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Thank you for standing by. This is the conference operator. Welcome to the Cameco Corporation Second Quarter 2022 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask question. [Operator Instruction]
I would now like to turn the conference over to Rachelle Girard, Vice President Investor Relations, and Treasury and Tax. Please go ahead.
Thank you, operator and good morning everyone. Welcome to Cameco’s second quarter conference call. I would like to acknowledge that, we are speaking from our corporate office which is on Treaty 6 territory, the traditional territory of Cree people and the Homeland of the Métis.
Today’s call will focus on the trends we are seeing in the market and on our strategy. As always, our goal is to be open and transparent with our communications. Therefore, if you have detailed questions about our quarterly financial results or should your questions not be addressed on this call, we will be happy to follow-up with you after the call.
There are a few ways to contact us. You can reach out to the contacts provided in our news release. You can submit a question through the contact tab on our website or you can use the Ask a Question form at the bottom of the webcast screen and we will be happy to follow-up after this call.
With us today on the call are Tim Gitzel, President and CEO; Grant Isaac, Senior Vice President and CFO; Brian Riley, 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.
I’m going to hand it over to Tim to talk about the long-term fundamentals for our industry, the current market dynamics and about Cameco’s strategy to add long-term value. After, we will open it up for your questions.
If you have joined the conference call through our website event page, there are slides available which will be displayed during the call. In addition, for your reference, our quarterly investor handout is available for download in a PDF file on our website 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.
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.
Well, thank you, Rachelle and good morning, everyone. We appreciate you joining us on our call today. I hope you are getting some time off to enjoy the summer.
I want to start today by reflecting on a recent essay from UxC. There are two reasons for this. First, it drove home a number of the themes you have heard us express for some time now, about the fundamentals of the uranium market.
In a world that increasingly recognizes the important role nuclear energy will play. Demand for uranium fuel is going up, inventories are going down. And in a market that is bifurcating due to geopolitical concerns, Western capacity is lagging.
Those themes aren’t new. However, the second reason I raise it is that we believe the conclusion to the essay sent the wrong message. It said this, “let’s just hope nuclear fuel supply availability does not derail nuclear energy’s latest promising advance”.
This statement implies that the responsibility for maintaining the growing momentum for nuclear power rests with the supply side of the industry. We believe that responsibility is misplaced. The reality is there is a simple solution to the looming supply challenge. The essay should have concluded by driving home the point that the responsibility and solution for the looming supply challenge rests with the demand side.
Utilities need to recognize it is time to exercise the power of their procurement to avoid a supply crisis that could as they stated derail nuclear energy’s latest promising advance. And this is true right across the fuel cycle from uranium production to conversion and enrichment.
Those of us who have experienced operating in this industry understand that a responsible producer does not invest in new capacity, without line-of-sight to having a long-term profitable commitment that creates a permanent home in which that fuel will be used.
Cameco’s strategic and deliberate decisions over the past decade are a great example of this. Driven by these signals our customers have given us, we have taken a balanced and disciplined approach.
Our decision to proceed with the next phase of our supply discipline, which is now well underway, is in direct response to the procurement decisions by some really forward thinking utilities. These utilities want to line-of-sight to the future supply needed to fuel their reactors and ensure the continued reliability of electricity supply from nuclear power.
Their contracting decisions provided us with the signals and certainty we needed to begin the process of increasing production, but more is needed. Our current plans do not entail a return to our full productive capacity.
As a result, the company remains in the supply discipline mode, which positions us extraordinarily well in this rapidly changing market. We will continue to make responsible supply decisions in accordance with the signals our customers are sending.
Let’s look at the market fundamentals in a bit more detail starting with demand. We have talked before about how the benefits of nuclear energy have come clearly into focus with a durability that is being driven by the accountability for achieving the net zero carbon targets being set by governments and companies around the world.
With 90% of the world’s economy now covered by net zero targets. Attention is turning to the challenge of cleanly and reliably solving the problems of energy poverty, energy replacement and energy growth.
Adding to that challenge is solving the energy crisis experienced in some parts of the world, while pivoting away from reliance on Russian energy without jeopardizing net zero commitments. Therefore not surprising that concerns about energy security are amplified and at the top of the list for many governments, creating further pressure to reexamine their energy policy decisions.
Policymakers and business leaders around the world are recognizing that energy policy must balance the objective to achieve a clean energy profile, with the need for affordability and security.
Too much focus on intermittent weather dependent renewable energy has left some jurisdictions struggling with power shortages and spiking energy prices, or a dependence on Russian energy supplies. The good news for us is that in their quest to restore balance or pivot away from Russia, many are turning to nuclear.
Nuclear power fits nicely at the center of the policy triangle providing safe, reliable, affordable carbon free baseload electricity, while also offering energy security, and independence, which is why in addition to all of the developments I noted last quarter, we saw a number of supportive initiatives and announcements this quarter, which we outlined in our MD&A.
Suffices to say we are seeing governments and companies turn to nuclear with an appetite that I’m not sure I have ever seen in my four decades in this business. Therefore, it is easy to conclude that the demand outlook is durable and very bright. But supply is quite a different picture.
For some time now, we have said that we believe the uranium market was as vulnerable to a supply shock as it has ever been due to persistently low prices. Low prices have led to growing supply, concentration by origin, and a growing supply gap.
And unlike in the past, we don’t have the same stock of secondary supplies to fill the gap. After years of drawing on these onetime sources, the secondary supply capacity is now declining significantly into the future and productive capacity is not poised to respond.
Taking the challenge of filling that gap to a whole new level, with the continued conflict in Ukraine, there is also growing uncertainty about the ability to continue to rely on nuclear fuel supplies, originating or transporting out of Russia, whether as a result of sanctions or because of conflicts with company values.
Currently, the global nuclear industry relies on Russia for approximately 14% of its supply of uranium concentrates, 27% of conversion supply, and 39% of enrichment capacity. Utilities are now faced with considering and planning for a variety of potential scenarios, ranging from an abrupt end to Russian supply to a gradual phase out.
The market was confronted with one of these scenarios in late June. Amendments to Canadian sanctions caused the owner of a Canadian shipping vessel to conclude it would be in violation of Canadian laws, if it were to load and deliver enriched uranium product, scheduled for pickup in St. Petersburg.
While an exemption by the Canadian government has resolved this issue for now, it highlights the tenuous nature of reliance on Russia or Russian ports for supply. It is one of the reasons why last quarter, we decided to avoid using Russian rail lines and ports to move our share of Incas production to our Blind River facility.
Instead, we are delaying our deliveries from Kazakhstan, while we work with our partner to enable shipping via Trans Caspian route. We do not have a confirmed date for when the first shipment could proceed. However, we have the ability to mitigate the risk with inventory, long-term purchase commitments and product loans, if necessary.
It is still early days, but we are already seeing some utilities beginning to pivot toward procurement strategies that more carefully weigh the origin risk. They are working their way through their fuel supply chains to determine, where there are vulnerabilities.
As a result, we have temporarily seen their focus shift from securing uranium to the more immediate need in their supply chain for enrichment and conversion services, where Russian capacity plays a much bigger role.
So make no mistake. We expect uranium will follow. After all, it is the product to which all services are applied. With more than 45 million pounds in new uranium contracts added to our portfolio, since the beginning of the year, 2022 has already been a contracting success, and we continue to have a significant and growing pipeline of contract discussions underway.
However, for the moment, we too are focusing our efforts on capturing the record high conversion prices, under long-term contracts in our fuel services segment. And with what we expect will be more uranium demand ahead of us. We will continue to exercise strategic patients.
The primary driver for our contracting activity is always value. We like to leverage our current uncommitted in-ground inventory provides us to the further market improvements we expect to see.
So let’s talk more about Cameco and what we are up to. As a commercial supplier, our decisions had uniquely positioned the company to capitalize on the increasingly undeniable conclusion, the Nuclear power must be an essential part of the clean energy transition and even more so in a world where origins matter. With demonstrated Tier 1 assets, strategic Tier 2 assets and a focus on vertical integration, we have taken a balanced and disciplined approach to our strategy of full cycle value capture.
As I just noted on the contracting front, we have been balanced and disciplined in layering and volumes where it makes sense for us, and in building a diversified customer base. We are also taking a balanced and disciplined approach to our supply decisions.
The next phase of our supply discipline, which involves not only McArthur River, Key Lake, but starting in 2024, Cigar Lake is balanced with our contract portfolio and where we think the market transition is currently at.
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. We need good long-term contract homes in our portfolio, and we need to see further improvements in the uranium market, before we make changes to our production plans. And I think we have shown we can be trusted when we say we will remain disciplined.
Finally, while we are talking about balance, we have shown balanced financial discipline. We will retain our conservative financial management to support our continued balanced and disciplined contracting and supply decisions.
Having said that, we will deploy capital where it makes sense, increasing our ownership share of Cigar Lake from 50% to just over 54% made sense, and I can tell you, we will take those pounds any day.
Cigar Lake is one of the world’s best and most prolific Tier 1 production assets on the planet. It is a proven permitted and fully licensed mine and a stable jurisdiction that operates with the tremendous participation and support of our neighboring indigenous partner communities. And of course, we know it very well because we operate it.
At the McArthur River Mine and Key Lake mill, we continue the process of transitioning from care and maintenance to operational readiness. The current workforce at these sites is now approximately 670, including employees and long-term contractors, with a view to achieving about 850 prior to the start of production later this year.
Our operational readiness activities are transitioning from construction to early stage commissioning of our mining and milling circuits and McArthur River and Key Lake. Critical automation and digitization projects at the Key Lake mill are being tied into existing infrastructure. In addition, asset condition assessments and subsequent repair and reassembly of all equipment is now winding down.
However, we have seen some delays to our work schedule at the Key Lake mill. We have encountered some challenges with respect to the availability of critical materials, equipment and skills.
In addition, after four years on care and maintenance, we have experienced some normal commissioning issues. As we work to safely and systematically integrate the existing and new assets with updated operating systems.
We have adjusted our schedule to accommodate the slower ramp up at the mill and anticipate first production will be deferred until later in the fourth quarter this year. As a result, our revised plan is for up to two million pounds of production this year.
It is yet another good reminder for the demand side of our industry about the challenges of bringing on supply in the current environment. However, the slower ramp up at the Key Lake mill has been offset at Cigar Lake. We have been successful in catching up on development work and production at Cigar Lake and we are expecting production of 18 million pounds on a 100% basis.
Therefore, with the additional production at Cigar Lake and the risk mitigation measures we have in place, we expect to deliver on all of our commitments, and therefore we don’t need to rush the process at McArthur River, Key Lake.
Just one of the advantages that being a multi asset multi jurisdictional producer affords us that makes us a stable, reliable and long-term source of supply to ensure the reliability of our customers reactor fleets.
So what is the result of our disciplined actions? The solid balance sheet and the ability to self manage risk. At the end of the second quarter again we are in a negative net debt position with $1.4 billion in cash, about one billion in long-term debt and a one billion undrawn credit facility. And this doesn’t include the $778 million owed to us by the CRA.
Once production at the McArthur River Key Lake operation resumes we expect to begin to see a significant improvement in our financial performance. As production achieves a reasonable level, we will no longer expense operational readiness costs to cost of sales and we will be able to source more of our committed sales from lower costs produce pounds.
As we saw again, this quarter the higher prices in the currently improving markets are beginning to flow through our existing contract portfolio and with an inventory of unencumbered pounds in the ground, rising prices will also create the opportunity to layer in new long-term commitments, commitments with appropriate pricing mechanisms that will underpin the long-term operation of our productive capacity.
We have also continued to utilize some of our long-term purchases, we put these arrangements in place as a means of risk mitigation. We will balance this activity with our spot market purchases. As such, we expect to maintain the financial capacity to execute on our strategy, capturing long-term value well self managing risk, including from the global macroeconomic and geopolitical uncertainty we are seeing today.
So what does all this mean for Cameco? Well, it means we are optimistic. We are optimistic about the growth in demand for nuclear power, both traditional and nontraditional. We are optimistic about the growth in demand for uranium and for downstream fuel services. And we are optimistic about the incumbency opportunity for Cameco in capturing long-term value. Therefore, we will continue to execute on the next phase of our supply discipline strategy. And more importantly, we will continue to do what we said we would do.
We have operating and idle Tier 1 assets that are licensed permitted, long lived and are proven operations that have expansion capacity. The fully permitted and proven Tier 2 assets that don’t make sense at today’s prices, but when you think about them in context of a looming supply and origin gap, there is a potential pathway for them to add value for us in the future. But we will continue to be very disciplined in our evaluation on that front.
And just as a reminder, our interest extends beyond just mining. We are vertically integrated across the nuclear fuel cycle with refining, conversion and fuel fabrication. As utilities look to secure access to nuclear fuel supplies in jurisdictions that are stable, reliable and politically dependable, we will also look to continue to build our fuel services contract book.
And we are looking to expand our reach. For example, through our fuel manufacturing capabilities and investment in global laser enrichment, we are exploring fabrication of new fuels, including High Assay Low-Enriched Uranium, or HALEU. And you can clearly see the benefits of chemical being involved with ventures like this.
Thanks to a reputation as a reliable fuel supplier and a long history of cooperating with the U.S. government on various projects. The technology has the opportunity to participate in the growing commercial opportunity for enrichment capacity in the U.S.
It is why GLE was able to navigate the regulatory process in the U.S. and gain access to the DOE tails material. And that is why utilities like Constellation Energy and Duke Energy, are willing to sign letters of intent to collaborate with GLE to help diversify the U.S. nuclear fuel supply chain, including measures to support GLEs deployment of Silex Laser Enrichment Technology in the U.S.
We are also participating in the development of small modular reactors and have entered a number of nonbinding arrangements to advance their commercialization and deployment in Canada and around the world.
And we have an interest in the Nuclear Sustainability Services, the back end of the fuel cycle, including aiding in the responsible cleanup of enrichment facilities, no longer in operation. These opportunities align with our commitment to manage our business responsibly and sustainably and to increase our contribution to global climate change solutions.
Our decisions at Cameco are deliberate. We are responsible, commercially motivated supplier with a diversified portfolio of assets, including a Tier 1 production portfolio that is among the best in the world.
We are committed to operating sustainably by protecting, engaging and supporting the development of our people and their communities, and to protecting the environment something we have been doing for over 30-years.
Our strategy, which includes contracting discipline, supply discipline and financial discipline will allow us to achieve our vision, the vision of energizing a clean air world and thereby delivering long-term value in a market where demand for safe, secure, reliable and affordable clean energy is growing.
So thanks for your interest today. And we are happy to take any questions you might have.
Thank you. [Operator Instructions]. Our first question comes from Andrew Wong with RBC Capital Markets. Please go ahead.
Good morning. So the uranium market looks to be improving and Tim, like you have said in your prepared marks, it is the duration and endurance of this improvement looks to be longer lasting and we have McArthur restarting. So, your cash flows are set to improve pretty significantly over the next few years. Could you maybe talk about your plans on capital allocation over the next few years? Where do you expect to kind of spend some of that cash as that comes in?
Good morning, Andrew. Thanks for the question. You hit it. You followed the script there. Things are looking a lot better for us the market. Clearly, we think there is a durability there that is going to continue. We see lots of countries. It is amazing if you read the press, watching the countries that are turning to Nuclear, taking a look at Nuclear, turning back to Nuclear.
I think in Germany and others in Europe were really struggling with their energy situation. So we think as there we see 54 reactors under construction. We see lots of countries willing to build. We see lots of push on SMRs. So the demand side looks really good.
Supply side looks tighter. We are certainly delighted to have some world class Tier 1 assets, Cigar Lake, Chunk of JB, Kyiv and now McCarthy, Key that we are just bringing back on. So we think we are in pretty good shape conversions looking really, really good.
So, we do think our financials will improve overtime. And you have heard us talk about capital allocation before and just how we think about that. But Grant sitting beside me. Grant, why don’t you walk everyone through, maybe you want to say a little bit about the market and then about our capital allocation plans.
Well on the market just make the point that you made, we were bullish on the outlook for uranium and nuclear fuel. Prior to all of these incredible tailwinds that have emerged, I don’t think anybody can conclude that it isn’t even a stronger picture, a stronger outlook for Cameco than it was even last quarter.
I mean take slide three from our investor presentation today, or just look through slide pages seven to nine of our MD&A. And just the list of headline news, that has happened in our industry all positive. So Andrew couldn’t agree more, that the recovery of our cash flow and earnings has only just begun. We positioned for these moments in the market to build these, this long tail of sticky revenues, earnings and cash flow and that becomes the basis of our capital allocation.
So for us, it is important to remember, we are still in supply discipline, as good as the news is we need to see it translate into those procurement decisions that call for the production that we have. And we are not there yet. Our plan is still to ramp up McArthur, but not to full capacity. Our plan at the time is in 2020 for us to bring Cigar back.
So as Tim said at the outset, we just found that UxC hit all the right points and drew absolutely the wrong conclusion. The power of the procurement of the utilities is what is going to make sure that the Western capacity is there to meet the Western demand and a bifurcated market.
So we need to see that continue to build, we have been building it 45 million pounds year-to-date, Cameco committed sales forward, that is over 60% of the reported long-term business in the market this year. It is an extraordinary performance for one company that is not, that is 90 million pounds on an annualized basis.
I’m not saying that that is where we even want to be. I just want to emphasize to those who might say it is only five million pounds in quarter two, it is 45 million pounds year-to-date and over 60% of the long term market so far.
And so as that business builds that will afford us the opportunity to go back and revisit our supply discipline decisions, as we revisit those, we might find ourselves making different decisions about our production plans going forward.
That will then might suggest that maybe our current conservative financial management, time to give way to two things one, are there growth opportunities required for Cameco, where we can take advantage of a bifurcated market calling for more Western capacity. And we will look at that and obviously, if we can convince our owners that that makes sense, we would go forward on that.
Or we may find ourselves in a position where the long-term sticky cash flows that come from building that contrast, both will cover any growth ambitions. In which case, we would have to conclude, it is probably time to return some value to our owners because we don’t need to hang on to the conservative financial position.
All of that is predicated on this continued build, which is predicated on more procurements in the market calling for patents. So at the moment, we are still supplied discipline, it is the right position to be in. But I would just say, we are just extraordinarily well positioned for what is going on in the market.
Okay, thanks for all that. So maybe just switching gear towards Inkai. Could you just talk about a little bit more about the decision to delay shipments from there? Is it mostly because you can’t receive the material because of sanctions or restrictions or is it because of the risk mitigation and maybe just not wanting to ship through Russia for like ethical, moral or other reasons. Thanks.
Yes, Andrew it is a bit of all of that. For sure, it has to do with we do not, at this point want to be using Russian rail lines or ports to ship our material, that is contrary to us. For a values as a company and so we are looking at options, we are looking at that Trans-Caspian route, you have heard Grant and others talk about it.
And so we haven’t got any kind of final decision on whether that is going to be available to us or when. We know it has been used sometime in the past, but not available right now for our material. So I think they are working on it, Sean, I don’t know Sean Quinn is here looks after Kazakhstan and transport. Sean, you have any comment?
I would say I think what is covered in the MD&A. We are apart with our partner and JV Inkai. Sorry, with the support of our partner because add upon JV Inkai is working on getting a significant shipment to the Trans-Caspian route. We expect to know more about that over the next few weeks. And once the material gets here, there is no sanctions that apply to Kazakh material of any distinction. So there is no concerns on that side.
Grant.
Yes, I would like to just jump in here as well, Tim. From a market perspective, I think we just need to frame this appropriately, which is this is just more supply discipline. Of course, this is forced supply discipline.
But this is this issue should be thought of as more supply discipline in the industry, more uncertainty about the availability of primary production. If you think about it from a Cameco perspective, we have risk mitigation in place to deal with this. We have non-Kazakh production operating.
It is as supply disciplined rates, of course, plus we have idled assets, but we have other assets outside that jurisdiction, we have an inventory for moments just like this, that inventory is located in Western markets, we have access to long-term purchase commitments that we have entered into that we could bring forward today in order to access material, we have licensed facilities that would allow us to borrow pounds if needed.
So for Cameco, it is a very easy risk for us to manage. It is not for the entire industry, the entire industry is incredibly reliant upon a lot of material coming out of Central Asia and arriving at Western facilities in 2022.
So it is just yet another supply risk, and should be thought of in the frame of more supply discipline, this sort of forced by logistical, transportation set of issues, but should be thought of in the same context that we all think about supply discipline.
That is great. Thank you very much.
Thanks Andrew.
The next question is from Gordon Johnson with GLJ Research. Please go ahead.
Hey guys. Thanks for taking my questions. And I guess the first one I had was answered. I guess with respect to the contracts, the contract pricing has been rather robust. I’m just talking about UxC contract pricing has moved up from $42.50 in February, to about $50.50 in June. On the first quarter conference call you guys highlighted UxC said there was about 60 million worth of contracting 40 million of which is yours. Now they are saying there is roughly 72 million of contracting. First question, can you tell us how much of that contracting is yours and if you have benefited from this rise in contracted pricing? And then I have a few follow ups?
Yes. Thanks Gordon. I think Grant touched on that in the first question, but we go ahead.
Yes, when we look at the reported term activity by say UxC it is 72 million pounds year-to-date, and we are 45 of that. So we are over 60% of the reported term business, which is, of course a really strong performance for us.
What that is proof of is, what we have been saying all along that we enjoy some incumbent advantages here. We are a proven, reliable producer, multi-asset, integrated supplier with by the way, a real ESG performance, that we can point to that is important for procurement decisions today and, we can take advantage of a market that is increasingly bifurcating.
We also would observe that the terms and conditions that we are able to, I would say, obtain in this market are outperforming the prices that are reported, which suggests to us that, while we are joining incumbent advantages, maybe there are some more forced sellers in the market who are willing to discount their material in order to lock up the volumes.
But, that is okay. I mean, that would be expected in a bifurcated market. All I know is that, our origins are pretty coveted and we are going to be very disciplined in placing them in contracts that make sense to us, we now have about 170 million pounds under long-term contract commitments, looking ahead. Our average is about 22 million pounds per year for the next five-years. This is that long tail of revenues, cash flow and earnings that we have talked about.
So, we create this incredible benefit for folks. They get to play the upside that only comes in the commodity and resource space, but we get to lock it in for a period of time, that is more akin to kind of the infrastructure returns. So, it is the best of both worlds for an investor.
Okay. And then just a quick follow-up, I’m looking at enrichment SWU prices and conversion prices that have kind of went significantly higher. If just looking at the chart over the past year. Yet spot U308 prices haven’t necessarily followed. So specifically, Grant, can you tell me when you expect or if you expect spot prices to follow, and also if you guys expect to sign additional contracts, as those spot prices potentially move higher? Thanks for the questions. Congrats on the results.
Thanks Gordon
Thanks, Gordon. Let me just, back up a little bit and remind everybody on the call that, while uranium often gets treated through a commodity lens, it would be wrong to conclude that you simply back up a dump truck of uranium oxide and dump it into a reactor core. And it is not the coal model.
Once you have the U308, it actually begins a very long journey, through a number of really important services to arrive at often a very bespoke fuel bundle to meet the particular needs. And in fact, the particular location within any one Nuclear power plant.
And we often have forgotten about that because the service side of the industry, especially enrichment and conversion, had been so well supplied for many years, prices were low as a result.
And I would say, fuel buyers were very comfortable about the services they had procured, that all changed, on February 24th when Russia invaded Ukraine. It had thrust the spotlight back onto those services, Russia’s 40% of the global supply of enrichment, and they are nearly 30% of the global supply of conversion.
And for utilities that meant moving from a very comfortable view of their forward service commitments to suddenly reevaluating, where they were getting those services from. So, we have seen a lot of attention pivot away from uranium downstream to enrichment and conversion.
So no surprise, we have seen effectively a doubling of the enrichment price, we have seen more than a doubling of the conversion price. In fact, conversion is sitting at historic levels. We have never seen conversion prices this high before.
And that is representing this focus on new areas of service that are exclusionary of Russia and that is a big challenge. But eventually, you need the product, these are just services and they need to be applied to the product, the product is uranium, and there is no substitute.
We have never seen a D link cycle for the reason that you eventually need the uranium. Just like in 2021, in the beginning of 2022, there was a lot of focus on uranium, it is now shifted downstream, but it has to come back, because you need the uranium to plug into those services you have procured. So we expect to see that.
But sort of a shock on the uranium side, it could take a bit longer for utilities to put in place all of that replacement service business, we are seeing obviously, the benefits on the conversion side, we can be strategically patient on the uranium side and the leverage for when that demand comes into the market.
So to your final question, absolutely. We expect to be leveraged to a uranium market that starts to price in the cost required for Western capacity to meet Western demand.
The next question is from Orest Wowkodaw with Scotiabank. Please go ahead.
Hi good morning. Hope everyone is well and by the way thank you very much for releasing your results earlier than normal 30 minutes or so, it is very welcome, thank you.
Thank you.
My question really has to do with where things are at in the market. I mean, last quarter, you talked about utilities, refocusing their procurement efforts on enrichment and conversion. And then we saw no incremental pounds added to your book. So three months have gone by and you have obviously added another five million pounds to the book. But can you give us a sense of where that process is at, in terms of utilities like? Are you starting to see utilities coming back to procure uranium or are we still at kind of early days of figuring out conversion enrichment?
Thanks for the question Orest and the acknowledgement. This definitely was happy to get up at 3:30. This morning, I think to let the results. Grant over to you to say on the market some questions.
Yes. Orest I would say, your observation is correct in that utilities are by and large, trying to replace our reliance upon Russian supplies of enrichment and conversion with non Russian sources. And that is a very big focus in the market right now, which is what has driven such strong price improvement in those two services. That is what has driven, incredible attention to the global laser enrichment project that we are a part of for example. So that downstream activity is quite strong.
And that is, I would say delaying some inevitable pure uranium demand. Normally, utilities do this, they sort of start at the reactor level, count the fuel bundles they have then they turn to the fabricators and assess the unprocessed material they have and then they turn to the enrichers, turn to conversion and then focus on the uranium to plug into that chain.
So it is correct to say that the market has lost some of the focus on uranium that we saw through 2021 and into early 2022, spurred, obviously by some of the events in Kazakhstan early in the year, but this is just delayed. The demand will come back, and it is more likely to come back into lumpier fashion.
So there is no doubt that the focus is a little more downstream at the moment, but it will come back upstream, it has to. The product needs to eventually be bought to plug into that service chain. But I don’t want to leave the impression, nobody’s looking for uranium.
We are not at 45 million pounds year-to-date, because there is no demand in uranium. So there is quite substantial demand in uranium relative to the last couple of years. Relative to replacement rate, no, we are not there yet. That is why we are still in supply discipline mode, it makes sense for us to be signaling that the procurement on the uranium side is just not sufficient yet.
But let me give you another leading indicator that we have talked about, we often talk about our pipeline. And to give you a bit of a sense of how much activity is in there. And it is a fact that from origination through to execution, we have more pounds under discussion than we had since the Fukushima window.
So as a bit of a leading indicator, I would say there is demand. It is not yet replacement rates, but it is there. And once we see the services replaced, and confidence of the utilities, that they have got their enrichment lined up and excluding Russia, and they have got their conversion, we could actually see demand in the uranium side come in a far more concentrated fashion than would have been the case prior to February 24th. So that is the way we look at it. We are leveraged to that move and we think it is the absolute right space for us to be.
Thanks Grant. And just as a separate follow-up, how are you currently thinking about in Inkai from an asset perspective? I mean, we have seen obviously a number of Western companies exit Russian assets. How do you currently think about Kazakhstan and Inkai specifically from a risk perspective?
Orest, obviously we watch it very close. In fact, I was over there a month ago and had a visit to in the country. Obviously, it is an important asset for us Inkai and we are watching the political situation there.
But right now, it is remains a good jurisdiction for us to operate in and we are happy with our partnership and our joint venture and it is working well, we are a bit concerned with the transportation issue and getting our material out of there. So we just continue to keep a very, very close eye on that investment and right now, we are happy to be there.
Okay. Thank you.
The next question is from Lawson Winder with Bank of America Securities. Please go ahead.
Hello, good morning. Thank you for sitting, nice to hear from you all today. I wanted to ask about the conversion business and try to get a better idea for what the potential upside is here, even just keeping sort of volumes flat. So with your disclosures, not really evidence, sort of what the size of the contract book is also not entirely evident, just looking at conversion, sort of what the average price is in your current contract book. And perhaps you could give us kind of those levels? So, we can square that with spot that is now above $30 per kilogram. And maybe help us to think about the potential to increase the EBITDA contribution from conversion. Thanks.
Grant do you want to talk about the conversion market now?
Lawson, as you know, and thanks for the question. As you know, not a segment we have been particularly drawing attention to for a long time. It was a forgotten part of the industry. And one where, we were warning folks that as inventories were drawn down, one of the realities of the inventory draw down is that it often showed up as UF6, so already converted material.
As those inventories have been drawn down, the need to replace, it requires fresh conversion. We saw the fundamental start to improve and then of course, also exacerbated by the Russian invasion of Ukraine.
So a lot more attention on the conversion space than we are accustomed to, which is great. But our disclosures, you are right, we bundle our fuel services division into one segment and we don’t draw out specifically what is going on in conversion.
But I would remind you that, on an annual basis, we tell you what our book looks like, we have got 49 million kilograms of conversion sold under long-term contract. Again, like uranium that is got long tail of revenue, cash flow and earnings that underpins, the entire fuel services group. Conversion is almost exclusively sold on fixed price basis.
So in a world where conversion prices have hit historic levels, but let’s remember conversion has more ability, more idle productive capacity that can come back to the market than I would say uranium or enrichment enjoy. So, we need to be mindful of that.
What I’m talking about there is the conversion business in the U.S. plans to restart at the Condradine plant. The French facility is still ramping up. There is an idle facility in the UK. All that suggests to us, these are great prices and it is time to lock those in.
So, expect the performance of the fuel services division, just to continue to be very robust on the back of that historic pricing, as we layer in more and more conversion. But we are just always going to be challenged with the disclosure doesn’t reach down to the full conversion level.
But I would say, the historic proportion where fuel services was between 15% and 20% of our EBITDA and uranium was the rest, that proportion is probably going to rebalance significantly with these historic prices. So we just expect to lock in really strong performance for a multi-year basis.
Take these strong spot moves and lock them in for the long-term. So, we have high hopes for the conversion business and it is just absolutely critical to the nuclear fuel cycle and Western capacity, meaning Western demand.
Maybe just a quick follow-up on that, and your comments on the nature of the contract being mostly fixed price. Do you see, or do you have a desire to perhaps shift to a bit more of an index price basis for that business? And then the follow-up question that I really wanted to get to was just on labor at McArthur and McClean Lake. And maybe just understand if the expiring collective bargaining agreement in McArthur has anything to do with the slower-than-expected ramp up. And then, as you think about renegotiating that contract, which expires at year end, what would be a reasonable expectation in the current inflationary environment for sort of like pay increases based on your knowledge of past inflationary environment? Thank you.
Lawson I will just take the second part of that and then I will pass it to Grant on the fixed versus variable pricing. But certainly we have an outstanding workforce and McArthur River, we are bringing them back, we were down to it.
A minimal number for the last couple of years, they have come back and we have been blessed, with a competitive advantage of having over 50% of our employees being from the north, around their mindsets that many who have come back many new ones.
And so they are busy getting that asset ready to go, McArthur is ready to go put some final touches on it, a bit of a delay at Key Lake. But normal bargaining process, I’m not going to preempt that or forecast what is going to happen.
We will go both sides in good faith, and we have had a great relationship with our union up there. So that expires at the end of the year, and they will watch it see how that plays out. So Grant, do you want to talk about conversion pricing term versus spot.
Yes. Similar to the way we look at uranium and I would say the enrichers look at the enrichment space and the way we will certainly look at the enrichment space when we are in it. It is a function of where capacity is at.
And because conversion does have line of sight to additional Western capacity to come back in the next few years, actually, this is a good time to be capturing those prices on a fixed basis before that capacity comes back.
So I would say right now, this is the type of pricing environment that is very favorable for locking in that value. And as Condradine comes back ramps up as the French facility is expected to ramp up as decisions are made about the Springfields facility in the UK. Now is not the time we would want to be indexed to those production, that production coming back.
So we are quite happy with the move in the conversion market. We are quite happy to be the only operating conversion plant in North America right now and full cycle value capture means we are leveraged for moments just like this.
Okay and thanks very much. Very helpful responses.
Thanks Lawson.
The next question is from Alexander Pearce with BMO. Please go ahead.
Thanks. I just wanted to turn back to the potential Trans-Caspian route for your Inkai material. Could you be a little bit more specific on what and where the current hurdles are? Is it more of a case of getting the right agreements in place in Kazakhstan for to rerouting that material or is it more about getting those in place through the Azerbaijan et cetera into Canada? Thanks.
Yes. Thanks Alex. I will ask Sean Quinn to speak to that.
Sure. JV Inkai is working on that with Kazatomprom and there are lots of logistics issues. The actual flow would be up to the port of [Assabah] (Ph) rail, and then over to Baku, in Azerbaijan and by rail through to the port of [Podi] (Ph) on the Black Sea there to be loaded on a boat, and then putting all those segments together. So there is just a lot of logistics supply work there.
And then there are also regulatory hurdles that need to be accomplished in connection with the necessary approvals from the various governments along the way and in particular, they need to get approval to transit to Azerbaijan, and they have approval for a certain quantity this year that will cover a shipment to us and they are just putting it all together. And it will take, I think a few more weeks of work to do that and we hope to learn more as we move into the month of August.
Thanks. So just to kind of condense that, I mean it sounds like a it is not a question of - it does sound more like a win issue?
I think I would still say it is a bit of if and when in my mind, it will be happy when we actually see the shipment get loaded on a boat in the port of Podi.
Okay. Thank you.
Thanks Alex.
The next question is from Greg Barnes with TD Securities. Please go ahead.
Yes, thank you. Grant is there a particular trigger that allows you to take your interest in GLE up to 75% from where you are currently?
Well Sean can speak to that too, because he is - thanks, Greg. Nice to talk to you. Sean, go ahead you are the GLE trigger guy.
Yes. Hi, Greg, could you just - you are a bit muffled there.
Is there a trigger to increase our percentage in GLE?
Okay, yes, sure, there is a time trigger, we have an option that is effective after roughly the end of this year. And then it is just a question of us exercising the option.
Okay. And just going back to conversion with Grant, from your discussion on the last quarterly call, it sounded like you are not going to have more capacity at Port Hope. And you are pretty heavily contracted. So taking advantage of these higher prices is going to be more of a longer term issue for you? When would these higher prices kick in your contract? If you are able to nail it down?
Well, it is already starting to happen. The conversion move has been underway for a couple of years, as you know. And our goal is never to like in a more of a classic commodity sense, you see a strong spot price. You then increased production to take advantage of that strong spot price.
That is not our incentive at Cameco, we see strong spot prices and we actually move away from that we don’t aim to target the spot market, we want to see that tightness persist long enough for us to lock that in multiyear value.
And that is what we are doing. So we are just continually layering in as this conversion market moves up, recognizing that these prices are going to attract idle production to come back to the market.
So rather than getting carried away with our own production plans, the goal is to maximize the margin on our current productive capacity. While it is really the only game in town in North America, and then lock those in on a multi term basis.
So you are already seeing that pick up and it will just continue to build is that classic following capture that we have in our contract portfolio to not just a couple of weeks at the top of a spike, but to lock it in on a multiyear basis.
So that segment is expected to perform for a long time and then actually have a stickiness to it, even if productive capacity does come back in other locations will have locked in that value on a much longer term basis.
Okay. Thank you.
Thanks Greg.
The next question is from Brian MacArthur with Raymond James. Please go ahead.
Good morning. Just following up on conversion. At one time you did have agreement if I remember with Springfield, do you have any option to legacy saying like you often have backup plans for security of supply, because you only do really have one facility and conversion. Do you have anything less there than say bring that back that you have options on alternative supply there or anything into this whole conversion market?
Not at this point, Brian. We don’t. I think we exited Sean, what year was it?
2014.
2014 yes. And we left it completely, Brian. So at this time, we don’t have any optionality there and I’m not sure that plant could even go if you wanted it to. But the answer is no, we don’t.
Okay. And secondly, like most of the industry at the moment, everybody is facing inflation, it is tougher to get things restart are tougher. Everybody talks but incentive price. And if we are going to have an bifurcate of market and it is part of your marketing strategy and you make comments about the utilities aren’t there and it is not economic right now.
How much do you think that price has gone up since when you started this strategy? I mean, the old days people talked about $45 or $50 was maybe where it made sense. But, it is not easy to restart things. It is not easy to put Greenfield into production. In the Western world nothing is getting cheaper. I mean, how much do you think that inflationary impact has affected the industry and how does that fits into your strategy about actually even doing contracts right now? Because one could argue the price might have to go on off a lot higher going forward, especially as you point out it continues to get delayed as utilities focus on near-term problems and enrichment.
Yes, Brian. We are certainly seeing from your reports and many others on other companies, the effective inflation on CapEx. It is a bit of an epidemic and then supply chain continues to affect everyone. Labor, as I said, we are a bit blessed here. We have got some homegrown labor that comes back to us. But Grant, do you want to talk to the inflationary effect?
Yes, I do. Brian, you are raising a good point, but I want re-frame it a little bit because I put it in a different context. I would just simply say that as the world is bifurcating and origins are origins mattering more, when we speak about a Western cost curve and we are saying that, in order for a Western capacity to meet Western demand, we are going to have to see investment. And it is a fact that the Western cost curve on the uranium side is more expensive.
We are inclusive of things like inflation and regulatory hurdles and ESG requirements in the Western. So, we bake all of that in, when we say the incentive price on the Western cost curve versus a global cost curve that is excluding Russia and making other origins more difficult to obtain. It is already factoring that in. So, we agree with you that, one of the kind of exciting pieces for us is that, that strike price for the last marginal pound of Western supply is probably higher.
Now, it is not our supply because we don’t need to invest in Greenfield to get it. I mean, we are still in supply discipline mode. We have got more production from our Brownfield. We have got more Brownfield expansion capabilities long before we have to think about that last Western Greenfield pound that needs to come to the market.
Brian, we are slightly greedy enough to wait for that price as well. We are not looking to be sold out. To your point and we often hear this, well, there are some that say, well, why haven’t you done more contracting? And there is some that say, why are you doing any? And we think we are sort of right in between, right where we are exactly where we need to be.
We are not looking to be sold out right now. We are not looking to just land volumes to bring back all of our supply at name plate production, because, we think prices have to adjust and reflect the need for Western supply, the need for Western supply in an inflationary market, the need for Western supply that has proven ESG performance. And were patient to wait for those prices. So we agree with you we just bake it in to a different view of where that Western cost curve is going.
So would it be 25%, when you start it two years, three years ago with a strategy 50% higher in your mind?
Well, Brian, we wouldn’t quarrel with those in the industry that say that the Western supply is probably - if the global is the last marginal town from a cost curve basis, prior to a bifurcated market was somewhere in the mid-70s.
We wouldn’t quarrel with those who have said that the price probably needs to be $20 a pound higher than that we see that analysis being done by some and we wouldn’t disagree with it. It makes sense, when you factor in.
I would turn to Trade Tech and the work that that those folks are doing, they are on the production cost indicator mindful that they are talking about sort of the next five-years, but extend that rationale and thinking out over the next 10-years, which is really a more appropriate timeframe. And you can quickly find yourself in that range. And we wouldn’t quarrel with that analysis.
Now, the good news for us is we can get there and we can grow into that with Brownfield leverage. We don’t have to put a capital program for Greenfield to get there and be exposed to it. But we think that those are good markers to think about.
Maybe we can slip one more in just on GLE now. Obviously, it is very strategic, but is the biggest impediment to moving. I mean, you have got the constellation. Everybody’s interested to move this forward faster. Is it now technical, regulatory, financial, what is the real - what would you say is the real bottleneck at the moment?
The answer is probably, yes to that. But Sean, go ahead.
I think we are about a developing degree of confidence on the technical side. And the big hurdles I would put in the financial camp, basically, the procurement going back to the procurement team that Grant and Tim mentioned at the beginning. When the market is ready and there is a real call for production for enrichment services, we will look at - and natural uranium, which is the first output for the facility. We will be able to advance that project.
That is the beauty of it, Brian, you have heard us say that before the triple threat to that we can we can use it to re enrich those DOE tails which we have an agreement with the DOE. We can use it just for pure enrichment which the world sorely the Western world sorely needs these days and then of course, everybody’s on the HALEU scramble these days with the Russians. Everyone was expecting the Russians to provide the first 10-years of HALEU and that is out the window. And so there are certainly drivers now for the technology, lots of interest, government and private and so we are pretty close to the future for GLE.
Great. Thanks very much for answering all my questions.
Thanks Brian.
The next question is from Paul Rubenstein, a Private Investor. Please go ahead.
Hi good morning. Yes I was actually going to ask you about GLE, so I have been kind of beat to the punch there. But maybe if you could go into a little bit more detail about what is actually going on in Paducah and in Wilmington, and are we still waiting on the DOE and if the DOE doesn’t come through. What are your plans to move forward, and is there some kind of timeline are we looking at a year from now, five-years, 10-years, where do things look and one last thing, is the Silex technology proven at this point, or is that still kind of experimental?
Thanks, Paul, for the question on GLE. Sean Quinn, please.
Sure. I will start with back end there. We are well past the experimental stage with the technology. Technology scale up and development continues. Split between the Silex site and Lucas site Australia that are just outside Sydney, where they are continuing to refine the laser side of the technology.
And the other end of the process separator systems which are being further developed in Wilmington, we will be looking at bringing all that back together over the course of the next number of months. So on the technology front, we continue to develop it.
And on the commercial side, we are anxious to see what comes out of the numerous U.S. government initiatives to look at dealing with the bifurcation of the market and the current reliance on you Russian enrichment and conversion services, and the need to develop a supply of value to support the advanced SMR industry as a whole.
There are, as I mentioned, a number of legislative initiatives being considered that would provide financial support, so we are pursuing those. So it is really then back to the procurement demand that we are waiting to see develop, coupled with that U.S. government support that will determine the pace of commercialization.
And I would mention - sorry, I would add just to that, that we are on track to supply the two, we are on track to keep our commitments to the Department of Energy under the [indiscernible] reprocessing agreement that Tim mentioned a bit earlier. I should note that too.
How many pounds of U308 would that be kind of equivalent to?
Once the Paducah facility is up and running, I think the U308 equivalent production per year is around five million if my memory is correct. And that is a 45 year life that we are looking at there. For the sales, yes, just to be very clear on that.
As far as long-term strategy, it looks like you guys are moving toward a strategy of a package deal. As far as contracting goes where rather than contracting just for you U308, or just for conversion, or just for enrichment that you would, utilities would come in and just do the whole thing together and I’m not speaking very well.
Yes, I will get our chief salesman to respond to that. Packaging of component parts. We get the question.
Yes, Paul, good question. I wouldn’t say moving towards. We have always been in that camp. So don’t forget. So, with Bruce Power, we provide fabricated fuel bundles, to Bruce Power. So we do everything right across the chain, and we have always been vertically integrated. We will always be vertically integrated and we have ambitions for more vertical integration, if it makes sense.
Now, what we are up against is a utility desire that is long entrenched in a lot of our customers to buy on a components basis. And the reason they have wanted to do that is, so that they have line of site to what is going on in each of the components versus say, buying just a fuel bundle that you can think of as a battery to put in their kettle to boil water, turn turbines and produce carbon free electricity. But, there are some markets where they are accustomed to buying just a fuel bundle.
Think about that Eastern European Crescent that has been heavily reliant upon Russia, that is looking to break away. They have got no experience with buying components. What they want is that final fuel bundle and so right now you can expect to see greater partnering between the Cameco’s of the world, the Urankos of the world, the Westing houses of the world in order to offer that Western supply directly to the utility.
So for us, if it makes sense and we can drive value across those components, we would bundle and have integrated sales. If we can capture more value by selling on a component basis, because maybe one component is higher in price conversion at historical levels, we will do that too. So we have always been vertically integrated. We always will be, but our focus is on value and packaging it up or componentizing it to drive value. We will make those decisions on a case-by-case basis.
Okay.
Thanks a lot, Paul.
Thank you.
The next question is from [Kit King] (Ph) with S&P Global. Please go ahead.
Hi. Thanks for taking my question. I wonder if you could go back to the delay at Key Lake. I think earlier this year you were expecting five million pounds and now up to two million now. I’m wondering what the key driver there in terms of the delay is. You mentioned critical materials and some other things. Can you expand on that?
Yes Kit, thanks for the question. I’m going to ask our Chief Operating Officer, Brian Riley to speak to that, please.
Sure. Thanks Tim. And look, several key drivers. Let me just step back to the extent that our operational readiness program is in transition. So we are in transition from a construction phase to early stage commissioning, and I want to separate the mill from the mine, which is important as well.
So we have completed the first circuit at Key Lake mill in terms of early stage commissioning and we have had to make adjustments and the adjustments are really based on two drivers. One, this is a Brownfield site. It is a Brownfield site that has been in care and maintenance for the past four years. So we are up against some mechanical issues, but nothing that we can’t resolve. We have had to make some adjustments.
The second driver is focused around the changes we have made and we have made significant changes. We have installed a number of automation and digitization projects that really have changed the way we operate the mill and we have upgraded the operating system. So, those are the key drivers and until one actually completes the commissioning phase, it is difficult to understand what those issues are.
So, we have had to make some adjustments at the mill and hence we have had to re-forecast. I also want to, while I have got access to the microphone here speak to the mine. Because it is a different trajectory at the mine we are in good shape, we are on track. We have two sources of ore that we will supply to the mill, when required, we have got four million pounds of inventory sitting at the base of the mine. So we are in the process of commissioning the underground processing circuits.
We also have about 30 million pounds of frozen inventory, which we can access from 10 different production areas and that will provide the ore supply for the next two years. So the mine is in good shape, the mill, we have made some adjustments, we have disclosed those adjustments, but the objective hasn’t changed all through the process. Well commission the mind and the mill in a safe, orderly and systematic fashion. And we are preparing these assets for the next 30-years.
Yes Kit what I would just add to what Brian said, because I will hear about it. If I don’t from our Cigar Lake team that things are going very well there. And there we had forecast production of 15 million pounds. And now we have changed that to 18. They have caught up on some development. And so being a multi facility, multi mine company has benefits and we are seeing it in this instance.
And then last question, somewhat related, say market conditions improve and spur you to expand production next year or the year after that or whenever conditions may warrant? Can you remind me roughly how quickly or how difficult or what the timeline would be for expanding your production capacity, Cigar Lake or McArthur and the Key Lake mill, just give me a sense of kind of what kind of lead time is involved there?
Well as Grant said, we are in supply discipline at the moment. So we are actually planning to bring Cigar Lake down in 2024 to 15 million pounds. So obviously, we can vary between 15 and 18, not without much difficulty. McArthur we have license approval to go to 25 million pounds. Our plan 24 is to be at 13 million pounds, sorry, 15 million, I believe you have got it backwards. And so, our ability to increase production in McArthur, we would have to do a little bit of work. I don’t think there is much CapEx at all, and so we can move up.
So we have got that flexibility at our two sites. And as Grant said, we will watch, we will wait for the market. We see the signals that from the market that we need to increase our production if we have the view to sales going forward to we will adjust our production, but for now we are in supply discipline. We are going to stay there until further notice.
Thanks.
The next question is from Justin Huhn of Uranium Empire.
Good morning and thanks for the great color. Thanks for taking my question. Could you speak briefly to the Port Hope facility in terms of historical total capacity production relative to nameplate capacity in terms of percentage wise, let’s say over the past three to five-years? Are you currently operating at full capacity you expect to be and if we expect convert on back on my mid 2023 French operating relatively close to full capacity and the facility in UK you mentioned also idled? Are you considering increasing capacity or Port Hope for conversion?
Hi, Justin. Good to speak with you. Thanks for asking the question. And again, it is a focus on conversion that we are not accustomed to. It is great to see by the way, so happy to talk about it. Port Hope has actually had the opposite challenge not operating at full capacity but operating well below because the conversion market was just so underpriced for so many years.
It is licensed for 12,500 tons of capacity per year. We haven’t run it at that rate ever - we haven’t achieved that nameplate ever. We have in the past in the last sort of price spike, ran it at a rate for several months that would have annualized out to full nameplate production. But then the conversion market just fell away for the reasons that I talked about so much supply coming to the market, already converted showing up as UF6 conversion price fell below $5 a kgU for a period of time.
As a result supply discipline and conversion actually began. A few years before getting uranium It began with the SFL. Those Springfield’s facility in the UK shutting down in 2014, when we canceled our whole converting deal there and then of course, we began to toggle back production at Port Hope, then the Condradine facility went into care and maintenance.
And then of course, I think there were difficulties ramping up in France and that happened while inventories were being dragged down. And conversion suddenly was required again, so conversion fundamentals were already improving. And then along comes February 24th and the need to exclude Russia from the conversion space.
But as I said earlier, right now it is about looking at historic conversion prices, looking at maximizing margins, but being mindful that there are some facilities that are poised to come back and not front running demand with supply. I mean, right now, Condradine is planning to come back and I think at that time to have even talked about expanding that French facility can run at 15,000 or is nameplate to 15,000 tons and has expectations to get there.
So I’m talking about the facility in the UK, Springfield as a site is very important to the UK nuclear infrastructure, as the UF6 production sites, I think there are some challenges. But when conversion hits historic prices, obviously it creates incentives to at least have a look at it. So we just have to be very disciplined there and we like our position in Port Hope.
But I would say that the market is signaling that it needs conversion. But it is, until we see actual procurement, we are just not going to respond to “oh, well, people say they want it. So let’s increase production”. Well, no, in our business, the way you prove it is through the power of procurement. So we would need to see that pickup in a meaningful way to then even give any thought to further increases in Port Hope.
So at the moment conversion is tight and the only way to loosen it up is to begin to procure more. And that will lead to the production decisions that would increase it. So I think that is the way to think about those that part of the fuel cycle.
Excellent, great answer, thank you so much. And just a quick follow-up with regards to the conversion and enrichment markets we are already hearing that some Western enrichers have made a significant jump in their tails assays. When we consider that utilities are seeking out conversion and enrichment first which makes a lot of sense. And over the past number of years, look over the past decade really, they have been able to buy UF6 hand over fist from enrichers from underfeeding from sales or enrichment and that is at least in the West, looking to be declining, if not disappearing in terms of availability very, very quickly.
Can you guys put a little bit finer point on expected timeframes in terms of utilities wrapping their heads around available conversion enrichment capacity, let’s say out in the middle of this decade and seeking out further U308 procurement going forward. Is this something that you are expecting to happen in a significantly higher volume as soon as even this year?
Yes. But let me back it up into a couple of components. So obviously, you get the first demand outlook that uplift that just comes from the fundamentals, right. It is the improving clean energy focus, the energy security focus, the energy affordability focus.
And we are seeing that come as demand in the short-term, reactor programs being saved. In the medium-term reactor programs, getting life extensions. And in the long-term, it is new builds, not just a big reactors, but also advanced reactors, small modular reactors.
So, you have got that demand uplift that is driving the need for uranium right through to fuel fabrication. Then you add to this, the bifurcated market challenge, which I think is at the heart of your question.
The only way for the Western market to bridge through the Russian replacement challenge in the short-term awaiting additional capacity installed at Western enrichers is overfeeding. So the only way to get more out of an enrichment plant that is at capacity is to throw more uranium into it. So, there is more uranium demand that is going to come from that overfeed.
So that is kind of a shorter to medium term lift on uranium demand. But I don’t think people are even really paying a lot of attention, we are, but I don’t think enough people are paying attention to that overfeed piece.
And then don’t forget there is a third uplift in demand, and that is everybody’s inventory is going to go up because of the higher commitments. So you see that our purchases are going to go up in year because we have got more commitments. We have got more commitments. We need to carry more inventory, Cameco going to need to buy more, but that is going to happen all along the supply chain.
The converters, the enrichers, the fabricators everybody is working capital is going to go up. And by the way, utilities going through a supply crisis, inventory tends to be pro-cyclical. We will actually see demand come into - the one time demand for inventory at probably higher inventory targets than they were ahead of time.
So I think you are absolutely right in layering in these components to say that the only way for us effectively to do this is demands going up right across the fuel cycle. But actually there is going to be some shorter term pressures that are required in order to exclude Russia on a very rapid base, until such a time, as there is more enrichment capacity.
We are looking out into 2028, into that window before you have effectively expanded enrichment capacity, which says to us, there is a bulge of uranium demand just related to overfeed that is going to have to come in order to bridge through that exclusionary process.
So I think you are thinking about it the right way. I would just articulate it from that buildup. There is the fundamental demand. There is the exclusionary demand, and then there is the inventory demand and you add that all up and it explains why we are bullish.
Fantastic. Thank you guys so much.
Justin, thank you.
This concludes the question and answer session. I would like to turn the conference back over to Tim Gitzel for any closing remarks.
Well thanks very much, operator and with that I just want to say thanks to everybody who joined us today. We as always appreciate your interest support and the great questions we get.
Let me leave you just with a couple of comments today. Our world today is facing some pretty significant challenges including and we have talked about these decarbonization and electrification while ensuring energy, affordability and security without jeopardizing the ambitious net zero targets that have been set. There is a lot of uncertainty in the world energy landscape and a lot of countries are having to take a hard look at where they should get their fuel.
More than ever, the world is looking for a stable, reliable and politically dependable fuel supply. I believe we are witnessing a fundamental change that will alter the way countries approach their energy needs going forward. And I think that anyone who looks seriously at the global issues we are facing would say there is no solution without nuclear. So we see a lot of opportunity ahead of us with demand for safe, reliable, affordable and carbon free baseload electricity coming from across the globe.
As a responsible commercial supplier, with a strong balance sheet, long lived Tier 1 assets and a proven operating track record and line-of-sight to return to our Tier 1 cost structure. We believe we are extraordinarily well positioned to respond to the changing market dynamics. We are excited about the future we are seeing for nuclear power generation, we are excited about the fundamentals for nuclear fuel supplies, and we are excited about the prospects for our company.
We will continue to do what we said we would do executing on our strategy and consistent with our values. We will do so in a manner we believe will make our business sustainable over the long-term. And we will continue to make the health and safety of our workers, their families and their communities our priority. So thanks, everybody, stay safe and healthy and have a have a nice summer.
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.