Q1 2020 Earnings Call
Thank you for standing by this is the conference operator welcome to the Chemical Corporation first quarter 2020 conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
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 morning, everyone. Welcome to Camecos first quarter conference call, we're doing things a little differently this quarter or the Q a portion of the call all participants will be in listen only mode. We are trying this approach to alleviate some of the challenge of many of US I tried to dial into calls for multiple locations we have.
Hi, good questions from our sell side analysts and have included conquest wins, we've been hearing from the investment community over the past few weeks.
Always our call we'll focus on the trends, we're seeing in the market and our strategy not on the details of our quarterly financial results.
If you do have detailed questions about our quarterly financial results.
If we do not answer your question during the two ways session. There are a few ways to contact US you can reach out to the contact provided in our news release.
You can submit a question through the contact cap on our web site, a chemical dot com.
Or you can use to submit question tab on the web cast and we will be happy to follow up after this call.
With us today on the call our can get <unk>, President and CEO Grant Isaac Senior Vice President and CFO, Bryan Riley Senior Vice President and Chief Operating Officer, Sean Quinn Senior Vice President Chief Legal Officer, Corporate Secretary and Alice Wong Senior Vice President and Chief Corporate Officer, Jim will begin with comments on her.
Strategy and the market. After we will look at the Q a portion of the call.
If you joined the conference call through our website about page there aren't slides available which will be displayed during the call. The slide there also available for download in a PDF file through the conference call link that Cameco Dot Com. 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 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, who joined us today.
As we shall noted we're doing something a little different on the call today. So I'll keep my remarks quite brief and then we'll move to the Q and <unk>.
[music].
We're living in unprecedented and challenging times.
The impact of the Coven 19 pandemic is something we've never before experienced in our lifetime and it transcends anyone family community business government or country.
In fact, it's changed our world.
I want to take a moment to thank all the people who were working on the front lines everyday to save lives keep a safe and ensure we have the service is essential for daily lives.
Considering the sacrifices. These individuals are making I encourage everyone to do their part to help where they can no matter, how big or how small the contribution.
And I'm proud to say that a cameco, we're committed to doing our part to make a difference.
Today Calico is providing the fuel required to power the nuclear reactors.
Part of the critical infrastructure needed to ensure hospital care facilities and other essential services are available to us during this pandemic.
Perhaps more important is our more than 30 year commitment to protecting the health and safety of our employees their families in their communities and supporting local business development.
And then these uncertain times, perhaps more than ever.
To be critical that we continue to work together to build on the strong foundation, we've already established.
That is why consistent with our values you have seen us proactively make a number of necessary decisions to protect our employees.
Our families and their communities and to help slow down the spread of the virus.
It's why in addition to all the safety protocols, we put in place we suspended production at cigar Lake and at or Port Hope you up six conversion plan and the Blind River refinery.
That's why we continue to provide compensation for our employees were not working thereby alleviating the stress with having to rely on overtaxed government assistance programs.
That's why we set up covert 19 really funds totaling $1.25 million to help or communities in northern Saskatchewan, then, Ontario navigate through this difficult time.
Embedded in our decisions as a commitment to addressing the U.S.G. risks and opportunities that we believe will make our business sustainable over the long term.
As I said at the outset, the impacts of Cobot 19 are unprecedented.
Well, we expect our business to be resilient.
Why do I see that.
As you know for many years now in the face of an uncertain uranium market. We began implementing our strategy on three fronts operational marketing and financial.
On the operational frock, we've cut costs.
2016, we began curtailing uranium production, reaching a point in 2018, where annual production was well below our annual delivery commitments.
We've also faced some potential unplanned supply interruptions as a result of labor negotiations.
As a result, we've highlighted that production is a variable.
Both due to planned and unplanned events.
And Weve pointed out before that due to supply curtailments the market was as vulnerable to an unplanned supply shock as it has ever been.
Therefore in our strategic planning activities, we spent time thinking about and planning for different production scenarios.
We modeled the potential impact of these scenarios on our business. So we had cameco are equipped to deal with this unplanned event.
Although we're not providing revised outlook, let me be clear cope with 19 has not had a material impact on or deliveries to date.
Nor do we currently expect it will materially impact our remaining 2020 delivery commitments.
That's not to say, there's no risk to our deliveries.
However, in our view the biggest risk is likely more of a timing risk.
We continue to expect or customers are going to need uranium.
We will work with them to help meet their delivery needs. During this time. So they can continue to reliably generate the power their communities will need to manage successfully through this crisis.
Transportation of uranium does an external risk we face, but remember a lot of uranium sales are done by book transfer not physical delivery.
Where there is physical delivery of the sent by truck and at times by ship and the volumes transacted are relatively small given the high energy content of our product.
It's true that as a result of our strategy, we have become reliant on market purchases of uranium to fulfill our delivery commitments, but that is a deliberate choice.
The fact that we have had to temporarily suspend production at cigar Lake and that do you have six plant in Port Hope does not change our strategy.
Yes, it potentially cost us more in the near term and we have been upfront about the impact our purchasing activity is expected to have on our margins.
So why did we make the choice to rely on the market for supply.
It's because we believe that over the long term do will add significant value for our shareholders and other stakeholders and allow us to operate in a sustainable manner for years to come.
It is true that as uranium prices increased purchases become relatively more expensive than production.
However, as long as the near term cost of purchasing is less than the added value we expect to capture under our strategy, we're better off purchasing.
Where does that added value come from.
First it comes from preserving our tier one assets.
It comes from delivering into market related contracts in our existing contract portfolio at higher prices.
And as prices rise, we believe it sets up the conditions necessary to allow us to layer in new long term contracts at prices that recognize the value of our tier one assets.
This is how we build long term value, we preserve tier one assets to deliver into a long term contract portfolio.
To strengthen our strategic resolve we have been disciplined.
We have made prudent and deliberate decisions to shore up our balance sheet.
As a result, we have the tools, we need to deal with the current uncertain environment.
We are well positioned to self managed the risk associated with the temporary suspension of production at cigar Lake.
And in Port Hope.
We have $1.2 billion in cash and an undrawn credit facility, which we don't anticipate will need to drawn this year.
Relative to a year ago, our ability to service and retire or debt has improved.
And looking back a year there a couple of other things I want to highlight that we believe strengthen the resiliency of our business.
On the demand side relative to a year ago nuclear is very clearly back in the policy toolbox due to its carbon free attributes.
Since the 100% of our products go to producing clean carbon free electricity, we're growing part of the solution to the clean air and climate change crisis.
And now in the face of a public health crisis. We believe nuclear is once again proving its worth due to some of its key safety and reliability attributes.
First and foremost it is baseload.
It will run reliably 24 hours, a day, allowing hospitals care facilities and other essential services to continue to operate uninterrupted.
In addition, nuclear reactors are designed to operate for long cycles without the need to refuel.
They carry strategic inventories to guard against supply disruptions.
They have a number of backup systems for safety and reliability and fewer people are required at site to run the operations.
In the current environment all of these characteristics make nuclear power a logical choice.
So as I said earlier, our customers will need uranium.
In contrast on the supply side things are less certain.
Govan 19 has disrupted global uranium production, adding to the supply curtailments that have already occurred in the industry due to the lack of production economics.
The industry is reliant on supply that has become highly concentrated both geographically and geologically.
This concentration has given rise to the number of trade issues over the past few years, including the.
Session to 32 investigation in the U.S.
The nuclear fuel working group.
The review of the Russian suspension agreement and Iran sanctions.
As we've now seen with the report from the nuclear fuel working group. These trade issues of raise concerns over the role of state owned enterprises, and then placed an increased focus on the importance of supporting the regional supply of critical minerals, including uranium.
Therefore today on balance we think the risks to supply our greater than the risk of the man.
Which is why we have seen the uranium spot price increased by more than 35%.
From $24 to over $33 since the start of the Kobin 19 supply disruptions.
Inventories, which have been blame for low prices in our industry will come into greater focus as a result of the unplanned supply disruptions.
Some utilities math to rely on their own nuclear fuel inventories as a result of the disruptions to production and we may see an acceleration of the de stocking that was already underway in our industry.
For years, we've been hearing about large inventories of uranium will now get a sense for the mobility of these inventories.
As history has taught us and as we have seen recently in the conversion market. The inventory in our industry may appear high it's mobility tends to be inversely related to the price of uranium, which can further exacerbated supply disruptions.
And even if there is a large de stocking of inventory as a result of the production disruptions. These are onetime volumes that will be cleared from the market and in the meantime, it may allow us to make our purchases more cheaply.
Overtime, we expect this will create a renewed focus on ensuring the availability of long term productive capacity to fuel nuclear reactors.
And we expect this renewed focus on security of supply will provide the market signals producers need and will help offset the near term costs. We may incur as a result of the temporary disruptions to our business.
These are some of the reasons why we expect our business to be resilient.
And this uncertain time, we will continue to do what we said we would.
Executing on our strategy as we navigate our way through.
We are responsible 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 our deliberate driven by the goal of increasing long term shareholder value.
So thanks to everyone for joining our call today and with that we will move into the question and answer portion of the call today, which as Rochelle mentioned earlier isn't I'll listen only mode today.
I'm going to start the first question is one that's come from investors that we've been hearing a lot over the last few weeks.
Tim.
Theres been a lot of changes in uranium market since the beginning of March how has your thinking about the market changed and what trends in supply and demand are you seeing relative to a year ago.
Well, there's been a lot of changes in everything since the beginning of March I think the whole world as Ken upside down, but you know that said if you remember back just just two months ago. The topic of the day was not go with 19 or the Corona buyers. It was climate change climate change clean air Seo to reduction grid of doing Bert.
Those things aren't gone.
They are still around sure we've shut everything down and the Irrs a bit cleaner now, but it's all temporary it's coming back we're coming back the economies are coming back we didnt solve climate change so.
When economy started again emissions are going to start going up again, and we still have the same problems. We had before so this is where I believe that had been in this industry at my whole my whole life pretty much of this is where nuclear can play a great roll safe clean reliable carbon free electricity I think the world's got a great.
Hence no.
With that you know with the economic stimulus money in the shovel ready projects and the money that's going to be a.
Floated in to infrastructure to really.
Put it into a clean green energy infrastructure, which includes nuclear.
So I think theres, a real possibility in a real there's a real good place for a good role for nuclear to play going forward on the uranium side. Obviously, we've also seen a lot a change in the last couple of months and.
And demands remain strong for us nuclear reactors are still running and providing that reliable electricity that we expect from them keeping on hospitals and ventilators and health care facilities running so that's all good supply side, a lot more procures as everybody knows and you've seen the price moving at least the spot price.
And even before covert 19, we were seeing concerns with supply we had the and I mentioned them in my comments trade issues that to 32, that's the year and a half.
The nuclear fuel working group roll state owned enterprise all of those things were floating out there now we're having real supply issues, Canada Kaz extend the maybe a all having supply issues due to covert 19. So it's a I'd say, it's really an interesting space.
Just as saying to some of the team earlier.
Been doing this for three or four decades, and I've seen that fires and floods in tsunami isn't earthquakes didnt have a worldwide pandemic in the cards, but we have one today and we're dealing with it. So it's it's kind of a different world we're living in right now.
Okay.
Thanks. Kim next question comes from Alex appears at BMO capital markets. His question is what are you seeing in the spot market. How much material was available have you seen many utilities competing for the spot much market material.
Well, we're certainly seeing a lot of moving a lot of action activity in the spot market and I would you say grant and his team have been.
Absolutely neck deep in the market over the past few months, so I'm going ask grant to speak about the market and just what we're seeing grant Asher, it's a rather a broad based demand that we're seeing in the spot market, which explains why it's been a steady inflationary trend that is now with stood.
I would say to normal month end game, playing that can sometimes go on in our industry. Both March month ended April month end of now come and gone without taking any trajectory off that spot demand its of course producers and more among them that are looking to cover their committed sales in the face of.
Both planned and unplanned supply.
Discipline.
We've seen.
Some utility purchase I wouldn't say, it's the dominant part of the spot market I think it's important I understand that our customers are not free of concerns about cove. It and are focused on their own pandemic planning right now, but we have seen some utility demand in the spot market for sure.
We've seen some financials with a with a growing interest in the market and I think the other theme as.
We're seeing sellers retreat, you've heard us say before that historically in our market.
Willingness to sell or the mobility of material tends to be inversely related to the price and when the price goes up we see folks less willing to part with material. So this steady broad based inflation in the spot market. We expect to continue you know that our goal has been to buy material.
Very strategically in the product form we want in the locations we won.
And quite frankly in the timeframe that we walked and you heard us say a Q4.
You also hurt us say throughout 2019 that we were we were not finding a very deep market. When it came to pounds that we're in a can or in a canister and available today and I think what this market transition is showing is that that's that's true.
Great. Thanks Graham next question comes from Great Burns at TD Securities in a recent interview with Adam Crumbs CEO suggested that the role of traders in the uranium market would change significantly without surpassed material available to them. Moreover, indicated mid term market could shrink and that utilities could be pushed back into the term mark.
That does this correspond with your view.
Thanks, Greg Congratulations to take the owners will you do I read with interest the comments that were made by the CEO of 'cause Adam problem.
In part because they were absolutely true, but in part because I think it really expressed.
I said comment that many of us have had that that that carry trade business that the traders were involved it was a function of an oversupplied spot market. So it was always the spot market was being used for surplus disposal in a low interest rate environment, you were going to see the temptation to buy material off the spot market just.
Yes. It forward on the carry trade that enabled the maturing of a bit of a mid term market in our industry, but it also eroded term demand it filled in the early years of term to Matt and I would say bought our customers more time to contemplate what their procurement should be but as we move into a market where primary.
Reduction is well below annual demand and where we see secondary supplies, playing a less and less of a roll the availability of that material.
Isn't there and I think my earlier comments on the tightness that we're seeing in the spot market reflected by that consistent upward trend. This is just a reflection of that so you know I echo some of the question does not clear to me, where traders who are going to get material from.
In order to continue with that mid term business and to the extent to.
The financial interest that have funded that carry trade in the past don't have that liquidity that theyre willing to put at risk in the carry trade well, that's going to impaired as well.
So then you could see the opening up of more classic term demand as we know it in our industry, which would be a very helpful.
Development because of course traders CAD to offer that term material, they're not producers. They can't offer the long term security of supply. They don't have a production base. There just borrowing from the market if you will.
And then of course once you start to eliminate that temptation for carry trade, perhaps we'll see some of our competitors.
Less aggressive with their with their pricing for term business because they won't they won't have a sense. They have to compete with that spot carry trade anymore and maybe we can see the kind of disciplined that's necessary to see pricing out along the production cost curve not the spot carry trade. So you know I.
Welcome those comments and I think they were they were really accurate.
Great. Thanks Graham. The next question has also for Greg Burns at TD Securities You X term price increase this week to $33 per pound, but you X noted that no term activity has occurred with the price increase just based on a hunch.
Well you know I think it's a reminder for us and for everybody. That's in this industry in watches this industry that we do have price reporting, but we don't have price discovery like some folks know it in some commodities. We have noted that the frequency nor the volumes, where you can truly discover a price on a minute by minute basis.
Like you can in some other commodity and so price reporting involves judgment to be sure and I think this is just the flip side of the result that we saw with their last month reporting where you where you saw you acts increase the spot price increase the three year price increase the five year.
Price talk about the risks of unplanned supply does this disruption in the market and then lower at the turn price by a dollar and I think I think it just reminded people that they apply judgment and and so this is a judgment call. It's a judgment call. That's obviously made to keep pace with the fact that that five year price in our industry is now.
Just about touching $40.
Thats, a very helpful marker for us and for those who have tier one idled idled capacity and and then I think when we just compare the different price reporters.
It might be a little too simplistic to say it this way, but I think one of our price reporters you Act tends to apply judgment kind of based on yesterday and the other price reporter Tradetech I would say probably applies judgment based on tomorrow, and that's just kind of a consistent way of doing it but but if you've been staring at low prices for a long time then then.
Then you're going to always see low prices and until well there are no longer low or they start to transition. So yes, theres judgment, that's applied and I think this is just the flip side of the judgment that was reply applied last month.
This next question is one that we've been getting quite a bit over the last week since the nuclear nuclear fuel working group report came out what are your thoughts on this report and will benefit cameco.
And does that change your thinking about your U.S. assets.
Well as everyone knows that we reported in the past we were very involved in the section to 32 business those going on which transition into the nuclear fuel working group and the report came out to a few days ago I would have to say, we're very pleased with the tone of the report and.
The.
Secretary of energy D'andrea did a brilliant job of just laying out the us support for nuclear which has been lacking I would say in in the past we havent seen it to that blatant is as the secretary put out and then the support for the fuel business. The front end of the fuel cycle and so yes were.
Very pleased in that regard to clearly nuclear energy to play a big roll up I think he was.
Very honest in saying that the U.S. has taken a step back in the world and some other countries have moved ahead than he wants to regain that territory. The president wants to regain the territory. So that's that was all super positive lacking a bit in details I think more to come on that so we'll wait and see just how it's going to be implemented but I can tell you a with about.
$1 billion.
Investments in the U.S., we're well placed to take advantage of this new this new appetite for more nuclear and for support for the front end the nuclear fuel cycle. So we're happy about it we ask one thing we ask was that you know production not be subsidize to compete with.
Production, we've taken off the table and make a bad situation worse, and we didnt see that we see that any production that will be called for will be sequestered and so that was a good news be so overall, we're quite happy with the report and the we're waiting for more details to see how cameco can play.
The next question comes from Oscar Cabrera.
How significant is the announced reduction in Capex reduction due to covert 19, and how quickly can live production come back on.
Well thanks Oscar for the question that I can tell you anytime the.
Producer that produces 40% to 50% of the world production makes a move it is it's important and so we've been watching it very closely we'll see how long they stay down how long the coal would impact is there a we know Mr. Paramount to have well and we know that the health and safety of his.
Workers and the workers that all the sites is absolutely a top priority no different than any other company in our space. So we'll watch we'll watch to see what they do.
Good article lift from Mr. pyramid, often you X weekly this we go to encourage people to read it he was very forthright with where they're at.
I'd just say.
Different kind of mining than we do here into the Scotsman at least it's is our its drilling in it's a set of certifying well fields. All it takes time when you shut that down and you want to start up again it takes a while to do that so little different for us maybe at cigar we might be able to come back a little bit more quickly we're used to shutting down for.
The short periods of time in summers and and bringing it back on we'll see how it works in does extend but it'll probably take them a little bit more time to come back up.
The next question comes from Brian Macarthur at Raymond James.
Global inventories look like and are we likely to see them being liquidated at higher prices grant.
Well.
We've always had inventories in this industry and that's something we've talked about in the past its something that the different trade reporters have have commented on how much inventory is I would you say we look at this slightly differently because it's not that the size of the inventory that matters. Its the mobility up at that matters.
I would just remind you that.
One of the things we were saying about 2019 the way we we're characterizing that year as we were saying it really was no longer a secondary supply or inventory story anymore. What we were seeing in 2019 was was that a year. When we were the only demand in the market and what we're seeing was I'm committed.
Okay.
Rather than inventory, we were just seeing producers, who probably shouldn't have been producing should have been leaving that material in the ground. We're continuing to produce it was making its way into the market and that's what resulted in that bit of an anomalous result, where we would say the market is tight and yet.
Had a 24 dollar market to begin the year and what was going on there was when we were looking for material and it can or into canister.
Available.
True spot it wasn't there, but if you were willing to wait three months six months or nine months out you could find some of this uncommitted primary production it would leak into the market. So that that's what's been the story.
But thats whats profoundly different right now in 2020, because here you have unplanned supply disruptions affecting disproportionately those sources. If I'm committed primary production, we would see them leak out of cats expand perhaps through that because out of prompts joint ventures, we would see them come out of.
Namibia, we would see them come out of whose Pakistan Thats, where we were seeing that material show up Brian and so it was.
It was.
So we look at 2020, and we say well I'm not so sure you can be comfort at three months six months nine months out that supply is going to be there for you given the unplanned supply disruption that that's happening right now so that's how we look at it as more of a mobility issue and we're just not seeing the mobility, which is being reflected in that.
Thats steady inflating uranium price.
Thanks, Kim next question comes from Oscar Cabrera CBC.
Mentioned that end user demand has been absent in the market with all the production curtailments announced are you starting to see them coming to the market for spot purchases and long term contract.
I want to make a distinction between sort of camecos experience and the broader market because Oscar Oscars question is right in that we have not seen replacement rate term contracting for example at the industry level and what I mean by that is obviously the world's consuming a 180 million pounds per year the rain.
Yes, we havent seen 180 million pounds of new contracts being layered in overtime. So we don't have replacement rate. So by definition for many many years now we actually have been de stocking we've been taking material off of committed sales portfolios, but not replacing yet.
So if that's the industry situation it was actually been different for cameco.
You'll recall in 2019, we reported that we had added another 36 million pass to our contract portfolio.
And then we also said in Q4 that in our pipeline from origination through to negotiation or execution, we had more pounds under negotiation of uranium or more kgs of conversion service than we'd had for a very long time since Fukushima. So cameco was enjoying replacement rate contracting.
For a variety of reasons. So whats happened now is covance come along and it's it's affected in two important ways.
The types of negotiations that go on for term contracts. The first important way as is our customers are not immune to this.
To this public health crisis, and and we see our customers turning inward looking at how they're managing the risk starting with that we called it the tree arching of their fuel supply counting the fueled vendors of fuel bundles that the reactor facilities, then that checking with the fuel fabricators and seeing what their plans are and how much.
In process material, they havent kind of working their way upstream to make sure there supplies or are accounted for so they've had they've been focused on dealing with the public health crisis, which also creates a bit of delay, but but don't forget in a market that is transitioning where you start to see a uranium price in the mid thirtys in the spot market enough.
Five year price for uranium that's starting to touched before.
It removes a little bit of urgency we have to complete some of these transactions as well so between those two factors our customers dealing with the public health crisis themselves at us not being in such a rush because the market is transitioning in our favor.
We're where we can we think there could be some delays, but but I don't need I don't want anybody to interpret that as and Thats business Thats disappearing it business that from our perspective is actually firming up.
Hi extended to the industry level just to finish the question.
That was asked.
We have I can't really say I can point to a brand new RFP that's come into the market Post Cove itself. So I think it's just too early to be expecting a rush of term contracting driven by the unplanned supply disruption, but as I mentioned in an earlier answer we have seen a bit of utility demand into.
The spot market, which I think just reflects the that the greater speed that they can demonstrate when they're buying spot level versus the term level.
Great. Thanks Graham. If next question is again, one that we've been hearing quite a bit over the last couple of weeks with industrial demand down globally, what impact will the tab on the demand for nuclear energy and uranium and will the reduction in demand offset the supply disruption and are there any concerns that lays in construction renewed nuclear dako.
19, Nick Thanks.
No question industrial demand is down globally, we shut everything down as six weeks of other than essential services. We've taken most things off line everybody's been tucked in at home, which has led to an increase in residential demand for electricity probably has an offset the industrial demand.
You know depends how long that we're in this that I believe the economies are coming back.
It's a V shaped recovery or you are we've got to get back to to life.
As it will be going forward and that's going to have factories back open and lots requirements for electricity. So again as I said I think in my first answer I think nuclear is going to continue to play a role in was before there. So you talked about construction reactors I think theres. Some 53 year 54 reactors under construction around the world.
It Hasnt changed might have taken a pause in some areas, but back to building them again, including two units down in the us that are going ahead. So.
I don't know what the future looks like I don't think anybody does but we've got to get our economy's back up and running and nuclear power is going to play a role and so.
Electricity demand isn't going down we need clean reliable safe electricity and nuclear be part of part of it and we've we've got to supply them with the fuel for that.
Tim I might just add that from the point of view of our committed sales portfolio. We've spent a lot of time in the last couple of weeks understanding what the demand is in year. The commitments that we laid out at the beginning of the year are are we going to deliver into them as the demand to going to be there and what we're finding is that while the overall aggregate demand.
For power is.
It appears to be net down in a lot of jurisdictions were finding that nuclear is playing an important to roll a critical infrastructure role in those jurisdictions because of some of it's really important features we could we talk about it it's zero carbon feature from an environmental any SG point of view, but but in times of crisis its base load power feature that.
Absolutely critical I mean unique 24 hour powered to run hospitals and care centers and you don't want to ventilator running on intermittent power and then some operating features of reactors I mean, one of the things that weve on lamented is the inventory in our industry, but that inventory mix nuclear power and important source of Baseload right now during a crisis.
Because you you fuel reactor and it can run for 12 months 13 months up to 18 months without being refuel and as everybody knows that a reactor site. It's actually designed to have a lot less people add it up for radiation protection reasons, and all of that but as a consequence, you end up with the facility that's really well designed for physical.
Distancing as well so new give us got enough a lot of important features that actually has put it in a good position to deal with this crisis at a time when 24 hour base load power needs to be part of the critical infrastructure and Thats part of what gives us the confidence that says.
Our business for for 2020 continues to look resilient. Despite these impacts.
Thank you.
So this next question is a again one that we've been getting a fair amount and start to transition thats, a little bit more specifically into cameco related questions. What will be the driver of your decision to restart cigar Lake how long will it take to restart and what costs are involved.
Yes, well, obviously for cigar will be driven by the health and safety of our employees. We did that when we we said that when we took it down and we'll see that when we do decide the times rate to bring it back up again, obviously safety and health of our employees is important the surrounding communities you know we operate in northern sketch.
One communities around us lack the infrastructure to deal with health issues on a good day never mind in a covert.
Golden 19 World, we saw just yesterday and today again in the community Losch in the English we were first nation, which are which are a host of many of our employees in or contractors. I think there's 50 cases now that I've just broken out in the last few days and we.
We watch that very closely because that's not is that's not a good signs of health and safety will be number one we'll look at commercial implications. Obviously now we took it down as I sit on our own terms and so we think we'll be able to bring it up on our own terms as well we have a playbook for this we do this every summer.
We will work with the population health, which is the northern medical health authorities with the communities. The indigenous chiefs governments regulators employees, obviously, our partners around now we'll be working with them and so all of those things will go we'll go into the decision of.
Of went to restart.
We think we can do it quite quickly it's not like the Mcarthur key situation, where we have to retire the workforce the workforces, they're ready willing and the and the available to go when the times right. When the conditions are right. So thats what will drive us.
Thanks.
The next question comes from Alex appears at BMO capital markets.
What is your ability to flex some of your sales commitments in 2020 is it possible to defer differ a reasonable amount of the 28 30 million pounds of your previous sales commitments into next year to alleviate some of the expected production shortfall in 2020 or at least the for Q2 delivery to later in the year.
Im going to build on some of the comments that I made earlier about our committed sales portfolio and our view of the risk of that and a bit context, I mean, FOXO remember in Q4 last year.
The uranium market outlook put out by you X Conns uxc.
Was.
Concluded that outside of China, and Japan, most utilities were at or below their target inventory levels. So just a reminder, that a lot of Destocking had occurred already and then you add to it unplanned supply disruptions and we're finding its not putting.
The market in a in a sense of complacency quite the opposite it appears that folks want their material. However, we will we will obviously work with them.
To find out what the appropriate deliveries are the appropriate delivery times.
I don't know that we'll be asking to flex down I don't think we need to do that we've been planning our strategy to source our material either from production or from purchasing or from inventory. This has been part of our DNA. Since 2016, when we began our production cuts, but so far we see a resilient profile and are committed.
Sales and and we just don't think we would have to take those kind of actions and.
I see that reminder, that that when when we see.
When we see price is transitioning at our market we tend to not just see the mobility of inventory go down we actually tend to see additional purchasing thats one of the things that drives backwardation in our market. So I, just I think within that context.
Always a possibility, but not one that I think we need to explore at the moment.
Thanks Graham.
The next question comes from Oscar Cabrera CBC, how long can you go with all your operation shut down before liquidity becomes an issue grab <unk> go ahead.
When we set out on our strategy of supply discipline put demand in the market to satisfy our committed sales portfolio.
You know that those two aspects of it we're always backed up by an important third aspect of that was to have the financial ability to see this strategy out. So so we head into a pandemic where great greater on plan supply disruption comes along.
And we're very well positioned we have 1.2 billion in cash.
We have an undrawn revolver of a billion dollars that we don't expect to have to draw.
So we find ourselves in a very strong position going into this crisis. We we look at the decisions around cigar cigar Lake in Port Hope from a health and safety point of view and we have the financial ability to shoulder those important and responsible decisions.
So.
For us when when we look at.
A prolonged public health crisis, we can withstand that and continue with our strategy. We are there for US there are no awkward lurches to the equity markets are the debt markets that we envision here, we can stick to the path we were broad.
We always said that this market, we felt was becoming very vulnerable to an unplanned supply disruption. We had we weren't predicting a pandemic, but our history. In this industry tells us it will be something and while it turns out it was a pandemic, but these were the types of unplanned supply disruptions that we had in mind when we may.
The financial decisions, we made so I would say we're in it for the long run we're in it to see this to go to an appropriate transition that allows us to layer in the contracts required not just for a cigar but from Mcarthur key and then once we're operating only from those tier one assets Thats, a pretty good financial outlook.
For us.
Thanks Graham.
The next few questions actually come from lots the winter at Bank of America Merrill Lynch.
What happens if the spot material gets too expensive for you to purchase wherever you get your material from.
Thank you Ms. will take though we have.
When we think about the purchasing strategy that we've been on because we have this committed sales portfolio that we're going to deliver into we're going to source it.
We bought we thought about what do we do if the market starts to move away from US we kind of view it as one of those tail risks of course. This is an upper tail risk in it. It's the one that largely goes you either have an unplanned supply disruption and or you have sellers retreating, but but you're buying expensive material in the market.
I don't think we worry that we won't absolutely find it but at what price I think is at the heart of the question here and there is a trade off for US there is no doubt about it we've been very clear with that.
Purchasing material and feeding it into our committed sales portfolio has a negative margin impact relative to producing it from Mcarthur cigar of course it does.
But it's for US it's part of that general Destocking and it needs to be weighed off against two other features.
The first is if the prices rising and we're buying in the market and buying expensive material don't forget that we have market related exposure in our current committed sales portfolio that is starting to price at those higher prices. So we're going to get the cash flow and earnings pickup from a rising price environment.
But also don't forget that as the price moves up and up if you're really worried about that tail risk in a true uranium price thats moving rapidly up.
It is setting the environment for the terms and conditions that we need for the new contract portfolio to bring back cigar and Mcarthur and so if you think about it as long as the value created in the current portfolio plus the new portfolio is greater than the impact of purchasing more expensive matured.
Real in the near term, it's the right strategy, then you stick to it because thats, how you create value, but it is also important to note that that we mitigate risk I mean, it's part of our DNA and so we carry an inventory for the purpose of being able to deliver committed.
Sales in a market, where we are having trouble finding material.
No, we probably have the opportunity to if we needed to de Oro material from customers that that have material parked at our facilities. If we needed. It if we needed to take advantage of that to be repaid when we're producing again of course that would just accelerate the destocking that we've talked about in the past.
We have the ability to access some long term purchases that would that we were planning on taking several years from now, but if we needed to we could access those today, but again, that's just adding to the destocking that would be going on but of course, the big believers are.
Restarting cigar restarting mcarthur and getting those tier one assets producing so we will we have to buy in the market, where we have we're buying with conviction in the market will be very present.
What we've mitigated the risk as well.
Great. Thanks Grant.
The next question again is from Lawson Winder at Bank of America Merrill Lynch. So we talked a little bit earlier, you talked about the contracting activity what type of terms are you looking for our their term.
Are those term changing at the market evolves, and I think becoming more aggressive or conservative.
Well you know our terms haven't changed it concept you've heard us say for some time that we have a bias towards market related contracts and especially now that we're seeing a market that is transitioning we're grateful we added bias towards those market related contracts and we continue to have that.
But we deal with a lot of customers, who have a bias towards fixed prices. They they have known in the past that the pricey uranium was low it was well below production economics and they were doing a very smart thing. They were trying to lock in those low prices that were that were the result of surplus disposal going through the spot market, they're trying to lock.
That Ed for the longer haul and that that's smart for them to do we would all be trying to do it if we were in their shoes, but but of course, that's now changing and so for us that we have a market related preference.
To the extent that we deal with a counterparty who need some of it fixed.
It's going to be fixed at a much better price than it would have been just a few short weeks ago. So in concept, we like the market related exposure, we'd like to agree to the fixed pricing if it meets an acceptable return to our tier one.
But I, but I would just say as I mentioned earlier that when we see a market. That's in transition it takes away a little bit of our urgency to to lock in the business because we'd like to see where this uranium price is going to go before before we lock in too much. So the concept remains the same but the conditions have tilted more favorable.
For us.
Thanks.
One more question from London.
If you will services with to make 64% of your gross profit in 2020, how will the shutdown at portfolio affect that.
We have withdrawn our outlook, so I have to be a little bit careful with my comments here, but let me just say by and large I don't expect much of an impact that the.
Port Hope has absolutely fantastic operators.
They they took a shutdown for health and safety reasons as Tim outline but.
But right away they accelerated some of the maintenance that would have had.
Been conducted there any way maintenance that now will be done in the summer because it they'll have been a head start on it. So overall I actually don't expect it to have any impact.
On our outlook for fuel services and less for health and safety reasons it has to be extended.
Longer, but but at the moment, we're just not sure. So we were saying a four week temporary shutdown and if that's all it is I really don't expect an impact.
Next question comes from Oscar Cabrera CRB scene.
Given the challenging economic environment are you thinking about your capital allocation priority differently.
Well we aren't.
We've been saying for some time that our number one focus is the strategy that we're on right now we talked a little bit earlier about having the financial capacity to back up that strategy that strategy for us is how we create value for our owners over the long term, how we set the table for our tier one assets to be back office.
Operating at capacity and therefore, you get those expected margins that you that you deserve from tier one assets. So that is our pathway. We we then said in the past that.
If if it was a scenario where the market remained low we'd probably stay on a de levering path, but of course, that's not what's happening now with the unplanned supply disruptions were seeing a mark that is transitioning so that may be takes us more to the to a better case, but but we want to be disciplined and we want to be patient.
I would tell we've locked in that new business.
So that we can see line of sight and new committed contract portfolio with terms and conditions.
Price in a better market then we're going to stick to this conservative path, we're going to allocate capital conservatively.
And self managed risk is as we describe it to now is not the time to lose our disciplined the transition is under way, but it's not complete and capturing the value of the trend that transition is not complete for us either so.
No no changes.
And this is a question that we've been getting a lot as the well does consolidation of uranium space make sense in the current environment.
Well I can answer, though and I would say no. It's not something we're focused on clearly cameco, we've got I don't know 3456 of the.
Best year any mines in the world of Besley, probably we're seeing that are either suspended or shut down right. Now. So clearly the focus would be on bringing that production back on getting those units back up and running including Mcarthur River, which is an absolute Jim and so that would be our focus we bring those back long before we need any new production.
In this market.
Thanks, Tim and one final question in the call would not be complete without it.
You Federal Court of appeal hearing took place in March how did it go and when do you expect haven't decision if you're a successful when do you expect your financial capacity back.
Well, we were give us getting a bit lonely not answering CRM questions. Because we had them for 10 years and our own than they can the disappeared crude oil but.
Look I'd say this.
We had the hearing.
In front of the three court of appeal justices.
Two months ago now in March and no surprises, we think it went well we're hoping to get a decision in 2020.
So regarding our financial capacity and getting it back we can't forget the CRM could still appeal. So that so they're fun definitive the Supreme Court decides to hear it.
Could be another two years in the process, but.
Lots of lots of money at play here, if they don't seek did leave to appeal and we when we could expect to refund to think about $5.5 million and that's just for those tax years old three or five and six.
Don't forget we were also awarded.
Both pinpoint and he was 10.25 million grant in legal costs, plus disbursements another $17.9 million. So that's hanging out there that's it to be decided by the taxing off officer and we're waiting on that and then of course, if we do get a favorable decision at the court of appeal level, we would hope would have been.
Slide tool subsequent years, and so thats all out there.
We are waiting right now what we hope it's a 2020 decision we're hoping that the court of appeals looking at the matter now and we'll get a decision on.
This year.
Tim that concludes our question and I'll, maybe just turn it back here Tim for some closing remarks.
Okay, well. Thank you were shell and with that I guess I'll just say thanks, everybody who's been on the call with US today. We appreciate your interest your support to.
As I said at the outset. These are really unprecedented in challenging times for for everybody, but I can assure you that during this period of uncertainty we will continue to execute on our strategy and consistent with our values. We will do so in a manner that we believe will make our business sustainable over the long term. So thanks, everybody as Steve.
Safe and see healthy.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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