Cameco settles US tax spat, 2017 outlook weakens

VANCOUVER (miningweekly.com) – Canadian uranium producer Cameco has reached a settlement with the US Internal Revenue Service for the tax years 2009 to 2012, bolstering the company’s position that its transfer pricing arrangements are appropriate.

The settlement agreement results in a cash tax payment of about $122 000, which Cameco will book in the current quarter, compared with the originally proposed tax expense of $122-million.

However, Cameco’s long-standing tax dispute with the Canadian Revenue Service (CRA) is intensifying, with the tax authority continuing to dispute the company’s corporate structure and the related transfer pricing methodology it used for certain intercompany uranium sale and purchase agreements.

For the years 2003 through 2011, the CRA issued notices of reassessment for about C$4.1-billion of additional income for Canadian tax purposes, which would result in a related tax expense of about C$1.2-billion. Including the C$4.1-billion already reassessed, Cameco expects to receive notices of reassessment for a total of about C$8.1-billion of additional income taxable in Canada for the years 2003 through 2016, which would result in a related tax expense of about C$2.4-billion.

Cameco has disputed the CRA’s claims, and the trial related to the 2003, 2005 and 2006 reassessments started in October 2016. Final arguments are currently scheduled for September. If this timing is adhered to, the company expects to receive a Tax Court decision within six to 18 months after the trial is complete.

Cameco believes in the merits of its defence and expects to recover the amounts already remitted, including the C$685-million already paid or otherwise secured to date.

MARKET WEAKNESS
“We continue to face difficult market conditions, with the average year-to-date uranium spot price down 13% compared to the 2016 average. Our weaker outlook for 2017, compared to 2016, reflects the low uranium prices and the effects of the actions we have taken to address them,” stated Cameco president and CEO Tim Gitzel.

On the spot market, where purchases call for delivery within a year, the volume reported by Ux Consulting (UxC) for the second quarter was about 12-million pounds, compared with about nine-million pounds in the second quarter of 2016.

Year-to-date, about 21-million pounds has been transacted in the spot market, compared to 19-million pounds in the first half of 2016. At the end of the quarter, the average reported spot price was $20.15/lb, down $3.73/lb from the previous quarter.

Cameco's long-term contracts, where deliveries typically begin more than two years after the contract is finalised, comprised about 54-million pounds during the first six months this year, which, despite being higher than the 21-million pounds reported over the same period in 2016, was still less in volume than the quantities consumed, and remained largely discretionary on the back of high current inventory levels.

The average reported long-term price at the end of the quarter was $33/lb, unchanged from the first quarter.

According to Cameco, industry consultants estimate that the cumulative uncovered requirements total nearly 800-million pounds over the next decade, which will require a substantial amount of uranium to be contracted to keep both new and existing reactors running into the next decade.

The uncovered requirements fuel its confidence that the current discretionary demand sentiment will eventually give way to concerns about the security of future supply as more new-built nuclear reactors come on line.

“We believe those concerns will create opportunities for producers that can weather today’s low prices and provide a recovering market with uncommitted uranium from long-lived, tier-one assets,” the company advised.

Cameco said it expects the uranium term price to average $49/lb in 2017. However, the company advised that pricing on deliveries in the third quarter is expected to be the lowest for the year, which translates to an expectation of higher prices on deliveries in the fourth quarter.

Cameco produces uranium at an average annual cost of $36/lb to $38/lb.

FINANCIALS
Cameco has reported a headline loss of C$44-million, or C$0.11 a share. Despite being a 21% year-on-year improvement, this is still significantly below analysts' forecasts of a loss of C$0.02 a share.

The net loss shrunk from C$137-million, or C$0.35 a share, in the same quarter of 2016, to C$2-million, or nil per share for the period under review.

Revenue rose 1% over the year-earlier period to C$470-million. The results are strongly influenced by the performance of the company's uranium segment, which accounted for 63% of consolidated revenues in the second quarter of 2017.

Production volumes in the second quarter were 1% higher quarter-on-quarter at 7.1-million pounds, mainly owing to higher production from McArthur River/Key Lake relating to the timing of mill maintenance shutdowns and higher production from Cigar Lake. These increases were, however, partially offset by planned lower output from the Inkai and US operations, and a lack of production from the suspended Rabbit Lake operation.

Meanwhile, a multibillion-dollar contract cancellation also weighed on Cameco’s second-quarter financial results. Tokyo Electric Power (Tepco), the operator of Japan’s wrecked Fukushima nuclear plant, terminated a supply contract in January, alleging force majeure. This affects about 9.3-million pounds of uranium deliveries through 2028, worth about C$1.3-billion in revenue to Cameco, including about C$126-million in 2017. Cameco disputes the withdrawal, saying it sees no basis for terminating the agreement.

Further straining the balance sheet, there was a change in the Saskatchewan corporate tax rate, which reduced Cameco’s deferred tax asset, as well as a lower average realised price in the uranium business and a write-down of the value of the Nukem unit’s inventory.

OUTLOOK
Cameco's consolidated revenue outlook has improved to between $2.1-billion and $2.27-billion from $1.95-billion to $2.08-billion expected previously, as a result of increased sales volumes expected at its Nukem unit.

Sales volumes at Nukem are now expected to be eight-million to nine-million pounds, from five-million to six-million pounds expected previously, owing to new market opportunities, Cameco said.

The capital expenditures budget, meanwhile, has been pruned back to $175-million from $190-million, owing to reduced spending at both McArthur River and Cigar Lake, in Saskatchewan.

Cameco expects to produce 25.2-million pounds of uranium this year, with sales volume of 30-million to 32-million pounds.

The company's TSX-listed stock on Thursday advanced 6.5% to an intraday high of C$13.37 apiece.