Key takeaways: Cameco remains well-positioned to benefit from a sustained upcycle in uranium with constructive nuclear demand fundamentals and a looming structural supply deficit. The company remains focused on building value through a long duration contract book of high-quality demand that provides upside to market prices and downside support, resulting in sustainable cash generation over time. Cameco has the option to bring production online into a rising market as the contract book builds, while also benefiting from positive momentum across the nuclear supply chain through the fuel services segment and the investment in Westinghouse.
Focusing on high-quality demand through a deliberate contracting strategy, not the thinly traded spot market: Management addressed recent spot price volatility, highlighting the market is a thinly traded (~10Mlbs/year vs. ~180Mlbs global demand) discretionary market that cannot absorb significant volume. The run up in spot price above $100 in recent months was driven primarily by an absence of immediate supply, followed by a minimal return of volume that resulted in a price correction to ~$84/ lb this week (vs. term at $75/lb).
Cameco's contracting strategy is focused on high-quality, non-discretionary demand to build a long duration contract book that captures value over time. Management noted Cameco receives attractive pricing terms when compared to historical average market prices, as seen in Cameco's historical average realized prices relative to lower uranium purchasing costs for utilities. While the company's contracting strategy appears to provide less immediate exposure to spot prices, Cameco stresses the contract markets are the only viable path to sell significant volume while ensuring a sustainable uranium price cycle.
Current cycle has more durability with strong nuclear support while supply remains in a structural deficit: Management believes demand fundamentals are very favourable and durable as support continues to grow for nuclear energy. Demand continues to outpace supply with the structural deficit accelerated and amplified by impacts from the Russia/Ukraine war, which are viewed as enduring. Cameco sees the market bifurcation as long-lasting even if the Russia/Ukraine war is settled given long-term contracts and reluctance in the West to re-engage with Russia.
Utility uncovered requirements continue to grow and supply remains tight due to reduced secondary supply and lower-than- expected production from Kazakhstan and Niger. Meanwhile, a supply-response may see challenges from permitting risks, timeline delays, cost overruns, and technical challenges for new production that management believes has not yet been priced into the market. Between now and 2040, utilities need to contract 2.2Blbs of uranium, or ~140Mlbs/year on average, to meet current reactor fleet requirements before accounting for ambitious nuclear build-out plans. All together this leads management to believe in sustainably higher prices in the term market are needed to solve for the deficit.
Maintaining supply discipline while readying supply at McArthur and Cigar: Cameco highlighted significant brownfield production potential, but the company remains a disciplined producer and will only consider adding supply when it has been contracted. Cameco’s attributable share of production from Cigar Lake, McArthur, and JV Inkai could reach ~32Mlbs/year at nameplate (vs. 22.4Mlbs guided in 2024) if warranted by demand. A potential Cigar Lake extension into the 2030s may require ~$600M capex while management continues to progress evaluation work on a McArthur River expansion. Cameco is not currently focused on bringing Tier 2 mines back online in the near-term, but as utility demand grows the assets provide optionality as a proven multi- asset producer with previously producing assets on standby.
Westinghouse poised for growth, with a strong core business and leading reactor technology: Cameco recently revised the long- term growth outlook for Westinghouse to 6-10% CAGR (from 3.6% previously), due to strong tailwinds across the nuclear sector and business wins in fuel services. Management believes the low-end 6% growth rate can be achieved by the core business alone, with potential upside driven by increasing adoption of Westinghouse reactor designs for new builds. Regarding the Westinghouse reactor technology, the company sees an attractive opportunity set with the AP1000 as a proven reactor design ready to be deployed today while the AP300 reactor is 80-90% based on the AP1000 reactor and likely benefits from increasing demand for small modular reactors with an expanding customer base.