Q3 2019 Earnings Call
Thank you for standing by this is the conference operator welcome to the Chemical Corporation third quarter 2019 Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question Q you May Press Star one on your telephone keypad should you need assistance during the conference call you May signal, an operator by pressing star Zero I would now like to turn the conference over to Rachelle, Girard, Vice President Investor Relations.
Please go ahead Mr. Gerard.
Thank you operator, and good day, everyone. Thank you for joining US welcome to Count goes third quarter Conference call today's call will focus on the trends, we're seeing in the market and our strategy not on the details of our quarterly financial results. If you have detailed questions about our quarterly financial results. Please reach out to the contacts.
Why did in our news release, and we will be happy to help you with those details.
With us today on the call our Tim gets old President and CEO Grant Isaac Senior Vice President and CFO .
Alex Wong Senior Vice President and Chief Corporate Officer, Brian Riley Senior Vice President and Chief Operating Officer, and Sean Quinn Senior Vice President Chief Legal Officer, and corporate Secretary.
Tim will begin with comments on our strategy and the market. After we will open it up for your question.
If you ever joined the conference call through the web site event page there slides available which will be displayed during the call. The slide there are also available for download in the PDF file through the conference call link at Cameco Dot com.
Today's conference call is open to all members of the investment community, including the media.
During the Q1 eighth session. Please limit yourself to two questions and then returned to the Q.
Please note that this conference call will include forward looking information, which is based on a number of assumptions and actual results could differ materially.
Please refer to our annual information form and Mdna for more information about the factors that could cause these different results and the assumptions. We have made with that I will turn it over to Tim.
Well, thank you Michelle and welcome to everyone on the call today.
We appreciate you taking the time to join US, especially for those in the West who had to get up pretty early to catch the cool.
Just so you know this will not be a onetime change we plan to schedule all of our quarterly conference calls at eight am eastern from now on.
The reason for the changes simple.
Rather than having to correct misinterpretations at sometimes get perpetuated we want you to have the opportunity to hear directly from us first.
If you are unsure how to interpret what we have said are done or why you can ask us rather than rely on the interpretation of others.
I can assure you the conviction with respect to our strategy is strong and our actions are aligned with our strategy.
What I want you to take away from today's call or the following messages.
First we're doing what we said we would do.
Second as highlighted in the W. anyways nuclear fuel report the demand cycle is on an upswing well the production cycle has swung down.
Third based on where the demand and production cycles are up and the success, we're having on all strategic fronts. We're confident that the uranium market is heading for a transition similar to what the conversion market has just gone through.
And finally, we are well protected under contracts our balance sheet is strong and we have a lot of spot market purchasing ahead of us.
Let's start with a reminder, cameco strategy.
Our strategy is focused on our tier one assets, it's designed to add long term value.
We've taken the three prong approach in the execution of our strategy operational marketing and financial.
We've cut production far below our committed sales, which requires we purchase material in order to fulfill those commitments.
And we strengthened our balance sheet to ensure we can self manage risk.
So why is this our strategy, it's because we're optimistic about the long term fundamentals driven by the increasing recognition of the role of nuclear and the role that must play in ensuring safe reliable and affordable low carbon electricity generation.
We recognize that today's low price is creating tomorrow's opportunity for us.
The fact that we have tier one production shut down.
This this market needs to transition to ensure those pounds will be available to fuel growing demand.
The price needs to transition to one where prices set by the production cost curve.
When you look at utilities uncovered requirements in the success, we're having on the long term contracting front.
We know there is acceptable business to be done.
<unk>. This activity has been a leading indicator in past uranium cycles, which is the reason for our confidence that the uranium market will undergo the transition already seen in the conversion market.
As you know in Q1 or off market conversations led to the successful addition of 25 million pounds of long term commitments to our contract portfolio.
On terms that will support the eventual restart of our tier one production assets.
In other words contracts that provided an acceptable rate of return on our tier one assets for our owners.
Let me be clear, we need more of them before restart decision is made but with what is arguably the best commercially operated uranium mining in the world shut down we're confident those opportunities will come.
This will be an incumbents recovery.
Let's talk more specifically about our strategic actions, including our spot market purchases.
As we've said our supply reduction requires us to be active on the demand side as well.
With uranium sales commitments this year of between 30 to 32 million pounds and production of only 9 million pounds. We have said, we need 21 to 23 million pounds of purchased uranium to meet our 2019 delivery commitments and maintain our normal working inventory.
To the end of September we have taken delivery of about 14.6 million pounds of purchased uranium.
This material was partially drawn from our long term purchase commitments and our share of Inc. I production with the remainder coming from spot market purchases.
In addition, with Mcarthur River key Lake still on care and maintenance, we will need to purchase material to meet our delivery commitments in 2020 .
This means we expect to buy a lot of material on the spot market.
However, we are being discretionary.
We will responsibly manage our supply to meet our sales commitments, which means in any given year, along with our sales volume our production purchases and inventory are all variables.
Our activities are not constrained by December 31st deadline, we plan on a 12 month rolling basis.
Remember our goal is to buy as cheaply as possible in order to maximize our gross profit.
Therefore, if we think we can pick up cheaper pounds by waiting.
We may choose to delay some of our purchases and temporarily drawn our working inventory should the market sentiment dictate that it is prudent to do so.
But if we think pounce will be more expensive tomorrow, we may advance, our purchasing activity and actually build a bit more inventory to ensure we have the material, where we needed when we needed and in the rate form.
This does not change the quantum of purchasing required just the potential timing.
I've said before we're not following a static recipe.
We operate in the dynamic market and we will adapt our activities accordingly.
Today the activity, we're seeing in the spot market is largely churn the same material changing hands many times.
Theres been a lack of fundamental demand.
This lack of demand is really more appropriately thought of as delayed purchasing decisions.
Utilities are delaying their purchasing decisions due to the uncertainty caused by changing market dynamics, including.
The ongoing market access and trade policy issues, which will I will come back to later.
If there are sellers with material that want to sell into a market that lacks fundamental demand, we will take the opportunity to buy material as cheaply as possible.
Ultimately whether it is in the fourth quarter or thereafter, with Mcarthur River key lake on care and maintenance and production well below our sales commitments, we have more purchasing activity ahead of us than we have behind us.
We were also active on the financial front in the third quarter, we retired $500 million of debt or one third of our debt outstanding.
In addition, we extended the maturity date of our revolving credit facility to November 2023, while also reducing it by $250 million. It now sits at $1 billion.
We don't have a history of drawing on the excess capacity and we don't anticipate needing it.
Therefore, it does not make sense to paid to maintain excess capacity on our revolver.
Our balance sheet is strong.
As a result of the strategic decisions, we have taken we have more than $860 million in cash on our balance sheet.
Therefore, our ability to self managed risk has improved substantially.
And we believe the risks related to our CRM tax case has diminished based on the unequivocal Rulli. We received from the tax court in September of last year. A decision. We believe will be upheld on appeal.
I also want to remind you that the decreasing sales commitments in our portfolio today are a necessary part of a deliberate value oriented strategy.
We could can track all of our pounds of today's published prices.
But that would be volume strategy, not one aimed at creating long term value.
We are confident in our ability to transition through this period and capture demand that will provide leveraged tire prices.
The off market conversations, we're having with our customers bolsters that confidence.
We haven't seen this level of prospective business in our pipeline since before 2011.
Keep in mind, the contracting process in our businesses lengthy so it may take this activity sometime to show up in our committed volumes.
These customers recognize that from a security of supply perspective diversification is important and in some cases their risk management departments required.
They want access to long lived tier one productive capacity from commercial suppliers, who have a proven operating track record.
And increasingly they are required to ensure their suppliers adhere to more stringent environmental social and governance performance standards.
They also recognize the first mover advantage gain from securing their future access to our tier one pounds at the incentive price today as opposed to where prices might be in the future.
Like in Q1, we expect our conversations will lead to more contracts on the terms, we need to support a restart decision so stay tuned on that.
We expect the volumes added to our long term contract portfolio. This year will exceed the volumes, we deliver while maintaining leverage to higher prices.
We've been in this business for a long time, and we understand the commitment it takes to deliver long term value.
The current market dynamics are not unfamiliar to us and we've seen them in past cycles.
Nice to set by the most desperate seller, which leads to productive capacity being replaced by onetime finite supply.
And this time there are some additional factors that need to be considered.
Those doctors being the role of commercial and state owned entities in our market.
And the disconnect between where uranium has produced and where it is consumed.
The investigation under section to 32 of the trade expansion that is a good example of one of these factors.
Well the president found there was no national security threat, you establish the us nuclear fuel working group to further analyze the state of nuclear fuel production in the us.
This group was expected to report its findings and recommendations to the President on October 10.
However, the deadline has been extended by 30 days.
In addition, and very much aligned with the mandate of the U.S. nuclear fuel working group.
Canada, and the U.S., our drafting a joint action plan to ensure availability of reliable supplies of rare earth and critical minerals, including uranium.
There are also the trade tensions with China. The review of the Russian suspension agreement and the potential impact from us sanctions against Iran that need to be considered.
These factors raise important national security concerns provoke potential trade policy distortions that good regionalized supply and ultimately along with low prices will make the availability of future supply less certain and less predictable.
And if the market transition takes longer than expected. Thanks to our strategy, we will be positioned to meet the delivery commitments under our contract portfolio and still generate cash flow, while continuing to preserve our tier one assets.
However, the risk to other market participants from today's low prices is not symmetrical.
Let me use what has happened in the conversion market, which as I said earlier has already gone through the transition that uranium is poised to go through to demonstrate what I mean by that.
The conversion price dropped solo destroyed primary supply and then some production challenges were encountered.
As productive capacity decreased reliance on finite secondary supplies increased.
However, despite reports of large inventories many of which are in the form a view of six it turns out that is not the volume of inventory. That's important is the mobility of that inventory.
And the higher the price goes the less mobile inventories become.
At the end of 2017, the spot conversion price was about $6 us per kg you today, it's over $20 us per kg you an increase even the trade reporters never anticipated.
And for US the takeaways from the nuclear fuel report released by the W. any in September reinforce our belief that the uranium market is poised for a similar transition.
The report outlines three global scenarios for uranium demand and supply for the years 2019 through 2040.
All of which are materially better than the other trade reporters forecasts.
The first takeaway was that.
Demand is up in all scenarios considered the low case, the base case and the high case.
Secondly, the supply analysis recognize that there are economic considerations, which will impact the return of idle capacity the pursuit of expansion projects and the development of new projects.
Under all scenarios. Some if not all of these sources of supply will be needed to satisfy demand.
Finally, there was a recognition that even when inventories are high mobility can be low as we've seen in the conversion market.
So the longer the transition takes the greater the likelihood that the uranium price will go well beyond what is required to incent tier one production to return to the market and inventories will become less mobile.
I can tell you, we will be more than happy to contract or tier one pound in that market scenario.
Yes, we are now doing with conversion.
The discretionary market, we see today is not sustainable.
As I said at the outset, the underlying factors that the demand cycle is on an upswing.
While the production cycle has swung down.
And like occurred in conversion the market transition will likely only be recognized once it is in the rear view mirror.
So to conclude our strategy is designed to reward those who recognize the fundamentals as we do and patiently support our strategy to build long term value.
We are commercially motivated supplier with a diversified portfolio of assets, including a tier one production portfolio that is among the best in the world.
Our decisions are delivered driven by the goal of increasing long term shareholder value.
Ultimately our goal is to remain competitive and position the company to maintain exposure to the rewards that will come from having low cost supply to deliver into a strengthening market.
And with that operator, we would be delighted to take questions.
Thank you Sir we will now begin the question and answer session in the interests of time, we ask you to limit your questions to one with one supplemental if you have additional questions you're welcome to rejoin the queue.
Joining the question.
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We will pause for a moment as colors join the queue.
Our first question comes from Ralph proceeding with eight capital. Please go ahead.
Hi, there good morning for thanks for taking my questions.
Firstly, Tim the success that you're having in the long term contracting front.
Can you help us a little bit on terms of those contracts.
Any changes to how those discussions happened in the past say on pricing terms tenure and particularly the 40 to 60 split.
Yes, hi, good morning, and thanks for your question just as a starting on the back in the 40 60 split we still have that in in our minds is the best.
Best way to go forward on the long term market. We we've had people study of do MBK losses courses on it to see if they have a better system and we haven't found it. So I mean overall in our portfolio Thats, where we'd want to arrive at we then a waiver sometimes more market or more fixed but thats.
That's where we end up.
You know, we're as you heard to just in my comments.
The term market is quite encouraging for us we're seeing lot of our larger.
Long term customers come to us to to talk about fuel for the next decade.
And quite frankly, there's some concern out there as to where that's going to come from.
You look at the new the supply we just talked about and we were just talking about it. This morning your office.
How much supply has come off in the last couple of years, you can start with Paladin and then cameco, we've got five.
Different operations off you got around on now announcing a common act 2021 is gone you got Ranger gone in 12 months, you've got Rossing headed to the Chinese you got the Kazakhs holding.
Thats, what we were looking for on the supply side. So thats, good well demands going up and reference W. any report now as all three lines up into the right. We haven't seen that in seven or eight years and so it's it's on that backdrop that we're talking to these customers above long term.
Supply agreements and that you know what again, it's going to be a combination of fixed and floating prices.
We're looking for terms, we're trying to make sure our portfolio is balanced by customer by region by country by geography, all of those things and.
You know.
We have said in the past we want a price for the fixed portion that probably starts with a four and heads north from there. So no real change to what we're doing we're just seeing a lot more interest from our customers.
Okay. Okay. Thanks for that.
As a follow up I wanted to come.
To the issue of the nuclear fuel working group.
And it's been surmise that.
We could see direct U.S. government purchases of uranium.
If that were to happen would that be surprise to you and can.
Can the U.S. fuel supply chain be supported in any other way.
Thanks, Tim Thanks, Ralph.
Obviously, we were hoping to no already what was going to come out of that before our color before the end of our quarter. So that we could update we don't they've got an extra 30 days or thing too early November November 10th I think is the date, but.
We don't know what's going to what's going to come out of that we think the working group was really set up to allow for a broader scope of tools to be considered to support the front end of the nuclear market. You know what we don't need is probably more pounds on.
On the face of the Earth that don't have a home. So we're hoping that that those pounds. If they are can be produced in the us have a home to go too.
So we're waiting to see on that.
We don't have any.
I don't know a hints or anything coming out of the way those yet so I guess, we'll just have to wait for another couple of weeks to hear on that.
Yes, I understand Tim Thanks, very much I appreciate it thanks.
Our next question comes from Greg Barnes with TD Securities. Please go ahead.
Yes. Thank you you mentioned in the Mdna that these customers are talking about long term contracts are asking you what it takes to support your tier one assets over the longer term.
I'm, just wondering what you're telling them.
Yes, we we need.
What we just talked about Greg I think.
Prices that are acceptable to us as a company in our shareholders.
Long term and so.
We want to.
Filler, partially fill our contract portfolio so that when we produce those pounds that they have a home to go to we don't want them in the spot market, we're not going to spray them around anywhere we want to home for them and so they get that they can see the next decade. There are some question marks where we're supply coming from and.
I can say with the curves.
And demand going up into the right and supply going down.
There's a question there and I've said it to pass number of years now that we've been doing this for a while I a bit worried about the next decade, and where the production is going to come from if we don't get the signals to move ahead. There are no projects in the pipeline right now they are there aren't and it's not getting easier anywhere to bring a new project.
And whether it's in Canada, Australia or anywhere and so that's a that's a concern and so.
That's what that's what we're looking at than they were having great conversations we signed 25 million pounds of contracts in the first quarter don't have anything to announce at this moment, but we're on it so.
So thats evident I think thats seven to everybody what is preventing these.
Tilly's from signing these contracts now what is holding them back.
Well I think there's a lot of unknown still out there I mean, everybody is kind of frozen by the the to 32, the nuclear fuel working group.
Piece.
The trade policy issues Russian suspension agreement, so through that Iran. Sanctions that is hanging out there trade with China between Us and China, Canada, China, Canada you.
Theres a lot of pieces out there and I think I saw it in some in some publication just recently, but the markets kind of frozen waiting to see what the resolution of some of those pieces are and I think that the urgency just isn't there those pounds on the spot market people can pick up in the short term and but like I say, we're talking to our big customers along.
Term customers, we want to be talking to we're interested in refilling, our long term portfolio and and we're having some success on them.
Thank you thanks.
Our next question is from Andrew Wong with RBC capital markets. Please go ahead.
Hi, good morning.
So my first question is kind of around utilities and.
We've heard that they always want multiple supply sources can you help us understand how important that is to that and maybe help quantify it I guess, there maybe a point where utilities have sourced our contract on shelf from other say like non chemical sources, and then have to come back to chemical I get their way that.
Chemical can ask for premium for the for the material that they offer that's a little bit more stable.
Andrew Let me turn that around just a little bit and I'll try and answer the other way we as a supplier you can imagine if we had put all of our eggs in the Japanese basket as we could have easily in that 2007 to 2011 window when things are going a bit bid crazy, we could have because the dumb.
And was there and.
And we as a company in a credit the management.
Said, we have to diversify by customer by region by country, you cannot rely 100% on anybody because you just don't know it could be.
Could be an unfortunate that piece like Japan saw it could be legislation trade policy. There's all kinds of variables now so I think most of the utilities are the ones. We deal with wanted to be diversified and want to have options going forward and so is similar from the supply side and from the demand side.
Okay.
And then my second question is.
Around the turn market looks like there is lot more interesting picked up but has great.
I'm curious what happens in this scenario, where maybe that takes a little bit longer to kind of kept calling and.
The contract book that you guys have built out maybe starts falling off the bat.
What's your plan in that kind of scenario and what do you can consider shutting down cigar Lake.
You know what I'm going to pass it over to grant Grant just came back from the any fuel market conference, where he gave but.
Paper on the market and and can talk about Thats rent, whether you have so Andrew obviously, yes every decision we made in the last couple of years has been anticipating a market that we believe half the transition and Tim has talked a couple times now about some of the green shoots we're seeing the recovery and conversion that recovery and.
Yeah.
Has to bode well for the recovery in uranium and so we've been positioning for that we've got to contract portfolio that serves us very well in year 19, very well for we're happy with how we're covered in 2020 and we've deliberately said, we'll take more market exposure in the outer years, because now is not the time to go and commit a bunch of volumes because.
Certainly our fixed price basis. These arent the prices that we'd like but but obviously, there's a risk scenario that we have to look at and that risks scenario is there could be delays to that transition there could be things that that just make a little bit more material available to the market for a little bit longer before I kind of understanding of the lack.
Productive capacity hits like like in conversion to get out our use that as an example production started to come down and conversion, but price continued to fall for a while until the rest of the inventories were gobbled up demand started to come to the market and Lo and behold.
The material wasn't there enough with the conversion price. So so we do have a risk scenario, where we say what would it look like if we have to kind of weather the storm for a bit longer I would just remind you. That's our financial strategy. That's why we have taken the steps to de lever by a third we've taken down 500 million if our long term debt.
We.
Mobilized our inventory from the past turned it into cash all of that gives us the financial capacity to see this out. So you know in a scenario, where we see a couple of more.
Maybe a year or two where the prices remain difficult. We just commit to this we commit to supply discipline will still have great pounds in the full economic benefit of JV income coming in.
And then we will buy to meet those committed sales you asked a question about further production cuts well you know I think our view is we've got enough.
If the prices are are not satisfactory.
It's time for others to started recognize the value destruction that they're creating but but for us. It. The transition is probably sooner than later with what we're seeing I mean don't forget SWU and conversion or simply services that the main product is uranium and theres no substitute for it so.
If you're starting to see pressure on the services by definition you are going to see pressure on the main ingredient for those services. So we have a risk management strategy. We think it's a good what and it serves us really well, but its positioning for the transition that really is our priority.
Okay very.
Very helpful. Thank you.
Thanks.
Our next question is from Orest Wowkodaw with Scotia Bank. Please go ahead.
Hi, good morning.
Some more questions on the market from my perspective, I have a hard time really understanding what's happening in the radio market.
What would I look at what's happening on spot pricing and I mean, given the more bullish outlook that you haven't and longer term.
Would it be fair to say that if if the spot price moved higher utilities, probably have more incentive to lock in term contracts at higher pricing, but the issue on the term as it's hard to push up the term if the spot prices in the low Twentys and then I guess.
If thats true I'm just wondering.
Are you not incentivized to step up your.
Our market purchases.
To effectively push up the spot price to make that happen I, just I have trouble reconciling the whole thing.
Yes, yes, those are great questions and there is there's a number of.
Ways to unpack that let me, let me start with the link between spot and term I mean.
What we've seen and we saw this and other parts of our market. What we've seen is that as the spot price of uranium came down and you've heard us say before we had very motivated sellers coming to the market selling into a market where there just wasn't fundamental demand, we didnt have replacement rate to.
Tracking we didnt have.
Spot demand at levels that we've seen in the path. So you have you have not so much on oversupply situation, but you haven't under demand situation. So as the as the price spot price came down a drag the term price away from being linked to the production cost curve and more just being a premium.
On that I would say a surplus disposal price and so that obviously as a link that we've we've seen as its drag down.
Let me talk first about the term market the term business. That's out there. We've had success off market. We've had success off market at at levels as Tim talked about acceptable to us acceptable to our tier one profile, but we do get there. The response that when we then go to the price reporters and show them those contracts and say.
Look what we've been able to do they can point to others in the term market, who are little more motivated to sell than we are Ed and maybe it's just that they have a different definition of what the term market really as than we do but really what matters here at the end of the days the definition the price reporters are using so if you have a primary producer who.
Selling mid term material at spot escalated well, that's going to get reflected in the term price not the spot price, even though that primary producer might say well that's not really how I think at the term market. So on balance we've just still seeing some motivated sales there that I would say have mitigated some of the success we've had off market.
Then turn to this the spot market I just.
As Tim said, a couple of times it has lacked fundamental demand and in the face a fundamental demand we've seen.
Some people still continuing to sell so we've just watch the spot price drift down over the last couple of weeks. This isn't oversupply. These aren't big volumes. These are very small volumes, but they're hitting a market that doesn't have fundamental demand because fuel buyers are worried about.
Should I be concerned about trade policy should I be concerned about the origins of my supply should I think differently about my procurement strategy and thats effectively keeping some of that fundamental demand out of the market. So from our perspective, knowing that we have to buy a lot of material. We have more purchasing in front of us than we have behind us while mcarthur key is down.
We said that very publicly.
Why some sellers still come to the market in front of that we don't know, but remember if they're going to show up and put material into a market that lacks fundamental demand are going to push the priced out and then we're just going to buy it cheaper. So we're not incented in any way to start buying in front of that kind of pressure.
If it's there having said that if we start to see fundamental demand come into the market in a couple of ways, maybe we see some year end.
Utility buying on the spot market. Some discretionary purchases may maybe some of the mid term business thats in the market thats, probably going to be one by intermediaries, maybe some of that needs to be covered in the spot market and shows up as demand, maybe we'll get some resolution to some of these.
Trade issues in which case, we probably will see the ability to contract if we see that kind of pressure and its fundamental it's material that's coming out of the market. It's not chart. Then we will no longer have the luxury of waiting to see if the price comes off a bit more and then all the demand we have in front of US we're gonna have to pull forward and.
But in the market very aggressively so so right now it's not our job to hold up the market. If if somebody is really desperate to sell into a market that doesnt have fundamental demand. So I know that might seem a bit counter intuitive, but when we look at our year, Ed we're not overly exposed to where the spot prices any way on December 30 Onest.
For others.
December 31st might be really important to them, but for us the difference between December 30, Onest in January 1st is just a day.
Okay, and just as a follow up are you willing to let your inventories.
Fall to close to zero, if if you think its advantageous in terms of buying more cheaper material.
You know in in the first quarter versus Q4.
Zero would be a stretch, but certainly we're able to flex or inventory as we need to up or down to two.
To the market to where it's going so we can flex down yes, but we would not go to zero and every every pound we don't buy in 2019 as a pound we're gonna have to buy in 2020. So this is these are delays, but this isn't demand of ours thats gone away.
Okay, and just finally really quickly from my perspective.
Can you give us a sense of scale of how many pounds are out there.
That may be required to be cleaned up with respect to access.
Supply that's been hitting the spot market.
Well, that's a great question and I'm, just going to remind you of something we talked about in in Q2.
We put it RFP into the market.
This was back in March we were looking for a million pounds of uranium and it was undersubscribed. It was under subscribed by two thirds at the spot price of today. It was under subscribed by one third if we were prepared to go up $1.50 on the spot price at that day, but there was still one thing.
End of it that we just couldn't fell now.
To me that that says there isn't a lot of material available.
And.
And yet to the price reporters in the business. They said well you just didnt give folks enough time to fill that spot demanded if you would have given them months or half a year or they could have found that material and of course that may be true, but that's not a spot price. So when we look at the market. We're just not.
Sure, but when we go to buy.
We just don't see a lot of material there yet so.
Who knows it appears that a lot of what's going around the market is just churn it's market. It's material that's trading hands, among intermediaries, who who do not have productive capacity, they're not producers nor are they consumers. So they have a book that book has got purchases and sales and net theyre just flipping material too.
To take advantage of their book, but but it's just going around and around in around to get so like in conversion. Eventually the music stops eventually enough people have to have had dropped into that market and pulled out some of that chart and then folks realize that the lack of incentive on productive capacity.
He is now a problem.
And Opcos the price now.
It's starting to feel like the uranium market.
Couple of years behind conversion, but very very similar features.
Okay. Appreciate the color. Thank you.
Thank you.
Our next question comes from Lawson Winder with Bank of America. Please go ahead.
Yes, good good morning, guys. Thanks for taking my question so.
First question for me would be just going back to competitive dynamics, you're seeing in the contracting market and and.
I'd like to focus more though is on.
Projects that haven't yet being developed but might be in the market looking to sign contracts. So that they can then get financing to to build their new mines are you seeing any of those companies out there competing for the same long term contract that you guys are competing for and if so how competitive are there and.
Any comments around that.
I haven't seen Lawson and.
Many projects that I'm aware of our years years years away from producing a bona uranium. So no we're not seeing them in the market I think part of the challenges that if youre.
Worried about your run rate requirements going forward and you're looking at primary production and primary producers, it's pretty hard to say you're going to take the risk.
On.
An asset Thats Greenfield that isn't licensed isn't permitted probably doesnt have a proven mining method yet when you have idle tier one capacity that thats licensed permitted sitting there ready to go so it it's a very interesting.
Contracting dynamic and I don't think we're seeing folks willing to take that risk when theres idle capacity that you can be contracting way.
Okay. That's.
Thats very helpful and then.
Just as my a supplementary on the conversion market.
You guys added some additional.
Kilograms to your contracts and your your delivery volumes for this year.
I would just say just looking at revenue divided by the.
The volume it looked like the price came down a bit.
Which is a little surprising to me just given where the conversion markets gone I mean, I think is well known that its.
That conversion pricing is as has.
Improve wildly in the last two years.
I'm, just curious how might chemical capture more of that strength in the conversion market.
Yes, just a couple of things on that first of all remember that fuel services price in that field services volume is composed of a number of fuel service components not just the conversion service.
So it tends to be buried a bit secondly.
Most of our production on conversion right now is actually going into.
Previous contracts and remember in the conversion space a lot of that is priced on a fixed basis. In fact, most of it is priced on a fix basis. So the capture of that of the.
The much better prices in conversion is going forward and of course, we don't have that guidance out yet for for 2020 and beyond but but the demand is coming into the market.
Fuel buyers looking for conversion at looking for us six as well as well as other actors in the in the industry looking for U.S. Saks Enrichers looking for US six for example.
As all adding pressure to that and we're happy to be engaged in those conversations at these prices locking in these prices going forward on a fixed basis. So obviously not the same amount of uptick in year, but as you as we as our guidance comes out for fuel services going forward, we expect to be able to cap.
Sure.
This recovery that's happened in the conversion space.
Thank you.
Excellent.
Our next question is from Jon Thompson, a private Investor. Please go ahead.
Hi, guys.
But I don't.
I commend you guys all on reporting on the U.S. six and the conversion market in SWU something doesn't get talks about enough as far as what's been going on target.
But I wanted to touch on kind of relates to at some of the other colors did but just spot market.
What's holding you guys back from starting your pursue plan, giving.
The spot prices. So low there are some pounds available as I've got some of your contracts were looking that are tied to.
Spot.
Might be an opportunity there for some more revenue going forward Frito, some carry traders and maybe get into the fortys earlier than you assume and long term. So what was the hold up on spot purchasing.
Yes.
Yes, so John .
As I said earlier, when when we see folks that maybe a little bit more motivated to move material. Then we are to buy it at this moment it serves us well to wait.
As we look around it appears that maybe in the case of some intermediaries, maybe they had in anticipation of where demand would be and and now find themselves in a position where they don't want to hold the material and so we're starting to see that material come to the market and you know for us.
Buying at 24, instead of 25, when our portfolio isn't overly sensitive to that isn't a bad thing, but you're right and we look at our overall portfolio and its market exposure on our rolling basis, and even if we're not particularly sensitive to I'd say December 30, Onest there might be a time out in the future where.
We are more sensitive to it and so we think about our our purchases that way I guess I'm, just asking for AG and little bit at trust that we think about that sensitivity as we plan our purchases and when were when we're not overly sensitive to the market and people want to sell material, we're better off to buy cheaply now we still need to buy lots I mean, I guess, we cast.
Hey, this often enough in this market we have more purchasing ahead of US then we have behind us. So that demand is coming if folks can't wait for that and they need to move material well, we'll we'll pick that material will see them in the market picked that material left cheaply or if its primary producer that needs to move material before year end better to.
Great then to try to start buying and then have that it brings and material into the market. So right now we think we're in a good position we have.
We have our sales commitments, we have our production we have our inventory our purchases we look at the sensitivity that you just talked about and we think we're maximizing the value by doing it.
Okay excellent and just as a follow up question in regards to restarting Mcarthur River.
We know the the.
Okay.
Sorry.
Okay.
Okay.
Current derivatives some charter boats.
The next phase.
Mining or.
So or I've seen in documentation the zone is going to be harder to line parts some serious expertise their.
So this is going to be challenging maybe pushed the restart.
Further basically expertise needed that you've now let go.
In the future.
That would be fake news I think if you just checkered Tech report technical report on that there's an absolute well done summary of mining at Mcarthur River and its steady as she goes going forward. So thats. There is no issues. There we would fire up the bus again continue my.
And just like we were when we unfortunately had to take it down in 2017.
Excellent. Thanks.
Thank you have agreed to.
Our next question is from Patrick So Jackie a private investor. Please go ahead.
Hi, good morning.
So two questions there theres sort of unrelated the first one is in regards to the 2016 cigar Lake Technical report.
It mentions in their 65000 meter Joe campaign delineating the western portion on the deposit.
I was wondering if but Don and there will be like new resource estimate for.
For that and what effect it would have on the mine life there.
Then the other question, it's completely unrelated but.
The theoretical question with with Yellowcake, and you're a little participation trading below NAV.
Would it not makes sense just to buy those as a cheap source of pounds.
Larry.
Just wondering.
Thanks, Patrick I'm going to pass you over to our Chief operating officer, Brian Riley on that.
On the first question. The second question I'd, just say, we don't comment on.
Issues like that so Brian you want to takedown sure, but Patrick in terms of cigar Lake resource we have the on a 100% basis about 180 million pounds remaining and that takes us to a life of mine out into 2029 I can share with you.
We have.
We have done some additional drilling and the mineral resource estimate will be revised and 2020. So if you can hang tight that information will be published Q1, 2020 , but as we sit today life of mine is scheduled to 2029.
Patrick.
Okay. Thank you.
Thank you.
Our next question is from Andrew Weekly with Smith Weekly. Please go ahead.
Thank you operator, gentlemen, what is your certainty dairy 2020 that you can purchase all the volumes. So you will purchase on the spot market and what is the plan B. If you can't buy material in the spot market cost effectively.
Well, it's a great question Theres, a real test of the depth of the spot market of uranium coming up with all the demand. We have obviously the big risk management strategy is that if we go into a market that isn't that the assembly of it is.
Where sellers are retreating inventories aren't mobile and therefore, you see a price rising quickly the ultimate risk mitigation strategies Mcarthur river because in that environment.
I'd be a wonderful price environment for us to be contracting and then getting mcarthur back ready in the meantime, because it could of course it doesn't it doesn't start producing that on day, one we've taken some steps to make sure we could mitigate the risk that we can't find material and it's a combination of our working inventory.
Plus our ability to maybe access some material auto loan basis, that's already sitting at our license facilities. As an example, so for US we're quite confident that that week, if we step into the market and we see a market that really doesn't want to see us there and retreat from us and there's a strong price pressure.
That's a great environment Thats one were the contracts, we watched are being side the pathway to restarting a tier one asset is there.
This is kind of the problem, we want to have like I guess, let me put it that way.
Okay. Yes, you guys can fill the gap between when you can get production back online that will be entering due to see how that works out last question would you be issuing new debentures in 2020.
No we yet we have absolutely no plans to do that at all in fact, we're quite happy with where our balance sheet is right now just to de lever to absolutely no plans to to access the capital markets.
For for any new leverage no no plans at all or nothing.
Okay. Thanks, guys. Thank you very much and.
Our next question is from Craig Barnes from TD Securities. Please go ahead.
For the follow up.
Tim and grant if I'm a fuel buyer in the U.S. in particular I sit there and look at the Russian suspension agreement that needs to be were renewed and the around waivers coming due every 90 days now surely I would be thinking that I should be locking in some supply of along to.
Typically at these prices again I come back my question why are they not acting.
Well take the Greg litigation basis, Yeah, Greg. It's grant some are acting I mean, that's what we're talking about with our off market conversations the stuff, we've been able to book already and the more to come that Tim has talked about some are acting they are concerned.
I think that what you're seeing in the school market is part of the risk mitigation for dealing with that I mean, the SWU prices are starting to approve of course, you don't have SWU unless you have the feedstock. So that's supporting the conversion price, but ultimately you've got to get the uranium market moving as well. So some are moving.
I would never say that some are concerned about the risk.
Others.
I guess part of it is the reality that in our market.
Prices don't seem to rise on just the expectation you have to have the proof that the service or the material isn't there and I'm just going to use conversion as an example, once again the first production curtailments in conversion happened in 2014, when we canceled a toll converting agreement with Springfield's then we began.
On to curtail production at Port Hope then you saw conradine come down and now I think we're seeing some difficulties commissioning on asset in France.
But you saw the conversion price still continuing to go down even though those production curtailments was happening. So it wasn't until fundamental demand showed up in conversion and said Oh my goodness the material isn't available there to the inventories that we thought were mobile are not mobile and just the capacity to actually take the uranium and.
Convert it is not there. That's finally, what it took right now in uranium we're not there yet the fuel buyers that come out with mid term deals still find traders to bid into it with carry trade. So they've obviously got some material to fulfill it. We're just we havent quite hit that tipping point and then ultimately.
I think first for some of our customers. They would just rather wait for that point, because thats proof that they need to get into the game to contract. They I think they're a bit reluctant to be some of them to be out contracting ahead of that proof for me.
For some I think it's difficult to go and maybe price material at a 40 going at 25 dollar market, but in the market Thats starting to rise suddenly you you get all those permissions from higher levels up in the company to do that contracting so I would separate.
A concern from an actual willingness to contract, but some are doing at summer already risk mitigating and we're seeing that effect.
Some are concerned about it they just can't get the approvals to move and some are they've been through this before and they'll just wait and if they have to bite at a higher price provided a higher price.
Okay, great. Thanks, Brent.
Thanks, Greg.
Our next question is from Oscar Cabrera with CBC. Please go ahead.
Thank you have returned one we won.
Kim I would just wondering if you can 21.
Yes, I think frankly.
On my part answer the question.
One quick schools mix last question, but medium.
When you do a parallel with digital market inventories now we mobile app.
You, suggesting that inputs not will get utilities will keep their inventories in that won't come to market, where are you expecting any impacts from section 32, whereby people will be fluids to come to the term market with you because they won't be able to get.
Source from other countries.
Yes, it's kind of all of those things.
On the Japanese front, I think we've been saying for years to they're holding their inventory you see nine units up and running a great numbers. There two weeks ago, mainly with the utilities. It's a decent story there no nine units running there is another six that have gone through and been approved.
By the NRF and another I think 11 or 12 in the queue that are still going through the process. So you know it we'd love to have had all 54 come back we knew that wasn't going to happen but.
You add those numbers up and it's kind of 20 728, and that's starting to fit with the government policy of 20% to 22% nuclear overtime and so.
On the Japanese story not bad.
But theres is we've talked about all of these other pieces hanging out there the trade issues I've never seen so many trade issues.
Around the world quite frankly chaos in my life, Here's the bottom line. There are if you read you X.
771 million pounds uncovered over the next 10 years and in our World. That's that's not a long time and so thats. Thus the demand that has to come to the market at some point, we're seeing as we say some of our larger customers thinking about Thats now you wanting to cover right up to the end of the next decade and so.
That's interesting for us I, just think things are dumbed down a little bit right now by the.
This nuclear fuel working group, that's that's imminent so thats coming your Gregg said every 90 days were hearing on the Iran. Sanctions Act that Russian suspension agreement don't underestimate the up one thats a big ticket and there is some exposure there for sure depending on how that turns OTE China's a good story I think.
No. We finally have seen and we've heard for last year's Hey, what's going on there no new starts no new starts well guess, what new starts and if you saw the president of CNMC, who we know a came out and made some pretty positive comments about the future of nuclear and that they can build six to eight and thats the plan per year going forward.
That's all good news so.
Lots of pieces out there Oscar as always.
We're just waiting to see some of these pieces resolve but that fundamental demand is there 77 771 million pounds in the next and years, that's going to come and that's what we're hearing the company for.
Thanks, Tim and then lastly on now I don't think you'd have.
Commented on the unmet need Lake labor negotiations integration.
Do you have any updates loans.
Well I guess, we're waiting to see what happens.
The.
The agreement they thought they had to didn't didn't work out didnt get ratified so now they've moved into conciliation process over there, which is going to take them. Some months, so I guess I.
I don't think Theres, a 2019 events, but early in 2020, I think we'll see the results of the conciliation and I don't know I don't know what will happen. It's a it's obviously of interest to us because it affects cigar lake.
Bleakly and so we'll see how that turns out to rentals running that process and we have faith in them and so we'll just wait to hear.
Thank you.
Thank you very much Oscar.
Our next question is from Mike Alcan with say chemicals partners. Please go ahead.
Hey, Tim Grant.
Greg You mentioned, a few times about what we're seeing in the conversion market and your quietly seeing this through pricing moving higher end.
Randy market's been quite comfortable with secondary supplies, especially in the form of Underfeeding since Fukushima.
But as as you under feed more your consuming a lot more swing capacity and we're not seeing the enrichers replace centrifuges, we're seeing lower spending on capital expenditures there.
And with this rising price you would expect to see a shift to higher transactional tails in the long run could you talk about your guys view on higher demand for uranium feed as we start to see prices rise and your expectations for transactional tails to move.
Yes, Great question, Mike and.
I certainly appreciate it and obviously you have it get bogged down really really quickly and so we don't want to do that on the call today.
But when when Underfeeding occurs because the price of SWU is really low it's just kind of that last negative punishing effect in the uranium market. When you have in and richer who says that my service of enriching is worth less than they use six thats coming to the front door at my plan I would rather.
Or sell it as natural uranium and run by Platte harder, it's just kind of that we'll have negative effect on the radio market, but interestingly it reverses quickly because enrichers with much much prefer to be selling swift as opposed to be selling natural uranium. So it's a bit of a switch that gets flipped and so as soon as this will price starts to go.
Up and you start contracting forward for that SWU service, which is the preferred option and you have the ability to move those transactional tails as you say, you're not going to use us enrichment plant to create uranium means you're going to indeed uranium and it's coming at a time when conversion is as bottleneck, so having uranium in the OCC.
Site for isn't good enough you needed in the gas for and so conversion has bottleneck. It just it helpfully backs up.
Is that double lift it's the opposite of of what happens when this will price goes ghosts low so if that connection between those components.
And.
It makes us optimistic that there is.
Certainly I transition that needs to come because as we said before conversion and through our services, but the product is uranium and it has no substitute and were not investing into productive cap capacity. So if you get your head around you need enriched uranium product you got to chase it back through the supply chain.
And and usually in the past uranium is kind of led the charge. This time it isn't it's following but that link is still there.
I think what are the things that's interesting is.
Your next consulting gave a great paper at the Nei. This week talking about the reemergence of the SWU market talking about exactly this link I find it fascinating that some of the language that you X has been using lately about.
Warning that a transition it's coming to all parts of the market not reflected in price formation not reflected in price forecasting, but certainly there, saying very loudly that that that kind of transition needs to occur I just encourage everybody to have a look at that it the they do a really good job capturing what that link is from SWU back two years.
Many of our uranium up to SWU, but.
But it bodes well it absolutely bodes well.
Thanks, Greg.
Thanks, Mike.
Our next question is from David Lee with focus on asset management. Please go ahead.
Hi, Hi, Tim.
I just had a question.
Because we saw let's say positioning that though compliance and though we have especially focused solid uranium and.
You know previously we saw.
And well probably put that.
Hey, you know.
In 2017, then you know then we'd been again being on 18 then.
Yes, yes, do we know around that 2024 to 25.
Yes, So you asked a pound units I'm just wondering.
Hello, you seem to uranium price will go to well uranium price you know.
Go back to the.
To the low point during 2816.
Well I David in the yen nice to hear from you and thanks for the question.
Look I'm not a great predictor of the uranium price.
If you followed the call here today, I think we've gone through the market and what some of the big believers, our and things that we're watching.
From a supply when a view as we said earlier supplies coming off and it's been coming off for years now the supply of there's not enough supply fresh production at least two to fill the demand that's out there a demand going up good news. So we're trying to mop up some of the inventory that's been around since probably.
2011.
How long thats going to take we don't know, but for all of the reasons. We put out. This morning, we're optimistic about the market and so although it will go how high it will go I can't speak on that I can tell you we're doing a cameco everything we said, we do and everything that's in our hands to do.
We'll see what the held the market responds.
Sense I saw kind of some problem they had us feel quota, but trading updates.
They had a good production volume, but they.
This sales fall on mute.
Is quite low.
And the.
And then.
Given the chemicals situation and.
Together with today's uranium price.
Can I assume.
In the markets, yes steel pencil the inventory.
We don't really know that the I guess, David will we'll see.
We'll see going forward as I say, we've taken significant ammonia supply.
A significant amount of supply has come off including ours.
And the end demand is a good story for us so.
I don't know I think that's always been the black box how much inventory is out there you heard grant talk about.
Mobility, and our testing of the market back earlier in the year. When we went out for some material and and we didnt to fill the order right away. So.
I can't predict that David but as I said were.
We like what we're seeing no.
Okay. Thanks.
Yes, thanks for the question David.
Our next question is from Auris walk it out with Scotiabank. Please go ahead.
Hi, just a quick follow up when Ken when do you anticipate getting receiving the Tepco cash award.
We have it.
You have it so it it closed or are you received it I guess post the Q3 results.
Sean.
The to put I don't remember the day right now, but we see the.
The entire with the data than the portion for the that were intended we have at all.
Okay.
In what you reported right, yes, yes, I would add.
Yes, its into Q3 results yet okay. Okay. So it's in our cash okay. Thank you, yes. Thanks, thanks to our.
This concludes the question and answer session I would like to turn the conference back over to Tim gets all for any closing remarks.
Well. Thank you very much operator with that I, just want to say, thanks to everybody who joined US today, we always as always appreciate your interest and your support.
As a commercial supplier with a strong balance sheet long lived tier one assets in a proven operating track record. We had cameco think we're really well positioned to respond to changing market dynamics and benefit from the long term growth driven by the need for clean Baseload electricity I can tell you we're going to continue to do what we said we do executing on our strategy is.
We navigate through all the moving pieces in our industry. So with the say thanks, everybody thinks the those that have to get up early in the have agreed to.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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So.
No.
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And.
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