Q2 2019 Earnings Call
Thank you for standing by this is the conference operator welcome to the Cameco Corporation second quarter 2019 results Conference call.
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I would now like to turn the conference over to Leah have risen.
Manager Treasury and insurance. Please go ahead mr. person.
Thank you operator, and good day, everyone. Thanks for joining US welcome to Camecos second quarter Conference call.
Today's call will focus on the trends you're seeing in the market and on our strategy not on the details of our quarterly financial results.
If you have detailed questions about our quarterly financial results. Please reach out to the contract provided in our news release, and we will be happy to help you with the details.
With us today on the call are Tim Gitzel, President and Chief Executive Officer Grant, Isaac Senior Vice President and Chief Financial Officer, Alice Wong Senior Vice President and Chief Corporate Officer, Brian Riley Senior Vice President and Chief Operating Officer, and Sean Quinn Senior Vice President Chief Legal Officer, and corporate Secretary.
Tim will begin with comments on our strategy and the market. After we will open the call up for your questions.
If you join the conference call through our website event page there are slides available which will be displayed during the call. The slides are also available for download in a PDF file through the conference call link the Cameco Dot com.
Today's conference call is open to all members of the investment community, including the media.
During the question and answer session. Please limit yourself to two questions and then return to the queue. Please note that this conference call will be will include forward looking information, which is based on a number of assumptions and actual results could differ materially.
Please refer to our annual information form and Mdna for more information about the factors that could cause these different results and the assumptions. We have made with that I will turn it over to Tim.
Well, thank you Lisa and welcome to everyone on the call today. We appreciate you taking the time to join us.
As we noted last quarter, it's our intent to use our quarterly calls to talk about what we're seeing in the market.
And about our strategy.
Our results for the quarter and for the six months reflect the outlook, we provided for 2019 and the normal quarterly variation in contract deliveries, which are weighted to the second half of the year.
Well, there's a lot of noise in the market I want to start today's call by reminding you of the key message.
We continue to do exactly what we said we would do executing on our strategy to add long term value.
And we remain committed to that strategy.
We've taken a three prong approach in the execution of our strategy operational marketing and financial.
So why is this our strategy.
Because the current market is very difficult primarily due to other suppliers in the industry, who lack conviction or experience.
Suppliers, who are still over producing their committed sales and using the spot market for surplus disposal at a time when demand is discretionary.
Yet today's low prices, creating tomorrow's opportunity for us because investments in future supply or not being made while future demand is growing.
With our World class assets, we are well positioned to capture that demand that will come to the market.
So, let's turn to the two pieces of good news, we announced on July 13th.
First is the decision in the Tepco arbitration.
We are pleased the arbitrators once again ruled in our favor agreeing that tepco did not have the right to terminate its uranium supply agreements in other words it broke the law.
However, we find the award of damages in the amount of $40.3 million us very disappointing and we simply cannot explain the flawed thinking that's as Tepco does not have the right to cancel the contract, but then does not allow us to recover the full value of the contract.
But what was perhaps even more disappointing was the market reaction to the news.
Let me be very clear this ruling does not jeopardize our portfolio of contracts.
After two international Arbitrations. The legal result is clear cancelling a contract by claiming the Fukushima disaster as an event a force measure is a breach of contract.
The legal clarity is the deterrent to others.
Our customers are publicly traded entities publicly regulated entities and state owned enterprises that like cameco are governed by a code of conduct and ethics.
With Tepco being a rare exception our customers honor their contracts as we do.
We have continued to make deliveries even when the price we were receiving was well below the market because in our world a contract is a contract.
In addition, we have good relations with our customers and have been able to successfully accommodate the impact of Fukushima.
And the resulting market weakness on those affected.
Further unlike tepco, our customers have reactors operating and require uranium for ongoing operation reactors that could run for 40% to 60 years and they recognize markets cuts both ways.
The security of supply being Paramount the premise that you can unilaterally terminated contract. If you don't like the price should be very disturbing for them as well.
Like us there are times when their contracts are in the market and times when they aren't.
And keep in mind in our previous arbitration, we recovered the full amount of the contract.
So at best the odds are 50, 50, and now ongoing commercial supply is put at risk.
Let me say it again, our contract portfolio is on stable ground.
The second piece of good news is of course.
The President's decision in the section 232 trade investigation.
We are pleased that president Trump found that no new trade restrictions are required on the import of foreign uranium into the us at this time.
As a commercial supplier camecos uranium has never been a threat to us national security a distinction we worked very hard to emphasize.
I'll come back to this a bit later.
So a couple of more of the big outstanding issues have been resolved, which is good news.
As I emphasized at the beginning of the call we have a deliberate strategy based on value and we remain committed to that strategy.
On the operational front, we decided to preserve the value of our tier one assets for better days in the market.
We suspended production that the Mcarthur River key Lake operation, removing 18 million pounds of supply from the market.
The suspension was temporary at first then based on continued market weakness, we transitioned to an indefinite suspension.
And make no mistake Mcarthur River key Lake is coming back supported by the very robust economics and the significant value. We expected we will create when it comes back into production.
However, we do not intend to restart until we were able to commit those valuable pounds under acceptable long term contracts.
Contracts that provide an acceptable rate of return on these assets for our owners.
Rewarding them for their continued patience and support of our strategy to build long term value.
So for the time being Mcarthur River key Lake along with our Rabbit Lake and US operations will remain in care and maintenance, resulting in annual supply reduction of more than 26 million pounds.
In terms of the market aspect of our strategy our supply actions require that we take demand action as well.
Our inventories in 2018, while significant were not enough to meet our delivery commitments. So we were required to buy material in the spot market.
This requirement not only continues in 2019 it ramps up.
In the second quarter, our sales commitments increased.
We now have sales commitments of between 30, and 32 million pounds in our uranium segment.
That means we now need to take delivery of between 21, and 23 million pounds of purchase uranium just to meet our current 2019 delivery commitments.
The majority of these volumes more than 70% are expected to come from the spot market.
Over the first six months of the year, we've taken delivery of about 12.7 million pounds of purchase uranium.
This material was drawn partially from our long term purchase commitments and from Inc. with the majority coming from the spot market.
In addition, we have secured a portion of the remaining spot material required but have not yet taken delivery.
So we still have purchasing activity ahead of us this year in order to fulfill our contracted sales.
And remember because our contract book extends beyond 2019 like in 2018, we expect to also begin securing uranium this year.
To meet next year's delivery commitments.
So 21 to 23 million pounds really represents the floor for our purchasing activity in 2019.
There are some additional variables to keep your eye on as well that could further accelerate our purchasing in 2019.
Those being additional sales commitments in either 2019 and 2020.
An increase in our target inventory as a result of increased sales are tightening supply.
And any unplanned production variance.
And when we make purchases our goal is always to buy uranium as cheaply as possible.
In order to maximize our gross profit.
Therefore, if the market sentiment points to lower prices Tomorrow, we will wait to buy.
However, if we see a change in sentiment that suggests prices will be higher tomorrow, we will purchase today.
But let me be very clear, we will not be the buyer of last resort, we are not here to assist others achieve their profit targets.
When you combine our expected spot purchases for 2018 and 2019 and include the production we have taken out of the market since 2016.
We will have removed more than 70 million pounds of uranium from the market with the potential for more to come.
Our supply and demand actions are backed up by a financial goal to strengthen our balance sheet and position ourselves to self managed risk.
And I can confidently say, we have successfully achieved this goal.
At the end of the second quarter, we held $1.1 billion in cash.
We will also continue to generate cash from operations this year.
And even with our decision to retire the $500 million in debt that matures in September .
We expect to maintain a significant cash balance.
So today, our balance sheet is in good shape.
Once we collect them the cost award for our CR rate trial and the damages under the Tepco contract will also help.
And they're also remain some upside depending on what uranium prices do for the remainder of the year and whether a final resolution of RCR a tax case can be achieved on terms consistent with our unequivocal win in tax court.
So I am happy to report that were batting three for three in terms of the execution on our strategy.
Turning to the market as I said last quarter. It is fundamentally better than it was a year ago.
In 2018 from a demand point of view consumption returned to pre 2011 levels.
We have now filled in the pot hole of lost demand and that demand continues to grow.
There are more than 50 reactors under construction and as each of these reactors gets turned on it represents net new demand.
In China alone the fastest growing nuclear energy market in the world. There are 45 reactors operating 11 units under construction and they are targeting 120 gigawatts by 2030.
And don't forget their aggressive reactor construction plans to build 30 reactors outside of China over the next decade as part of the built in road initiative.
In addition, there is the growing recognition of the role that nuclear power must play and ensuring safe reliable and affordable zero carbon electricity generation.
For the first time in nearly two decades, the International Energy Agency released a report on nuclear energy in the hopes of bringing it back into the global energy debate.
The report highlighted that a steep decline in nuclear power would threaten energy security and climate goals and result in 4 billion tons of additional carbon emissions by 2040.
Adding 4 billion tons of carbon emissions to the atmosphere would mean, adding the equivalent of the annual emissions from the United States.
The second largest source of greenhouse gas emissions in the world.
And as I have said before this growing recognition of the benefits of nuclear is not new I've seen this movie twice before.
Nuclear falls out of favour politically and a number of countries announced they're going to reduce reliance on or phaseout nuclear.
Then the world steps back and examines its options for carbon free base load sources of electricity.
And realizes the options are limited.
Theres hydro, which is an option for some countries, but not all.
And Theres nuclear.
And they realize that nuclear can provide the power they need not only reliably, but also safely and affordably and in a way that avoids emitting greenhouse gases.
Theres no doubt there is a role for wind and solar but they aren't base load.
Our health care education communication and transportation systems can't just shut down when the Sun doesn't shine in the wind Doesnt blow.
Then consider the ambitions in China, and India for increasing the number of electric vehicles on the roads.
I can tell you if there are powered by carbon producing sources of electricity they will be doing more harm than good.
So clean air concerns and climate change aren't going away.
You can look at the news every day and see an increased sense of urgency to limit the temperature increase of the planet.
And perhaps that's what's different this time, it's that sense of urgency.
Even the investment community is concerned.
There's been a significant rise recently in the focus on environmental social and governance or ESG issues.
Many pension funds mutual funds and investment firms are developing strategies to measure and address the impact of these SG issues within their investment portfolios.
Not surprisingly the business and finance or risks associated with climate change are front and center.
So all support for nuclear is growing in demand for nuclear fuel is certain and growing.
Supply is less certain and in fact declining.
Over the past several years, we have seen meaningful production cuts and reductions in producer inventories.
This has led to increased demand for uranium in the spot market from producers and financial players.
With decreasing primary supply as a result of these curtailments and demand in the spot market from producers and financial players.
The interest in long term contracting is once again starting to pick up.
At Cameco, we are having off market conversations with some of our best and largest customers about what it takes to support the operation of our tier one assets longer term.
These customers, whose uncovered requirements are growing are recognizing the risk that over reliance on finite sources of supply poses to the security of their supply longer term.
And they want first mover advantage.
In light of some of the issues affecting our market. They are increasingly looking for stable commercial suppliers with long lived tier one assets.
A proven operating track record.
And favorable performance on the ESG factors I mentioned earlier.
And there aren't many of us.
As you know in the first quarter, we added 25 million pounds to our long term contract portfolio.
And we expect more to come so stay tuned.
However, while we are seeing encouraging signs make no mistake. There is still a long way to go before we decide to restart Mcarthur River key Lake.
While the long term fundamentals reflect a growing demand story in a market where the uranium price needs to transition today, we still have a uranium price rooted in surplus disposal in the spot market, which drags down the long term price.
The long term price needs to transition to one that will incenting existing tier one production to restart and ramp up to full capacity with the spot price then reflecting a discount to the long term price.
However at the beginning of my remarks, I mentioned that there are some short term factors driving sentiment in our industry and delaying the transition.
Market access and trade policy issues were at the top of that list, making the availability of supply where it is needed much less predictable.
The most notable of these market access and trade policy issues was the investigation under section 232 of the trade expansion Act in the United States.
As I said at the outset of my remarks, we are happy with the President's finding the new trade restrictions are not required on the import of foreign uranium into the us at this time.
However, the president did acknowledge that there are challenges for the industry and is establishing a working group to further analyze the state of us nuclear fuel production.
We believe the working group will allow for a broader range of tools to be considered in addressing the industry challenges, which go beyond just uranium production encompassing the entire front end of the U.S fuel cycle.
The working group has up to 90 days to report back on its findings and any recommendation it has to enhance us domestic capabilities.
We will support the efforts of the working group in any way we can.
As a long time commercial producer employer supplier and investor in the US with current idle capacity, we want to see this industry grow and succeed.
We expect there may continue to be some uncertainty until the findings and recommendations of the working group were finalized.
But we ultimately view the decision as positive.
Some of the other short term factors include the role of financial players as they build a physical position in uranium.
And the varying degrees of market conviction and disciplined they exhibit.
From a supply point of view there is still uncertainty created by the May 30, Onest expiry of around those collective agreement with unionized employees at the Mcclean Lake Mill, where we send our cigar lake or.
Cigar Lake supplies 18 million pounds of uranium per year more than 10% of annual consumption.
So any labor disruption could create a significant swing in supply.
And until a new agreement is reached that risk will remain.
In the meantime, they continue to operate under the terms of the expired collective agreement.
On the other hand also from a supply point of view it is clear that not all value strategies are created equal.
We can't lose sight of the fact that while we have taken steps that are helping to clean up the spot market.
Cutting our production well below our committed sales volumes and purchasing pounds to fulfill our commitments.
There are others in our industry, who are still over producing their committed sales volumes and using the spot market for surplus disposal.
And there are a number of developers who have not learned the lessons of past producers and our promising new uncontracted supply on very optimistic timelines.
And even if those promises were to materialize.
It's no mystery as to where those pounds will end up.
And yet another failed volume strategy.
So today the market dynamics are changing due to a number of moving pieces.
However, what isn't changing is the commitment to our strategy.
It's a deliberate strategy that allows us to respond to the changing market dynamics.
We are commercially motivated supplier with a diversified portfolio of assets, including a tier one production portfolio that is among the best in the world and we have the ability to restart and expand these assets should we see the right signals.
Keep in mind these would be among the first and lowest cost pounds in the market.
We believe we have the best global exploration portfolio and are the only uranium producer in Canada with licensing permitting and operating experience and a proven community development track record.
Our decisions are deliberate driven by the goal of increasing long term shareholder value.
Ultimately our goal is to remain competitive and position the company to maintain exposure to the rewards that will come from having low cost supply to deliver into a strengthening market.
So thanks again for joining us today and with that we would be pleased to take your questions regarding the market and our strategy.
Certainly we will now begin the question and answer session in the interest of time, we ask you to limit your questions to one with one supplemental if you have additional questions. You are welcome to rejoin the queue to join the question queue. You May Press Star one on your telephone keypad, you will hear a tone acknowledging your request.
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To withdraw from the question queue. Please press star two.
Webcast participants are welcome to click on the submit question tab near the top of the webcast frames and type their question. The Camco Investor Relations team will follow up with you by email after the call. Once again anyone on the conference call who wishes to ask a question May Press Star one at this time, we will pause for a moment as callers join the queue.
Yes.
Our first question.
Comes from Ralph Profiti with eight capital. Please go ahead.
Hi, there thanks for taking my questions.
Tim I'm looking at your increased guidance for deliveries in 2019 and the commensurate.
Purchases guidance.
Is that due to increased demand I'm, hoping you can talk a little bit about the drivers of that updated guidance.
Yes, well thanks for the question nice to talk to you today. So yes. It is we've got some.
Customers clients, if you like that are looking for a bit.
More material and have come to us for that and so.
We were happy to supply them, we're happy anytime we can take pounds off the spot market and find a nice stable long term home for them and get them off that Mary will round. So that's really what's behind that it's customers that have come out and need a bit more material. This year.
Yes, I would just add Ralph its grant that we consider that fundamental demand and we actually consider it to be very positive fundamental in the sense that its utilities as Tim said once we sell to them that material is gone it's not demand from intermediaries, we're not interested in that demand because that's just going to add to churn into the market. It actually goes hand in glove. If you will with the broader good news in the market that we put out in Q1 and that was that we are seeing those off market.
Conversations with our customers about term business. So no surprise when theyre thinking about term business. There are also thinking a bit about spot business as well. So so we actually view this as a very positive development.
Yes.
Good thanks for that.
A follow up.
In the section 232 decision it wasn't really clear to me on the nature of the working groups focus okay.
Specifically the role of sovereign entities and operating uranium assets in foreign countries.
And how the US was going to treat that do you think that this is something that they are going to look at.
Good question Ralph.
We.
We.
We're heavily involved in.
In the task force that the I put together to help inform if you like the white house when they made their decision and so obviously thrilled when the decision came out we weren't to maybe anticipating this additional working group 90 day period review. So I think the good news in all of this.
Is that through the Tothirty two there were some pretty blunt instruments at the president could have employed.
This tariffs and quotas that weve never really understood how they would in practice be deployed and so those seem to be gone and so now I think we're.
That a rather lengthy group that's been put together and wait.
It's going to be looking at things like.
Their policy adjustments legislative changes that can be made to help the front end.
Of the fuel cycle, if it's needed things like tax abatement subsidies things like that so I think that the.
That piece is going to be looked at I didnt see any specific.
Points regarding state owned enterprises or.
Or any any specific direction to that committee to look at that but it wouldn't be surprised if it comes up.
Thanks.
Okay great.
Thanks for that.
Thank you.
Our next question comes from Brian Macarthur with Raymond James. Please go ahead.
Good morning, I, just thought I'd ask a little bit about Japan, I think you mentioned last quarter that when you put our Q that you saw cement some interest from Japanese utilities selling has there been any change in behavior, especially.
Post the Tepco decision.
No we haven't seen any change in behavior Brian .
We were I thought we were fairly transparent last quarter. When we said that we saw some material potentially trickling out of Japan that not very much but there was a bit and we've always said we'd be.
Clear with what we're seeing from Japan, I can tell you from a capital point of view we're seeing.
Good of a net inflow into Japan, there are three utilities running some units there are more to come and the.
We have been having discussions and with the with some of the Japanese utilities on on on a very positive discussions on inflow into Japan. So if there is anything new it's that.
And would they be looking for long term contracts.
Yep.
Great. Thank you very much thanks, Brian .
Our next question comes from Greg Barnes with TD Securities. Please go ahead.
Thank you Tim all brands have you seen any early reaction from utilities in the US post the 232 decision.
Or are they waiting for this group.
Process to be concluded.
So Greg I'll, just say that we saw anticipatory movement in the us actually the day before the news came out I think we saw some some transaction some quick transactions with the price moving I think it was granted dollar or dollar 50 on the Friday, and then into the Monday, and it's kind of it's kind of slowed down since then so.
Not much more I mean.
Everyone was.
Waiting for the 232 response to come.
Reed Association, so more to come on that one yes, we could report Greg that.
There is increased interest.
Not turning into transactions, yet, but what's to 30 to set aside yes, theres, the working group and some issues to work through but but with 232 set aside the temptation to use those border measures seems to be removed, which I think is giving utilities, a little more confidence that they can buy with less concerned about the origin of the material and so it's not going to be a surprise to see we're heading into a normal contracting cycle here into September with the W. In a certain way and with a little more clarity that they don't have to worry so much about the origins, we do expect that to pick up and and don't forget.
We're going to be a buyer as well we've got a lot of buying left to do so so it's going to be an active fall for sure.
Okay.
I just wanted to talk a little bit about the long term strategy too.
Yes sure.
Portfolio does roll off most significantly post 2020.
Then if you don't get the recovery in the uranium price that you're looking for what what you intend to do.
With respect to.
<unk> potential margin contraction us if you have to contract into lower pricing.
Yeah, Greg It's a great question and it is the question at the heart of our strategy we were looking at.
A market that really quite frankly doesn't make sense today, we've talked about it over and over again will mentioned it again today that the spot price is being set by surplus disposal as opposed to.
Being set by the production cost curve and it's not there yet that transition has to occur and we know what has to occur because this market has actually led to tier one production being shutdown tier one production being curtailed that doesn't make any sense. So we know that transition has to occur.
And in light of that looking at the demand picture the uncovered requirements of utilities, we think theres business to be done. So we look at the market today, it's not where we want it to be we look at the market in the future and we say the fundamentals are supportive we are not going to chase this market down and I think we've been rewarded for that the the fact that we are able to book business in Q1 and report that to you. The fact that we continue those discussions with the with the teaser there to stay tuned. It tells US that this is being noticed and so it gives us confidence that as we layer in.
New contracts that are acceptable to us we don't have to chase. This market downturn that we have the coverage right now today to to manage through the supply discipline that we have and to come out. The other end with a tier one strategy will have mcarthur running we'll have cigar running we'll have JV income I will have among the best assets on the planet and those will be reflected in our cost base with with acceptable new term contracts, obviously, the higher the transition to better but it but it tells us that that tier one strategy and that focus on on those assets only is the right one and it gives us the confidence will transition through this period, the market's gonna start incenting tier one to put production to come back and Thats. The environment, we want to price our material and Greg. We just were looking at the U.S. numbers. This morning for the next 10 year period, and Theres a body just under 800 million pounds uncovered.
Over the next 10 years.
It's a slow put an upward slope to lessen the near term, but theres a lot of uncovered material coming forward and we think those phones are going to come to the market too soon.
Yes squeeze in one more don't you think the windows closing a bit on your though this 18 month.
Timeframe till the end to 2020 is.
Shrinking obviously.
Well absolutely from that perspective, Greg we've been very clear that our strategy to curtail production to have an operating prong to our strategy along with the demand action strategy is actually in a direct response to what you just said that there is a compression there and we want to say if the market isn't pricing uranium right today, because there is excess material, while we haven't committed sales portfolio and there could be a home for that material. So thats what were going to target.
I would be really concerned if we weren't having these off market conversations, but we are so that to me. It suggests that the the path. We're on is the right one.
Okay. Thanks Brent.
And Tim.
Yes. Thanks.
Our next question is from Andrew Wong with RBC capital markets. Please go ahead.
Hey, Thanks, and good afternoon.
It's encouraging to hear the higher demand from utilities, but it also sounds like maybe there is a little bit more on disciplined sellers out there.
Could you just talk about is there more than you would have expected.
At this point in the market and where is that coming from.
Yeah, I'm not sure there is more than we expected, we're just to kind of disappointed to see.
The extra pounds coming in and more production than committed sales, it's not helping.
The market, we think we've given up the offices, we see or you've seen some of our numbers I think we've taken about 70 million pounds off the market.
In the last couple of years and.
We're continuing our supply discipline, so im not sure theres more coming units just some of the same sources.
And Andrew there's a dimension to it as well that.
These are sales that we're seeing driven by folks who are really consumed with quarter end reporting and so you've seen that you saw at year end you saw it again at the end.
Q1, you just see some panic selling from intermediaries in depth.
They've chosen a strategy that strategy is to go long and wait for the demand and then when the quarter ends they panic.
That's their strategy, but it has consequences they have to make some panic sales in the market. Our approach is not to protect them from panicking. Our approach is we are going to be material as cheaply as possible their behavior is becoming pretty predictive. So we will just wait for them to panic sell material will buy it and we will put it with utilities from where it is never coming back and you know at some point hopefully lessons get learns and hopefully some of these intermediaries recognize it's probably a lot smarter to sell forward and to buy but we're not there yet and that is what were trying to explain is a major question. We always get we always get we talked about how optimistic we are about the uranium space and how we think the fundamentals in our favor and then the second question is always available then what's wrong with the spot price what we're telling you what's wrong with the spot price right. Now we just have some people who are on disciplined in it for whatever reasons their own drivers we want to recognize that we are very clear about it and then explain to you.
How our strategy is actually in part dealing with that.
Okay. That's that's helpful.
And then maybe just regarding the purchases and then.
Tying that into your sales how much of that strategy.
Is trying to find those opportunities from utilities side, and and making those sales versus trying to facilitate that the market for some of those excess pounds to find a home where it doesn't disrupt the market. So much yes, well Andrew I think your framework is the right one.
In fact.
Hi.
I wish others had that view because entered two to interpret it as we're making spot sales because we're we're desperate or selling excess supply well. That's it that's a foolish view, it's a foolish view because.
It's actually orthogonal to everything we said so we see demand in the market from utilities they come to US, we'll we'll grab it when it makes sense for US then we'll go and find the material to put to those utilities and then it's not coming back again and every time, we do that hopefully it's one last pound thats in the hands of somebody who's going to panic at quarter end and be a desperate seller and take the market now, but if they're going to do that we're going to step back we're going to let them panic the market will find a floor when utilities believed the pricey uranium is cheap again and when we see that demand in the market then we will buy as well.
But we're not going to reward it. So that's a that's a part of it is Andrew we're it's fundamental demand we're interested its fundamental demand we're focused on.
Okay. Thank you.
Thank you.
Our next question is from Alex Paris, with BMO capital markets. Please go ahead.
Great. Good afternoon, Oh, So you just see.
One other question.
About.
Demand has changed off too.
The second 232, so obviously with this 90 day working group arrangement.
I just wondered whether.
You see any kind of change in a regional premium with a still a regional premium tool.
Within the.
In the sector.
Given that 90 day, how do you kind of yeah.
You called it.
And whether you can kind of make the most of that.
In the current situation.
Thanks, Alex I don't think we've seen the regional premium I think as I said, we saw a little bit of preemptive buying as there were lot of rumors going on the Friday before and there was a from different countries that seem to have a scoop from the way those as to what it was up thing. So you saw some movies speculators are people buying in advance but.
I don't know since then I think things have calmed down it's it's been pretty common flood the brace of uranium jumped to think about $1.50 over.
Over the weekend, there and until pretty much there and now I think everybody is waiting to see what what's the next step whats. This 90 day piece is going to bring and quite frankly, it's ended July beginning of August .
There is not a lot of activity going on in the market and I don't think there will be a until the W. In a conference when we come over and see you in.
In September .
There has been.
Alex There has been some talk in the industry about a a premium and it really is reflecting what the conversion side of our business is going through and so you see actually backwardation right now in conversion supply discipline has been.
So significant on the conversion side that that anytime you can price you have six.
That that's very attractive right now you're seeing that reflected in the results in our fuel services division as well so.
We're hoping obviously that what the conversion market has gone through a pretty good analog for the uranium market that oversupplied oversupplied real supply discipline came into the market and prices responded. So so thats where were seeing the premium when you can price the conversion or the U.S. six part of it.
Okay. Thank you.
Thank you.
Our next question is from Lawson Winder with Bank of America Merrill Lynch. Please go ahead.
Hi, Thanks for taking the question just.
The CRM it looks like you have finally had a chance to look at their appeal document and.
I mean everything seems to be in line is there has there been any approaches in terms of settlement conversations at all thanks.
The those losses, Tim no we have not had any conversations in that regard.
And then.
Do you have any sense of.
What their strategy might be in terms of.
Introducing new evidence or I mean, there was this thing.
Earlier on in the year, where they where they tried to extract oral testimony is or is there more of that going on or they just kind of sitting on their argument and waiting for a decision.
Yes. Good question, let me pass it over to Sean Quinn here, who is our resident expert on the motor.
Hi Lawson.
The what's happening now is the appeal to the federal court of appeal and that takes place on the record from the trial Court.
So the federal court of appeal will have the decision of the trial court and all the evidence the trial court looked at and additional submissions, but no new evidence of any description.
Okay, that's very helpful.
And then maybe just on the Mcclean Lake.
Mill collective bargaining agreements. So that was that expired may 31st are you guys involved in that conversation is that something thats strictly between around on the and the Union, yes, that's around those business to deal with and we know, they're they're working hard on that with them or with other workers.
In the Union, so nothing new to report on that but the best in the rental piece.
Okay, and then maybe just one last thing from me if you could just.
I mean as you have.
Very thoroughly stated.
On in terms of primary supply.
There is not enough.
Cherilyn primary supply out there to meet the demand. There's no question just curious with your activity in the market.
What are you seeing this year versus last year in terms of in terms of secondary supply in.
The more detailed you can provide the better but.
I would love to hear your comments on that thank you.
Brent go heavier yeah, well I'll just make a few observations as you know we've been in the market purchasing sometimes through RFP, sometimes off market directly with folks, we think are pretty motivated sellers and sometimes through brokers.
I would say on the secondary supply what is notable.
Is that despite this fear that there is still this secondary supply kicking around the market, it's not being offered to us when we put our RFP season. So yes, it's true that some of the Enrichers.
Our have sold Underfeeding and under feed capacity, but they sold it into term contracts actually generally as part of.
Shoring up their SWU contract.
The giveaway uranium on the front end, but its tied up into a term commitment and as a consequence, we're not seeing that in the spot market that just another piece of the good news story here with it we're not confronted with this unrelenting supply of secondary in fact, then we add to that.
The only material is not showing up in the market anymore because of the determinations from the secretary down there he's restricted the OE from doing that that's very good news. So the secondary piece is actually one of the things that gets us pretty excited it's one of the things driving the conversion price remember secondary material almost always showed up as you have six if that material is not showing up then uranium showing up needs to be converted it needs to be converted into space, where there has been supply constrained no surprise the conversion price goes up so instead, what we're seeing.
When we get when we win win now offers come into our RFP is this.
More on the concentrate side the folks that are grabbing some material from a supplier who is producing more than they should.
And they are grabbing it anticipation of our demand and then offering us back to that that's the material, we're seeing but happily it's not a secondary supply story.
Okay, that's very helpful. Thanks.
Thank you for the question.
Our next question comes from Orest Wowkodaw with Scotia Bank. Please go ahead.
Hi, good afternoon, a lot of my questions have been answered, but I didn't catch it earlier.
Tim but did you mention sorry, how many pounds you purchased year to date in the spot price I know you said greater than 70% on that 20 123, but can you give us a sense of where you're at.
We are.
We said we needed to purchase 21 to 23 million pounds. This year.
And I think we've secured.
Secured overall about 12 and a half million phones. So that's not the purchases that's a combination of.
JV Inca is some of the long term commitments, we have in some spot purchases and I think thats about as detailed as we get on that yes, we've been pulling back from reconciling those numbers because of the behavior that we spoke to earlier and that is.
Folks going long on uranium in anticipation of our demand and then if it doesn't show up before their quarter end, they panic and they sell it.
Their behavior should be go find demand of your own and then by the divided fill it because you know our purchasing is coming so we said 21% to 23 this year, but thats for calendar year 2019, you know we're going to buy more.
We're going to begin to buy for 2020 in 2019, So I would just say more as to its important to remember we got more purchasing ahead of us than we have behind us.
Okay. Okay. So the bottom line you still need to acquire about 10 million pounds. This year.
The combination of spot off.
Other purchases and then chi material.
Can we can you give us a sense of how many pounds that you secured from a purchase perspective for 2020 at this point no we haven't put that out there yet.
Other than to say, we haven't been very active yet when when the market started to sell off in March when we when we when we can't we saw these intermediaries in particular really start to panic that triggers for US. Our response to say, we step back because our goal is to buy as cheaply as possible. If the sentiment appears to be deflationary then that means the cheaper pounds, our tomorrow, they're not today. So we'll step back what the market find its own floor and as a consequence, we weren't very active and haven't been very active since that mark sell off but we will have to be this fall and so you look at the normal buying cycle. That's coming up you look at the clarity around 232 in terms of less concerned about origins.
You look at some of the supply issues.
And then you add to that effect that we need to buy and we've been very clear that were coming to buy and there's more purchases ahead of us than behind us.
It should make for a very active fall.
Okay, and then just finally get I mean, you mentioned you've removed about 70 million pounds from the market via.
Your shutdowns and your purchases.
Do you have a sense of.
How big the potential cleanup trade is here in terms of cleaning up that.
Excess supply or distress sellers.
That we actually go back to more of a supply demand driven market.
Well believe it or not or us, we actually think that.
The cleanup is fairly well underway remember in Q1, we talked about an RFP, we put into the market and that RFP was for a million pounds and remember we said we were only offered about a third of that at the spot price and then if we.
Went up $1.50 that day on the spot price, we could have secured another 300000 pounds, but the punch line is we were we were one third under subscribed on a million pound RFP and we were two thirds in spot pricing dynamics, so that suggest to us that the transition that we talked about.
He is not is elusive as people think it is but right now you got a discretionary demand met by some in the market who are being irresponsible with their supply we're not here to clean that up we're going to let that work its way through the market and then will step in and be very very active to meet our own needs tuck that material into our committed sales portfolio and then it's gone never to come back.
Okay. Thanks for the color.
Thanks.
Our next question is from Oscar Cabrera, Let's see IVC. Please go ahead.
Thank you operator.
Yes, good afternoon, good morning, everyone.
Just looking at the long term price.
From Uxc.
Beginning of 2018, we were trading at about $30 a pound and this went up to 32 and has been maintained there.
When you talk about and disciplined.
Supply.
Is there also on disciplined.
Long term contracting happening now.
Yes, Oscar Unfortunately, there is some of that to some of the suppliers trying to fill the term contract book at pretty aggressive prices and we've been watching that happen throughout the year. So I would say theres. Some of the same phenomenon on as we're seeing in the spot on the term market and it's one of those situations Oscar where.
We see some of our competitors.
Doing.
The the right thing for the right reasons, which is to tuck your supply into a term contract portfolio. Just we might just say you're doing it at the wrong time, and so even though we've been successful off market.
Striking business with our customers, that's acceptable to us and acceptable to them.
When we report those prices the trade reporters are quick to tell US yeah, well for every one of those we can show you someone who's being very desperate in the market and maybe has only a volume strategy needs to put certain volumes under contract. So it's just.
As we want to reinforce the color, we're providing to the market is not to say, we're more negative on the market. It's to help connect the dots between we're quite positive and constructive on our industry. The prices Havent responded why havent. They responded yet and we're just trying to point out those facts.
Oh, Yes, no no I appreciate that comment I think what I'm trying to get out here is that with those volumes strategies.
And as Greg pointed out with your contracts rolling over in 18 months do you think that those strategies can be maintained for like more than two years three years.
We obviously.
Bill run to the end of what they have available to sell.
There was a lot of nearly 90 million pounds contracted in the term market last year.
So far year to date I think were at close to 40.
In the term market. So somebody is moving a lot of selling a lot of material and committing a lot of material and when you look at it relative to all the supply discipline that's happened.
You got to believe some people are going to run to the end of how much volumes. They have left to sell now.
Unfortunate for them they are going to be trapped into future business, that's going to be locked into prices that reflect today, but those are their decisions for us we want the market leverage that's going to come from a market that transitions. We've got the protection today not to chase that market down. So we're taking a different approach Oscar.
Yeah, no that's well understood great appreciate that and I commend you for just strategy.
Then lastly, if I may.
On the on the click of Raymond in that clean Lake.
If that comes to.
A strike what happens then to the.
On to the usually or they presumed that you would need for cigar Lake.
Well, let me just be clear that they're not there yet and there is a lot of steps that would have to happen before they go out there, but if they did there just be a disruption of supply.
The cigar Lake you, there's only limited storage for the the Aurs that are taken out so we'd have to take some steps to hold back production until that result.
Thank you very much Tim Congrats Krishna thanks, Oscar good to talk to you.
Our next question is from FAI Lee with Odlum Brown. Please go ahead.
Hi, Thanks for taking my questions. The first question I have is regarding change I reference traits temporary increase in inventory. This this quarter.
Im assuming its going to reverse in the back half of the year is that correct or am I thinking about that correctly or theyre, well thats Arctic fried will we've we've got some inventory now, but as you know we're always backend loaded on sales.
Three Q4, and so no change this year.
Okay and.
In light of the Tepco arbitration decision as you go forward and sign new long term contracts does.
The decision to change your contracting practices and how you word arbitration or.
They are damages or <unk>.
It does it change anything on your contract.
Going forward.
Ill pass it over to Sean to answer that but I just want to say this was a unique situation, let's be clear on that view of the utility that had numerous reactors running until some fund themselves, none running and large inventories.
Whether they're going to restart their units remains to be seen.
So and we know that probably at least 10 of the 17 or so that are not going to restart the the other ones. We'll see so a really unique situation as compared to other utilities that either contracts with us today or that we're signing with the do have units running that are buying to keep their units running they need the material and they're good customers and the abide by the rule of law and take their products. So this was a unique circumstance, but Sean do you want to talk to the the tepco in or contracting.
Sure.
I think that we'll probably have some call them lessons learned and tweak our portfolio, but it's fundamentally strong we're not going to be any significant changes in how we write our contracts anything else.
Okay. Thanks.
Thanks Juan.
Our next question is from Adam Rodman from Sacroc Capital Management. Please go ahead.
Hi, Tim Grant and team I know you've spoken at length.
On several quarterly calls now about the criteria for Mcarthur and other care and maintenance restarts have but I have to ask again.
Given how consensus forecasting has taken shape.
When Mcarthur was originally put on temporary shutdown, most consultants and analysts decided that the restart of that operation was a function of time.
And not so much a function of price.
As a result, the supply discipline that you've worked hard to achieve the last 18 months.
Again based on forecasts would would come back in just a little bit more than a year.
While those same consensus sources forecast a price with a 30 dollar handle on them.
I think the consequence of this is that the market believes.
We have a significant amount of care and maintenance pounds returning to the market.
In a low price environment.
Can you clarify for me all things equal how care and maintenance assets will be treated should the market not respect or your strategy.
I guess talking about the time and price elements involved in your restart decisions.
Adam just a couple of observations there first of all I would separate.
The markets view on who is disciplined and who's not from our decision on Mcarthur River win win when folks look and say Oh, well there'll be lots of supply at $30. For example, they're not looking to US there are in fact looking to Catholic Stan I mean, thats, what they are saying they're looking at the.
The joint ventures, there the public disclosures that we've all now seen and they're saying well look you know there they do pretty good at 30 Bucks. So they're not going to have any discipline. So that that obviously is a question for them to ask and I would say their actions to date have shown some commercial discipline some supply discipline. So I'm not sure. That's the proper assumption to make when people look and say all at $30 that will be fine, it's certainly not us our resolve.
To wait and save our assets for better times.
Is strong it is part of our strategy into the financial element to our strategy. It's why we've protected the balance sheet. We have so that we can self manage risk and execute on the strategy. We're on so so don't don't don't folk shouldn't look to us to say Oh, yes, $30 is good enough. We don't think thats good enough for an asset is good as Mcarthur River.
That's a fair point grant and maybe I should clarify directly speaking some sources have mcarthur coming back in 2021.
Which as you know again, just that not even a half a year and a half away. So commenting on that in this price environment.
And then also maybe how you consider your other tier one assets and I like cigar Lake in the current price environment.
The other ones, where we've made no decision at all yet on the Mcarthur key we've said we've been very strong as grant said that we're patient lot. If nothing else. So we said we want to refill or contract basket at prices that are acceptable to us before we bring it back and then there's the the fact that bringing it back to you is an overnight. It takes US a period of time to get it back up and running so I just say.
I can tell you right now no decision has been made to move on that and then we will wait to see a better times before we do.
Thank you Tim Thanks Grant thanks.
Our next question is from Terry Pat to know a private investor. Please go ahead.
Hi, everyone. My questions have been answered so thanks for the great job keep it up.
Our next question is from Brian Macarthur with Raymond James. Please go ahead.
Oh, sorry, most of my questions relate more to SWU and you have six which you sort of talked about but just a quick philosophical question as they go through this working group in the United States. You know there's concern about reliability in us and we all assume it's just related to.
You know you three production is there also under your understanding are they concerned about having local you have six production again in SWU production or is it just.
But the use through eight level.
Please stand by while we attempt to reconnect with our speakers.
Our next speaker is Brian Macarthur with Raymond James.
Brian Please repeat your question.
Oh, sorry, I guess, we got cut off I was just following up on you have six and a slew markets, but I think you gave us some over there, but I'm just curious that this whole working group in the U.S. from your perspective is that just related to.
Maybe helping if they use railway industry or is it also going to involve looking at SWU and you have six down there too.
Yes. Thanks for the question, Brian in grant to make sure your silver and we Didnt hang up on and we just got to.
No.
So I guess, we're still waiting to see Brian .
In the in the paper work, we got it said that the fuel cycle you know the front end of the fuel cycle.
So we're assuming that looks through uranium to conversion enrichment I don't know about fabrication I think it's the whole piece that they want to have a peek at so we welcome that and we'll as we said we'll be involved both through the trade ins the trade associations, we belong to and as cameco and as we learn a bit more we'll we'll let everyone know and I think Brian It's fair to say as well we're optimistic that the nuclear fuel working group starts with the premise that the best thing for the nuclear fuel cycle is a healthy new trailer fleet in the U.S. and therefore, we will be looking at other measures that support the operations of our customers.
May be looking at stopping measures that are a deterrent to their customers and.
And and really making that the focus because if there is a healthy and stable nuclear fleet in the us with lots of certainty then the fuel cycle almost takes care of itself and so that's where we are absolutely aligned with the U.S. utilities on this working group.
But you're also seeing as you said tightening in the U.S. six business are you seeing big tightening in this business as wealth globally.
With prices starting to improve but like uranium. It just has a long way to go.
Still suffering from overcapacity and it's an industry that doesn't turn off capacity the way you leave or in the ground I think and then Richard will tell you.
If they shut off capacity.
They never get it back again, whereas if you shut down a mine the ore stays in the ground. It's just a timing issue you can always go back and get it I think the bigger issue is probably thing there is still a trade action market access action there on us and that's the Russian suspension agreement Thats going through an administrative review the the us realize quite significantly on on Russian SWU. So that probably has more to do it then the capacity side of it.
Great. Thanks, very much for the color.
Yeah. Thanks, Brian .
This concludes the question and answer session I would like to turn the conference back over to Tim gets sold for any closing remarks.
Well, thanks, very much and with that I just want to say thanks to everybody who is on the call. Today are we always as always appreciate your interest and your support.
As a commercial supplier with a strong balance sheet long lived tier one assets and a proven operating track record. We are I believe well positioned to respond to the changing market dynamics and benefit from the long term growth driven by the need for clean Baseload electricity I promise you. We will continue to do what we said we were going to do executing on our strategy as we navigate through all the moving pieces in our industry. So with that I'd, just say, thanks, everyone and have a great day.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Nothing.
No.