Cameco reports first quarter results, beginning to benefit from strategic decisions as uranium prices improve; well-positioned with leverage to market transition
Cameco (TSX: CCO; NYSE: CCJ) today reported its consolidated financial and operating results for the first quarter ended March 31, 2022 in accordance with International Financial Reporting Standards (IFRS).
“With the recent uranium price increase, we are beginning to enjoy the benefits of the strategic and deliberate decisions we have made. And, with leverage to rising prices, we are well-positioned to continue to capture value from the market transition we believe is underway, and that is supported by the fundamentals; fundamentals characterized by durable, full-cycle demand against a backdrop of growing concerns about security of supply,” said Tim Gitzel, Cameco’s president and CEO.
“Durable demand is being driven by the accountability for achieving net-zero carbon targets, while balancing the need for affordable, reliable and secure baseload electricity, all while diversifying away from reliance on Russian energy supplies. Governments and policy makers are increasingly recognizing the role that nuclear plays in achieving those objectives. It is why, since the start of 2022, we have seen announcements from countries like the United States, the United Kingdom, France, South Korea and Belgium focused on preserving and expanding the life of their existing reactor fleets as well as on building new reactors. There is also momentum building for non-traditional commercial uses of nuclear power around the world such as development of small modular reactors and advanced reactors, with numerous companies and countries pursuing projects. We’re seeing countries and companies turn to nuclear with an appetite that I’m not sure I’ve ever seen in my four decades in this business.
“The supply side is quite a different picture. For some time now we have said that we believed the uranium market was as vulnerable to a supply shock as it has ever been due to persistently low prices. The low prices and resulting lack of investment have put productive capacity at risk and not just for uranium, but for conversion and enrichment as well. We have seen the deepening of geopolitical and origin risk as supply has become increasingly concentrated. With Russia’s invasion of Ukraine, whether because of sanctions or because of conflict with company values, the industry now faces the challenge of disentangling its supply chain from dependence on Russian nuclear fuel supplies. It is still early days, but we are seeing what we believe is an unprecedented geopolitical realignment occurring in the nuclear fuel cycle.
“With geopolitics complicating and potentially bottlenecking nuclear fuel supplies, we are seeing not just utilities but some of the intermediaries and service providers beginning to shift their attention to securing material for their uncovered requirements, and to derisk some of their origin dependencies. And we are seeing the continued thinning of the spot market by physical uranium investors. As a result, uranium prices have increased significantly with the spot price up 38% and the long-term price up 15% since the start of the year. The conversion spot price is up 65% and the long-term price is up 25%.
“As the market continues to transition, we expect to continue to place our uranium and conversion services under long-term contracts and to meet rising demand with production from our best margin operations. While we have not concluded any new contracts in 2022 beyond the 40 million pounds disclosed in our fourth quarter MD&A, we have a significant pipeline of contract discussions underway. However, we will continue to exercise strategic patience in our contracting activity.
“We will also take a balanced and disciplined approach to our supply decisions. Even though we have seen considerable pricing pressure resulting from the geopolitical uncertainty, we will not change our production plans. We will not front-run demand with supply. As we announced in February, we are continuing with indefinite supply discipline. Starting in 2024, with McArthur River/Key Lake and Cigar Lake operating at less than licensed capacity, we plan to be operating at about 40% below our productive capacity (100% basis). This will remain our production plan until we see further improvements in the uranium market and have made further progress in securing the appropriate homes for our unencumbered, in-ground inventory under long-term contracts, once again demonstrating that we are a responsible supplier of uranium fuel.
“Thanks to our deliberate actions and conservative financial management we have been and continue to be resilient. Our strong balance sheet, with $1.5 billion in cash and cash equivalents and short-term investments, positions us well to self-manage risk, including any global macro-economic or geopolitical uncertainty and volatility that may arise.
“We are optimistic about Cameco’s role in capturing long-term value across the fuel chain and supporting the transition to a net-zero carbon economy. We have tier-one assets that are licensed, permitted, long-lived, are proven reliable, and that have expansion capacity. These tier-one assets are backed up by idle tier-two assets and what we think is the best exploration portfolio that leverages existing infrastructure. We are vertically integrated across the nuclear fuel cycle. We have locked in significant value for the fuel services segment of our business and we are exploring opportunities to further our reach in the nuclear fuel cycle and in innovative, non-traditional commercial uses of nuclear power in Canada and around the world.
“We believe we have the right strategy to achieve our vision of ‘energizing a clean-air world’ and we will do so in a manner that reflects our values. Embedded in all our decisions is a commitment to addressing the environmental, social and governance risks and opportunities that we believe will make our business sustainable over the long term.”
- Net earnings of $40 million; adjusted net earnings of $17 million: first quarter results are driven by normal quarterly variations in contract deliveries and the continued execution of our strategy in a market that we believe is in the early stages of transition. Adjusted net earnings is a non-IFRS measure, see page 4.
- Strong performance in the uranium and fuel services segments: First quarter results reflect the impact of increased average realized prices in both the uranium and fuel services segments. In our uranium segment we produced 1.9 million pounds (our share) during the quarter and sold 5.9 million pounds at an average realized price 34% higher than the same period last year. In our fuel services segment average realized prices were 8% higher than in the first quarter of 2021.
- Significant pipeline of contract discussions in strengthened price environment: As we announced in February, in our uranium segment, since the beginning of 2022, we had been successful in adding 40 million pounds to our portfolio of long-term uranium contracts. While we have not concluded any additional contracts in 2022, we continue to have a significant pipeline of contract discussions underway. Origin risk is driving interest in securing uranium supply as well as conversion services. We are being strategically patient in our discussions to capture as much value as possible in our contract portfolio. In addition to the off-market contracting interest, there has been a re-emergence of on-market requests for proposals from utilities looking to secure their future requirements and reduce origin risk.
- Operational readiness for McArthur River/Key Lake is on-track: During the first quarter, at the McArthur River mine and Key Lake mill we focused on recruitment and training activities. There are now approximately 600 employees and long-term contractors employed at the mine and mill. When we resume operations later this year, we expect to have approximately 850 employees and long-term contractors. In addition, we advanced the work necessary to complete critical projects and the maintenance readiness checks at both the mine and mill. We expensed the operational readiness costs directly to cost of sales, which totaled approximately $40 million during the quarter. We continue to expect we could produce up to 5 million pounds (100% basis) this year depending on our success in completing operational readiness activities and managing the potential risks of the COVID-19 pandemic and related supply chain challenges.
- JV Inkai shipments: The geopolitical situation arising as a result of the Russian invasion of Ukraine is creating transportation risk in the region. Sanctions on Russia and restrictions on and cancellations of some cargo insurance coverage create uncertainty about the ability to ship uranium products from Central Asia, potentially complicating the logistics for deliveries from those areas, including JV Inkai’s final product. We are working with Inkai and our joint venture partner, Kazatomprom, to secure an alternate shipping route that doesn’t rely on Russian rail lines or ports. In the meantime, we have decided to delay a near-term delivery for our share of production from JV Inkai. In the event that it takes longer than anticipated to secure an alternate shipping route, we could experience further delays in our expected Inkai deliveries this year. To mitigate the risk, we have inventory, long-term purchase agreements and loan arrangements in place that we can draw on. See Uranium 2022 Q1 updates in our first quarter MD&A for more information.
- 2022 guidance updated: Our outlook has been amended to reflect the increases in uranium prices. See Outlook for 2022 in our first quarter MD&A for more information.
- Strong balance sheet: As of March 31, 2022, we had $1.5 billion in cash and cash equivalents and short-term investments and $996 million in long-term debt. In addition, we have a $1 billion undrawn credit facility.
- Received dividends from JV Inkai in April: On April 28, we received dividend payments from JV Inkai totaling $83 million (US). JV Inkai distributes excess cash, net of working capital requirements, to the partners as dividends.