Cameco reports Q3 uranium contracting gains, touts scooping Russian market share

Canadian uranium major Cameco (TSX: CCO; NYSE: CCJ) has narrowed its September-quarter loss, citing building momentum in long-term contracting by power utilities amid concern about global energy security and the rising acceptance of nuclear power to reduce carbon emissions.

Cameco’s CEO, Tim Gitzel, told a post-earnings release analyst call it had advanced contracting discussions for about 27 million lb. of long-term uranium business and 7.5 million kg of uranium of conversion services.

In July, when Cameco reported its second-quarter results, it noted the addition of 45 million lb. of uranium to the contract portfolio since January. That number had grown to 50 million lb. early in October.

“This quarter, we have provided a further glimpse into our pipeline of contracting discussions because it has us pretty optimistic,” said Gitzel on the call.

Pending the new contracts’ finalization, the total volume of uranium successfully contracted since the beginning of 2022 is expected to be about 77 million lb. The total volume of conversion services contracted is expected to be about 14.5 million kg of uranium.

“Our pipeline of contract discussions remains large, and we expect to see more long-term demand to come to the market. We will continue to exercise strategic patience in our contracting activity,” said Gitzel.

The CEO explained that the primary driver of contracting was value. The spot market for uranium fuel is not the fundamental market.

“We recognize that in our business, real value is created by building a long-term contract portfolio that supports the operation of our productive assets, provides exposure to increasing prices and provides downside protection,” said Gitzel.

Meanwhile, despite a more buoyant uranium sector of late, given the sustained lift in the spot and contract uranium prices following a near-decade-long lull below US$40 per lb., Cameco stressed it was committed to continuing down its path of supply discipline.

Its operating plan calls for the McArthur River/Key Lake and Cigar Lake mines in Saskatchewan’s Athabasca Basin to operate at less than licensed capacity starting in 2024. From 2024, it plans to produce 15 million lb. per year (100% basis) at McArthur River/Key Lake, 40% below the annual licensed capacity, with production at Cigar Lake reduced to 13.5 million lb. per year (100% basis), 25% below its yearly licensed capacity. That makes for a combined reduction of 33% of licensed capacity at the two operations.

In addition, it plans to keep its tier-two assets on care and maintenance. Production at the Inkai Joint Venture with Kazakhstan’s Kazatomprom (LSE: KAP), the world’s largest uranium producer, will continue to follow the planned 20% reduction until the end of 2023.

“Continued contracting success and further improvements in the uranium market will be the key to enable us to make production planning decisions that will get us back to operating at our tier-one run rate,” said Cameco in the release of its results.

Kazatomprom announced in August its plan to produce 10% below its total Subsoil Use Contracts level in 2024. This plan is expected to result in increased production in Kazakhstan of about 5-8 million lb. of uranium oxide in 2024, compared with 2023, bringing the total predicted annual uranium output to about 65 million pounds. Kazatomprom stated the decision was based on its contracting progress. However, Cameco commented that it may still face significant challenges to any increase above current production levels due to the current state of global supply chains.

Long-term contracts usually call for deliveries to begin more than two years after the contract is finalized and use several pricing formulas, including fixed prices escalated over the contract term and market-referenced prices quoted near delivery time. Long-term contracting reported by UxC for the first nine months of 2022 was about 80 million lb. uranium oxide-equivalent, up from about 53 million lb. reported over the same period in 2021.

The average reported long-term price at the end of the quarter was US$51 per lb. equivalent, a decrease of US50¢ quarter-over-quarter.

Global supplier of choice

However, investors’ attention was firmly focused on the recent announcement it had reached a deal to buy U.S.-based Westinghouse Electric Company (WEC) will give it a “pole position” in nuclear markets historically served by Russia, company executives said on Thursday.

“Westinghouse enjoys the pole position … having the certified and verified ability to produce the VVER fuel,” said Cameco CFO Grant Isaac on the conference call, referring to a series of pressurized water reactor designs initially developed in the former Soviet Union.

“What we want to do is help provide those Western solutions to those markets looking to turn away [from Russia].

In his remarks, Gitzel said nations in Eastern Europe were “turning away from the Russians” and “looking for a substitute” to meet their nuclear energy needs as they seek to disassociate from Russia.

“And that substitute is Westinghouse. They’re very active in Ukraine today. There’s [the] Czech Republic, Slovakia, Poland, and many of those Eastern European countries we think are potential business for Westinghouse, and quite frankly, for Cameco as well,” said Gitzel.

The CEO estimates the country controls 39% of enrichment capacity and 14% of the uranium concentrates supply.

Earlier in October, Saskatoon-based Cameco and Brookfield Renewable Partners (TSX: BEP-UN) agreed to buy WEC for US$4.5 billion, plus debt, from another unit of Brookfield, and its institutional partners.

The deal is expected to close in the second half of 2023. Cameco’s 49% stake in WEC would give it more direct access to customers through one of the world’s biggest nuclear service providers. However, the company’s stock fell after the transaction was announced.

Canaccord Genuity Capital Markets analyst Katie Lachapelle wrote in an Oct. 27 research note that there was general frustration among investors with the lack of disclosure, Cameco’s decision to reduce its leverage to rising uranium prices, and the significant capital outlay required to consummate the deal, as well as the considerable debt carried by WEC.

Despite this, she still believes there is a solid long-term rationale for the transaction and opportunities for Cameco to capture value.

By combining Cameco’s upstream uranium production with WEC’s downstream capabilities, Cameco will effectively become a ‘one-stop shop’ for utilities. By the late 2020s, Cameco could provide end-to-end solutions throughout the nuclear fuel cycle. Lachapelle views this as particularly relevant in the current geopolitical environment as utilities look to diversify their supply chain away from Rosatom (Russia).

According to Gitzel, utilities are now planning for various potential scenarios ranging from an abrupt end to Russian supply to a gradual phase-out. “It’s still early days, but we are already seeing some utilities beginning to pivot toward procurement strategies that more carefully weigh the origin risk,” he said.

Q3 highlights

Gitzel said Cameco was progressing with the restart of its “best suite of uranium assets on the planet,” referring to the McArthur River mine and Key Lake mill, which have been closed since 2018 due to low demand for uranium. Commissioning is underway, with the first production expected by December.

The company booked a $20 million loss for the period ended Sept. 30, compared with a $72 million loss in the same quarter last year. Cameco says this reflects normal quarterly variations in contract deliveries and the efforts to ramp up production by 2024.

The headline loss came in at $20 million, or 5¢ per share, down from earnings of $84 million or 21¢ per share, missing analyst forecasts calling for nil per share.

Revenue increased 8% year-over-year to $389 million, also missing consensus expectations.

The equity dropped more than 4% on Thursday to $32.49, giving it a market cap of $14 billion.