Q3 2022 Cameco Corp Earnings Call
Thank you for standing by this is the conference operator, welcome to the Chemical Corporation third quarter 2022 conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation there'll be an opportunity to ask questions.
Join the question queue.
Star then one on your telephone keypad.
Should you need assistance during the conference call you may signal, an operator by pressing star zero.
Webcast participants are asked to wait until the Q&A session before submitting their questions as he information. They are looking for may be provided during the presentation.
I would now like to turn the conference over to Michelle Jarrard VP Investor Relations talks and Treasury. Please go ahead.
Thank you operator, and good morning, everyone welcome to chemicals third quarter conference call I would like to acknowledge that we're speaking from our corporate office, which is on treaty six territories. The traditional territory of creep people and the whole land at the May T with US today on the call are Tim <unk>, President and CEO Grant Isaac Senior Vice President.
And CFO , Brian Reilly, Senior Vice President and Chief Operating Officer, Alice Wong Senior Vice President and Chief Corporate Officer, and Sean Quinn Senior Vice President Chief Legal Officer, and corporate Secretary I'm.
I'm going to hand, it over to Tim in just a moment to discuss how the improving growth outlook for nuclear power is translating into an improving growth outlook for cameco and then Graf will discuss our recent announcement to acquire Westinghouse.
After we will open it up for your questions.
We've allocated an hour for this call. However, as always our goal is to be open and transparent with our communication.
Therefore, if you have detailed questions about our quarterly financial results or should your questions not be addressed on this call. We will be happy to follow up with you. After the call. There are a few ways to contact US you can reach out to the contacts provided in our news release.
Can submit a question through the contact tab on our website.
You can use the ask a question form at the bottom of the webcast screen and we will be happy to follow up after this call.
If you joined the conference call through our website event page there are slides available which will be displayed during the call in.
In addition for your reference our quarterly Investor Handout is available for download in a PDF file on our website at Cameco dotcom.
<unk> Conference call is open to all members of the investment community, including the media.
During the Q&A session. Please limit yourself to two questions and then return to the queue.
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 you should not place undue reliance on forward looking statements actual results may differ materially from these forward looking statements and we do not undertake any obligation to update any forward looking statements, we make today, except as required.
Feared by law.
Please refer to our most recent annual information form and MD&A 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 good morning, everyone. We appreciate you joining us on our call today.
Two weeks ago I started my call by saying that nuclear energy is back in durable growth mode and that cameco is back in durable growth mode.
Growth that will be soft in the same manner as we approached all aspects of our business strategic deliberate disciplined and responsible.
I'm pleased to say that we're seeing the growth in our industry translate into improving financial performance, because the exposure to increasing prices and our contracts across the fuel cycle flows through to our average realized prices.
Even more important we're seeing that industry growth translate into growth in our book of business as we responsibly build homes for our valuable tier one assets.
Business that maintains significant exposure to rising prices for us.
This is exciting because as you know, we're still operating well below capacity.
Continued contracting success is setting us up for further growth as it lays the foundation for our transition back to a tier one run rate.
It's a good reminder of why we believe that cameco remains the best way to invest in the recovery in the uranium market.
Thanks to our strategic and deliberate actions in our Conservative financial management, we are well positioned well.
Well positioned for the nuclear fuel cycle tailwind driven by the focus on clean energy and energy crisis and by the geopolitical realignment that's occurring.
We're also well protected from the current macroeconomic headwinds.
We have a growing durable contract portfolio in our customer's nuclear plants are part of the critical infrastructure needed to guarantee the availability of 24 hour electricity to run hospitals care facilities and other essential services.
With $1.3 billion in cash on our balance sheet at the end of September improving fundamentals for our industry and our business and our decision to prepare Mcarthur River key Lake for production, our plans give us line of sight to a significant improvement in our future financial performance.
So I'm going to start by talking about cameco and the success, we're having in an improving market.
Then I'm going to turn it over to grant who is going to walk you through our strategic partnership with Brookfield renewable to acquire Westinghouse and why we expect it to augment the core of our business expand our ability to compete for more business and offer more solutions to our customers across the nuclear fuel cycle.
In July when we reported our second quarter results. We noted that we had added a total of 45 million pounds to our uranium contract portfolio since the beginning of January .
Two weeks ago, we indicated that number had grown to 50 million pounds.
We also noted that in our fuel services segment, where pricing is at historic highs since the beginning of January we had secured 7 million kilograms of uranium as you have six under long term contracts.
Contracts that will underpin the operation of our tier one assets and that we expect to benefit from for many years to come thanks to our strategic patience.
This quarter, we have provided a further glimpse into our pipeline of contracting discussions because it has us pretty optimistic.
Our discussions range from initiation to accepted and awaiting finalization.
We're pleased to report that we are having good success in our discussions.
In addition to the 50 million pounds I noted earlier, we've had another 27 million pounds of long term uranium business excepted.
While the contracts are not yet finalized the key terms, including pricing mechanism volume in tenor.
Have all been agreed to.
In addition, we have had $7 5 million kg you have additional conversion business accepted which is also being finalized.
Once all contracts are finalized the total volume of uranium successfully contracted since the beginning of this year is expected to be about 77 million pounds in the total volume of conversion contract. It is expected to be about $14 5 million K G U.
That's a lot of contracting and that's a credit to our team.
Well the Finalization of these contracts may or may not occur in the calendar year. It demonstrates that we are having significant success with our discussions.
This success is expected to secure long term value for cameco and allow us to sustainably operate our assets and therefore provide our customers with access to the fuel they need to operate their reactors.
We believe the key to our success is our ability to offer customers access to reliable assets across the fuel cycle.
The assets that are existing.
Proven tier one licensed permitted and in Geo politically attractive jurisdictions.
So why are we so excited about this contracting activity well, it's because that's what we've been patiently waiting for.
It demonstrates how well cameco is positioned to grow.
Our growth is expected to come from brownfield leverage our existing suite of tier one operating assets.
We do not have to build new capacity to capture the value.
We just need to turn up the assets, we already have a position we have not enjoyed in previous price cycles.
And of course with the planned joint acquisition of Westinghouse, We're excited about being able to extend the base of our reach in the nuclear fuel cycle at a time when there is tremendous growth on the horizon for our industry.
We're extending our reach with assets that like ours are strategic that are proven that are licensed and permitted and that are located in geopolitically attractive jurisdictions.
Assets that we expect will be able to participate in the growing demand profile for nuclear energy from their existing footprint.
And assets that are expected to provide new opportunities for our existing suite of uranium and fuel services segments.
Finally, we are excited because we've said all along it is utility procurement that provides the signals we need to make the production planning decisions that will get us back to operating at our tier one run rate.
But we're getting closer to that date, we are not there yet but every pound helps.
And while it has already been a successful year of contracting our pipeline of uranium and conversion negotiations remains large and we expect to see more of long term demand to come to the market.
So it's clear that utilities are increasingly recognizing the value and security access to chemicals strategic proven licensed permitted tier one assets that are located in geopolitically attractive jurisdictions.
To meet their fuel supply needs.
So let's talk about where we're at in the next stage of our supply discipline as we progressed toward the eventual return to our tier one run rate the restart at the Mcarthur River mine.
And that the key Lake mill.
We believe that this is one of if not the best suite of uranium assets on the planet.
Assets that are proven low cost and long lived.
At the mine all process circuits have been commissioned and the critical mining equipment and initial production areas have been prepared and are ready to go.
Trucks are now hauling ore slurry to the mill.
We've talked a lot about the significant upgrades we've made at the mill.
We've implemented and installed a number of automated systems and incorporated a number of digital technologies that we expect will make the asset more flexible more efficient an even safer than before.
We expect the first produced pounds to come out of the mill not too long from now and I can tell you that is a day that we will celebrate.
So stay tuned on that.
As I said earlier, our plans, which include the return to production sets us on a path that we expect will significantly improve our financial performance will.
You'll be able to source more of our committed sales from lower cost produced pounds and we get out from under the operational readiness costs, we've been expensing.
And of course, all those pounds have a home and are committed contracts portfolio.
With our experienced operating in this industry, we understand that to create long term value and provide supply reliability for our customers we.
We must build a permanent home for a production before we pull that out of the ground.
Without line of sight to having a long term profitable contract to deliver into uranium shows up in the spot market, which is neither the size nor the transaction frequency to absorb and contracted primary production.
This oversupply in the spot market puts downward pressure on price, which negatively impacts producer profitability and.
And therefore creates a threat to the long term security of supply for customers.
It happened in the last price cycle.
And those producers who thought they would wait and sell their material in the spot market.
Very quickly learned that it's a flawed strategy.
They may have sold a few hundred thousand pounds at the peak, but they rode the price right down to where their operations were no longer sustainable.
Whereas our average realized price outperformed the market throughout the trough.
So we will continue to make strategic supply decisions in all segments of our business and in accordance with the signals are customers are sending.
Okay.
I also want to remind you of the why behind what we do that being the increasingly important role for nuclear power in achieving the objectives of providing clean energy are providing secure energy and are providing affordable energy.
The heart of nuclear powers returned to the energy policy tool box is the reminder, that energy decisions must achieve all three of these objectives.
At the same time.
When energy policy decisions are determined based on these three objectives. It quickly becomes evident that nuclear power fits nicely at the center.
Nuclear power provide safe reliable affordable carbon free base load electricity, while also offering energy security and independence.
Suffice it to say, we're seeing governments and companies turn to nuclear with an appetite that I'm not sure I've ever seen in my four decades in this business.
Therefore, it's easy to conclude that the demand outlook is durable and very bright.
But supply is a different picture.
Low prices have led to growing supply concentration by origin and a growing primary supply gap.
Along the way the secondary supplies that have played such a crucial role in our industry have been drawn out of the market.
And taking the challenge of filling that gap to a whole new level as a desire to diversify away from Russian supply and nuclear fuel supply chains.
Currently the global nuclear industry relies on Russia for approximately 14% of its supply of uranium concentrates 27% of conversion supply and 39% of enrichment capacity.
Utilities are now considering and planning for a variety of potential scenarios ranging from an abrupt end to Russian supply to a gradual phase out.
It's still early days, but we are already seeing some utilities beginning to pivot toward procurement strategies that more carefully weigh the origin risk are.
We believe we are well positioned to help our customers derisk their fuel supply needs and this has us very optimistic.
We're optimistic about the growth and demand for nuclear power, both traditional and non traditional.
We're optimistic about the growth in demand for uranium and for the downstream fuel services.
We're optimistic about the opportunity for cameco and capturing long term value.
Our decisions at cameco or deliberate.
We're responsible commercially motivated supplier with a diversified portfolio of assets across the nuclear fuel cycle, including a tier one production portfolio that is among the best in the world.
We're committed to operating sustainably by protecting engaging and supporting the development of our people and their communities and to protecting the environment something we've been doing now for over 30 years.
Our strategy, which emphasizes strategically aligned contracting operationally flexible supply and financial discipline will allow us to achieve our vision.
The vision of energizing, a cleaner world and thereby delivering long term value in a market where demand for safe secure reliable and affordable clean nuclear energy is growing.
So with that I'm going to turn it over to grant.
Thank you Tim.
Good morning to all who have joined US today I want to follow him spotlight on our contracting activity with a spotlight on our recent announcement to acquire Westinghouse.
Obviously since we don't own it yet there really are significant limits to what we can disclose about a private company, especially one currently owned by a private equity firm.
But what we can do is to outline our expectation for this acquisition. After it closes we have six key expectations first we expect Westinghouse like cameco to benefit as nuclear power is forecast to double over the coming decades growth and demand comes from several sources existing re.
The actors say from early shutdown.
<unk> reactors undergoing life extensions to operate for materially more decades, new markets for fuel products and services like Eastern Europe as a result of the unprecedented geopolitical realignment.
And of course, new builds of large or small end of micro reactors.
A durable demand outlook that we believe is the best ever.
The second we expect this acquisition to enhance our ability to compete for this improving nuclear demand as nuclear demand improves proven suppliers have an enhanced ability to compete for that demand at cameco. We believe we are the very best way to invest in the recovery of nuclear fuel demand because we have always been invested in the fuels.
Michael with valuable licensed existing capacity and geopolitically important jurisdictions, where our participation in the industry is closely regulated the Mcarthur River mining key Lake Mill, the cigar Lake mine the Blind River refinery the Port hope conversion facility.
Port Hope fuel manufacturing are all examples of such valuable assets assets with brownfield organic inside the fence line growth characteristics meeting growing demand without the immediate need for Greenfield investments, which are particularly challenged given current inflationary and supply chain pressures at Westinghouse.
Conversion fabrication and manufacturing assets managed by a world class team have the very same characteristics of meeting growing demand for brownfield leverage.
We expect an enhanced ability to compete at a time when the western nuclear fuel cycle needs to provide reliable and secure uranium conversion enrichment fabrication.
Arts and service solutions to nuclear power plants that are absolutely critical in dealing with today's dual energy and climate crisis. In other words. This acquisition does not reduce our exposure to improving uranium prices, we expect it to enhance our exposure to improving uranium prices.
Third we expect distributions from our investment in Westinghouse Westinghouse is a stable and predictable core business generating durable cash flows and is well positioned to compete for growing nuclear demand.
With a long term contract portfolio like Amoco's, we expect Westinghouse to not only be well positioned to compete for growing nuclear demand, but also well protected from any current macroeconomic headwinds as utility customers run their critical nuclear power plants. This durable and growing business is expected to allow Westinghouse to self fund it.
Approved annual operating budget to maintain existing capacity and to service its financial obligations. The expected result is derisked cash flows from this investment.
Fourth we expect this strategic and transformative acquisition to be accretive accretive to our cash flows given that the stable and predictable core business generates durable cash flows and is well positioned to compete for growing nuclear demand and for the same reason accretive to our earnings after customary purchase price allocation account.
And adjusting for differences between U S GAAP and <unk> reporting standards and accretive to our net asset value given we have added to our existing asset base additional valuable strategic licensed and permitted existing capacity and geopolitically important jurisdictions.
Fifth we.
We expect that Westinghouse is existing long term debt level will have no negative impact on westinghouse's core business or growth potential.
There are two critical questions to ask about westinghouse's long term debt. The first question is whether the debt level or more precisely the debt service costs is expected to negatively impact the annual business plan and objectives of Westinghouse. The answer is no. We expect that given the stable and predictable core business of Westinghouse.
It will be in a position to self fund its approved annual operating budget, including servicing its financial obligations.
The second question is whether the debt level is expected to negatively impact market growth opportunities. The answer again is no. We expect that Westinghouse will remain a critical supplier of essential nuclear fuel and service solutions, the growing nuclear power markets around the world.
Overtime as nuclear demand grows and as Westinghouse realized as opportunities to grow the debt metrics will improve.
Sixth we expect that as we navigate by our investment grade rating and equity account for this joint venture.
The increase to our debt leverage metrics as part of financing this transaction will be temporary.
We expect that our financial performance will improve significantly as increased prices and increased contracting translate into uranium and fuel services production shifting from extreme supply discipline plans towards more production, we expect that our tier one cost base will be restored as we eliminate care and maintenance.
Cost operational readiness costs and the higher cost of purchasing material at closing, we expect the accretive Westinghouse transaction to add to our financial performance and I should point out that the additional debt results in a total long term indebtedness similar to where we were prior to retiring our 2019 matured.
<unk>, which was before the recovery in the uranium price and while Mcarthur River and key Lake we're still in care and maintenance our outlook has improved significantly since that the result is that we expect only a temporary impact to our debt leverage metrics as we navigate by our investment grade rating and equity account for this joint venture investment.
And Tim I would just add two final observations if I may.
We are delighted to partner with the outstanding team at Brookfield renewable led by Conor Caskey together we.
We have structured a strategic joint venture combining their extensive experience and expertise in clean energy transition and production with our extensive expertise and experience in the nuclear fuel cycle, a partnership where westinghouse's key decision items, such as strategic plans and operational budgets are reserved matters.
During both Brookfield renewable and Cameco does support the decisions our partnership that we expect to be a platform for growth as nuclear demand grows.
And finally, I think that everyone who has invested in the nuclear fuel cycle has at least at one point ask themselves why other investors have not taken notice of the fact that the investment case for western assets and the nuclear fuel cycle has never been stronger or ask themselves. Why is that there is not more investment capacity and scale in this exciting and critical clean <unk>.
<unk> space we.
To have asked that question.
What I would observe is that the past couple of weeks has demonstrated to me that this is precisely the type of transaction that generates the broader investor interest we have wondered about from a broader energy perspective Brookfield renewable for example is just clearly signaled to their global base of clean energy investors that nuclear power has a central.
Role to play in the transition to net zero and that the nuclear fuel cycle is absolutely critical to achieving that net zero transition from an industry perspective, we are providing investors with upstream exposure to valuable and strategic mining and milling assets downstream exposure to valuable and strategic fuel service.
Assets and ultimately leverage to improving prices in the growing cash flows and earnings that come from responsible long term contracting across the nuclear fuel cycle.
Perhaps this is the moment when a broader group of investors takes notice of nuclear energy.
With that back to you Tim great. Thanks for that grant and with that operator, we're happy to answer any questions.
Yeah.
Okay.
Thank you we will now begin the question and answer session in the interest of time, we ask you to limit your questions to one and once the supplemental if.
You have additional questions you're welcome to rejoin the queue.
She joined the question queue. You May Press Star then one on your telephone keypad, you'll hear a kiln acknowledging your request.
If youre using a speakerphone please pick up your speakers your handset before pressing and Keith.
To withdraw your question. Please press Star then two.
Webcast participants are welcome to submit a question through the box at the bottom of the webcast frame the chemical Investor Relations team will follow up with you by email after the call.
Once again anyway on the conference call, who wishes to ask a question Press Star then one at this time.
The first question is from Rs Walker, though with Scotiabank. Please go ahead.
Hi, good morning.
Wanted to ask about the Westinghouse and what your plans are with respect to managing your own debt.
You mentioned grant that you think Westinghouse, there's going to be self sustaining and basically paying out cash distributions to the partners.
Can we assume that any cash distributions. We received from Westinghouse will go primarily go to reducing your own corporate debt and I'm curious, if you're putting in place any kind of targeted debt levels or debt reduction levels.
Post closing.
You want to take that yeah happy to.
So thank you for that question, it's a good one and when I went through the expectations that we had.
To think about this at closing one of the one of the things I did want to dwell on was how we're looking at financing it and financing. It includes taking on some temporary debt, but I just wanted to remind folks of a couple of things first of all the temporary debt that we're looking at really is.
Within the confines of navigating by our investment grade ratings, so that remains an important an.
An important factor for us. So you can think about in terms of targets maintaining those those debt leverage metrics and so how do we think about that we think about that from quite a dynamic perspective. So first of all we do expect this acquisition to be accretive. So we do expect it to payback distributions, but remember we're at a pretty critical turning point.
With respect to the uranium and fuel services segment.
It's core to our business we've got Mcarthur.
Coming back online with production expected here in Q4, and you know better than anybody that that begins a process of shedding care and maintenance costs and shedding operational readiness costs and actually getting out from under purchasing material that's more expensive than producing at all of that to say the financial performance.
I expect it going forward is quite a significant improvement for us. So we put that against navigating by our investment grade rating and we're very comfortable to make the claim that we're looking at the additional leverage as being temporary.
And so.
I think thats, probably a fair way to say it and the other thing I just wanted to remind folks of is we're not talking about an unprecedented amount of leverage.
We're sitting at $1 5 billion in long term indebtedness at when Mcarthur River was shut down before we retired our 2019 maturities and so all of that factors into a much stronger outlook. So I think thats the right way to think about it.
Okay, just a follow up on that Greg.
About from them like I say, a net debt to EBITDA perspective target obviously, it will be elevated upon closing where would you like to get it to you.
When I when I say, we navigate by our investment grade rating. There is some coded language in there I guess, so so let me just kind of back that up.
Obviously, when you look at the rating it's over a period of time, it's never in a moment in time and ratings agencies are are pretty thorough in their assessment about where you sit today relative to a rating horizon of 18 to 24 months out.
I say investment grade rating do you think about that.
Triple B flat as being two five times net debt to EBITDA would be a good navigating point and so obviously.
As we have the recovery in our core business plus the distributions for Westinghouse we feel like that EBITDA performance is recovering really quickly and improving really quickly.
Guess, what what is a modest debt level relative to that level of financial performance. So that would be a good way to the target.
Thanks, Chris.
Okay.
Yeah.
The next question is from Gordon Johnson with G. L. J research. Please go ahead.
Hello, John .
Hi, Gordon.
Yes, Hey, guys. Thanks for taking my question I appreciate it sorry about that little miscommunication.
So ah congrats on the results and my first question is how do you guys think the geopolitical environment.
There all the time in CGM perception has shifted dramatically changed the strategic value of Westinghouse and then I have a follow up thank you.
Well I mean, we think it's very positive for Westinghouse and we've seen it already that we are seeing it.
<unk> months ago, I was over in Prague, not long ago with Westinghouse we were there as cameco, which you can see those eastern European countries that have relied on the Russian technology Rosetta them, the Vv ours and older technology and servicing turning away from the Russians and saying, we don't want to we don't want to operate with them anymore, we would want to work with them in.
Looking for a substitute in that substitute as Westinghouse, they're very active in the Ukraine, even today, they're as jet Republic, Slovakia pull in many of those eastern European countries. We think are potential business for for Westinghouse and quite frankly for chemical was.
Well, so you know.
So we're very very saddened by what's going on in the Ukraine with the Russians, we don't like that at all but.
It is a quite positive for our business.
Okay actually that brings up one other quick question on that topic.
When the deal was announced the stock reacted negatively and I think it was just because of the pricing, but some people were coming out negative on the deal we didn't quite understand it I just wanted to clarify here. Our view is that it looks like you guys are trying to become.
Forgive me if this isn't the right place, but the western version of brushes.
As a subsidiary of ours, it's on it's kind of like a one stop shop remind converted been breached badly traded uranium fuel assemblies.
And it looks like you guys are trying to grab market share there.
The west pivot potentially permanently.
Away from our connect as a world supplier would you guys agree with that analogy or am I thinking wrongly there and then I'm sorry, one more follow up.
Yeah Gordon Thanks for the question look that Oh did quite a you can make your own judgments on that I think listen I've been we've been doing this for decades for decades in opportunities like this don't come around very often we couldnt be more excited about this deal and we are it's a great deal for cameco for our stake.
Holders of our shareholders and our employees.
It's very very rare that you get the right conditions, the right partner and the right opportunity and we think we got them all here with this deal we really like our partner in the clean energy trade renewable energy being nuclear energy, we've seen as renewable now we've got the Westinghouse well run.
Many very good results.
Turned them around over the last four or five years and so you know this is their business is very complementary to what we do at Cameco. We are in the front end, we've got world class.
Uranium resources conversion, we're into the can do fuel business fabrication and then they take over from there and the Lightwater side. So we think it's very complementary as I say these opportunities don't come around very often this one hit us at the right time, and we were ready for it through all the discipline, we have exercised over the.
The last.
Decade, I would say and so I'm just saying we are very pleased with this deal and we think it's going to make chemical a stronger company and set this company up for many years to come.
Okay. That's very helpful. And then my last question is and I always ask this question, but I just wanted to get the most recent update.
Are you guys starting to see any slow up.
I would say traditional ESG money back into our into rather uranium sector and then thanks for the questions guys. Congrats on the results.
Yeah, Thanks, Gordon Grant's been pretty much nonstop with Rochelle on the Investor line over the last week or 10 days do you want to comment on the grid.
Gordon It's a great question I would say what I would call the clean energy trade really started to pivot into an interest in cameco actually about 18 months ago, and maybe on an accelerated basis about 12 months ago, and then we think that it's just poised to.
To take another step up.
Obviously had a lot of interest in our announcement and a lot of new interest in our announcement as well as support from existing page one investors.
I put it that way.
And we think that that translates into a growing awareness that that as as you saw Mark Carney say in the press release, there is no path to net zero that doesn't involve nuclear power. So we are seeing a pretty powerful awakening there and understanding that this is an industry that provides.
The E bonafide ease in ESG, but it's an industry that also provides the <unk> and the GE bona fide ease in ESG.
ESG metrics as well so we're we're very enthusiastic that that a broader base of investors.
Paying attention to this critical clean energy.
Okay.
Thanks Kurt.
The next question is from Ralph <unk> with eight capital. Please go ahead.
Hi, good morning, Thanks for taking my questions Jimmy Grant.
Grant when you talked about your your six point.
You know sort of conditions for this rationale at Westinghouse and I wanted to come back to sort of the first point and I'm wondering if if the benefits that you're seeing from these market opportunities has actually you're thinking about increased attention on the upstream right and so I'm thinking about you know does is there an upstream link to uranium mining and increased exploration.
<unk> taken a look at some of these greenfield and brownfield opportunities post the Westinghouse coming into the portfolio.
Yes, it's an interesting way to put it obviously as.
We view this as very complementary AD supported we viewed is enhancing our position in the uranium market recovery and what we simply mean there is look there are a lot of markets that are growing growing because reactors that they thought were going to be shut down are being saved reactors that may have come.
Two a license limit are being extended and of course, new markets as Tim talked about markets that are turning away from would've been traditional sources and looking for western solutions and quite frankly, the full suite of Western solutions all of that means greater opportunities for cameco contracting and of course.
As we build up that book, we then turn to our production plans. We're in a very favorable position right now with cameco in that we can grow into this market recovery from brownfield leverage. It really is just a matter of turning on the assets that we currently have versus embarking on a greenfield, but you're asking a longer term question.
Which is a good one and that is as.
As we have success building that contract book and as we resume production.
And obviously at some point get shed the last little bit of supply discipline and get to full capacity production at our tier one assets then it will be time to turn our attention to where that growth comes from we have an extraordinary portfolio, whether it's an asset like millennium adjacent to brownfield infrastructure on the eastern side of the Athabasca Basin.
Whether it's our tier two assets that are already licensed a permitted whether it's an asset at the right time in Western Australia, we already have a great base to start from when we look for those growth modalities, but at the moment. We're just we're not there. It is about taking advantage of growth and taking advantage from a brownfield.
<unk> that is our our priority right now and we think that drives the greatest amount of value for our owners.
Great Great answer Thanks Grant.
I have one for you.
The collective bargaining agreement at Mcarthur River expires December of this year can you talk a little bit about the ability for the workforce to operate under the expired CBA and are there incremental steps that chemical needs to take her or preparedness because it doesn't look like building up inventories as part of the narrative going.
Forward for chemical and it hasn't been for the last little while and how well does that contract book going to be protected against potential strike risk yes.
Thanks Ralph.
We do.
Our collective agreement is coming due at the end of the year and we were just talking about it yesterday Brian .
Brian and Alex and others are preparing our team year to sit down with our our colleagues in the union steelworkers at the sites and.
I think we will start those negotiations pretty soon you know what.
We have a world class workforce, and we've had great relations with them I think people are delighted to be back those that came back to Mcarthur River.
And key Lake.
Happy to be back and got a lot of new employees hired 500 or 600 people in the last 12 months. So we will get into those Ralph and we we are we've seen I think around or just went through some negotiation. So we've seen them I think there's others in the province going through negotiations its normal course, and we hope we'll be able to come to.
A satisfactory solution that both sides are very quickly and get on with life.
We obviously watch our inventories and grant will tell you. We've got all different sources, we've got long term agreements we've got inventory we've got.
We've got borrowing agreements. So we're well looked after often we're not concerned about that.
Excellent. Thanks for that good luck thanks Ralph.
The next question is from Greg Barnes with TD Securities. Please go ahead.
Okay.
Without the business suffered.
Yeah.
Yeah.
Greg It's Tim Greg We can't hear you.
Really muffled Greg.
Alright.
Yeah.
Go ahead, we will see what we can do.
And so a number of questions from investors about the business opportunity in eastern Europe .
And what that means for Westinghouse and for you can you quantify that in anyway.
Okay.
Yeah, I think it would be a little early to try to quantify.
The business opportunities there are other than to say, they're quite extensive and we know that Westinghouse is there in spades now theres, a big meeting going on in Washington D. C yesterday and today most of those European countries are there we know there's a bunch of meetings going on with them. So I'm not sure we can quantify it.
To any great extent at the moment, but maybe grant do you want to add something yes, we can provide a bit of a regional context that is a market that has historically as you know been served by the Russians 34 ish reactors of varying sizes that market consumes close to 15 million pounds of uranium per year about <unk>.
<unk> thousand tons of conversion.
Very significant opportunities for for.
Switching costs are really high in our industry, it's not easy to switch fuel fabricator, it's not easy to switch those suppliers, but when an event like the invasion of Ukraine prompts those switching costs, obviously, theres a great opportunity Westinghouse enjoys the pole position as having the certified and verified.
Ability to produce the <unk> fuel and obviously, what we want to do is help them provide those western solutions to those markets looking to turn away and so for us it's about a greater proportion of uranium and conversion contracting than say rule of thumb, what would we normally get in <unk>.
On a competitive basis, we just think it enhances our competitive position to be able to offer on a solutions basis for the full assemblies. So it is a pretty substantial new market is kind of the way to think about it.
Alright, Thanks, Grant and just secondarily.
Just on the capital structure for this transaction.
You've got 1 billion use of cash 600 million term loan you've got 1 billion bridge and then you've raised $750 million of equity.
Judging from all that you will not have to really draw on that bridge to any great extent is my understanding.
Yes, it would it would certainly be our intention to put the permanent permanent capital structure in place at time of closing and obviously theres a bit of uncertainty on that closing time because of the regulatory approvals required.
But ultimately we are very comfortable.
With the equity that we raised commensurate with the net asset value pickup that we just got.
Talked about the debt leverage being we're looking at it as temporary all against the recovery of the uranium and fuel services segment.
At a turning point and that's well underway now is mcarthur is coming back online.
So we just think we're in a good position at time of closing two to maintain the permanent capital structure in and actually close it out with cash.
Great. Thanks, Greg.
The next question is from Lawson Winder with Bank of America Securities. Please go ahead.
Hello, Good morning, gentlemen, and thank you for the update just.
Looking at the delivery schedule and.
And the fact that you have.
Production is not able to directly meet that schedule. Thank you for highlighting some of the options you have so you mentioned inventory long term purchase agreements.
<unk> arrangements.
Is it.
I guess the question is at some point will there be a need for chemicals to to go directly into the spot market and purchase, particularly if the guy deliveries are not realized sort of a longer term view, so maybe extending.
Well into 2023, and then just with any of those existing.
Options for.
For filling the gap between production and deliveries is there any indirect our spot market purchases.
Great influence to talk about the market a bit and so yes.
We have been the major purchaser in the market since we began our extreme supply discipline as you know loss if I go back to Mcarthur coming down.
Cameco bought roughly 56 million pounds of uranium a lot of it for immediate delivery some of it under long term purchase arrangements that were priced at much lower uranium environment under fixed contracts, we're able to access some of those today, but we do occasionally stick our nose in the spot market part of it is <unk>.
Just to figure out who's selling and what's available what I will tell you is that whenever cameco sticks its nose in the spot market to buy at suddenly offers move up they move away from us, which just indicates what we've been saying all along which is this is an incredibly thinly traded market looking ahead, we meet our.
Committed sales through a combination of inventories maybe accessing these long term purchase arrangements and spot market purchases when it makes sense for us when we have the right product form in the right location.
All of that of course.
Supportive of the price discovery in the market supportive of this notion that it is a thinly traded market. So yes don't expect us to.
Two to leave that spot space occasionally.
But look what what's never changed is our desire to manage risk. We never said, we would be only a spot market buyer. We said when we went into extreme supply discipline, we would always manage.
Our sources, so that we could meet our committed sales so don't be surprised if we buy a bit of spot material.
But just remember we've got lots of tools in the toolbox to do what the most important thing is to do which is to meet our committed sales.
Okay.
Okay.
Then I guess the other question I would like to ask that as my supplementation for the ink Guy deliveries can you just elaborate on the latest in terms of what's happening with that so have.
Have you managed to a range a range for insurance coverage for your shipments from <unk>.
Is there still reluctance to ensure those shipments on some degree and then.
With the material now sort of being stuck in transit could you just explain.
Sort of the details of how that situation.
And there isn't an outlier.
Solve itself yes.
Yes. Thanks for that question Lawson, we were kind of anticipating that one and Sean Quinn is here looks after our Kazakh operations and is on top of our transportation issues on a daily basis. So Sean why don't you give the latest on how thats working.
Hi.
Sure and it is working with delays is how I would characterize it overall at this time.
We are obviously as disclosed looking at having JV income who is responsible for shipping to chemical we take title and the material is delivered by JV and guide at Blind River.
We've had JV I work on the using the what we call the Trans Caspian Route.
And they are doing that in conjunction with it because Adam pronged shipment, which is already made in partway through and we are.
Looking at.
That material coming through and there are some delays and Azerbaijani permits.
That we're waiting for updates on and we're still optimistic that it will get to but it has been delayed due to.
Regulatory requirements that J P and K is working on in Azerbaijan.
So more to come Lawson.
If I might so I hereby adjourn is just one step along the way do you anticipate any further problems in like Georgia, and then what about transferring to the Black Sea.
We are.
There are no guarantees there we anticipate it will go smoothly once its through two Azerbaijan, but we will see.
It is a delivery route that has been used before.
So we're quite optimistic that it will work in due course, but.
We will we will see once it gets the blind River.
Okay, great. Thanks, and congratulations on a great result.
Yes, Thanks Lawson.
The next question is from Brian Macarthur with Raymond James. Please go ahead.
Hi, Good morning. My first question has to do with Westinghouse and I see you kind of put some financials in your MD&A, which is helpful and it sort of shows capital expenditures are pretty flat.
Over the last number of years and you talk about how it's going to be self funding going forward.
Is there any reason why I should believe that those sustaining capital expenditures should change significantly going forward without any other acquisitions or investments to grow.
I don't think so Brian but.
So the question would grant has studied the capex.
Previous and an outlook.
Depth. So grant when you comment what are the points I made earlier, Brian was that Westinghouse enjoys some asset characteristics for cameco enjoys which is the ability to take advantage of growth in the nuclear industry from brownfield leverage inside the fence line.
Opportunities to grow and so we do have an expectation that that capital lie.
Stays pretty flat it really is just attracting maintenance and replacement capital.
For the normal our manufacturing and fabrication operations, so very similar to to cameco, it's not easy.
These arent assets that require a significant greenfield investment in order to benefit from the growth. So that's the right way to think about it Brian .
Okay.
Great. Thanks, maybe switching to another topic you do mention GLA made progress.
Doing eight months of testing and now it's been moved to the U S can you give us.
Any update on well first of all what does that actually mean in moving the process forward.
And b, whether that has any implications on timeline floor GLA.
Yes, we're excited about the future for Julien fits nicely in the larger package that we're talking about today, but our good friend Sean Quinn. In addition, together extend is responsible for GLA. So why don't you give an update on that Sean.
Sure.
I will answer it kind of in two parts.
We are on the commercial side.
Very interested and watching very closely developments.
In the U S on the political front in regards to funding opportunities.
And.
There do seem to be some coming into existence, particularly under the IRA.
And in conjunction with that we are looking at next year its program and budget.
For GLA and the continued development of the technology and the two.
The two will be <unk> to some extent.
So.
Continued work on technology development towards TRL, six continues and that rate of progress will be tied to how we do in obtaining some funding support.
In the U S and discussions of course with our partnering silex.
So you wouldn't expect major capital going out the door on this next year.
No major capital going out the door next year.
Great. Thank you very much for answering my questions I appreciate it yeah.
Nice to talk to you Brian . Thanks, operator can I just interrupt for a moment I see we still have a few people in the queue and we certainly don't want to cut anybody off I know you said an hour, but we're prepared to stay longer to finish the lineup. That's on the screen in the queue. So please let those let those folks to ask their questions and we're happy to stay on.
Understood.
The next question is from Justin Kim with uranium Insider. Please go ahead.
Hi, Good morning, guys. Thanks, so much for taking my question.
First of all I wanted to say congratulations to you guys and the team for many years and supply discipline seemingly finally paying off I.
I know, that's a really big deal for the company. So congrats on that.
I wanted to ask a question about some historical context in terms of long term contracting.
There's plenty of speculation amongst the investing community, let's say that perhaps 2023 could be the first year in a decade replacement rate contracting on behalf of the utilities.
For example, we saw a jump in 2004 to 2005 from about 80 million pounds contracted 2004 to 260 million pounds contracted 2005.
What are you seeing.
In an historical context in terms of utility demand going forward and what are your expectations for this contracting cycle that appears to be just now starting to kick off for the years going forward.
So just let me open and just say thank you for your kind comments and because we don't take them lightly and we appreciate them.
We didn't have a whole lot of fun year I look around the table his team's been shoulder to shoulder for 10 years through some pretty tough times, we love phones in the grown at $17 and we're hoping to bring them out to an hour and a better market, but that we had to take some tough medicine, along the way and so we appreciate you recognizing that and certainly pass it on.
To our team so on.
Historical demand and returning to two run rates of purchasing grant willing to give an overview, yes, Jeff its a great question and there are some lessons to be learned obviously from looking back in the main lesson is something you've heard me say before which is contracting begets <unk>.
Contracted utilities, I think they've watched the decisions of producers very carefully but they watch each other very carefully as well and when when big utilities arent contracting I don't I think it creates it ended.
Maybe of complacency for others, and then when contracting starts to pick up and Youre seeing that.
US at 77 million pounds, a year to date between accepted and executed that's an extraordinary amount of contracting and if you. If you look at it against what some of the trade reporters are saying what cameco is doing 91% of those term contracting in the market. Obviously it means there is more contracting going on.
And then what's being picked up by the by the trade press, which is good which is going to be I think quite eye opening for those who have maybe been waiting in the contracting queue and thinking that they have a bit more time.
So historically, you look back and you see that con.
Contracting begets contracting, but looking ahead there is actually some characteristics that are different than what we've seen in the past and I think more supportive.
Number one is when you think about that <unk> hundred five window and the contracting cycle and the volumes that came there was a heck of a lot more inventory and a heck of a lot more secondary supply available around the world than there is today 405, there would still be hundreds of millions of pounds yet to come to the market in the HEU.
Agreement alone, which was an enormous amount of secondary supply and of course, you had much larger inventories than you have around the world Secondly.
When you look back then you had a lot more production being invested in you had the Kazakh ramp up underway in that window.
Which of course, then went on to become an extraordinary asset base of supply you had investments in cigar Lake underway, obviously, a really important tier one asset being built flip forward to today secondary supplies falling dramatically inventories drawn down to really low levels, it's not an inventory story.
And where are the investments in supply after years of really low uranium prices there isn't that Hugh.
Production, that's already being invested in and already being developed and so it takes me back to the point that I made in Q2, which is we're in the early innings.
We're not even at replacement rate and we've never started this cycle at this high of a uranium price before so historically contracting begets contracting looking ahead. There are some features that are just far more supportive of the uranium price recovery than we would have seen in that window.
Thank you that's a great answer and if I could follow up with.
Maybe you can add a little color as far as spot market goes so I think it's relatively understood amongst investors that the spot market is quite steady you mentioned just sticking your nose under the market offers start to move up.
The real market is the term contracting market and we know that however, the spot market is what is most visible to investors. So.
In the private conversation we had last month Grant you mentioned that traders are essentially the connective tissue between the two markets can you add a little bit of color to that as far as what investors can expect.
Spot market.
According when it comes to the expected move in long term contracting and pricing.
Good good question, so the spot market I always characterize it as being just a very discretionary market.
It has changed significantly in the last number of years. It is no longer an inventory market. What we're still seeing though is a bitter uncommitted primary production. So there remains some producers.
Around the world.
They are either primary uranium producers or maybe they have uranium as an off take maybe it is a copper gold operation that has uranium as a byproduct for example.
That just haven't done the work of building homes for their production and so it shows up when it's available.
Traders are there to buy it and then the traders are there to turn that material around the market for some period of time and of course it is not supportive.
Production economic price discovery in the market, but what we've seen is a spot market that but that has actually started to develop our real fundamental floor I mean, even when when the financial players for example aren't in there buying.
For quite a period of time.
The Sprott vehicle. This brought fiscal uranium trust was at a discount to its NAV and it wasn't able to buy prices didn't fall through the $40 down into 30, I mean, the floor is being set by the fundamentals and the need for production to be incentive to come to the market the ceiling in the spot market tends to be set.
A little bit by equity interest and so when when spot does have opportunities to motivate its at the market feature we are seeing quite a bit of price elasticity and it is pushing the price. So the callers are different the floor is really the fundamentals, which is great sort of suggested that the days of buying uranium that started.
With a three or a low for those days are well over in the question now is how much can you buy that starts with a five before you have to buy it that starts with a six or seven or higher.
So that really as you see the term contracting pickup and more of the production sources have an opportunity to layer in production committed into long term contract. There is going to be even less available material for the traders there'll be less.
Uncommitted primary production.
And therefore, the market will quickly return to the what it's supposed to be which is a term price set by production economics, and if you want a sense of where that needs to be.
Turn to trade Tech and look at their pioneering work on the production cost indicator right now it sort of reflects existing capacity coming back to the market, but as they do extend their great model to include Greenfield that needs to come we're going to see that production cost indicator Polk higher and then the spot market will just be a discount.
On available material today versus what we lived through which is the term price was nothing more than the forward carry on an oversupplied spot market. So we are seeing a pretty structural change underway in the way to think about spot pricing dynamic.
Thank you so much for answering both of those questions and again, congratulations again on the Westinghouse deal very exciting traction this quarter take care.
Thanks, a lot Justin.
Okay.
The next question is from John Tumazos with John Tumazos very independent research. Please go ahead.
Good morning.
Should we interpret from the $3 9 billion.
Capital allocation to processing.
But over the next five years.
Possibly longer cameco.
Doesn't expect to have for example, 4 billion dollar Greenfield New mine project or discovery.
That are the.
The processing is the better opportunity.
<unk>, maybe is a little thin.
And you've got mines to restart.
Okay.
Well, we've got all of those options Jon to be honest with you. We've got some we've got some nice projects as you know, we're just bringing mcarthur key back on and so thats, our number one priority, but not not at full speed.
Going to continue to exercise supply discipline.
Going forward on that so we still have some room there we've got some other brownfield projects that are on care and maintenance Rabbit Lake the United States. We Grant mentioned, we've got other Greenfield in Australia. So we think we're looking pretty good and I can tell you that this deal with Westinghouse doesn't entire ends forever on other projects we have.
As grant explained right from the outset, we have the financial capability to to do other things and as we return to a tier one run rate in our business, we should be very well positioned to to decide what we're going to do going forward, So and John I may be <unk>.
Reading too much into your question, but just to make sure that it's not a question, saying is this uranium or <unk>.
Downstream in fuel this is an and transaction this enhances our ability to put more uranium and conversion under contract as we put more uranium and contract and build out that business book It enhances our ability to turn on all of our existing assets as Tim said and it enhances our ability to grow.
The uranium and the conversion platform. Accordingly, so I don't want you to think about it as and maybe I'm reading too much into it but I don't want you to think about it as.
We are unhappy with our exploration portfolio or I'm happy with our base of existing uranium assets and therefore chose to invest downstream. This is an and transaction. This transaction enhances our ability to grow our uranium and fuel services segment.
You seem to imply that.
Three and a quarter billion.
Net of the equity offering.
Ed or indirect doesn't count.
So you're in effect.
Viewing Westinghouse has a risk with the annuity.
In terms of cash flow and then you'll never have to support that debt.
So the way I the way I look at it as.
As an equity.
<unk> is that that is that that stays at the joint venture level and so it really comes down to the questions that I outlined.
Earlier, which is over the period, where that debt matures, which is out to 2026.
Does it impair westinghouse's ability to grow in my view is and my expectation is it doesn't and then secondly are there markets around where Westinghouse could perhaps get more market share where a customer might go well I'd like to go with their fuel assembly or I'd like to go with their reactor newbuild, but.
Not comfortable with their debt level. The answer is no there too I mean ours is an industry, where there actually arent a lot of players in the nuclear fuel cycle, who enjoy an investment grade rating like cameco does and so if.
If that were the barrier for utilities, they only do business with people who are investment grade.
We have all the business at Cameco, So I don't see that causing a problem. So really it's a watching file its not a flashing red file for either us or Brookfield renewable and as Westinghouse grows with the market.
Its financial metrics will improve our organically as the business risk of nuclear improves from a ratings point of view, it's metrics will grow organically and then as we look ahead to other growth opportunities for Westinghouse that will trigger conversations about what the optimal capital structure is for Westinghouse, but at the moment.
It's not going to constrain the incredible opportunities that Westinghouse has before it.
So if one of your uranium geos.
A little nervous.
Got it good.
Salary offer for Maria and Rio pitched them that if these discoveries uranium at Rio they can write the check.
For $1 billion of mine.
How would you reply to the Geo who might not understand this private capital.
It doesn't count arguments can you just offer them better stock options or an MSR on his discovery to keep them.
John .
The folks that work in our amazing folks that work in our exploration at our mining unit I understand that the model for creating full cycle value in uranium. It's one where you build the homes for the production before you build the production. So actually it's the contracting performance that were enjoy which is the glue that keeps those people.
Catch to the cameco as being the absolutely best way to invest in the uranium market recovery.
Okay.
Thank you.
The next question is from finally with Ireland Brown. Please go ahead.
Alright, great. Thank you.
My question I guess I was wondering regarding Westinghouse.
We do see alright eastern utility.
Eastern European utilities switch and Westinghouse enabled structured.
Some of the business from Adam.
I'm, just wondering what that means for enrichment capacity.
And Mark just to begin with that's going to drive more over exceeding and perhaps changing more and more demand from that region.
Thanks.
There is a shortage of enrichment supply I mean, it's a huge issue you know US you heard us talk about the Russian supplying 40% of the enrichment market I think it was 27% of conversion 14 of uranium. So if they are pulling back.
Leaving a huge gap and we're seeing it is spending a lot of time in DC with utilities everywhere wondering where their future supply is going to come from so it is it is leaving a big hole brenna.
It's a great question there is no way to replace Russian enrichment today without doing two things.
One one is drawing down inventories on a temporary stock GAAP basis and number two is moving to very significant overfeeding.
Of enrichment plants and Overfeeding, it's just simply code for more uranium demand so to the extent that the existing western customers.
Look for more western enrichment capacity, and then you add to that eastern European customers looking for that same western capacity.
It will require absolutely require Moreover, feeding and Moreover, feeding as uranium demand and so it's yet another point of demand thats not really reflected in any of the industry forecast. So you think about overfeeding, it's not there yet in the forecast you think about the demand for <unk>.
And the fact that some of the advanced nuclear reactors are not just more demand for uranium, but it tends to be lumpier demand because you will fuel some of those advanced reactors upfront to run on perhaps a 10 year basis.
That demand isn't factored in yet so all of the reasons why we're pretty optimistic.
The west these western assets and the nuclear fuel cycle.
Oh, great. Thank you.
Thanks, very much bye.
This concludes our question and answer session I'd like to turn the conference back over to Jim Getz for closing remarks.
Well, thank you very much operator, and with that I just wanted to say thank you to everybody who has joined US on the call today, we as always appreciate your interest and your support we.
We see a lot of opportunity ahead of us with the demand for safe reliable affordable and carbon free baseload electricity coming from across the globe is a strategic commercial supplier with a strong balance sheet investments in long lived tier one assets across fuel cycle, a proven operating track record and lineup.
Site to return to our tier one cost structure. We at Cameco believe we are extraordinarily well positioned to respond to changing market dynamics. We are excited about the future we're seeing for nuclear power generation.
We're excited about the fundamentals for nuclear fuel supplies and we're excited about the prospects for our company.
We'll continue to do what we said we would do executing on our strategy and consistent with our values. We will do so in a manner. We believe will make our business sustainable over the long term.
And we will continue to make the health and safety of our workers their families and their communities our priority.
So thank you everybody stay safe and stay healthy.
This concludes today's conference call you may disconnect your lines.
Thanks for participating and have a pleasant day.
Okay.
Okay.
Thanks.
Great.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Yeah.
Yes.
Yes.
Okay.