not yet at the point where we want to announce that MacArthur's going to 25 million pounds, because we're not at the point where all of our tier 1 production, pre-expansion has been spoken for. So we need that demand to come. We need to be patient with our supply discipline decisions. And we're not even thinking about our tier 2s on top of that. So as the demand firms up, as quality demand comes at terms and conditions that are representative of the future market, we will capture that demand and then we will make our production decisions accordingly. That's the way the uranium market works.

Craig Hutchison

I mean, [I'm noticing] (ph) MacArthur River has been operating very well year-to-date, had a really good first half of the year. Just any sense in terms of capital intensity for an expansion of this sort that you provide now, or is it just too early to kind of give some references for what that could cost?

Grant Isaac

Yeah, it's too early, but here's the good news. When you look at our supply discipline decisions, Cameco is sitting with about 30% of brownfield leverage beyond our current production targets. So whether it's expanding MacArthur River, the potential upside at our asset in Kazakhstan, plus bringing back our tier 2s, we have a 30% increase of production that's possible for Cameco from already licensed, already permitted projects that have supplied and been reliable suppliers. The capital intensity of brownfield increases is always better than the capital intensity of greenfield. So when this market went into, its hiatus, when term demand stepped out, we made a really important decision, Craig. We said we're going to inventory pounds in the ground, not in the can. And because we left those pounds in the ground, but left them adjacent to brownfield infrastructure, we have the best portfolio to bring back new production when the quality demand is there. And it's just not there yet, but it's coming.

Craig Hutchison

Okay. I mean, we should focus a little bit to the Westinghouse business. There's been a lot of rhetoric in the market in recent weeks that Russia may pre-emptively ban exports of LEU to the US. Does this create an opportunity for Cameco, considering you're much more vertically integrated with the Westinghouse and potential for – [enrichment side of] (ph) business at Westinghouse?

Grant Isaac

There is absolutely no question that Cameco is a primary beneficiary of a Western map that has been redrawn now includes Central and Eastern European customers, along with Western Europe, North America, South America, parts of Asia, because we're an incumbent producer across the fuel cycle. So that is hugely beneficial to us. You've seen it reflected in the Ukraine contract, where Cameco, Urenco, and Westinghouse are providing 100% of the fuel for Ukraine in order to replace the Russian fuel. And you've seen multiple announcements in other Central and Eastern European countries as they tried to move away from that. So being vertically integrated, participating across the nuclear fuel cycle is super important because uranium can never be thought of as a commodity independent of the fabricated fuel bundle that it's destined for. We don't sell to a smelter. We don't sell to a metals exchange. So participating in all those stages drives information, it drives value, and it drives value capture to other parts of the segment.

So there's no question -- we're a beneficiary of this shift. With respect to the Russian shift, it really is, as the Russians leave Central and Eastern Europe, there's fabrication opportunities for Westinghouse. But in the West, the Russians weren't fabricating a lot of fuel. So in the West, the traditional West, it really is replacing Russian enrichment, but in Russian enrichment shows up attached to something, and that's uranium and conversion. So there is no doubt that if you need to replace Russian enrichment, you've got to go and find the conversion and ultimately the uranium for it. So this is a very beneficial position for us to be in. It's why we have these assets across the nuclear fuel cycle. And while the uranium segment is critically important to us and always will be, we're absolutely delighted we're not just a miner and just a uranium producer because we get now to participate in all the value capture. You know, this is an important dynamic in the market and it's great for Cameco.

Craig Hutchison

Just again, on Westinghouse. I think you guys have talked about a 6% to 10% EBITDA growth outlook for this business. And [for what I understand] (ph), correct me if I'm wrong. These targets do not include new AP1000 wins. But we have seen a few wins kind of announced in the last month or so in Poland and China. Do these announcements start to push the forecast towards the upper end, to that 6% to 10% forecast?

Grant Isaac

Yeah, I just want to want to just clarify it a little bit. So at the time of putting out that forecast, we actually knew about the Poland announcement. We knew about Bulgaria. So what that reach to 10% does include is the initial front-end engineering and design type contracts that need to flow in. This is all pre-final investment decision, pre-FID by the Polish or the Bulgarian operators. But you begin to capture the high value engineering work. What it doesn't capture is if a final investment decision is made. What it doesn't capture is, and I'm standing between your audience and Julie Kozeracki, who's going to present the DOE study, the next liftoff report.

If we see a real unleashing of AP1000 new builds in the North American market, as a result of these very exciting first of a kind to end of a kind transitions in the cost structure at a time when nuclear is being looked at as national security, not just energy security, not just climate security. All of that is upside for the Westinghouse case. It's not built into those numbers. So you'll have to forgive me for being pretty excited about the world talking about gigawatt scale new build again, because Westinghouse has a reactor that isn't, doesn't take technology risk, doesn't take fuel risk. That is a great recipe for the clean dispatchable 24 hour electrons that are needed in this national security environment.

Craig Hutchison

So maybe we can just go there with the DOE report. It just seems like more recently with the announcements, like the center of gravity seems like it's shifting away from SMRs and more back to more traditional builds that could obviously favor AP1000. Is that your view as well?

Grant Isaac

I think I might just nuance it slightly, Craig. I think what's happening is the market is starting to mature into use cases. I think there'll always be a use case for mobile, micro reactors and hard to abate segments or Northern infrastructure, mines, mills, remote communities, a Permian Basin where you have to move power around so you don't want to build a fixed asset. I think there'll be a use case for micro.

I think the use case for the SMR, the 300 megawatts, is really consolidating around carbon replacement. This notion that if you have big fossil fuel generating facilities, coal plants, and you can take them down and put nuclear at that site and tie into all the existing transmission and distribution and not double pay for that, that's a good model to decarbonize. So I think a use case is forming there. But what's happening in the gigawatt space is the demand for electricity from the hyperscalers, from the on-shoring of manufacturing, the demand for which electrons is a critical path item, that demand is proving to be way, way bigger than you would satisfy by building a thousand microreactors or 300 SMRs, it's time to really just start talking about gigawatt scale new build, because gigawatts are what are needed in order to solve the electricity growth. So I just think we're seeing a maturing of the use cases and that's great.

Craig Hutchison

We have a couple minutes left. This is a question that's come up a lot recently from you and about marketing. Just in terms of Westinghouse capital returns, is there a capital returns framework that's set up in the JV level or free cash flow will start to come back to the JV partners? And if there is, can you just give us a sense of how that works and whether there's a targeted leverage ratio at the JV level before you start to see some dividends in the free cash flow?

Grant Isaac

Yeah, we're all working through that all right now. This is our first turn working with the strategic plan. We closed in November, so we kind of inherited a strategic plan. So us and Brookfield Renewable are turning that. We're turning that at a time when, hey, Cameco's excited about all the opportunities for Cameco, Westinghouse is excited about all the opportunities for Westinghouse. So we're going through the process of saying, yes, we expect a distribution, yes, we expect capital returns, but we also see very good investment opportunities. LEU plus fuel, BWR fuel, opportunities in the AP1000 space, AP300 space, potentially in [Invinci] (ph). We want to make sure we're making the right capital decision, so that Westinghouse can also benefit from these tailwinds for maximum value creation.

So pretty exciting time, not business as usual, but looking at a very durable growth profile for both the Cameco assets, the Westinghouse assets. And we haven't talked about it, but we're still pretty excited about the global laser enrichment opportunity too, on top of it.

Craig Hutchison

We're pretty much at time, but if you want to maybe have one extra minute, because I think we're going to break after this. Do you want to talk about that segment of business, the enrichment?

Grant Isaac

Yeah, so the enrichment segment, I already referenced it. Remember we got uranium, then it's for 90% of the global reactors has to be converted into a gas. Then it gets enriched as a gas. Then it gets brought back into usually an oxide form. But for some of these advanced reactors, maybe a metal be de-converted back into something for fabrication. Enrichment is something that we've always wanted to be in. We've just never been able to find our way into that unique club. So we decided to explore our way into that club. And now we've got our hands with our partner, SILEX on a technology that's attracting a lot of attention because it's not just supplier diversification. Because if you're in a world where you're saying no to the Russians and you're not replacing Russia with China, you're down to really Urenco and Orano, which have been really reliable suppliers, but most people don't realize they just share the same core technology.

So you're actually, you're not improving your technology risk, you're consolidating your technology risk in the ETC platform. So you're taking, you're getting technology diversification as well as supplier diversification. So GLE is attracting a lot of attention. It has multiple options, one, re-enriching depleted tails, so a liability management project to produce natural UF6. You've seen the conversion price, it's at historic levels. Good time to be thinking about that. It can do mainstream enrichment to replace the Russians. It could even do the high assay stuff if that market really starts to form.

So we've never been more optimistic about the opportunities facing the GLE technology. But make no mistake, it is a technology. It's got to work through a process. It's end of the decade before you can even conceive of deployment. That's tomorrow in the nuclear world. But we just always have to be realistic about these things. We're really excited about our position in uranium, conversion, enrichment, and of course, fabrication with what we do for the heavy water reactors and through Westinghouse, and now part of the reactor cycle in a way we've never been before. So these tailwinds are great for Cameco.

Craig Hutchison

It's a great wrap up and summary. I think we're going to have to leave it there a couple minutes over time, but thanks so much again, Grant.