Direct administration costs in 2010 were $19 million (16%) higher than in 2009 as we continued to pursue and evaluate growth opportunities. The increase is largely related to increased hiring and analysis of business opportunities to achieve our growth plans. These costs were lower than we forecast as we narrowed the scope of some business development activities during the year.
We recorded $15 million in stock-based compensation expenses this year under our stock option, deferred share unit, performance share unit and phantom stock option plans, compared to $14 million in 2009. See note 22 to the financial statements.
Outlook for 2011
We expect administration costs (not including stock-based compensation) to be about 15% to 20% higher than in 2010 due to planned higher spending in support of our growth strategy.
In 2010, uranium exploration expenses were $96 million compared to $49 million in 2009. The increase in 2010 largely reflects the increase in evaluation activities at the Kintyre and Inkai block 3 projects in Australia and Kazakhstan. Our exploration efforts in 2010 focused on Canada, the United States, Mongolia, Kazakhstan, Australia and South America.
Outlook for 2011
We expect exploration expenses to be about 5% to 10% lower than they were in 2010 due to a reduction in evaluation activities at the Kintyre project as we near the completion of the prefeasibility stage. See Operations and Development Projects – Uranium Exploration for more information.
Interest and other charges
Interest and other charges were $16 million higher than last year mainly as a result of recording $7 million in foreign exchange losses compared to gains of $21 million in 2009, partially offset by a $7 million increase in interest income attributable to higher cash balances. Gross interest charges this year were $10 million higher than last year attributable to our higher average debt level. See note 15 to the financial statements.
Gains and losses on derivatives
In 2010, we recorded $75 million in mark-to-market gains on our financial instruments compared to gains of $244 million in 2009. Unrealized gains on financial instruments were lower in 2010 than 2009 as the Canadian dollar continued to strengthen against the US dollar, but to a lesser degree. We voluntarily removed the hedging designation on our foreign currency forward sales contracts effective August 1, 2008, and have since recognized unrealized mark-to-market gains and losses in earnings. See note 26 to the financial statements.
We recorded an income tax expense of $27 million in 2010 compared to $53 million in 2009. This was mainly due to a $235 million decrease in pretax earnings in 2010, which was largely attributable to the decline of $169 million in gains on derivatives.
On an adjusted net earnings basis, our effective tax rate in 2010 was 4%, or 7% higher than 2009 as:
- A higher proportion of taxable income was earned in jurisdictions with higher tax rates.
- In 2009, certain future tax liabilities recognized in prior years were reduced.
- In 2009, the statutory income tax rate in Canada was reduced, allowing us to reduce our provision for future income taxes.
On an adjusted net earnings basis, our tax expense was $20 million in 2010, compared to a recovery of $15 million in 2009.
Since 2008, Canada Revenue Agency (CRA) has disputed the transfer pricing methodology we used for certain uranium sale and purchase agreements and issued notices of reassessment for our 2003, 2004 and 2005 tax returns. We believe it is likely that CRA will reassess our tax returns for 2006 through 2010 on a similar basis. Our view is that CRA is incorrect, and we are contesting its position. In July 2009, we filed a Notice of Appeal relating to the 2003 reassessment with the Tax Court of Canada. In November 2010, we filed a Notice of Appeal relating to the 2004 reassessment with the Tax Court of Canada. We intend to object to the 2005 reassessment and pursue our appeal rights under the Income Tax Act. However, to reflect the uncertainties of CRA's appeals process and litigation, we have provided $27 million for uncertain tax positions for the years 2003 through 2010. We believe that the ultimate resolution of this matter will not be material to our financial position, results of operations or liquidity over the period. However, an unfavourable outcome for the years 2003 to 2010 could be material to our financial position, results of operations or cash flows in the year(s) of resolution. See note 18 to the financial statements.
Outlook for 2011
On an adjusted net earnings basis, we expect our effective income tax rate will reflect a recovery of 0% to 5% as taxable income in Canada is expected to decline.