Positioned for success
Our strategy is set within the context of a challenging market environment, which we expect to give way to strong long-term fundamentals driven by increasing population and electricity demand.
We are a pure-play nuclear fuel producer, focused on taking advantage of the long-term growth we see coming in our industry, while maintaining the ability to respond to market conditions as they evolve. Our strategy is to focus on our tier-one assets and profitably produce at a pace aligned with market signals in order to increase long-term shareholder value, and to do that with an emphasis on safety, people and the environment.
Uranium production is central to our strategy, as it is the biggest value driver of the nuclear fuel cycle and our business. We plan to focus on our tier-one assets and manage our supply according to market conditions in order to return the best value possible. As conditions improve, we expect to meet rising demand with increased production from our best margin operations.
See Uranium – production overview for additional details.
Our fuel services division is a source of profit and supports our uranium segment while allowing us to vertically integrate across the fuel cycle. Our focus is on maintaining and optimizing profitability.
We continue to explore opportunities in the second largest value driver of the fuel cycle.
NUKEM’s activities provide a source of profit and give us insight into market dynamics.
Capital allocation – focus on value
Delivering returns to our long-term shareholders is a top priority. We continually evaluate our investment options to ensure we allocate our capital in a way that we believe will:
- create the greatest long-term value for our shareholders
- allow us to maintain our investment grade rating
- ensure we execute on our dividend policy
To deliver value, free cash flow must be productively reinvested in the business or returned to shareholders, which requires good execution and disciplined allocation. We have a multidisciplinary capital allocation team that evaluates all possible uses of investable capital.
We start by determining how much cash we have to invest (investable capital), which is based on our expected cash flow from operations minus expenses we consider to be a higher priority, such as dividends and financing costs, and could include others. This investable capital can be reinvested in the company or returned to shareholders.
Today, considering the continued near-term uncertainty, we believe the best way to create value is to focus on expanding our tier-one assets and maintaining a strong balance sheet. This provides us with the opportunity to gain operating leverage as the market transitions to being demand driven, and mitigates risk in the event of a prolonged period of uncertainty.
Before investable capital is reinvested in sustaining, capacity replacement or growth, all opportunities are ranked and only those that meet the required risk-adjusted return criteria are considered for investment. We also must identify, at the corporate level, the expected impact on cash flow, earnings and the balance sheet. All project risks must be identified, including the risks of not investing. Allocation of capital only occurs once an investment has cleared these hurdles.
This may result in some opportunities being held back in favour of higher return investments, and should allow us to generate the best return on investment decisions when faced with multiple prospects, while also controlling our costs. If there are not enough good growth prospects internally or externally, this may result in residual investable capital, which we would then consider returning directly to shareholders.
If we determine the best use of cash is to return it to shareholders, we can do that through a share repurchase or dividend—either a one-time special dividend or a dividend growth policy. When deciding between these options, we consider a number of factors, including generation of excess cash, growth prospects for the company, growth prospects for the industry, and the nature of the excess cash.
Share buyback: If we were generating excess cash while there were little or no growth prospects for the company or the industry, then a share buyback might make sense. However, our current view is that the long-term fundamentals for Cameco and the industry remain strong.
Dividend: We view our dividend as a priority. Therefore, any change to our dividend policy must be carefully considered with a view to long-term sustainability. Currently, the conditions in the uranium market do not provide us with the level of certainty we require to implement changes to our dividend policy.
Marketing strategy – balanced contract portfolio
As with our corporate strategy and approach to capital allocation, the purpose of our marketing strategy is to deliver value. Our approach is to secure a solid base of earnings and cash flow by maintaining a balanced contract portfolio that optimizes our realized price.
Uranium is not traded in meaningful quantities on a commodity exchange. Utilities buy the majority of their uranium and fuel services products under long-term contracts with suppliers, and meet the rest of their needs on the spot market. We sell uranium and fuel services directly to nuclear utilities around the world as uranium concentrates, UO2, UF6, conversion services or fuel fabrication. We have an extensive portfolio of long-term sales contracts that reflect the long-term, trusting relationships we have with our customers.
In addition, we are active in the spot market, buying and selling uranium when it is beneficial for us. Our NUKEM business segment enhances our ability to participate, as they are one of the world’s leading traders of uranium and uranium-related products. We undertake activity in the spot market prudently, looking at the spot price and other business factors to decide whether it is appropriate to purchase or sell into the spot market. Not only is this activity a source of profit, it gives us insight into underlying market fundamentals.
Optimizing realized price
We try to maximize our realized price by signing contracts with terms between five and 10 years (on average) that include mechanisms to protect us when market prices decline and allow us to benefit when market prices go up.
Because we deliver large volumes of uranium every year, our net earnings and operating cash flows are affected by changes in the uranium price. Market prices are influenced by the fundamentals of supply and demand, geopolitical events, disruptions in planned supply and other market factors.
We target a ratio of 40% fixed-pricing and 60% market-related pricing in our portfolio of long-term contracts. This is a balanced and flexible approach that allows us to adapt to market conditions and put a floor on our average realized price, reduce the volatility of our future earnings and cash flow, and deliver the best value to shareholders over the long term. Over time, this strategy has allowed us to add increasingly favourable contracts to our portfolio that will enable us to participate in increases in market prices in the future.
Fixed-price contracts: are typically based on the industry long-term price indicator at the time the contract is accepted and escalated over the term of the contract.
Market-related contracts: are different from fixed-price contracts in that they may be based on either the spot price or the long-term price, and that price is as quoted at the time of delivery rather than at the time the contract is accepted. These contracts sometimes provide for small discounts, often include floor prices, and some include ceiling prices, all of which are also escalated over the term of the contract.
Fuel services contracts: the majority of our fuel services contracts are at a fixed price per kgU, escalated over the term of the contract, and reflect the market at the time the contract is accepted.
Contract portfolio status
Currently, we are heavily committed under long-term uranium contracts through 2018, so we are being selective when considering new commitments. We have commitments to sell approximately 190 million pounds of U3O8 with 41 customers worldwide in our uranium segment, and commitments to sell approximately 65 million kilograms as UF6 conversion with 33 customers worldwide in our fuel services segment.
Customers – U3O8:
- Five largest customers account for 47% of commitments
Customers – UF6 conversion:
- Five largest customers account for 59% of commitments
Managing our contract commitments
To meet our delivery commitments, we use uranium obtained:
- from our existing production
- through purchases under long-term agreements and in the spot market
- from our existing inventory
We allow sales volumes to vary year-to-year depending on:
- the level of sales commitments in our long-term contract portfolio (the annual average sales commitments over the next five years in our uranium segment is 27 million pounds, with commitment levels through 2018 higher than in 2019 and 2020)
- our production volumes, including from the rampup of Cigar Lake and from potential increases at McArthur River/Key Lake
- purchases under existing and/or new arrangements
- discretionary use of inventories
- market opportunities
Focusing on cost efficiency
In order to operate efficiently and cost-effectively, we manage operating costs and improve plant reliability by prudently investing in production infrastructure, new technology and business process improvements. Like all mining companies, our uranium segment is affected by the cost of inputs such as labour and fuel.
Operating costs in our fuel services segment are mainly fixed. In 2015, labour accounted for about 51% of the total. The largest variable operating cost is for zirconium, followed by energy (natural gas and electricity), and anhydrous hydrogen fluoride.
Purchases and inventory costs
Our costs are also affected by the purchases of uranium and conversion services we make under long-term contracts and on the spot market.
To meet our delivery commitments, we make use of our mined production and inventories, and we purchase material where it is beneficial to do so. The cost of purchased material may be higher or lower than our other sources of supply, depending on market conditions. The cost of purchased material affects our cost of sales, which is determined by calculating the average of all of our sources of supply, including opening inventory, production and purchases.
As greater certainty returns to the uranium market, based on our view that the market will transition from being supply-driven to being demand-driven, we expect uranium prices will rise to reflect the cost of bringing on new primary production to meet growing demand, which should have a positive impact on our average realized price.
In addition, as we execute our strategy to focus on tier-one production, we expect to see more stability in the unit cost of sales for our uranium segment.
Sustainable development: A key part of our strategy
Social responsibility and environmental protection are top priorities for us, so much so that we have built our corporate objectives around them within our four measures of success: a safe, healthy and rewarding workplace, a clean environment, supportive communities, and outstanding financial performance. For us, sustainability isn’t an add-on for our company; it’s at the core of our company culture. It helps us:
- build trust, credibility and corporate reputation
- gain and enhance community support for our operations and plans
- attract and retain employees
- manage risk
- drive innovation and continual improvement to build competitive advantage
Because they are so important, we integrate sustainable development principles and practices at each level of our organization, from our overall corporate strategy to individual employee practice in day-to-day operations.
Safe, healthy, rewarding workplace
We are committed to living a strong safety culture, while looking to continually improve. As a result of this commitment, we have a long history of strong safety performance at our operations and across the organization.
- our total recordable injury rate decreased by 10%
- continued low average dose of radiation to workers while moving Cigar Lake into commercial production
- awarded the John T Ryan National Safety award for McArthur River mine based on prior year performance
- top employer awards
A clean environment
We are committed to being a leading environmental performer. We strive to be a leader not only by complying with legal requirements, but also by keeping risks as low as reasonably achievable, and looking for opportunities to move beyond requirements.
We track our progress by monitoring the air, water and land near our operations, and by measuring the amount of energy we use and the amount of waste generated. We use this information to help identify opportunities to improve.
- sustained the significantly reduced uranium-to-air emissions achieved at our Port Hope Conversion facility in 2014
- implemented waste management initiatives across the organization, including significant reductions of low level radioactive waste stored at our Fuel Services Division facilities
- achieved a 50% reduction of surface water consumption at our McArthur River operation through increased recycling initiatives
- carried out industry leading research and innovation in groundwater restoration at our US in situ recovery operations
Gaining the trust and support of our communities, indigenous people, and governments is necessary to sustain our business. We earn support and trust through excellent safety and environmental performance, by proactively engaging our stakeholders in an open and transparent way, and by making a difference in communities wherever we operate. These efforts are critical to obtaining and maintaining the necessary regulatory approvals.
- over $299 million in procurement from locally owned northern Saskatchewan companies
- 1,369 local personnel from northern Saskatchewan (811 Cameco employees, 558 contractors)
- no significant disputes related to land use or customary rights
- community engagement activities at all of our operations
- established relationships with five universities along with Los Alamos National Laboratory, and the United States Geological Survey in conducting groundwater restoration
Outstanding financial performance
Long-term financial stability and profitability are essential to our sustainability as a company. We firmly believe that sound governance is the foundation for strong corporate performance.
- continue to achieve an average realized price that outperforms the market
- ranked 26th out of 234 Canadian companies by Globe and Mail in governance practices
Monitoring and measurement
We take the integration of sustainable development and measurement of our performance seriously. We have been producing a Sustainable Development (SD) Report since 2005, using the Global Reporting Initiative’s Sustainability Framework (GRI). It is our report card to our stakeholders. It tells them how we’re performing against globally recognized key indicators that measure our social, environmental and economic impacts in the areas that matter most to them. It provides information about our goals, where we’ve met, exceeded or struggled with them, and how we plan to do better. We expect to release our next SD Report in 2016.
All of our operating sites are ISO 14001 compliant. In addition, we have now transitioned from individual site-based ISO 14001 certifications to a single corporate certification. We expect to roll the majority of our operations into this single certification.
We are a four-time Gold award winner through the Progressive Aboriginal Relations program as judged by the Canadian Council for Aboriginal Business. We are also proud to have been named one of Canada’s Top 100 Employers, Saskatchewan’s Top Employers, Canada’s Best Diversity Employers and one of Canada’s Top Employers for Young People for the sixth year. We are a leading employer of indigenous peoples in Canada, and have procured over $3 billion in services from local suppliers in northern Saskatchewan since 2004. This year, we were also named one of the world’s most sustainable corporations by Corporate Knights, a Canadian media and research company.
In 2015, we secured approval to increase production at the McArthur River operation as a result of earning the confidence of our regulators, which—although primarily based on our safety, health and environmental performance—is also a reflection of the support we have from our neighbouring communities in northern Saskatchewan.
We encourage you to review our SD report at cameco.com/about/sustainability which outlines our commitment to people and the environment in more detail.