Cameco Corp (CCJ) 2017 Q1 法說會逐字稿

Thank you for standing by.

This is the conference operator.

Welcome to the Cameco Corporation First Quarter 2017 Results Conference Call.

(Operator Instructions) And the conference is being recorded.

(Operator Instructions)

I would now like to turn the conference over to Rachelle Girard, Director of Investor Relations.

Please go ahead, Ms. Girard.

Thank you, operator, and welcome, everyone.

Thanks for joining us.

Welcome to Cameco's conference call to discuss the first quarter financial results.

With us today on the call are Tim Gitzel, President and CEO; Grant Isaac, Senior VP and CFO; Bob Steane, Senior VP and Chief Operating Officer; and Sean Quinn, Senior VP, Chief Legal Officer and Corporate Secretary.

Tim will begin with comments on our results and the industry, then we'll open it up for your questions.

If you joined the conference call through our website Event page, you will notice there will be slides displayed during the remarks portion of this call.

These slides are also available for download in a PDF file called Conference Call Slides through the conference call link at cameco.com.

Today's conference call is open to all members of the investment community, including the media.

(Operator Instructions)

Please note that this conference call will include forward-looking information, which is based on a number of assumptions, and actual results could differ materially.

Please refer to our Annual Information Form and 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, Rachelle.

And welcome to everyone on the call today.

I hope you're having a nice day.

I'm going to spend the next few minutes giving you a brief overview of the current state of our industry and then talk about our first quarter results and just how Cameco is navigating through these challenging times.

However, before I get to the market, I first want to point out that our results are as expected, and our 2017 financial and operational outlook remains unchanged from what we guided to in the fourth quarter.

Hard to believe, but just over a month ago, we marked the sixth anniversary of the Fukushima accident in Japan, an event that has really determined the course of our business for the past 6 years, and an event that has driven uranium prices to levels that are neither rational nor sustainable.

Current prices are nowhere close to the levels required to get producers thinking about new production, production that will be needed to ensure reliable supply is available to meet growing demand.

At Cameco, we're in the enviable position of having the ability to expand production at our Tier 1 assets once the market demands more uranium and when prices are significantly higher.

However, today, even our existing production, which is among the lowest cost in the industry, is under pressure at these prices.

So not only is Tier 1 production expansion off the table, but we're obviously miles away from bringing on or acquiring any greenfield uranium projects.

Sometimes, I worry about the lack of supply development, especially as we approach the end of the decade.

As you know, bringing on new production is not easy due to the complexities of our business.

Outside of our expansion capability, a new project in Saskatchewan or Australia can take up to 10 years to get to first production from the time the decision is made to get underway.

And although the current uranium price is about 30% higher than the 12-year low reached in late 2016, there's still a long way to go.

As a result, our outlook for 2017 and beyond remains cautiously optimistic.

Optimistic because we've seen some positive developments on both the supply performance and demand signposts we have been watching.

Cautious because market challenges persist and could derail progress towards stronger prices.

First and foremost, on the positive side, and we talked about this on our fourth quarter call with the announcement in January that Kazakhstan intends to cut its 2017 production by 10%.

Kazakhstan accounts for almost 40% of world supply by itself.

The 10% reduction takes about 5 million pounds out of the market in 2017.

Also, on the supply side, it's no secret that other producers in the mining space have suffered serious financial difficulties and are struggling to recapitalize in order to survive.

The impact of their financial difficulties from a supply point of view is not entirely clear, but it does demonstrate that supply is vulnerable in this market.

On the demand side, we're seeing some positive news out of Japan.

The Osaka High Court has overturned an injunction preventing the operation of Kansai's 2 Takahama reactors, and these reactors are now expected to restart in May and June of this year.

Further, last month, the Hiroshima District Court dismissed an application for a temporary injunction seeking to shut down Shikoku's Ikata reactor.

And recently, Kyushu Electric received approval at the local level to restart its Genkai 3 and 4 reactors.

These developments brings more clarity to the restart process and, hopefully, creates a momentum for additional restarts in Japan.

But it's not all good news.

At the end of March, as you may have heard, the U.S. division of Westinghouse filed for Chapter 11 protection as a result of losses stemming from the construction of 4 AP1000 reactor units in Georgia and South Carolina.

The impact of the announcement on global new build is not yet clear, creating more uncertainty in the market.

On the geopolitical front, there's further uncertainty driven by changing governments and pending elections that could affect both the supply and demand sides of the industry.

Ultimately, a transition to a more positive market environment will be signaled by a combination of Japanese restarts; further supply-side reductions, whether planned or unplanned; continued Chinese reactor build; and the return of term contracting in meaningful quantities.

Until these developments take hold, we will continue to manage our business as if difficult market conditions will persist.

Turning to our own performance now.

Our quarterly results were as expected and are beginning to reflect the impact of decisions made in 2016 and in early 2017 with production costs, average cost of sales, admin costs, exploration cost, all down from this time last year.

Consistent with the estimated delivery pattern we provided guidance for in the fourth quarter, deliveries in the first quarter were light.

As is typical, delivery commitments in our uranium segment are heavily weighted to the second half of the year and in particular, to the fourth quarter.

Our average realized price substantially outperformed the market but compared with Q1 of 2016, was impacted by the canceled TEPCO agreement, weaker uranium prices, and a stronger Canadian dollar.

We are on track to achieve an average realized price of $49 per pound in 2017, assuming uranium prices remain stable at current rates and a U.S.-Canadian exchange rate of CAD 1.30 for USD 1. However, in the second and third quarters of this year, we expect the pricing on deliveries to yield similar results to the first quarter, with a higher average realized price expected on deliveries in the fourth quarter.

And with inventory building as production and purchases exceed deliveries early in the year, our cash flow will largely follow the same pattern as deliveries.

On the cost side, average unit cost of sales, including D&A in our uranium segment, was down 5% over the same period last year.

This measure reflects the average cost of all our sources of supply and also includes the care and maintenance costs at Rabbit Lake and severance costs associated with the workforce reductions we announced in January.

The ripening of our Tier 1 strategy is reflected in our cash cost of production, which are down 30% compared to a year ago and are in line with the expected life-of-mine cash costs outlined in our Annual Information Form.

Direct administration costs were down about 27% compared to this time last year.

Now that the upfront costs associated with the 2016 restructuring are behind us, we are starting to see the benefits of our cost-cutting measures.

On the operational front, our production is down slightly from last year this time, reflecting our curtailment decisions in 2016 and the Kazakh production cut announced in January.

And our 2017 financial and operational outlook remains unchanged.

There are 2 other things I should touch on briefly: our CRA case and the TEPCO contract dispute.

In terms of the CRA case, we have finished presenting our evidence in court, and the Crown is now presenting its case.

We expect the trial will wrap up in early July, with final arguments expected in September.

The decision will then be in the judge's hands, and we would expect to have a decision 6 to 18 months later.

On the TEPCO file, we are working our way through the dispute resolution process as outlined in the contract.

This requires a period of good faith negotiations to try and resolve the dispute, and we are currently complying with that.

The discussions are confidential, and I unfortunately can't provide additional detail.

In both of these cases, we remain confident in our position and expect favorable outcomes.

After 6 long years of market weakness, it's sometimes easy to lose sight of the strong fundamentals supporting our business.

World population and demand for energy is steadily rising.

And when countries consider their options for baseload power, nuclear is increasingly attractive as air pollution and climate change problems become more urgent each year.

Growth in reactor construction continues and will translate into increased uranium consumption.

Today, there are 57 reactors under construction, the majority of which could be online over the next 3 years if start-ups occur as planned.

China represents about 1/3 of that.

India, South Korea, Russia and the Middle East are also significant contributors to demand growth.

Of course, more reactors means more uranium, and we know that some of this demand is coming to Cameco.

No other producer, I believe, is better positioned to seize this demand than Cameco.

We offer a long-lived, secure, reliable source of fuel to nuclear utilities around the world.

We have a strategy focused on our Tier 1 assets, those that are the lowest cost and provide us with the most value.

Ultimately, our goal is to remain competitive and position the company to maintain exposure to the rewards that will come from having uncommitted low-cost supply to deliver into a strengthening market.

We can't control the timing of a market recovery, but we are taking action on the things we can control, like ensuring we're as streamlined and as efficient as possible.

We're responsibly managing our production, our inventory and our purchases.

We're protecting and extending the value of our contract portfolio, and we're working hard to maintain our investment-grade rating, all to ensure that we're ready when the market calls for more uranium.

So thanks, again, for joining us today.

And with that, I'm going to turn it back over to the operator.

(Operator Instructions) The first question comes from Rob Chang, Cantor Fitzgerald.

Quick question is, with respect to the purchased pounds, I know it's just 1.8 million that was purchased at CAD 41.47, is there any color that you could give us on that?

I'm just looking at Grant, Rob.

I'm not sure if we have any color...

Yes, Rob, what do you mean by additional color?

In terms of, why is the price at that level?

How much longer does it run, or how it's sized or anything like that.

Okay, thank you.

Just a bit of a reminder, these are purchases that we committed to in the past.

These aren't purchases that we made on a discretionary basis in Q1.

So if I take you back in history a little bit, in 2014, for example, we were still ramping up Cigar Lake.

We were looking at a market where we were contemplating action that's now been revealed, such as curtailing our Tier 2 production at Rabbit Lake and in the U.S. So we had acquired some purchase commitments, and this is simply delivery of those commitments happening in Q1.

It's not purchases made in the most recent Q1.

So it's just referencing prices from the past.

Right.

And is there any color on how much more there is that's from these type of contracts?

Yes, so for 2017, we put out guidance to say we had about 5 million pounds of purchases to make, again, in the same spirit of commitments that we had made in the past.

So we've got the quarter 1 purchases out of the way, and we'll see how the rest of the year unfolds.

But those were the commitments that we had guided to.

So 5 million in total for 2017.

Yes, Rob, just a little context.

It's Tim.

As well, you just recall that we sell 30 million to 32 million pounds a year, and we're producing this year about 25 million.

So there's a little bit of a gap there that we would use some of our inventory for.

The next question is from Yan Truong, Crédit Suisse.

My question relates to the price sensitivity table, which seems to have come down by $1 to $2 a pound.

Seems like it's more pronounced in the latter years.

So my question is, are these revisions due to assumption changes?

Or are they due to renegotiations of some of the contract books that you have?

And if that's the case, should we assume that prices beyond 2021 are also subject to this downward revision?

Yan, I think it's a reflection of our contract portfolio, and I think further, we took the TEPCO contract out of that price table after the announcement on that one.

So that would be a factor.

But Grant, do you have any...

Yes, as you compare the sensitivity table to the one from last year, for example, you're just seeing more sale volumes referencing a price outlook that's a bit lower due to the [fact of the] market that we're in right now.

So you're just seeing that effect.

You take out that TEPCO contract, and that's where the changes come from.

Thanks, Yan.

The next question is from David Wang, Morningstar.

My first one is on the Westinghouse bankruptcy.

I was wondering if you had any thoughts on if there are any potentially broader implications for cost overruns or delays in regions outside of the U.S., And if the bankruptcy is indicative of anything that's larger than just those 4 reactors.

And then, I guess, my second question is -- again, going back to that price sensitivity table.

It looked like it was a change between the numbers from the end of the year versus the first quarter ones in today's reports, where both of them seem to already account for the loss of the TEPCO contract.

So I'm wondering what the net difference is.

As a previous caller had mentioned, it seemed like maybe $1 or so in some of the latter years.

David, it's Tim.

Just on the Westinghouse piece.

Obviously, not a good piece of news there.

Everyone's watching it closely.

In fact, today, I think I was reading this morning that today's an important day.

I think there was a bit of a 30-day extension of financing by the utilities to keep the construction going, and so something needs to be decided today.

I heard somewhere that they probably would look at extending it even further.

But I was at the world -- the WNFC, World Nuclear Fuel Conference in Toronto this week and just meeting with some of the -- our U.S. colleagues.

And I think the position of the industry is, we are encouraging the parties and the U.S. government for the 4 reactors in the U.S. To complete those reactors is very important for the industry and for those utilities.

So lots to be worked out there and not a simple situation, but I don't think -- we'll see how it turns out.

There's other players that are looking it at as well.

Hopefully, it gets resolved, and we can get those reactors up and running in the U.S. And there's some in China that I think are just about finished.

They're Westinghouse AP1000s as well.

So we'll see how it turns out, but not a great piece of news.

But the good news is there's 57 reactors overall under construction and coming on over the next few years.

So we'll get through this one.

We always do.

And Grant, do you want to talk about the price table?

Sure, there's a rolling dynamic to the price sensitivity table.

And I'll just remind folks that in November of last year, during our investor workshop, we spent quite a bit of time talking about how this table rolls out over the course of a year.

So what you're seeing with respect to the changes from quarter-to-quarter are that we've already delivered 5.7 million pounds as of quarter 1. So that leaves less material available, so there's less referencing to the price available.

So it's just that weighting.

And -- but not enough yet to change our view on the average realized price for the year, and so you'll see this price sensitivity move.

But I think now that we have that guidance out there for our average realized price, that's the one really to pay attention to.

And if you see that move, we'll obviously have a lot of color why that would be changing in the outlook table.

The next question is from Alex Pearce, BMO.

So you touched on the planned production cuts within Kazakhstan.

I just wondered whether you could maybe provide a little bit more color on the timing of the cuts over the course of this year.

And have you seen any impacts already?

Well, if specific to Kazakhstan, yes, we have.

I think the minister came out last week and reported the production for the quarter, which I think was down 12% for the quarter-over-quarter, '16, '17.

So it looks like that's on track.

Now our businesses isn't a quarter-to-quarter business.

We take shutdowns.

Our production is spread across the whole year.

Different countries, different companies have different rhythms.

It's not a widget factory, that we produce the same amount of units every month.

So I think everyone was watching for that, to see in Kazakhstan what was going to happen.

And so down 12% is probably a good-news piece.

And that goes along with the cuts we made last year.

It's actually -- I think it was exactly, last year at this time, it was the 26th of April when we went up and made our announcements, took 7 million pounds off.

We saw in Toronto this week, AREVA made a presentation that they pulled back by 10% or 12% at their Somair and Cominak operations in Niger.

So we're starting to see a bit of discipline in the market, and the Kazakhs are doing what they said they would do.

The next question is from [Richard Williamson], private investor.

Another Kazakhstan question, if you don't mind.

I read the January notification with interest, and I saw that the last line that they offered there was that they do not intend to cut back on their sales.

And so I just question, how realistic is it in the short term to think that these production [costs] are going to have any impact on the market?

And also secondly, do you have any information on, like, inventory levels, like KazAtomProm and how long it might take to draw down any inventories?

[Richard], thank you very much for calling in your question.

I think with respect to the not reducing their sales, that would be their committed sales that they have already in place, so they'll deliver under those contracts.

And just with the overall reduction in production, that just means there's less pounds coming out of the ground for sale probably on the spot market or on the shorter-term market.

So I think that's certainly a good-news piece.

With respect to their inventories, that, we don't know.

We have no insight into what kind of inventory KazAtomProm would be holding.

The next question is from [Anton Hugo], (inaudible)

I saw that your uranium inventory raised by almost 3 million pounds from 28.5 million pounds at the end of December to 31.4 million pounds at the end of March.

Can -- I mean, those are historically very high levels, almost 1 year of total delivery for the group.

Could you give us a sense of what your ideal inventory level would be?

And under what circumstances you would see the figure dropping towards that ideal level?

Yes, [Anton], thank you.

Indeed, they are higher, our inventory levels, for exactly the reason that Grant was just talking about.

You have to go backwards a little bit.

2013, the HEU agreement ended.

We were getting a little bit over 7 million pounds a year from that agreement and having sales in the 30 million to 32 million-pound range.

We had hoped -- our goal had been to have Cigar Lake up and running at the end of 2013 to replace those pounds.

That didn't happen.

We had a gap.

We had an issue, and so we had to go and cover.

And so we entered into some purchase agreements back in those years that called for delivery now, last year, this year and it declines significantly going forward.

We're almost through it.

So that's why we're sitting with some excess inventory.

We like to sit with about 6 months of forward sales, so that would give you an idea of where we'd like our inventory to be, just because we need material at different locations around the world so that we can deliver to our customers.

So we're a bit high now.

As I also said, we -- our sales guidance this year is 30 million to 32 million pounds.

We're going to produce -- I'm looking at Bob Steane here.

We're going to produce about 25 million from our Tier 1 assets.

And so we will be using some of those pounds to fill that gap, and we'll do that over the next few years and be drawing down our inventory.

The next question is from Greg Barnes, TD Securities.

Just [investigate] this realized price issue, [this year's].

Is the weighting towards Q4 going to be similar next year?

I know it's early, but just get some kind of sense how it's going to evolve.

Thanks, Greg.

Grant, do you know the answer to that?

No, not yet, Greg.

Obviously, what we're dealing with here is just the contract mix that we're delivering into.

As Q1's already in the books, as we look at Q2 and Q3 based upon delivery notices, that contract mix is suggesting the average realized price will track below the guidance in the outlook table for '17.

And so Q4, obviously, has to track above in order for us to be holding at $49.

For '18, which I think is your question, we haven't begun to receive those delivery notices yet.

It's far too early for us to say what the contract mix is going to look like over the 4 quarters of 2018.

Okay.

Do you have approximately the same volume contracted next year as you do this year?

Well, it comes off a little bit.

You know that our committed volumes, we say we're heavily committed out to 2019.

But of course, that overall average driving the price sensitivity table is coming down, so you know that exposure opens up.

So next year, we still have pretty good commitment levels.

Not quite where we're at this year, but a lot could happen.

If we find opportunities to layer in attractive contracts, we will do that.

So still pretty early to be guiding what 2018's going to look like.

(Operator Instructions) The next question is from Ian Bickis, The Canadian Press.

I'm just curious, with the further job cuts in January, are you at optimal staffing levels?

Are you considering more cutbacks?

Or what would trigger more staff reductions?

Yes, Ian, we're just about complete with that.

We're reducing our workforce up north at our mine sites, and that takes some time.

There are obviously procedures and rules and laws that you have to comply with, and we want to make sure we do that as -- with as much sensitivity as we can.

So we're just about finished with that.

We have our production guidance.

We want to produce 18 million pounds from each of the sites this year.

That's our plan right now, and so we'll proceed on that basis.

Okay, great.

And with -- I mean, I keep hearing talk of, yes, U.S. nuclear development kind of floating with Westinghouse.

Now there's -- how much of that play into the global demand for uranium?

Or how much of a knock-on effect could there if uranium development comes to a standstill in the U.S.?

Yes.

It's -- the U.S., we've seen, is pretty flat over the last number of years.

We were quite excited about -- the Watts Bar unit came on for TVA last year.

That was the first one in about, I think, 20 years, and now these 4 units, these 4 units in the southeast of the states.

My view is that they'll finish them.

They're so far down.

We went and visited them actually last year, and they're well advanced.

So hopefully, they find a way forward on that.

Let me tell you, again, coming out of the World Nuclear Fuel Conference, talking to our Chinese colleagues, we talked to our South Korean colleagues.

Emirates are firing one of their new ones up within the next month, I think, or 6 weeks.

There's some pretty good news around the piece.

Those 57 units around the piece that are coming on over the next couple of years, that'll help put some demand into the market.

So we're excited about that.

So yes, the U.S., 99 reactors, I think.

Hopefully, they can get those on.

But really, the growth story is over in Asia, and that's where we're focusing a lot of our efforts these days.

And sorry, if I can have one -- just to clarify the current state of the Japanese reactors.

Can you say how many are on?

And how many you expect to come on this year?

Yes, actually, there's some pretty good news this morning on that one.

There's 3 reactors that are operating right now, and we've been waiting on a couple of court cases.

There's been a couple of real good decisions lately.

Takahama 3 and 4, that were probably a year before the courts, have been approved.

And indeed, they're loading fuel today in unit 4, we heard.

So that's good.

We think that'll start up in Unit 4 in May, Unit 3 in June.

Shikoku had a good decision on Ikata.

They rejected an injunction.

And Genkai 3 and 4, Kyushu are approved to go.

So we're at 3. We could be 5, 7, 8 units over the next number of months, which would be a real step forward.

And hopefully, as I said in my comments, we get a bit of momentum going in Japan with respect to restarts, and I think that'll be really positive.

So TEPCO as well, is applying to get their units.

They got some new management there.

They're applying to have their Kashiwazaki-Kariwa 6 and 7, they mentioned I think, by 2019 back on, and then others coming on after.

So that would be real good news if TEPCO could get their units back up and running as well.

So yes, we're watching very closely what's happening in Japan and certainly hoping progress continues.

The next question is from P.T. Luther, Bank of America Merrill Lynch.

First question I had is just out of that surprise TEPCO force majeure declaration this past winter.

Have there been any additional contract rework discussions that you can talk about that have popped up since then?

Or do you really view that as sort of a one-off?

Well, that's -- so far the word contagion is used.

Has there been any -- have we seen anybody else catching the fever?

And the answer is no, we haven't.

It was a one-off, and we're in a process now with them.

We've been to see all of our customers.

We have, I think, 8 other Japanese utilities as customers.

We've gone to see them with our sales team.

I saw some of them this week, and we're not seeing any contagion.

Okay, good to hear.

Great.

And then last follow-up for me is, after the Kazakh announced supply cuts, its stock price has started to run up a bit.

You had an upward lean to the market and then the spot market sort of trailed off and drifted down from there.

But I was wondering against that backdrop, if you could sort of share some perspective on the pace of any contract discussions and negotiations.

If they picked up after the Kazakhstan announcement or cooled off?

Has there been any change in sentiment there?

Yes.

I think it's been pretty flat.

You see the numbers in the spot market and how much has moved.

I think we saw 10 million or 11 million pounds in the spot market, which is pretty normal.

A bit on the term market, I think there's 28 million or 30 million pounds.

Still a little bit of movement.

I mean, all producers and all customers always talk.

I can tell you this meeting in Toronto was just -- and I have to be careful what I say.

But the conference is always interesting but it's all the side meetings that are really interesting.

And that's to see where customers are at, whether you can blend and extend contracts or whether there's any appetite.

So that goes on all the time.

So there's been a modest amount of contracting going on.

But I just say it again, we're 6 years and 2 months into this.

Prices, the day before the Fukushima accident, USD 73.

This morning, they're at USD 22.

I mean, it's not sustainable.

I could tell you, even for a large producer -- with us, we think we have probably some of, if not the best assets in the world.

We're having to dig down deep and bring our cost structure way down.

It's not sustainable over time with the growth we see in the reactor build.

So we're doing what we can here.

We're optimistic for the future.

But right now, it's tough going, and we'll have to just keep -- we're working our way through it.

The next question is from [Anton Hugo], (inaudible).

Just looking at your Cigar Lake joint venture mine, TEPCO Resources is a 5% share of it, with TEPCO Holdings as, of course, the company with which you're on dispute.

Can you give us a sense of the relationship between those 2 entities?

And then secondly, if TEPCO Resources is, in fact, still accepting delivery of roughly 1 million -- just under 1 million pounds of (inaudible) this year?

Same TEPCO, [Anton], different sides of it, perhaps.

So yes, indeed, they are a 5% holder of an interest in Cigar Lake joint venture.

And yes, they're taking their 5% of the production that's coming out of Cigar Lake.

So that's one side of it.

And then, of course, the contract dispute on the other side.

This concludes the question-and-answer session.

I would like to turn the conference back over to the presenters for any closing remarks.

Well, thank you, operator, and I just want to say thanks to everyone who's joined us on the call today.

We certainly appreciate your interest and your support.

As I said, this isn't easy.

This is a challenging market, and we're positioning the company as we need to, to make it through.

And we look forward to better days ahead.

So thanks, everybody.

Have a great day.

This concludes the question-and-answer -- sorry, this concludes today's conference call.

You may disconnect your lines.

Thank you for participating, and have a pleasant day.