Earnings Call Transcript - CCJ Q2 2023

Operator, Conference Operator

Thank you for standing by. This is the conference operator. Welcome to the Cameco Corporation Second Quarter 2023 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. Webcast participants are asked to wait until the Q&A session is started before submitting their questions as the information they are looking for may be provided during the presentation. I would now like to turn the conference over to Rachelle Girard, Vice President, Investor Relations. Please go ahead.

Rachelle Girard, Vice President, Investor Relations

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 Peoples and the homeland of MAT. With us today on the call are Tim Gitzel, President and CEO; Grant Isaac, Executive Vice President and CFO; Heidi Shake, Senior Vice President and Deputy CFO; Brian Reilly, Senior Vice President and Chief Operating Officer; and Sean Quinn, Senior Vice President, Chief Legal Officer and Corporate Secretary. I’m going to hand it over to Tim in just a moment to discuss how the improving growth outlook for nuclear power continues to drive an improving outlook for Cameco. After, we will open it up for your questions. As always, our goal is to be open and transparent with our communication. 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. If you 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. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we make today, except as required by law. Please refer to our most recent 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 good day to everyone. We appreciate you joining us for today’s call. I hope everyone is enjoying the summer or winter months, depending on where you’re tuning in from. With many people vacationing, July and August are typically quieter months in the business community. However, I can tell you with absolute confidence that business for Cameco has not slowed down nor has interest in the nuclear sector. The momentum that’s been building over the past 18 months continues. Our financial performance, which reflects the expected quarterly variation in our contract deliveries this year, is benefiting from our strategic decisions, with gross profit improving as we transition to our Tier 1 run rate. We’ve seen an uptick in the breadth of new investor interest in Cameco, surpassing anything I've seen in my more than 16 years at Cameco. In addition to interest from our traditional resource investors, we’re seeing interest from energy investors, clean energy investors, infrastructure investors, and generalists. We believe this increased interest reflects the recognition that Cameco is a proven and reliable nuclear fuel supplier that supplements Tier 1 mining assets with critical fuel service capabilities. It is an endorsement of our strategy to capture full cycle value. It’s also an acknowledgment that Cameco has a deep understanding of how the nuclear fuel market works, and that we have the type of experience that gets us invited into the room when important policy decisions are being made about how best to support the nuclear fuel cycle. There’s appreciation for the compelling opportunity to invest in the growing demand for nuclear power and a clean and secure energy future. In fact, that growing demand has placed security of nuclear fuel supplies at the top of our customers' lists. With more than 118 million pounds of long-term contracting industry-wide so far this year, we’re happy to say we believe there’s clear evidence that the broader uranium market is moving toward replacement rate contracting, the type of contracting necessary to promote the price discovery we've already seen in the enrichment and conversion markets. Contracting and price discovery will be needed to incentivize the investments in expanding existing supply and developing the new supply necessary to satisfy growing long-term requirements. Let's look at the key driver for those growing requirements for nuclear fuel supplies and services: the increasing support for more nuclear power. All over the world, we’re continuing to see government policies and corporate decisions generating positive news in support of strong growth for nuclear. Importantly, those policies and decisions are being followed up with proposals, commitments, and actions. These are the activities necessary to support the broader nuclear fuel cycle and reenergize nuclear power as a fundamental source of clean, secure, and low-cost energy. We don't have enough time on our call today to cover all the highlights from around the world, which really says it all in terms of the volume of good news. But there have been a few announcements that have caught our interest, especially right here in Canada. The nuclear power industry is witnessing support for adding new capacity and refurbishing existing capacity in Canada like never before. Starting with Bruce Power, which, with support from the Ontario government, announced it will undertake an environmental assessment to add as much as 4.8 gigawatts of nuclear capacity to the almost 7 gigawatts it already has in place. The added capacity could make the Bruce site the largest nuclear complex in the world. The consideration of additional large-scale nuclear installations using well-established technology in Canada speaks to the extraordinary industry and market transition that is underway. With respect to existing nuclear capacity, Ontario Power Generation announced that it applied for and received approval to extend the operation of its Pickering reactor until 2026. In the meantime, at the request of the Ontario government, it is now considering a refurbishment project for Pickering to keep safe, clean, and reliable nuclear energy flowing from that facility for another 30 years. That’s positive local news on big traditional nuclear power demand. But as many of you listening today would know, small modular reactors or SMRs have also been capturing a lot of attention. In Canada, the province of Ontario is leading the way in that regard as well. It’s working with Ontario Power Generation to begin planning and licensing three SMRs at the Darlington nuclear site. These SMRs are in addition to the initial SMR project at Darlington, for which site preparation and licensing activities are already underway. Those are just a few of the highlights from right here in Canada. Internationally, moving faster than policymakers, big commercial consumers of power are making firm plans for investments to support carbon-free nuclear power to help achieve their net-zero commitments. For example, at the end of the second quarter, Microsoft signed an agreement with nuclear energy producer Constellation Energy to bring a data center in Virginia closer to operating 24/7 on 100% carbon-free electricity. That’s in addition to a previous clean energy credit deal that Microsoft signed with OPG in Canada late last year, which is expected to support those ongoing SMR deployments I mentioned earlier. Brookfield Properties announced its plan to power its portfolio of U.S. office space, totaling about 70 million square feet, utilizing only zero-emissions electricity by 2026. Set to begin the transition to clean electricity supply in 2024, Brookfield's plans include an evolution to direct purchasing of clean power, including from nuclear. Those are just a handful of examples of the ongoing positive sentiment being publicly expressed through both government policy announcements and private sector initiatives that are driving full-cycle demand growth. This full-cycle demand growth is driving increased requirements for the uranium and various services required to fabricate fuel and run reactors. However, it’s important to remember that demand doesn't drive just-in-time spot purchasing interest from customers, as is often seen in other commodities. As always, in the nuclear industry, customers are looking to secure supply on a much longer-term time horizon. They're seeking supply solutions today that guarantee their reactors run well into the next decade without the costly risk of interruption. The risk that the required supplies and services might not be available when they are needed is becoming more significant every day. With demand growth looking more robust than ever and with the industry expectation that by 2030, both primary and secondary supplies will not be sufficient, the industry needs to invest in more capacity. But expanding or building new capacity across the fuel cycle will take time. In May, at the World Nuclear Fuel Markets meeting in the Hague, it was clear that all the major producers across the fuel cycle have learned the lessons of the past. Presentation after presentation expressed a similar sentiment that in order to solve the urgency of supply, there needs to be urgency in demand. It was clear the major suppliers are not prepared to take the risk of expanding or bringing on new capacity without long-term contracts to support their investments. I've been around this industry for a long time and have been involved in every new uranium project developed in the Athabasca Basin in Northern Saskatchewan since the late 1970s. Let me tell you from experience, bringing on a new project anywhere is not easy, despite some of the promises made by those who have never done it. Today, the calls to increase uranium conversion and enrichment capacity are happening in a complex global environment. An environment where supply chain issues, general inflation, skilled labor limitations, rising interest rates, and increasing regulations and ESG standards are not making it easier or cheaper to build new assets or even operate existing ones. In addition to production challenges, we must not forget about the geopolitical uncertainties, leading to concerns about the origin of supply. Some utilities are seeking to exclude Russia in their future contracting decisions, along with the ongoing risk of formal sanctions. Then tied to the origin risk, there was a recent reminder that moving nuclear material around the globe to various points in the fuel cycle is also more difficult than it was once. Concerns about obtaining insurance coverage for shipments out of Russia surfaced. While the issue appears to have been resolved for now, these are shipments that are absolutely required. Any delays could be very impactful on the market. Depending on the magnitude and length of the delay, we believe it could be a shock event akin to the Cigar Lake flood in 2006. Lastly, we should not forget that the Trans-Caspian corridor still isn't a reliable delivery route for uranium from Central Asia to the West. After one shipment earlier this year, which was actually this was a delayed shipment from last year, we have not received any further uranium via this route in 2023. However, we expect the transit of our 2023 production from JV Inkai to begin in Q3. Delays are a small problem for Cameco as we have other sources of supply to meet our commitments. Transportation could be a much bigger issue for the industry if these supplies can't make their way to the West. Cameco's strategy of contracting discipline, production discipline, and risk-managed financial discipline is set within the context of the transitioning market environment we are currently in. A market that is expected to durably strengthen the long-term fundamentals for nuclear power and uranium supplies and services while emphasizing energy security and sustainability. At Cameco, we recognize that to capture value from the opportunities in front of us, we must get two things right: the volume and timing of our production. In terms of volume, we have to bring on production to meet growing demand, and we must do it on time and on budget. With respect to timing, we understand that it would be a strategic mistake to bring on production before we have contracts to deliver those pounds into. Let’s look at the uncovered requirements curve to see why that's the case. It's true when you look out to 2030 and beyond, there are a lot of uncovered requirements, and that is exciting for the future. But it's really important to understand the structure of our market and how that demand will come to the market. Uncovered requirements in 2030 do not equate to in-year spot market demand in 2030. As I said earlier, utilities driven by security of supply want visibility on the nuclear fuel supplies and services they need to keep their reactors running reliably and without the risk of costly outages. They will not rely on the spot market which is small and discretionary to purchase the run-rate requirements of their reactors. Utilities are starting to contract now to cover their requirements for 2030 and beyond, which is what we mean when we say we're in a long-term contracting cycle today. Customers are layering in long-term contracts with reliable suppliers who can deliver with the right origin. By the time 2030 rolls around, utilities are expected to have very little in-year requirements that aren't already covered under long-term contracts. As has always been the case, we will have little need to participate in the spot market at that time. In fact, the spot market in 2030 will look similar to in-year spot demand this year; small and discretionary, far from a level that would support a significant volume of uncommitted supply coming out of the ground. Therefore, Cameco will continue to be balanced and disciplined in our contracting activity, layering in contract volumes where it makes sense for us while building a diversified customer base. We will remain selective in committing our unencumbered in-ground uranium inventory and UF6 conversion capacity under long-term contracts. Our book of business is growing; our average delivery volume from 2023 through 2027 has increased from 26 million pounds per year to 28 million pounds per year from last quarter as we translate our previously announced accepted volumes into executed contracts. That's only within the 5-year window shown in the table. We also have delivery commitments that span more than a decade, some out to 2040, and we continue to have a large and growing pipeline of contracting discussions underway. Make no mistake though, in our uranium segment, we are not looking to lock in today’s prices. We are looking for market-related pricing mechanisms under our long-term contracts. While these contracts support our production planning decisions, they will not be priced today but rather will be based on the future price of uranium and may include floor price protection and ceilings. We want to maintain exposure to the future incentive prices needed to promote investment in new supply to satisfy growing long-term demands. While our approach to contracting gives us the ability to participate in further price increases, it also provides strong downside protection should headwinds arise in the macro or industry environment. As uncovered requirements translate into additional long-term contract commitments, Cameco retains the flexibility at our existing Tier 1 assets, including the option to expand and extend production. If we took advantage of all these opportunities, our annual share of Tier 1 uranium supply could be about 32 million pounds. As for our Tier 2 assets, we plan to keep those on care and maintenance unless we can secure long-term contracts that provide returns similar to what we can achieve on our Tier 1 assets. Our strategic contracting and production decisions are translating into better earnings and cash flow as we return to our Tier 1 run rate. With $2.5 billion in cash, $1 billion in total debt, and a $1 billion undrawn credit facility, our balance sheet is strong. We will retain our conservative financial management to support our continued balanced and disciplined contracting and supply decisions to provide us with the ability to self-manage risk and pursue value-added investments like Westinghouse. We expect Westinghouse will be able to participate in the growing demand profile for nuclear energy and downstream services from their existing footprint. The team here continues to work toward closing the Westinghouse investment later this year. Once it closes, we will be able to provide more details on the exciting prospects we see for that business, which, with the positive momentum in the nuclear industry that I outlined at the beginning of the call, are only getting better. As the market transitions to what appears to be replacement rate contracting, these are busy and exciting times for Cameco. As a proven and reliable supplier across the fuel cycle, we remain committed to operating sustainably. We will protect, engage, and support the development of our people and their communities while protecting the environment, something we've been doing for over 30 years. Our vision of energizing a cleaner world keeps us focused on delivering long-term value in a market where demand for safe, secure, reliable, and affordable clean nuclear energy is growing. Before I conclude, I want to recognize some upcoming changes to our Board of Directors. Joining our Board as of September 1 are Chief Tammy Cook-Searson, who currently serves as Chief of the Lac La Ronge Indian Band and is the President of Kitsaki Management Limited Partnership; and Dominique Minière, who was the Executive Vice President in charge of new nuclear and international development for Ontario Power Generation prior to his retirement. The depth of knowledge of these two individuals will further strengthen our Board and provide new and diverse perspectives. We look forward to the contributions that they will make to our Board and to Cameco. One last thing before we get to your questions: Over the last several days, we've been closely following the evolving situation in Niger in Central Africa. As the former Vice President of the Mining Business unit for Areva, now Orano, I was responsible for the uranium mines in Niger for several years and grew very fond of the country and its people. We find the situation in Niger today to be very concerning for its people and are certainly hoping for a peaceful resolution in the near future. So with that, I will say thank you for your interest today, and we are happy to take your questions.

Operator, Conference Operator

Our first question comes from Ralph Profiti of Eight Capital. Please go ahead.

Ralph Profiti, Analyst

Thanks, operator, and good morning, Tim and Grant. Tim, you talked about this move to 100% replacement rate contracting and greater, and it seems as though you're also potentially speaking to this having a finite life where at some point it's followed by a quiet period. And just wondering how you reconcile this replacement rate ratio with the wedge of unfilled requirements in the context of how long you think this contracting cycle may last.

Tim Gitzel, President and CEO

Well, Ralph, thanks for the question. Yes, we are, as you say, moving into the era of replacement rate contracting that we haven't been in for a granted 10 years or so. And so how long will it last? I guess you just have to look at the uncovered requirements going forward. There’s a significant chunk of material yet to be covered over the next few years. But I'll move it over to Grant, our expert. Grant, why don’t you answer Ralph's question.

Grant Isaac, Executive Vice President and CFO

Yes. Ralph, we would absolutely characterize the term market as very constructive right now, for the reasons that Tim was articulating. You've got a durable demand profile, a demand that includes reactors being saved, reactors going through life extensions, and obviously, new builds. Now there’s the real prospect of adding to the uncovered requirements, of course, with small modular reactors and micro modular reactors. This is all creating a very durable demand outlook. We are seeing more contracting. To date, year-to-date, we are already at more term contracting in the uranium business than we've seen at annual rates in the last decade. You have to go back to 2012 to see a number higher than this. So obviously, the security of supply urgency of demand cycle is underway; we would still call it early because despite all that contracting, it isn't making a marginal dent in that uncovered requirements curve. We are adding more demand to the curve faster than we're taking it away through contracting across the industry. So to your question about when these security of supply cycles set in, they typically last several years. If you go back and you look at the various points of strong contracting through the decades of the commercial uranium cycle, when these cycles set in, they do last a number of years. Utilities cover their run rate requirements, but it is true that then at some point a bit of complacency steps in and they step back; they don't have as much immediate demand. We think there's more demand coming. And this is going to be the feature of the market for a while. We're not even contemplating what that step back looks like yet, because of the growth of the uncovered requirements curve.

Ralph Profiti, Analyst

Quite helpful, very, very much. Thanks. And, Tim, does any of the Niger source material get processed in any of the downstream conversion facilities of Cameco operations, where now you're sort of faced with sources and uses of supply decisions where you may have to move material around?

Tim Gitzel, President and CEO

Yes, that won't affect us, Ralph. There might be a bit that comes in, but mostly it goes into France, as you can imagine through the French entities.

Ralph Profiti, Analyst

Okay. Thanks. Understood. Thanks everyone.

Tim Gitzel, President and CEO

Yes, thanks, Ralph.

Operator, Conference Operator

Our next question comes from Orest Wowkodaw of Scotiabank. Please go ahead.

Orest Wowkodaw, Analyst

Hi, good morning, and nice to see the continued momentum here. In the past several quarters, you've shared the amount of pounds added to the long-term contract book. I didn't see that information this quarter. Can you provide any update on that?

Tim Gitzel, President and CEO

Yes, Orest, I think we said we weren't going to be reporting on a quarterly basis. But Grant, you can speak to that.

Grant Isaac, Executive Vice President and CFO

Our normal process, Orest, you’ve been familiar with this for a while. We typically discuss the uranium and conversion services we’ve added to our portfolio on an annual basis, usually in February during Q4. However, we decided to do it quarterly because we were noticing demand trends earlier than others, and we felt it was important to convey the emerging demand in the market. We validated this by discussing our accepted and executed contracts. Now, we’re observing broader industry developments, such as the 118 million pounds contracted in the term market, which shows that proof exists across the industry. It no longer necessitates us to be the leading indicator since the market is stable, and we believe demand will continue to rise. Therefore, we’ve shifted away from consistently highlighting demand formation, as the evidence is evident for everyone.

Orest Wowkodaw, Analyst

Okay. But clearly your book has increased again, just given that your 5-year average sales was increased to 28 million pounds from 26?

Grant Isaac, Executive Vice President and CFO

Yes, absolutely. We always think about it, as you know, with respect to our portfolio, which is the committed sales we've already captured and our pipeline, which is the negotiations we have underway to capture value out into the future. I’ve been saying for some time now that pipeline is big. And despite the fact we’ve taken a lot of demand, translated into executed contracts, we still have a big pipeline. The replenishment of the demand into the pipeline continues to be very strong. That’s what our marketing team is focused on. Those folks do an incredible job negotiating the type of contracts that provide us with great upside participation in the market, really strong downside protection should there be any macro headwinds, and a long tail of cash flow and earnings that come from having such a robust contracting portfolio, which we can then serve as we resume our Tier 1 costs from our Tier 1 infrastructure, so that margin improvement flows through to our owners. We're very excited about how constructive it is.

Orest Wowkodaw, Analyst

Thank you. And can you give us maybe just a quick flavor of where current floors and ceilings are on new contracts?

Grant Isaac, Executive Vice President and CFO

Yes, I can sort of speak to what our experience is, I don’t know where others are. But our preference right now in the term contract space is for market-related volume. We’re willing to commit volumes out into the future, but we just want to price them out into the future; we're not looking to price them today. Those would be called fixed contracts or base escalated contracts. On market-related, they’re often collared. They’re collared in part because utilities have lived through price cycles before, and they've seen spikes. And so they'll ask for ceilings, and if they ask for ceilings, we’ll ask for floors; both floors and ceilings are escalated. For Cameco, in today’s market, mid-50 spot, we can drive $50 escalated floors and we can drive $80 escalated ceilings. I’m assuming others would be somewhat close to that, but probably not quite as attractive. With each contract, we just like to turn those indicators higher with every contract that comes to the market and secures future supply, while there's less future supply for the next slice of demand, which then makes for an even more constructive conversation. That’s how we go and build that contract portfolio with good upside protection and incredible downside protection.

Orest Wowkodaw, Analyst

Thank you, Grant.

Grant Isaac, Executive Vice President and CFO

Thanks, Orest.

Operator, Conference Operator

Our next question comes from Greg Barnes of TD Securities. Please go ahead.

Greg Barnes, Analyst

Yes, thank you. I'm wondering if at this point you can get a little more granular on the timing of the closing of the Westinghouse deal. Any comments on the U.K. comment period they announced today on their regulatory approval process would be helpful, too.

Tim Gitzel, President and CEO

Yes, Greg, thanks for the question. Nice to hear from you. As you know, Bruce has standard practice. We started with 30 and now we're down to just a couple. Regarding the timing you mentioned, I believe we are still looking at closing the Westinghouse deal in Q3 before the end of the year. We have a dedicated team working on it, and we hope to close it this fall, but I don't have many more details to share with you right now.

Greg Barnes, Analyst

Okay. Is the fact that U.K. launched a contract now so far in this process unusual, or is this standard practice for them?

Tim Gitzel, President and CEO

No, we started them all off on the same foot, and some reacted really quickly. I think we got the U.S. and China right off the bat. And that's one of the ones we still have to get in the U.K. So pretty normal practice, Greg.

Greg Barnes, Analyst

Okay, thank you. That's it for me.

Tim Gitzel, President and CEO

Yes. Thanks a lot, Greg.

Operator, Conference Operator

Our next question comes from Grace Symes of Energy Intelligence. Please go ahead.

Grace Symes, Analyst

Hi, Grant. My delay, and I was wondering if you could give any reason or detail on that?

Tim Gitzel, President and CEO

Grace, you were cutting in and out, but I believe you asked about the transportation routes out of Kazakhstan. As noted in our MD&A, we are still working on that. We have not had any shipments pass through that route yet. This year, we are optimistic that we will be able to get one through in Q3. We are working on this daily and coordinating with the various countries and governments involved. Kazatomprom is obviously leading the efforts in this area. We are hopeful that we will see some deliveries come through later this year.

Grace Symes, Analyst

All right. Thank you. And just one quick follow-up. Does Cameco ship all of its material from Inkai through the Trans-Caspian route now, or does any of it get sent to China?

Tim Gitzel, President and CEO

We are sending it all, if we can, through the Trans-Caspian route at this point.

Grace Symes, Analyst

All right. Thank you.

Tim Gitzel, President and CEO

Yes, thank you. Thanks, Grace.

Operator, Conference Operator

Our next question is a follow-up from Greg Barnes of TD Securities. Please go ahead.

Greg Barnes, Analyst

Yes, thank you. Just for you Grant, the 118 million pounds contracted year-to-date, what kind of line of sight do you have on what the rest of the year holds in terms of long-term contracting for the industry as a whole, not just for Cameco?

Grant Isaac, Executive Vice President and CFO

Yes, great question. When we look at our own pipeline of negotiations, I said earlier that it remains quite large. We've got a lot of pounds under negotiation, a lot of conversion service under negotiation. If I then sort of reflect that as being indicative of what others are seeing, I think we can expect quite a bit of demand to come to the market in the second half of the year. I'm not prepared to say we can simply annualize 118 million pounds to double it; I don't know for sure. But I think this is a year where we can expect to see a material increase over last year's contracting rate. As we know, in our industry, contracting begets contracting. As more and more of the known production is spoken for under long-term contracts, it will increase pressure on those who have not contracted yet to get their hands on an even smaller slice of certain supply. Obviously, attention will turn to the contracting and prices required to get real Greenfield moving. That’s all in front of us and all value we intend to capture. We are expecting a constructive term market to continue through this year, and if past is prologue, these last several years.

Greg Barnes, Analyst

Great. And just a follow-up question regarding the operations themselves, McArthur and Cigar. The cash cost there in the last Cameco report was $16 to $18 a pound depending on which operation we're talking about. We've had inflation and other cost pressures and supply chain issues. What do you think the cost profiles look like now at each operation from this point?

Grant Isaac, Executive Vice President and CFO

Yes, it's a great question, Greg. There are two things going on simultaneously moving in different directions. Obviously, as we ramp up production at places like McArthur and Key, we're going to have the unit cost effect, which will be very positive; more production means lower unit costs, and that will be offsetting. But then, of course, when you look at the challenges that have been in the market, the challenges on supply chains, the challenges on inflation, the challenges on finding skilled labor and appropriate contractors at the right time, that kind of offsets that improvement. On balance, we would just kind of go back to our Annual Information Form numbers. That's the update to our technical reports. We’re looking at that $16 to $18 cash cost, and that's what we're negotiating towards as we're excited about meeting the growth in this market and fulfilling our contracts from already licensed and permitted existing facilities that we simply have to get back up and running.

Greg Barnes, Analyst

Okay, great. Thanks, Grant.

Operator, Conference Operator

Our next question is a follow-up from Orest Wowkodaw of Scotiabank. Please go ahead.

Orest Wowkodaw, Analyst

Hi, thanks for taking the follow-up. Just, Grant, on the same lines as Greg's question, but maybe a little bit different. At what point do you need to see the contract book? Or I guess at what level do you need to see the long-term contract book before we start hearing more about life extensions at Cigar Lake, for example, and even potentially taking McArthur up to the full licensed capacity of 25 million pounds?

Grant Isaac, Executive Vice President and CFO

Yes, great question. It is one where we would say, whether it's the excellent work done by TradeTech, for example, where there is very clear urgency of supply building in the market. We just simply respond to that by saying we need to see an urgency of demand. So yes, 118 million pounds year-to-date in the term market is a good indicator of urgency of demand. Yes, a $55 U.S. price is a much better price than the $17.75 per pound that it was when we brought McArthur and Key Lake into supply discipline. But it's not at the level, from a pricing point of view, that is required to make serious investment in expansion or, quite frankly, in Greenfield. We would need to see more urgency of demand as evidenced by more term contracting coming into the market and stronger price formation. Then we would capture that in our contract portfolio. Those are the milestones to watch for. Those will determine our production decisions, the expansion decisions at McArthur River, and the extension decisions at Cigar Lake. The market is constructive right now, but it has to be even more constructive to incentivize us to grow that base of production.

Orest Wowkodaw, Analyst

Okay. And just as a quick follow-up, do you think you are happy with your current portfolio of growth options within uranium? Or do you see any opportunity for M&A in terms of adding undeveloped deposits?

Tim Gitzel, President and CEO

We're really happy, Orest, with what we've got. We've got assets that are built and licensed and ready to go. So we're just, as you know, in the process of ramping them up. As Grant said, we’re looking at whether we need to extend and expand those; we've got Tier 2 assets that are licensed and permitted on standby, but under the right conditions could go ahead. So we're not looking too far afield; we've got some great assets that we want to bring back in.

Grant Isaac, Executive Vice President and CFO

And, Orest, we might just juxtapose that a little bit with the last price cycle. People reflect on that '06, '07 window, where a lot of contracting was done and a lot of strong price formation. At that time, Cameco was looking to add a new mine, the Cigar Lake mine, as a supply source to fulfill those contracts. This time around, because of our supply discipline, we left a lot of pounds in the ground in a low price environment. Those pounds are now available in a much higher price environment. So we’re meeting this new contracting cycle from what we think is an extraordinarily strong brownfield leverage position, which gives us a very attractive capital profile. We're only talking replacement and maintenance capital; we’re not talking greenfield capital in order to meet it. We think this is a much different value proposition for investors in Cameco in this contracting cycle than it was in past cycles. This is our deliberate execution of our strategy.

Orest Wowkodaw, Analyst

Thank you.

Operator, Conference Operator

Our next question is a follow-up from Ralph Profiti of Eight Capital. Please go ahead.

Ralph Profiti, Analyst

Thanks, Tim and Grant, for the follow-up. We have seen a little bit of volatility in the Inkai pounds, both from deliveries and a shipments perspective. And just wondering when it comes to delivering those pounds in this uncertain market, are you making up those pounds in the spot market because the actual inventory situation at Cameco has been relatively stable? The purchase commitments have actually moved lockstep with the sales guidance. So just wondering how you make up for that volatility?

Tim Gitzel, President and CEO

Ralph, I'm just going to go backwards a little bit and provide some context because we just have to set our purchasing to meet our committed sales in the proper context of our strategy. As you know, and a lot of people on this call now, what we do is build the homes first through the contracting cycle. Then we sourced those commitments from production; we’ve got production increasing with the ramp up of McArthur River and Key Lake. We’ve got production from Cigar and from Inkai. We source through inventory and we source through purchases, and occasionally we’ll source through loans. But let's focus on the big three: production, inventory, and purchases. With respect to purchases, if we have a delay in production, remember we set kind of quarterly and annual guidance on production. But if we miss that, the pounds are still there; we get them a little bit later. Occasionally, we might have to go into the market to supplement with some purchases. When we purchase, say, for example, if we had to purchase to replace Inkai pounds, just think about those in the proper context. We can purchase either in the spot market today, and we'll do that occasionally. It’s a very thin market, and our demand would be noted and would probably create upward price pressure if Cameco showed up in the spot market. So sometimes we also purchase under long-term purchase commitments. Somebody might be offering pounds at a fixed price out into the future, and when we look at the dynamics in the construction market, we might say those are cheap pounds today. Eventually, we always retain the right to harvest those contracts whenever we want; we don't have to wait till the terminal date in the contract. We can purchase in the spot market or we can purchase long-term and just retain the option of when we pull that source in. When you think about those spot purchases, they have both a cost and a benefit. The cost of us purchasing is obviously that it costs more than it does to produce. There’s a margin impact, definitely a cost. The benefit though is when our demand is in the market, it tends to thin out the spot market and it tends to be priced constructively. So now our portfolio of committed sales that are market-related are also capturing that higher price, and it captures it over our true margin. Anything we're negotiating is now being negotiated at higher price references. We always look at that short-term in-year cost against the in-year and multi-year benefits when we make purchases; it’s never something we fear, always something we do strategically and deliberately. That’s how we would replace any shortfalls or timing shortfalls with respect to either production from our Canadian assets or arrival of material from JV Inkai.

Rachelle Girard, Vice President, Investor Relations

And, Orest, I might just add that purchase volume includes our expected Inkai deliveries. So it gets moved out mainly because of the increase in the in-year sales and our desire for working inventory. So I would just note that as well.

Ralph Profiti, Analyst

Yes, got it. Thank you for that clarity, Grant and Rachelle.

Operator, Conference Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Tim Gitzel for any closing remarks.

Tim Gitzel, President and CEO

Okay. Well, thank you, operator. With that, I just want to say thanks to everybody who has joined us on the call today. We certainly appreciate your interest and your support. I would say we’re excited to see the positive momentum building for nuclear around the world. We, at Cameco, expect to play an important role in providing the solution for the existential problems of decarbonization, electrification, and energy security. More than ever, we're being asked by countries, leaders, and government officials to participate in discussions on where that world energy picture is going. I can tell you that we, at Cameco, work hard to gain that kind of standing on the world stage to be recognized as a global company, making a difference and providing something the world desperately needs. As interest continues to grow, last month we hosted a tour of our Cigar Lake operation for Ambassador Kirsten Hillman, the Canadian Ambassador to the U.S., and just last week, Ambassador David Cohen, the U.S. Ambassador to Canada, toured McArthur River. I could tell you the positive feedback from these officials and their teams following the tours was nothing short of flattering. That’s, of course, thanks to the hard work of our people over the years. We built a reputation as a proven and reliable producer with key assets and a stable jurisdiction with a long history of strong environmental, social, and governance performance. We believe our vision of energizing a clean world will allow future generations to thrive and enjoy this beautiful planet. We will continue to do what we said we would do, executing on our strategy and consistent with our values. We'll do so in a manner we believe will make our business sustainable over the long term. So thanks, everybody, enjoy the summer. Stay safe and healthy.

Operator, Conference Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.