Wednesday, March 15, 2023, Andrew Weekly of SmithWeekly Research sat down with Grant Isaac, the executive vice president and CFO of Cameco Corp. (CCO:TSX; CCJ:NYSE) to talk about what the company has been up to and the uranium market as a whole.
Click here to see the entire interview.
Cameco is one of the world's most prolific uranium fuel providers. Weekly said in his interview intro that "through its proven tier one assets Cameco has a reputation of being the preferred supplier for nuclear utilities globally."
After a parley on the spring weather, Weekly asked Isaac how Cameo was doing and what Isaac's view on the market as a whole was.
Why Uranium?
While uranium has many uses, it is most known for being a key component in the production of nuclear energy. As countries around the world strive to reduce their carbon emissions and transition to cleaner energy sources, nuclear power is becoming an increasingly attractive option. In fact, the International Energy Agency predicts that nuclear energy will play a crucial role in achieving global climate goals.
In a recent interview with Kitco News, Rick Rule, CEO of Sprott US Holdings, said he believes uranium stocks are "extraordinarily attractive" and could deliver significant returns in the coming years. He cited the growing demand for nuclear energy, as well as the limited supply of uranium, as key factors that make uranium stocks a compelling investment opportunity.
There has been a 27% increase in uranium demand over 2021-30.
Regarding the sector, Isaac first touched on uranium as an element. Uranium, discovered first in 1789, has been used commercially for a number of years.
He stated, "It's important to set the context that Cameco has been part of every commercial cycle. In the uranium nuclear fuel cycle for 40 years, 45 years . . . We've seen it all. We've seen the highs, and we've seen the lows many times. Each cycle has slightly different features, of course, slightly different causes. And what that combined experience tells us over and over again is that investors need to target uranium producers who understand that durable earnings don't come from thinking there's a spot market strategy in uranium. It comes from a producer who understands that this is an industry of term contracting."
Isaac also went into the cycle of the uranium marking, saying, "From a risk-managed financial perspective, our cycles are long in our industry. The typical uranium cycle is a decade long, potash will cycle three times in a decade, and oil and gas will cycle four or five times in a decade." He went on to say that for Cameco, one cycle is only a decade.
He continued, "We're looking at a cycle right now that has many tailwinds" regarding movements in the nuclear industry as a whole. "We're just in the early innings," he said. "The contracting cycle is really just beginning . . . there's a lot of game left here. And we've never started a uranium contracting cycle from this higher uranium price before. So that looks pretty good to us."
Weekly stated he "fully agreed" with Isaac's claims, saying he thinks this is important to note and that a lot of indicators point toward the market moving higher.
"Cameco is the key to nuclear fuel services and the energy transition trade," he told Streetwise.
Brookfield Renewable Partners
They next touched on Cameco's deal with Brookfield Renewable. In February, Cameco released its 2022 fourth-quarter results, which included news that Cameco had entered a strategic partnership with Brookfield Renewable Partners and its institutional partners (Brookfield Renewable) to jointly acquire 100% of Westinghouse Electric Company.
The acquisition was announced to close in the second half of 2023.
Weekly asked for key points surrounding this partnership and about the importance of it for the industry as a whole.
Isaac started by pointing out how Cameco's success comes from its integrated strategy. He said, "Westinghouse is an absolute no-brainer for us. The opportunity to combine our already licensed permitted scarce mining and conversion assets that have brownfield leverage with Westinghouse's scarce, licensed permitted assets was something we were going to pursue every day."
He went on to say, "It is a really exciting opportunity to enhance the benefits that we've got from integration in the past with a broader base of the global market." Isaac then doubled down on the importance of this deal in light of everything going on in Russia and Ukraine.
He said, "Cameco has the full fleet deal for uranium and conversion, and Westinghouse has the full fleet deal for fabrication. Westinghouse has the deal for new builds when and if they happen in Ukraine. But here's the key to it. What the world needs right now in the West is conversion. So a uranium producer alone cannot drive conversion demand into their uranium portfolio. Whereas we can take the fact that we have the only North American operating conversion plant right now, and take this unique conversion demand and drive it back into our uranium."
According to the World Nuclear Association, there are currently 437 nuclear reactors in operation around the world, with another 59 under construction, and 103 ordered/planned, plus 325 more proposed (360GW) with 28 of 59 new builds coming online over the next three years. As more reactors come online, the demand for uranium will increase. Most of these are consolidated to only a handful of countries, limiting supply. They also pointed out there has been a 27% increase in uranium demand over 2021-30.
Isaac said, "After years of very low uranium prices, we do not have the global primary productive stack in a position to respond quickly enough to this demand. Nobody's been investing." Previously, Russia had been the primary and secondary supplier of uranium, but moving forward this can't continue, and this strain is only expedited by the increased interest in nuclear energy overall.
For example, in 2022, the U.S. established a federal reserve of domestically produced nuclear material.
Long-Term Interests in Kazakhstan
Next, they spoke on Cameco's long-term interests in Kazakhstan. Isaac noted that the company got into Kazakhstan at a time when there was awareness of uranium but the country itself didn't have any mining experience. So, Cameco stepped up to the plate.
"All these years later, they're a heck of a lot better at all three of those things. So no surprise, the relationship has evolved," Isaac pointed out. He praised their assets and production and noted that they have been "resilient" even when dealing with major changes in the last 18 months due to their proximity to Russia.
With that Weekly noted, "This is a beautiful one for me to have in my portfolio."
"Commercial decisions to avoid Russia hit them as well as they try to disentangle. So we give them full credit for dealing admirably with those challenges."
While multiple challenges have arisen, they have dealt with them professionally.
Plus, Isaac continued, "We have other sources of production. We have inventory. We have long-term purchase commitments that we can utilize. So it's actually just a timing issue for us. But for the broader fuel cycle, it is a very stark reminder that these are not risk-free pounds that we're buying. They're at risk on the front end with respect to just the reliability of supply because of the supply chain challenges. They're at risk on the back end, because of the logistics of just getting that material into Western facilities. So you know, in some ways, I don't mind that the route works, but it's not repeatable and fully established because we get the benefit of the production eventually. But it's a reminder that there are a lot of risks here."
Jurisdictional Focus
Isaac was then asked about Cameco's jurisdictional focus. He mentioned that there are attractive resources in a number of jurisdictions, however, Cameco is very comfortable in Canada and in the United States, and despite challenges Kazakhstan as well. He also pointed out the few projects the company has in Australia, saying, "That's a very attractive mining jurisdiction now. Right now, uranium is not in favor, but we're patient. And we think over time, it probably will be in Western Australia."
He went on to emphasize the company's standards no matter the location. "We take what we do here in Canada, and that becomes our footprint for how we will operate in other jurisdictions unless other jurisdictions have higher standards than Canada does," he said.
Cameco is committing to maintaining these standards and not simply bending them depending on the jurisdiction. "So," he continued, "We're comfortable in a lot of different jurisdictions, as long as we can be Cameco."
Cameco Financials
After briefly touching on jurisdictional standards and ESG, Isaac spoke on the current financial strength of Cameco Corp. He stated, "On a cost-adjusted basis, the period that we were just through post-Fukushima uranium price getting down to US$17, a pound was the lowest effective price commercial industry has ever seen. And we came through that with US$1.5 billion on the balance sheet and a billion-dollar undrawn revolver."
He went on to say it all begins with a solid marketing strategy and then determining a flexible production strategy.
"Right now we're in a very advantageous position in that we've come through the toughest part of the market," he noted "We're in the early innings of a contracting cycle. We're capturing forward demand on market-related terms. We're benefiting from having the only operating conversion plant in North America at a time when conversion prices have never been higher. And we're seeing the recovery in the uranium in the fuel services segment as a result. And now we're adding on, even more, derisk cash flows from the Westinghouse acquisition, putting us into a very strong business case going forward."
With that Weekly noted, "This is a beautiful one for me to have in my portfolio."
Dividend Policy
They then spoke about Cameco's dividend policy. Weekly pointed out that consistent dividends attract a certain type of investor that is typically income-oriented. These investors want to receive constant dividends, which Weekly believes opens a lot of doors.
He said, "To another group of investors out there that would look at Cameco and say, you know, this is great. They've got steady cash flows; they've got potential growth here. This is a beautiful one for me to have in my portfolio for dividend purposes."
Grant heartily agreed, saying, "Even when we're in extreme supply discipline, and we cut our dividend, we did not cut it to zero for the reasons that you just described. And as we bring on more de-risked cash flow in earnings, it will give us more opportunity to have that more consistent return." Grant even suggested there likely will be more dividend increases as Cameco moves forward.
News Since
Since the interview, Cameco Corp. has come out with a couple of releases. First, on March 27, 2023, Cameco announced that it is set to receive a substantial refund of US$300 million from the Canada Revenue Agency (CRA) after a long-standing tax dispute with the agency.
The CRA has issued revised reassessments for the 2007 through 2013 tax years, which will result in the company being refunded a total of approximately US$300 million. The refund will consist of US$89 million in cash and US$211 million in letters of credit, which the company previously remitted to the CRA.
Canaccord Genuity analyst Katie Lachapelle rated the stock a Buy, with a target price of CA$48.
According to Cameco, the refund will allow the company to reduce its net debt by approximately US$200 million, which will improve its financial position and provide greater flexibility for future investments.
In light of this news, Canaccord Genuity analyst Katie Lachapelle rated the stock a Buy, with a target price of CA$48, saying, "We believe the receipt of this US$300 million is a positive indicator for the long-running dispute with the CRA and suggests it is likely that Cameco will be successful in recovering the full amount for the remaining tax years in question."
Then on April 4, 2023, the company released it would be celebrating the extension of its long-term exclusive nuclear fuel supply arrangements with Bruce Power for an additional ten years through to 2040.
Streetwise Ownership Overview*Ownership and Share Structure
According to Reuters, 70.29% of Cameco's shares are with institutional investors. The Vangaurd Group Inc. has the most at 3.41%, with 14.78 million shares. Fidelity Management and Research Corp. has 3.32%, with 14.38 million. Capital World Investors has 3.30%, with 14.28 million. Mirae Asset Global Investments has 3.26%, with 14.12, and William Blair Investment Management has 2.59%, with 11.21 million.
0.44% is with management and insiders.
The rest is retail.
Market Watch states that Cameco has a market cap of US$10.85 billion and 432.52 million shares outstanding. It trades in the 52-week range between US$20.02 and US$32.49.
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