Earnings Call Transcript
CAMECO CORP (CCJ)
Earnings Call Transcript - CCJ Q1 2020
Rachelle Girard, Vice President, Investor Relations
Thank you, operator, and good morning, everyone. Welcome to Cameco's first quarter conference call. We're doing something a little differently this quarter. For the Q&A portion of the call, participants will be in a listen-only mode. We are trying this approach to alleviate some of the challenges many of us have had trying to dial into calls from multiple locations. We have collected questions from our sell-side analysts and have included common questions we've been hearing from the investment community over the past few weeks. As always, our call will focus on the trends we're seeing in the market and our strategy, not on the details of our quarterly financial results. If you do have detailed questions about our quarterly financial results, or if we do not answer your questions during the Q&A session, 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 at cameco.com or you can use the Submit Question tab on the webcast, 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 Reilly, Senior Vice President and Chief Operating Officer; Sean Quinn, Senior Vice President, Chief Legal Officer and Corporate Secretary; and Alice Wong, Senior Vice President and Chief Corporate Officer. Tim will begin with comments on our strategy in the market. After that, we will move to the Q&A portion of the call. If you’ve joined the conference call through our website event page, there are slides available, which will be displayed during the call. The slides are also available for download in a PDF file through the conference call link at cameco.com. Please note that this conference call will include forward-looking information, which is based on a number of assumptions, and actual results could differ materially. Please refer to our Annual Information Form and MD&A for more information about the factors that could cause these different results and the assumptions we have made. With that, I will turn it over to Tim.
Tim Gitzel, President and CEO
Well, thank you, Rachelle, and welcome to everyone who has joined us today. As Rachelle noted, we're doing something a little different on the call today. So I will keep my remarks quite brief. And then we'll move to the Q&A. We're living in unprecedented and challenging times. The impact of the COVID-19 pandemic is something we've never before experienced in our lifetime, and it transcends any family, community, business, government, or country. In fact, it's changed our world. I want to take a moment to thank all the people who are working on the frontlines every day to save lives, keep us safe, and ensure we have the essential services needed for our daily lives. Considering the sacrifices these individuals are making, I encourage everyone to do their part to help where they can, no matter how big or how small the contribution. And I'm proud to say that at Cameco, we're committed to doing our part to make a difference. Today, Cameco is providing the fuel required to power the nuclear reactors, part of the critical infrastructure needed to ensure hospitals, care facilities, and other essential services are available to us during this pandemic. But perhaps more importantly, is our more than 30-year commitment to protecting the health and safety of our employees, their families, and their communities and supporting local business development. In these uncertain times, perhaps more than ever, it will be critical that we continue to work together to build on the strong foundation we've already established. That is why, consistent with our values, you have seen us proactively make a number of necessary decisions to protect our employees, their families, and their communities and to help slow down the spread of the virus. It's why, in addition to all the safety protocols we've put in place, we've suspended production at Cigar Lake and at our Port Hope UF6 conversion plant and the Blind River refinery. We continue to provide compensation for our employees who are not working, thereby alleviating the stress of having to rely on overtaxed government assistance programs. That's why we established COVID-19 relief funds totaling $1.25 million to help our communities in Northern Saskatchewan and Ontario navigate through this difficult time. In our decisions is a commitment to addressing the ESG risks and opportunities that we believe will make our business sustainable over the long term. As I said at the outset, the impacts of COVID-19 are unprecedented. But we expect our business to be resilient. Why do I say that? As you know, for many years now, in the face of an uncertain uranium market, we began implementing our strategy on three fronts: operational, marketing, and financial. On the operational front, we've cut costs. In 2016, we began curtailing uranium production, reaching a point in 2018 where our annual production was well below our annual delivery commitments. We've highlighted that production is a variable, both due to planned and unplanned events. We've spent time thinking about different production scenarios. Although we're not providing a revised outlook, let me be clear, COVID-19 has not had a material impact on our deliveries to date, nor do we currently expect it will materially impact our remaining 2020 delivery commitments. However, in our view, the biggest risk is likely more of a timing risk. We continue to expect our customers are going to need uranium, and we will work with them to help meet their delivery needs during this time so they can continue to reliably generate the power their communities will need to navigate success through this crisis. The transportation of uranium is an external risk we face, but remember a lot of uranium sales are done by book transfer, not physical delivery. Where there is physical delivery, it’s sent by truck and at times by ship, and the volumes transacted are relatively small given the high energy content of our product. It's true that as a result of our strategy, we have become reliant on market purchases of uranium to fulfill our delivery commitments. But that is a deliberate choice. The fact that we have had to temporarily suspend production at Cigar Lake and at the UF6 plant in Port Hope does not change our strategy. Yes, it potentially costs us more in the near term, and we've been upfront about the impact our purchasing activity is expected to have on our margins. It's because we believe that over the long term, it will add significant value for our shareholders and other stakeholders and allow us to operate in a sustainable manner for years to come. It is true that as uranium prices increase, purchases become relatively more expensive than production. However, as long as the near-term cost of purchasing is less than the added value we expect to capture under our strategy, we're better off purchasing. Where does that added value come from? First, it comes from preserving our tier 1 assets. It comes from delivering into market-related contracts in our existing contract portfolio at higher prices. And as prices rise, we believe that sets up the conditions necessary to allow us to layer in new long-term contracts at prices that recognize the value of our tier 1 assets. This is how we build long-term value. We preserve tier 1 assets to deliver into a long-term contract portfolio. To strengthen our strategic resolve, we have been disciplined. We have made prudent and deliberate decisions to shore up our balance sheet. As a result, we have the tools we need to deal with the current uncertain environment. We are well-positioned to self-manage the risk associated with the temporary suspension of production at Cigar Lake and in Port Hope. We have $1.2 billion in cash and an undrawn credit facility, which we don't anticipate we'll need to draw on this year. Relative to a year ago, our ability to service and retire our debt has improved. And looking back a year, there are a couple of things I want to highlight that we believe strengthen the resiliency of our business. On the demand side, relative to a year ago, nuclear is very clearly back in the policy toolbox, due to its carbon-free attributes. Since 100% of our products go to producing clean, carbon-free electricity, we're a growing part of the solution to the clean air and climate change crisis. In the face of a public health crisis, we believe nuclear is once again proving its worth due to some of its key safety and reliability attributes. First and foremost, it is baseload. It will run reliably 24 hours a day allowing hospitals, care facilities and other essential services to continue to operate uninterrupted. In addition, nuclear reactors are designed to operate for long cycles without the need to refuel. They carry strategic inventories to guard against supply disruptions. They have a number of backup systems for safety and reliability, and fewer people are required on-site to run the operations. In the current environment, all of these characteristics make nuclear power a logical choice. As I said earlier, our customers will need uranium. COVID-19 has disrupted global uranium production adding to the supply curtailments that have already occurred in the industry due to the lack of production economics. The industry is reliant on supply that has become highly concentrated both geographically and geologically. This concentration has given rise to a number of trade issues over the past few years. As we have now seen with the report from the Nuclear Fuel Working Group, these trade issues have raised concerns over the role of state-owned enterprises and placed an increased focus on the importance of supporting the regional supply of critical minerals, including uranium. Therefore, today, on balance, we think the risks to supply are greater than the risk of demand. We've seen uranium spot prices increase by more than 35% from $24 to over $33 since the start of the COVID-19 supply disruptions. Inventories that have been blamed for low prices in our industry will come into greater focus as a result of unplanned supply disruptions. We expect this will create a renewed focus on ensuring the availability of long-term productive capacity to fuel nuclear reactors. We expect this renewed focus on supply security will provide the market signals producers need and help offset the near-term costs we may incur as a result of the temporary disruptions to our business. These are some of the reasons why we expect our business will be resilient. In this uncertain time, we will continue to do what we said we would, executing on our strategy as we navigate our way through. We are a responsible, commercially motivated supplier with a diversified portfolio of assets, including a tier 1 production portfolio that is among the best in the world. Our decisions are deliberate and driven by the goal of increasing long-term shareholder value. So thanks to everyone for joining our call today. And with that, we will move into the question-and-answer portion of the call today, which, as Rachelle mentioned earlier, is in a listen-only mode today.
Rachelle Girard, Vice President, Investor Relations
I'm going to start. The first question is one that’s come from investors that we've been hearing a lot over the last few weeks. So Tim, there've been a lot of changes in the uranium market since the beginning of March. How has your thinking about the market changed, and what trends in supply and demand are you seeing relative to a year ago?
Tim Gitzel, President and CEO
There have been many changes since early March, and it feels like the world is upside down. However, just two months ago, the main topic was not COVID-19 but climate change, clean air, CO2 reduction, and figures like Greta Thunberg. Those issues are still relevant. While everything has been paused and air quality has improved somewhat, this is only temporary. As economies restart, emissions will rise again, and the same problems will persist. In my long experience in this industry, I believe nuclear energy can play a vital role by providing safe, clean, reliable, carbon-free electricity. With the economic stimulus and funding for infrastructure projects, there’s a tremendous opportunity to invest in clean energy systems, including nuclear. There’s a strong demand for uranium, and nuclear reactors are still operating effectively, supplying reliable electricity vital for hospitals and healthcare facilities. However, the supply side is much more uncertain. We’ve seen significant price movements and were already aware of supply concerns prior to COVID-19, including trade issues and investigations. Now, countries like Canada, Kazakhstan, and Namibia are facing real supply problems due to the pandemic. It's a challenging situation. I've witnessed various crises over the decades, but a global pandemic was not something I anticipated. Now, we must navigate through this changed reality.
Rachelle Girard, Vice President, Investor Relations
The next question comes from Alex Pearce of BMO Capital Markets. His question is, what are you seeing in the spot market? How much material is available? Have you seen many utilities competing for the spot market material?
Tim Gitzel, President and CEO
Well, we're certainly seeing a lot of activity in the spot market. I would just say Grant and his team have been absolutely neck-deep in the market over the past few months. So I am going to ask Grant to speak about the market and just what we're seeing.
Grant Isaac, Senior Vice President and CFO
Yes, sure. It's rather a broad-based demand that we're seeing in the spot market, which explains why it's been a steady inflationary trend that has now withstood, I would say, two normal month-end games that can sometimes go on in our industry; both March month-end and April month-end have now come and gone without taking any trajectory off that spot demand. It's, of course, producers, and we're among them, that are looking to cover their committed sales in the face of both planned and unplanned supply disciplines. We've seen some utility purchases. I wouldn't say it's the dominant part of the spot market. I think it's important to understand that our customers are not free of concerns about COVID and are focused on their own pandemic planning right now. But we have seen some utility demand in the spot market for sure. We've also seen some financial interest in the market. Another theme is we're seeing sellers retreat. You've heard us say before that historically in our market, willingness to sell or the mobility of material tends to be inversely related to the price. When the price goes up, we see folks less willing to part with material. So this steady broad-based inflation in the spot market we expect to continue. You know that our goal has been to buy material very strategically in the product form we want, in the locations we want, and quite frankly, in the timeframe that we want. You heard us say in Q4, you also heard us say throughout 2019 that we were not finding a very deep market when it came to pounds that were in a can or in a canister and available today, and I think what this market transition is showing is that, that’s true.
Rachelle Girard, Vice President, Investor Relations
The next question comes from Greg Barnes at TD Securities. In a recent interview, Kazatomprom’s CEO suggested that the role of traders in the uranium market would change significantly, without surplus material available to them. Moreover, he indicated that the mid-term market could shrink and that utilities could be pushed back into the term market. Does this correspond with your view?
Tim Gitzel, President and CEO
Thanks, Greg. And Grant, do you want to take that one as well?
Grant Isaac, Senior Vice President and CFO
Yes, I read with interest the comments made by the CEO of Kazatomprom, in part because they were absolutely true, but in part, because I think it really expressed a sentiment that many of us have had that, that carry trade business that the traders were involved in was a function of an oversupplied spot market. So long as the spot market was being used for surplus disposal in a low-interest-rate environment, you were going to see the temptation to buy material off the spot market and just price it forward on the carry trade. That enabled the maturing of a mid-term market in our industry, but it also eroded term demand. It filled in the early years of term demand. And then I would say it bought our customers more time to contemplate what their procurement should be. But as we transition into a market where primary production is well below annual demand and secondary supplies are playing less of a role, the availability of that material isn't there. My earlier comments on the tightness we're seeing in the spot market, reflected by that consistent upward trend, is just a reflection of that. It's not clear to me where traders are going to get material from to continue with that mid-term business. The financial interest that has funded that carry trade in the past may not have the liquidity that they're willing to put at risk in the carry trade, which might impair it as well. Then you could see the opening up of a more classic term demand as we know it in our industry, which would be a very helpful development because, of course, traders can't offer that term material. They're not producers. They can't offer the long-term security of supply. They don't have a production base; they're just borrowing from the market, if you will. Once you start to eliminate the temptation for carry trade, perhaps we'll see some of our competitors be less aggressive with their pricing for term business because they won't have to compete with that spot carry trade anymore. Maybe we can see the kind of discipline that's necessary to see pricing out along the production cost curve, not the spot carry trade. I welcome those comments, and I think they were really accurate.
Rachelle Girard, Vice President, Investor Relations
Thanks, Grant. The next question is also from Greg Barnes at TD Securities. The Ux term price increased this week to $33 per pound. But Ux noted that no term activity has occurred. Was the price increase just based on a hunch?
Grant Isaac, Senior Vice President and CFO
Well, I think it's a reminder for us and for everybody who’s in this industry and watches this industry that we do have price reporting, but we don't have price discovery like some folks know it in some commodities; we have neither the frequency nor the volumes where you can truly discover a price on a minute-by-minute basis like you can in some other commodities. Price reporting involves judgment, to be sure. This is just the flip side of the results we saw with their last month reporting where you saw Ux increase the spot price, increase the three-year price, increase the five-year price, talk about the risks of unplanned supply disruption in the market, and then lower the term price by $1. This is a judgment call that’s obviously made to keep pace with the fact that the five-year price in our industry is now just about touching $40. That's a very helpful marker for us and for those who have tier 1 idled capacity. When we compare the different price reporters, it might be too simplistic to say it this way, but I think one of our price reporters Ux tends to apply judgment based on yesterday, and the other price reporter TradeTech, I would say probably applies judgment based on tomorrow. It's just a consistent way of doing it. If you've been staring at low prices for a long time, then you're going to always see low prices until, well, they're no longer low or they start to transition. So yes, there’s judgment applied, and I think this is just the flip side of the judgment that was applied last month.
Rachelle Girard, Vice President, Investor Relations
This next question is one that we've been getting quite a bit over the last week since the Nuclear Fuel Working Group report came out. What are your thoughts on this report, and will it benefit Cameco? And does it change your thinking about your U.S. assets?
Tim Gitzel, President and CEO
As everyone knows, we were very involved in the Section 232 business that transitioned into Nuclear Fuel Working Group. The report came out a few days ago, and I would have to say that we're very pleased with the tone of the report. The Secretary of Energy, Dan Brouillette, did a brilliant job of just laying out the U.S. support for nuclear, which has been lacking in the past. We haven't seen it that blatant as the Secretary put out, and the support for the fuel business, the front end of the fuel cycle. We're pleased in that regard. Clearly, nuclear energy plays a big role. I think he was very honest in saying that the U.S. has taken a step back in the world and some other countries have moved ahead, and he wants to regain that territory; the President wants to regain that territory. That was all super positive. Lacking in details is more to come on that, so we'll wait and see just how it's going to be implemented. But I can tell you with about $1 billion of investments in the U.S., we're well-placed to take advantage of this new appetite for more nuclear and for support for the front end of the nuclear fuel cycle. We're happy about it. We asked one thing, that production not be subsidized to compete with production we've taken off the table and make a bad situation worse, and we didn't see that. We see that any production that will be called for will be sequestered. That was good news. Overall, we're quite happy with the report, and we're waiting for more details to see how Cameco can play.
Rachelle Girard, Vice President, Investor Relations
The next question comes from Oscar Cabrera at CIBC. How significant is the announced reduction in Kazakh production due to COVID-19? And how quickly can this production come back on?
Tim Gitzel, President and CEO
Well, thank you, Oscar, for the question there. Anytime a producer that produces 40% to 50% of the world production makes a move, it’s important. We've been watching it very closely to see how long they stay down, how long the COVID impact is there. We know Mr. Pirmatov well, and we know that the health and safety of his workers and the workers at all the sites is absolutely a top priority. No different than any other company in our space. We'll watch to see what they do. There’s a good article from Mr. Pirmatov in Ux Weekly this week, and I encourage people to read it. I’d just say a different kind of mining than we do here in Saskatchewan; at least it's ISR. It's drilling and acidifying wellfields. That all takes time. When you shut that down, you want to start up again, it takes a while to do that. So it’s a little different for us maybe. At Cigar, we might be able to come back a little bit more quickly. We're used to shutting down for short periods in the summer and bringing it back on. We'll see how it works in Kazakhstan, but it will probably take them a little bit more time to come back up.
Rachelle Girard, Vice President, Investor Relations
The next question comes from Brian McArthur at Raymond James. What your global inventories look like? And are we likely to see them being liquidated at higher prices?
Tim Gitzel, President and CEO
Grant?
Grant Isaac, Senior Vice President and CFO
Well, we've always had inventories in this industry, and that's something we've talked about in the past. The different trade reporters have commented on how much inventory. I would just say, when you look at this slightly differently, because it's not the size of the inventory that matters, it's the mobility of it that matters. What we were saying about 2019, the way we were characterizing that year is that it was really no longer a secondary supply or an inventory story anymore. What we were seeing in 2019 was a year when we were the only demand in the market. We were seeing uncommitted primary production rather than inventory, and we were just seeing producers that probably shouldn't have been producing; they shouldn’t have been leaving that material in the ground. The market was tight despite having a $24 market to begin the year. This is what was going on there: we were looking for material in a can or in a canister available in true spot, and it wasn't there. If you were willing to wait three months, six months, or nine months out, you could find some of this uncommitted primary production leak into the market. We look at 2020 and we say, well, I'm not so sure you can be comforted that three months, six months, nine months out, that supply is going to be there for you given the unplanned supply disruption that's happening right now. We're seeing unplanned supply disruptively affecting those sources of uncommitted primary production.
Rachelle Girard, Vice President, Investor Relations
Thanks, Grant. The next question comes from Oscar Cabrera at CIBC. You mentioned that end-user demand has been absent in the market. With the overproduction curtailments announced, are you starting to see them coming to the market for spot purchases and long-term contracts?
Grant Isaac, Senior Vice President and CFO
I want to make a distinction between Cameco’s experience and the broader market because Oscar’s question is right. We have not seen replacement rate term contracting, for example, at the industry level. We haven’t seen 180 million pounds of new contracts being layered in over time, so we don't have replacement rates. For many years, we've actually been destocking; we've been taking material off of committed sales portfolios but not replacing it. For the industry, it has been different for Cameco. We've reported that in 2019 we added another 36 million pounds to our term contract portfolio. In Q4, we said in our pipeline from origination through negotiation or execution, we had more pounds under negotiation of uranium and more kilograms of conversion service than we've had for a long time since Fukushima. Cameco has enjoyed replacement rate contracting for a variety of reasons. COVID has affected the types of negotiations that go on for term contracts. Our customers are not immune to this public health crisis. They've been focused on dealing with the public health crisis, which creates a bit of delay. In a market that's transitioning, with the uranium price in the mid-30s in the spot market and a five-year price for uranium starting to touch a four, it removes the urgency we have to complete some of these transactions. There's still a firming up from our perspective, but I don't want anybody to interpret that as business causing our disappearing. It's business that we believe is actually firming up.
Rachelle Girard, Vice President, Investor Relations
Great. Thanks, Grant. This next question is again one that we've been hearing quite a bit over the last couple of weeks. With industrial demand down globally, what impact will this have on the demand for nuclear energy and uranium? Will the reduction in demand offset the supply disruptions? Are there any concerns with delays in constructions for nuclear due to COVID-19?
Tim Gitzel, President and CEO
Yes, thanks. No question industrial demand is down globally. We shut everything down in six weeks. Other than essential services, we've taken most things offline. Everybody has been tucked in at home, which has led to the increase in residential demand for electricity. That probably hasn't offset industrial demand. It depends how long we're in this, but I believe the economies are coming back, whether it's a V-shaped recovery or U or, we've got to get back to life as it will be going forward. That means factories back open and lots of requirements for electricity. I think nuclear is going to continue to play a role as it was before. There are about 53 or 54 reactors under construction around the world; that hasn't changed. It might have taken a pause in some areas but they're back building them again, including the two units down in the U.S. that are going ahead. I don't know what the future looks like; I don't think anybody does. But we have to get our economies back up and running. Nuclear power is going to play a role. Electricity demand isn't going down; we need clean, reliable, safe electricity, and nuclear will be part of it. We have to supply them with the fuel for that.
Grant Isaac, Senior Vice President and CFO
Tim, I might just add that from the point of view of our committed sales portfolio, we've spent a lot of time understanding what the demand is in the year. The commitments that we laid out at the beginning of the year, will we deliver into them; is the demand going to be there? We're finding that while the overall aggregate demand for power appears to be net down in a lot of jurisdictions, nuclear is playing a critical infrastructure role in those jurisdictions because of its really important features. We talked about its zero-carbon feature from an environmental and ESG point of view. But during a crisis, it’s its baseload power feature that's absolutely critical. You need 24-hour power to run hospitals and care centers; you don't want a ventilator running on intermittent power. Operating features of reactors allow that, and one of the things we've long lamented is the inventory in our industry. That inventory makes nuclear power an important source of baseload during a crisis because you fuel a reactor, and it can run for 12 to 18 months without being refueled. Reactor sites are designed to have fewer people for radiation protection reasons, and as a consequence, they are really well-designed for physical distancing as well. Nuclear has gotten a lot of important features that actually put it in a good position to deal with this crisis at a time when 24-hour baseload power needs to be part of the critical infrastructure. That gives us confidence that our business for 2020 continues to look resilient despite these impacts.
Rachelle Girard, Vice President, Investor Relations
Thank you. So this next question is again one that we've been getting a fair amount, and it sort transitions a little bit more specifically into Cameco related questions. What would be the driver of your decision to restart Cigar Lake? How long will it take to restart, and what costs are involved?
Tim Gitzel, President and CEO
Yes. Well, obviously, for Cigar, it will be driven by the health and safety of our employees. We said that when we took it down, and we'll say that when we decide the time is right to bring it back up again. Obviously, the safety and health of our employees are important. The surrounding communities— in Northern Saskatchewan, communities around us lack the infrastructure to deal with health issues on a good day, never mind in a COVID-19 world. We saw yesterday and today again, in the community, a little outbreak in the English River First Nation, which hosts many of our employees and contractors. I think there are 50 cases now that have broken out in the last few days, and we monitor that closely because that's not a good sign. Health and safety will be number one. We'll look at commercial implications. We took it down, as I said, on our own terms, and we think we'll be able to bring it up on our own terms as well. We have a playbook for this. We do this every summer. We will work with population health, which is the Northern Medical Health authorities, the communities, the indigenous chiefs, governments, regulators, employees, and our partners, Orano. All these factors will go into the decision of when to restart; we think we can do it quite quickly. The workforce is there, ready, willing, and available to go when the time is right, when the conditions are right. So that's what will drive us.
Rachelle Girard, Vice President, Investor Relations
Thanks, Tim. The next question comes from Alex Pearce at BMO Capital Markets. What is your ability to flex some of your sales commitments in 2020? Is it possible to defer a reasonable amount of the 28 million to 30 million pounds of your previous sales commitments into next year to alleviate some of the expected production shortfall in 2020 or at least defer Q2 deliveries later in the year?
Grant Isaac, Senior Vice President and CFO
I'm going to build on some of the comments I made earlier about our committed sales portfolio and our view of the risk of it. Folks will remember the uranium market outlook put out by UxC concluded that outside of China and Japan, most utilities are at or below their target inventory levels. A lot of destocking has occurred already. But then you add unplanned supply disruptions, and we're finding it's not putting the market in a sense of complacency; quite the opposite. It appears that folks want their materials. We will work with them to find out what the appropriate deliveries are. I don't know that we'll be asking to flex down; I don't think we need to do that. We've been planning our strategy to source our material from production or from purchasing or from inventory since 2016 when we began our production cuts. So far we see a resilient profile in our committed sales. We just don't think we would have to take those kinds of actions. When we see prices transitioning in our market, we tend to see additional purchasing. That drives backwardation in our market. Just within that context, there is always a possibility but not one that I think we need to explore at the moment.
Rachelle Girard, Vice President, Investor Relations
Thanks, Grant. The next question comes from Oscar Cabrera at CIBC. How long can you go with all your operations shut down before liquidity becomes an issue?
Tim Gitzel, President and CEO
Grant, go ahead.
Grant Isaac, Senior Vice President and CFO
When we set out on our strategy of supply discipline, we also emphasized the need to have financial capacity to see this strategy out. We head into a pandemic, where greater unplanned supply disruptions come along, and we're very well-positioned. We have $1.2 billion in cash. We have an undrawn revolver of $1 billion that we don't expect to have to draw. We enter this crisis in a strong position. We look at Cigar Lake and Port Hope from a health and safety point of view. We have the financial ability to shoulder those responsible decisions. We believe we can withstand a prolonged public health crisis and continue with our strategy. There’s no awkward lurches to equity or debt markets that we envision. We feel we can stick to the path we were on. We always said this market would become very vulnerable to an unplanned supply disruption; we weren't predicting a pandemic, but our history tells us something will come up, and it turns out it was a pandemic. These are the unplanned supply disruptions we had in mind when we made our financial decisions. We’re in it for the long run. We want to see this to transition appropriately, layer in the contracts required not just for Cigar but for McArthur/Key. Once we're operating from those tier 1 assets only, that's a pretty good financial outlook for us.
Rachelle Girard, Vice President, Investor Relations
Thanks, Grant. The next few questions come from Lawson Winder at Bank of America Merrill Lynch. What happens if the spot material gets too expensive for you to purchase; where will you get your material from?
Tim Gitzel, President and CEO
Grant, you might as well, take that one.
Grant Isaac, Senior Vice President and CFO
We have been considering our purchasing strategy, particularly in light of our committed sales portfolio. In the event that the market shifts, we need to address the risks associated with unplanned supply disruptions. While sourcing material at a higher cost is a concern, our main focus is on the price aspect. There's a trade-off between purchasing material for our sales portfolio, which may negatively affect margins compared to production from McArthur or Cigar. However, this is part of our broader destocking strategy, which must be evaluated alongside two key factors. Firstly, if prices are increasing and we're buying materials in the market at higher costs, there's a market-related exposure within our existing sales portfolio that aligns with those higher prices. We anticipate an improvement in cash flow and earnings in a rising price environment. Additionally, should uranium prices rise rapidly, it would create favorable conditions for the terms in our new contracts needed to restart Cigar and McArthur. Therefore, as long as we can generate value from both our current and new portfolios that exceeds the costs of purchasing more expensive materials in the short term, this remains the right approach. Mitigating risk is integral to our operations. We maintain inventory to fulfill committed sales, especially in a market where sourcing material poses challenges. We also have the option to borrow materials from customers who have material stored at our facilities, which could expedite our destocking efforts. Furthermore, we could access some planned long-term purchases sooner than anticipated. Our strategies include restarting Cigar and McArthur while effectively utilizing our tier 1 assets, and we intend to actively participate in the market while managing these risks.
Rachelle Girard, Vice President, Investor Relations
Thanks, Grant. The next question again is from Lawson Winder at Bank of America Merrill Lynch. We talked a little earlier about the contracting activity. What type of terms are you looking for? Are those terms changing as the market evolves and becoming more aggressive or conservative?
Grant Isaac, Senior Vice President and CFO
Our terms haven't changed in concept. You've heard us say for some time that we have a bias towards market-related contracts. Especially now that we're seeing a market transition, we're grateful we had that bias. We deal with a lot of customers who have a bias towards fixed prices. They've known the price of uranium was low and below production economics. They were doing a smart thing trying to lock in those low prices resulting from surplus disposal through the spot market for the long haul. That's smart for them to do; we'd all be trying to do it if we were in their shoes. That’s now changing. For us, we have a market-related preference. To the extent that we deal with a counterparty who needs some of it fixed, it will be fixed at a much better price than it would have been just a few weeks ago. In concept, we like the market-related exposure, and we like to agree to the fixed pricing if it meets an acceptable return to our tier 1. When we see a market that’s transitioning, it takes away a bit of our urgency to lock in business because we’d like to see where the uranium price is going to go before we lock in too much. The concept remains the same, but the conditions have tilted more favorably for us.
Rachelle Girard, Vice President, Investor Relations
One more question from Lawson. Fuel services were to make up 64% of your gross profit in 2020. How will the shutdown at Port Hope affect that?
Grant Isaac, Senior Vice President and CFO
We've withdrawn our outlook, so I have to be careful with my comments here. By and large, I don't expect much of an impact; Port Hope has fantastic operators. They took a shutdown for health and safety reasons, as Tim outlined, but they’ve accelerated some of the maintenance that should have been conducted there anyway, which now won’t need to be done in the summer. Overall, I don't expect it to have an impact on our outlook for fuel services unless for health and safety reasons, it has to be extended longer. At the moment, we're just not sure, but I really don't expect an impact.
Rachelle Girard, Vice President, Investor Relations
The next question comes from Oscar Cabrera at CIBC. Given the challenging economic environment, are you thinking about your capital allocation priorities differently?
Grant Isaac, Senior Vice President and CFO
Look, we aren’t. We've been saying for some time that our number one focus is the strategy we're on right now. We talked a little earlier about having the financial capacity to back that strategy. That strategy creates value for our owners over the long term, setting the table for our tier 1 assets. We said in the past, if the market remains low, we’d probably stay on a de-levering path. But that's not what's happening now with the unplanned supply disruptions. We're seeing a market that is transitioning; this may take us to a better case. We want to be disciplined and patient. Until we've locked in new business and can see a line of sight and new committed contract portfolio with terms and conditions priced in a better market, we're going to stick to this conservative path. We're going to allocate capital conservatively and self-manage risk as we have described. Now’s not the time to lose our discipline; the transition is underway, but it’s not complete. Capturing the value of the transition isn't complete for us either. So yes, no changes.
Rachelle Girard, Vice President, Investor Relations
Does consolidation in the uranium space make sense in the current environment?
Tim Gitzel, President and CEO
I would say no. It's not something we're focused on. Clearly at Cameco, we've got, I don’t know, three, four, five, six of the best uranium mines in the world, that are either suspended or shutdown right now. Our focus is on bringing that production back on, getting those units back up and running, including McArthur River, which is an absolute gem. That would be our focus.
Rachelle Girard, Vice President, Investor Relations
Your Federal Court of Appeal hearing took place in March, how did it go and when do you expect to have a decision? If you're successful, when do you expect to get your financial capacity back?
Tim Gitzel, President and CEO
We were getting a bit lonely not answering CRA questions because we had them for 10 years in a row and then they kind of disappeared for a while. But look, I'd say this, we had the hearing in front of three Court of Appeal justices about two months ago now, in March. No surprises, we think it went well. We're hoping to get a decision in 2020. Regarding our financial capacity and getting it back, we can't forget that CRA could still appeal, so that's out there. If the Supreme Court decides to hear it, it could be another two years in the process. But a lot of money is at play here; if they don't seek leave to appeal and we win, we could expect a refund of about $5.5 million. And that's just for tax years ’03, ‘05, and ‘06. Don't forget, we were also awarded about $10.25 million in legal costs plus disbursements, and other $17.9 million. That's hanging out there, waiting on a taxing officer’s decision. If we get a favorable decision at the Court of Appeal level, we hope it will apply to all subsequent years. That’s all out there. We hope for a 2020 decision. We believe the Court of Appeal is looking at the matter now and we'll get a decision this year.
Rachelle Girard, Vice President, Investor Relations
Thanks, Tim. That concludes our questions. I’ll turn it back to you, Tim, for some closing remarks.
Tim Gitzel, President and CEO
Thank you, Rachelle. I’ll just say thanks to everyone who has been on the call with us today. We appreciate your interest and support. As I said at the outset, these are really unprecedented and challenging times for everybody. But I assure you that during this period of uncertainty, we will continue to execute our strategy. Consistent with our values, we will do so in a manner that we believe will make our business sustainable over the long term. So thanks, everybody; stay safe and stay healthy.
Operator, Operator
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.