Uranium markets starting to improve, Cameco’s Gitzel says

In-situ uranium recover at the Inkai operation in central Kazakhstan. Credit: Cameco Corp.

The following is a transcript of remarks made by Cameco (TSX: CCO; NYSE: CCJ) president and CEO Tim Gitzel during the company’s first-quarter conference call on May 1 on the topic of uranium markets and Cameco’s production strategy. In the first quarter, Cameco had an adjusted net loss of $33 million on uranium mining revenues of $207 million, and fuel service revenues of $83 million.

Tim Gitzel

Tim Gitzel

In the uranium market, fundamentally, it’s better than it was a year ago. From 30,000 feet, 2018 was a pivotal year for the uranium market. Why do I say that? It’s because from a demand point of view, consumption has returned to pre-2011 levels. We have now filled in the pothole of lost demand, and that demand continues to grow.

There are more than 50 nuclear reactors under construction (worldwide), and as each one 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 and 11 units under construction. And it just approved construction of two new reactor complexes, implementing the domestic Chinese Hualong One reactor technology — the Dragon, as they call it — for the first new build approved in over three years.

CNNC chairman, Mr. Yu, indicated recently that China expects to be able to build six to eight reactors each year if the project approval process returns to normal, which would allow it to meet its 2030 target of 120 gigawatts. In addition, we’re beginning to see a number of other countries and organizations come up with some very positive policy messages.

There’s growing recognition of the role nuclear power must play in ensuring safe, reliable and affordable electricity, while tackling climate change and air-quality issues.

Recently in the U.S., a bipartisan group of senators reintroduced legislation Bill 903 — the Nuclear Energy Leadership Act, or NELA, as it’s called.

The bill is aimed at boosting U.S. nuclear energy innovation and ensuring advanced reactors can provide safe, affordable and reliable electricity. In addition, the U.S. Secretary of Energy Rick Perry announced the US$3.7-billion loan guarantee to support completion of the two reactors under construction in the United States.

He indicated that the Vogtle project (in Georgia) is critically important to the U.S. administration’s direction to revitalize and expand the U.S. nuclear industry, calling it the “real green new deal.”

In New Jersey, the Board of Public Utilities voted to award zero-emission credits to three New Jersey nuclear power plants, and the U.S. Supreme Court said it would not hear an appeal challenging the rights of Illinois and New York to subsidize nuclear power plants.

In India, where they are targeting 12 new reactors, the Secretary of the Department of Atomic Energy recently stated that the Indian government supports nuclear technology as an irreplaceable source of clean energy.

I can tell you this growing recognition of the benefits of nuclear is not new — I have seen this movie twice before.

Nuclear falls out of favour politically in a number of countries that announce they’re going to reduce reliance on, or phase out, nuclear.

Then the world steps back and examines its options for carbon-free, baseload sources of electricity, and realizes the options are limited.

There’s hydro, which is an option for some countries, but not all, and there’s nuclear. And they realize nuclear could provide the power they need, not only reliably, but also safely and affordably, and in a way that avoids emitting greenhouse gases.

There’s no doubt there’s a role for solar and wind, but they aren’t baseload.

Our healthcare, education, communication and transportation systems can’t just “make do” if the sun doesn’t shine and the wind doesn’t blow.

Then consider China and India’s ambitions for increasing the number of electric vehicles on their roads. I can tell you if they’re 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 is different this time: it’s that sense of urgency. Even the investment community is concerned. There has been a rise 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 ESG issues within their investment portfolios. Not surprisingly, the business and financial risks associated with climate change are front and centre.

So while the support for nuclear is growing and the demand for nuclear fuel is certain and growing, supply is less certain, and in fact declining.

Over the past several years, we’ve seen meaningful production cuts and reductions in producer inventories, which has led to increased demand for uranium in the spot market from producers and financial players.

With decreasing primary supply as a result of curtailments and the competition for supply in the spot market from producers and financial players, the interest in long-term contracting is once again picking up.

At Cameco, we’re 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 are recognizing the risk that over-reliance on finite sources of supply poses to the security of the supply longer term, and they want first-mover advantage.

In light of the market access and trade policy issues affecting our market, they are increasingly looking for stable commercial suppliers with long-lived, tier-one assets and a proven operating track record — and there aren’t many of us.

As a result, you can see in the expected realized price sensitivity table in our management discussion and analysis that our average annual delivery volume over the next five years has increased. The terms of our recent contracting activity remain consistent with our overall portfolio goals.

However, not surprisingly for nearer-term deliveries, there is not much leverage to higher prices because it’s still a buyer’s market.

And while price is an important factor, we also must take into account who the customer is, the volume being contracted, duration, product form and regional diversification. Also, keep in mind that most of our long-term contracts don’t start delivery for two to three years after we sign them.

Overall, including our 2019 deliveries, our total portfolio of sales commitments has increased 25 million lb., with most commitments occurring after 2023, outside the range of the price sensitivity table. However, while these contracting activities are encouraging, make no mistake, there’s still a long way to go before we restart McArthur River–Key Lake.

The reason I say this is because the list of moving pieces in our industry continues to grow, creating uncertainty, as market participants try to digest the implications of these changing dynamics.

Market access and trade policy are issues that may make the availability of supply where it is needed much less predictable. Of course, the most notable of these issues today is the investigation under Section 232 of the Trade Expansion Act in the U.S., which has the largest fleet of nuclear reactors in the world.

On April 14, the Department of Commerce (DOC) issued its confidential report to the U.S. president containing its findings and recommendations. The president now has up to 90 days to decide whether to concur with the DOC findings and what actions, if any, will be taken.

Remember we at Cameco are not a state-owned enterprise, and we were the largest producer in the U.S. before we put those assets on care and maintenance.

If the U.S. is looking for more domestic production, our assets would be among the best and the quickest to start producing.

And, of course, the U.S. will remain dependent on foreign supply to keep its reactors running.

As the largest commercial supplier of uranium, we can help them out there, too, but until the president makes his decision and the potential impact — positive or negative — can be determined, it’s a moving piece affecting our market.

Another recent event that adds some uncertainty is the announcement on March 19 by the then-president of Kazakhstan, Nursultan Nazarbayev, that he was stepping down immediately. The Speaker of the Senate Kassym Tokayev assumed the presidency and subsequently called a snap election for June 9, 2019.

I can tell you, with 45% of the world’s uranium supply coming out of Kazakhstan, the leadership transition will be watched closely.

And there’s still the uncertainty created by the May 31 expiry of the collective agreement with unionized employees at the McClean Lake mill, where we send our Cigar Lake ore. With Cigar Lake supplying 18 million lb. uranium — more than 10% of annual consumption — any labour disruption could create a swing in supply.

Then let’s take a look at what happened in the spot market in the first quarter. In late March, we saw motivated spot market selling from a number of market participants. It seems these players had built up a uranium position in anticipation of short-term demand in the market, however, they misread the timing of that demand.

When it didn’t materialize on the timelines they expected, they began to sell material into a very illiquid spot market — also drawing a few other sellers into the market.

And yet once the market had seemed to find a floor, we issued a request for proposal for 1 million lb. uranium. Despite price signals to the contrary, we found there was not enough material to meet our specifications.

While there’s no doubt we need to buy material this year, let me be clear: we will not be the buyer of last resort.

Therefore, if we see this type of behaviour, our strategy dictates that we step back from our purchasing activity.

There’s a very real possibility we could see this behaviour again. We’re hearing that one of the Japanese utilities looks to sell a modest amount of its inventory — less than 150,000 lb. per year — for the next several years. While the volumes sound modest and we have not seen a broader shift in Japanese utility behaviour, this selling could impact market sentiment.

If you recall on a previous call, I talked about the perimeters of our strategy. I discussed our behaviour in the scenario where there’s a lot of supply in the spot market.

In this scenario, we’re buying uranium as cheaply as possible to maximize our gross profit, not assist others achieve their profit targets.

So today the market dynamics are changing, due to a lot of moving pieces. However, what isn’t changing is our commitment to our strategy. It’s a deliberate strategy that allows us to respond to the changing market dynamics, and it puts long-term value ahead of quarterly results.

We are a commercially motivated supplier with a diversified portfolio of assets, including the tier-one production portfolio, which 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 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. 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.


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