Foreign exchange

The exchange rate between the Canadian dollar and US dollar affects the financial results of our uranium and fuel services segments.

Sales of uranium and fuel services are routinely denominated in US dollars while production costs are largely denominated in Canadian dollars. We use planned hedging to try to protect net inflows (total uranium and fuel services sales less US dollar cash expenses and product purchases) from the uranium and fuel services segments against declines in the US dollar in the shorter term. Our strategy is to hedge net inflows over a rolling 60-month period. Our target for the first 12 months is to hedge 35% to 100% of net inflows. The target range declines every year until it reaches 0% to 10% of our net inflows (from 48 and 60 months).

We also have a natural hedge against US currency fluctuations as a portion of our annual cash outlays, including purchases of uranium and fuel services, is denominated in US dollars. The earnings impact of this natural hedge is more difficult to identify because inventory includes material added over more than one fiscal period.

At December 31, 2010:

  • The value of the US dollar relative to the Canadian dollar was $1.00 (US) for $0.99 (Cdn), down from $1.00 (US) for $1.05 (Cdn) at December 31, 2009. The exchange rate averaged $1.00 (US) for $1.03 (Cdn) over the year.
  • Our effective exchange rate for the year, after allowing for hedging, was about $1.00 (US) for $1.05 (Cdn), compared to $1.00 (US) for $1.18 (Cdn) in 2009.
  • We had foreign currency contracts of $1.3 billion (US) and EUR 93 million at December 31, 2010. The US currency contracts had an average exchange rate of $1.00 (US) for $1.03 (Cdn).
  • The mark-to-market gain on all foreign exchange contracts was $47 million compared to a $67 million gain at December 31, 2009.

Timing differences between the maturity dates and designation dates on previously closed hedge contracts can result in deferred gains or charges. At December 31, 2010, we had net deferred gains of $6 million which will be recognized in earnings in 2011.

We manage counterparty risk associated with hedging by dealing with highly rated counterparties and limiting our exposure. At December 31, 2010, all counterparties to foreign exchange hedging contracts had a Standard & Poor's (S&P) credit rating of A or better.

Sensitivity analysis

At December 31, 2010, every one-cent change in the value of the Canadian dollar versus the US dollar would change our 2010 net earnings by about $9 million (Cdn). This sensitivity is based on an exchange rate of $1.00 (US) for $0.99 (Cdn).

Cameco 2010 Annual Report