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Cameco's (CCJ) CEO Tim Gitzel on Q3 2017 Results - Earnings Call Transcript

Seeking Alpha logo Seeking Alpha 10/27/2017 SA Transcripts

Cameco Corporation (CCJ)

Q3 2017 Earnings Conference Call

October 27, 2017 01:00 PM ET

Executives

Rachelle Girard - Director-Investor Relations

Tim Gitzel - President and Chief Executive Officer

Grant Isaac - Senior Vice President and Chief Financial Officer

Brian Reilly - Senior Vice President and Chief Operating Officer

Alice Wong - Senior VP and Chief Corporate Officer

Sean Quinn - Senior Vice President, Chief Legal Officer and Corporate Secretary

Analysts

a typewriter on a table: Earnings Call Transcripts© Provided by Seeking Alpha Earnings Call Transcripts

Ralph Profiti - Eight Capital

Orest Wowkodaw - Scotia Bank

Fai Lee - Odlum Brown

Yee Chien Yang - S&P Global Platts

Alex Pierce - BMO Capital Markets

Greg Barnes - TD Securities

Robert Reynolds - Credit Suisse

Anang Majmudar - General American Investors Company, Inc

Anton Hugo - Premium Research

Presentation

Operator

Thank you for standing by. This is the conference operator. Welcome to the Cameco Corporation Third Quarter 2017 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions].

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

Rachelle Girard

Thank you, operator, and good day, everyone. Thanks for joining us. Welcome to Cameco’s conference call to discuss the third quarter financial results. With us today on the call are Tim Gitzel, President and CEO; Grant Isaac, Senior Vice President and CFO; Brian Reilly, Senior Vice President and Chief Operating Officer; Alice Wong, Senior Vice President and Chief Corporate Officer; and Sean Quinn, Senior Vice President, Chief Legal Officer and Corporate Secretary.

Tim will begin with comments on our results and the industry. Then we will 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. During the Q&A session, please limit yourself to two questions and then return to the queue. For those on the webcast, if you have questions, please select the Submit a Question feature to submit your questions by e-mail, and we will follow-up after the call.

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.

Tim Gitzel

Well, thank you, Rachelle, and welcome to everyone on the call today. We appreciate you taking the time to join us to discuss Cameco’s third quarter results which were as anticipated and in line with the outlook we provided last quarter.

You will recall that in Q2 we highlighted a number of items that led us to expect the third quarter to be the weakest quarter this year. First, although the delivery volumes in our uranium segment were higher than in Q1 and Q2, the realized price for the quarter was the lowest expected this year, again as we guided to last quarter.

This is a result of the pricing terms in the contracts we made deliveries under during the quarter and the weaker uranium price. Given the recent strengthening of the Canadian dollar we have updated our assumptions for the U.S. dollar exchange rates, as a result we have lowered our expected annual average realized price to CAD$47.50 per pound which points to an expected Q4 average realized price higher than the annual average.

And of course the actual results will depend on exchange rates and uranium market prices. But we can see from the sensitivity analysis we provide that the further weakening of the uranium price is not expected to impact revenue, adjusted net earnings or cash flow. This is of course due to the very deliberate way we have structured our contract portfolio and the protection it affords us.

We have also updated our expected delivery volume range to between £32 million and £33 million, largely as a result of some portfolio optimization opportunities we undertook. This means we will deliver between £11 million and £12 million in the fourth quarter. This assumes that all deliveries are made a scheduled in the quarter as you know it's not unusual for delivery to slip over the year end.

Unit cost of production were significantly higher than in the first two quarters and compared to Q3 last year due to lower production resulting from the implementation of a mandatory summer vacation period followed by planned maintenance shutdowns at our Northern Saskatoon operations. Again this was not unexpected.

And despite the impact on quarterly production costs these measures are designed to reduce overall operating cost for the year. Despite the quarterly fluctuation in production costs the average unit cost of sales was 10% lower for the quarter and 13% lower for the first nine months compared to the same period last year.

We have lowered our expectation for the average unit cost of sales including depreciation and amortization to be between CAD$35 and CAD$36 per pound a reduction of 11% to 13% from 2016. The reduction is driven by the deferral of some purchases and the revised U.S. dollar exchange rate assumption.

In the second quarter, we announced that we were pleased to have settled our tax dispute with the United States Internal Revenue Service and as we expected the financial impact was not material. In the end, we had to pay about a $198,000 to resolve the dispute related to the 2009 through 2012 tax years which represents 122,000 in taxes owing plus interest of about $76,000.

Based on the adjustments proposed by the IRS for this period, our potential exposure was a tax expense of $122 million. As we noted, we have to make the payment in the third quarter and record the associated tax expense.

The final items effecting the third quarter that we disclosed previously were receipt of the 2011 transfer pricing penalty from the CRA of $78 million. Although, we disagree with this penalty we are required to pay half of it in cash, while the matter is in dispute which we did in the third quarter.

Direct administration cost were down about 3% compared Q3 of last year and 20% for the nine month period. During the quarter in line with the other disciplined actions we have taken, we may change to the way our global marketing activities are organized, resulting in one-time admin cost of about $5 million.

Excluding these one-time cost, direct admin would have been down about 15% for the quarter and 23% over the comparative nine month period in 2016 continuing the downward cost trend.

The changes to our marketing activities require a write down of the full carrying of good will associated with our purchase of NUKEM, as such as we recorded a non-cash expense of $111 million in the quarter. We needed to make these changes because current market conditions do not support the level of resources and personal deployed under the previous structure.

Going forward, our Canadian and international marketing activities will be consolidated in Saskatoon. Marketing has always been strength at Cameco and that will not change. Existing purchase and sales contracts will remain in place along with Cameco European and U.S. subsidiaries that perform under these contracts.

Once fully implemented, we expect the changed will reduce cost by $8 million to $10 million per year. The changes we are making are intended to position the company to deliver increase shareholders value over the long-term no matter what that market condition is. Unfortunately they do effect people.

On the operational front, you will see that we have lowered our production outlook by £1.2 million for the year, the reduction is due to production delays at Key Lake caused by work required on the existing Calciner circuit and lower production than expected at Smith Ranch Highland as head grades continue to decline.

Given our inventory position and the market environment, we are willing to accept some production variability as long as we don’t compromise safety, the environment or the long-term health of the company. We continue to expect adjusted net earnings for 2017 to be lower than the $0.36 reported in 2016.

However, despite lower adjusted net earnings then in 2016, we continue to expect 2017 cash flows will be higher than the $312 million reported last year. The increased cash flow is a result of progress made in decreasing our operating, general and administration and exploration cost as well as a reduction in our purchasing activity resulting in less cash tied up in inventory.

In addition, we have pulled back our capital expenditures by almost 26% since last year, which has a positive impact on free cash flow. So while we have had some weaker result, they were anticipated and reflect a very deliberate strategy to strengthen the company in the long-term. Cameco remains a solid company financially generating strong cash flows.

Before I leave the quarter, I want to give a quick update on the CRE trial and TEPCO dispute. Final arguments in our CRE trial wrapped up on September 13th and now we await the judge’s decision which is expected to take six to 18 months from the conclusion of the trial. We have provided an overview of appeal possibilities in our MD&A which I won't go into detail here except to say either party has the right to appeal the decision of the Tax Court of Canada.

However, if neither party pursues an appeal the CRE would issue reassessments for the 2003, 2005 and 2006 tax years to reflect the decision and the corresponding payments or refunds including interest would then be made. The total tax amount reassessed for the 2003, 2005 and 2006 tax years, was $11 million and we have remitted 50% at the time the reassessments were issued.

On the TEPCO trial the three arbitrators have now been appointed and based on the current schedule set by them we expect the case will be heard in the first quarter of 2019. However, timing for a final decision will be dependent on how long the arbitrators deliberate following the conclusion of the hearing. In both the CRA and TEPCO cases we remain confident in our position and expect favorable outcomes, but the resolution timelines could still be a ways off.

Turning to the market, there was some good news on the construction front last week, nearly 60% of people polled in South Korea voted in favor of resuming construction of the two reactors halted following the election of the new President whose plan is to phase out nuclear power. And I was just in India and the United Arab Emirates and they continue to move forward with their nuclear plans. And of course China continues to be the bright spot with 19 reactors under construction.

However, we remain cautiously optimistic, cautious because we continue to face difficult market conditions, and have seen global demand expectations come down while the industry works its way through supply that was incented in previous price runs.

Yet optimistic, because today's uranium price is too low to incent the investment required to ensure that adequate uranium production is in the market, uranium needed to support the reactor construction program as well as the return of idle reactors to the grid and utilities uncovered requirements.

Our strategy to curtail higher cost production and focused on our best margin assets, restructure various aspects of our business and generally reduce costs is driven by these market conditions. We have consistently acknowledged the near to medium term challenges on both the demand and supply side.

However, we're a bit frustrated by the reliance on supply side forecast that failed to account for the economic factor that distinguishes the uranium reserve from our uranium resource. For example, we have seen forecasts that show McArthur River mine where cash operating costs are among the world lowest, increasing production in 2019 at uranium price of $25 per pound.

While we can't speak for the behavior of other producers in the $25 market, I can tell you this is not a rational assumption. At $25 we won't be investing a dime to increase production at McArthur River in fact expect there could be further variability in existing production beyond what we announced for 2017 if these conditions continue.

And we certainly won't be undertaking the work required to extend the £18 million per year mine life at Cigar Lake which we should be starting tomorrow if we want to extend production beyond 2027.

At today's prices or the prices used in those reports apart from making sure we have uranium to fulfill our contract commitments our supply is better left in the ground. Experience has thought us that success in our business requires patience and discipline. Progress is not measured in weeks or quarters, but in years and that’s how we manage our business. Our decisions are deliberate driven by the goal of increasing long-term shareholders value.

Global population is on the rise and with the world’s need for safe clean reliable base load electricity, nuclear remains an important part of the mix. Just last week the landsite commission confirmed that pollution causes nine million premature deaths each year, that’s equivalent of a country of both the size of Sweden or Austria every year. Clearly there is an urgent to address air population and nuclear offer a ready solution.

The good news is that many you recognize this, around the world there are 56 reactors under construction, the majority of which will be online over the next three year, if startup occurs plan. And more reactors means more uranium will be needed. We can't control the timing of a market recovery, but we are taking actions on the things we can control. We're focused on our strategy to produce some of our tier one assets, those that are the lowest cost and provide us with the most value.

We are restructuring our organization to be as efficient as possible. We are responsibly managing our production inventory and purchases protecting and extending of our contract portfolio and maximizing cash flow while maintain our investment grade rating. Ultimately our goal is to remain competitive and position the company such that we have the ability to be among the first to response when the market call for more uranium.

So thanks for joining us today. And with that, I will turn it back over to the operator.

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