Corporate expenses
Administration
| ($ millions) | 2011 | 2010 | change |
|---|---|---|---|
| Direct administration | 147 | 145 | 1% |
| Stock-based compensation | 10 | 10 | – |
| Total administration | 157 | 155 | 1% |
Direct administration costs in 2011 were $2 million higher than in 2010 as we continued to pursue and evaluate growth opportunities. These costs were lower than we forecast as we narrowed the scope of some business development activities during the year.
We recorded $10 million in stock-based compensation expenses this year under our stock option, deferred share unit, performance share unit and phantom stock option plans, the same as in 2010. See note 27 to the financial statements.
Outlook for 2012
We expect administration costs (not including stock-based compensation) to be about 10% to 15% higher than in 2011 due to planned higher spending in support of our growth strategy.
Exploration
In 2011, uranium exploration expenses were $96 million, the same as in 2010. Our exploration efforts in 2011 focused on Canada, Australia, Kazakhstan and the United States.
Outlook for 2012
We expect exploration expenses to be about 15% to 20% higher than they were in 2011 due to an increase in evaluation activities at Kintyre and Inkai block 3. We will also continue to focus efforts in Canada.
Finance costs
Finance costs were $74 million compared to $86 million in 2010. The decrease from last year largely reflects lower foreign exchange expenses and product loan standby fees. The product loan facility was terminated in 2010. See note 22 to the financial statements.
Finance income
Finance income was $25 million compared to $21 million in 2010 due to higher rates of return on short-term investments.
Gains and losses on derivatives
In 2011, we recorded $4 million in losses on our derivatives compared to gains of $75 million in 2010. The losses reflect the weakening of the Canadian dollar in 2011. See note 29 to the financial statements.
Income taxes
We recorded an income tax expense of $12 million in 2011 compared to $3 million in 2010 and higher than the guidance we provided in our third quarter MD&A (0% to 5% recovery). The higher expense was primarily due to an increase in the provision related to the CRA transfer pricing dispute discussed below. The increase in the provision was partially offset by higher losses being incurred in Canada, which was largely attributable to losses we recorded on derivatives in 2011 compared to the gains recorded in 2010. See note 24 to the financial statements.
On an adjusted earnings basis, our tax expense was $33 million in 2011 compared to a recovery of $3 million in 2010. The increase was primarily due to the increase in the provision related to the CRA transfer pricing dispute. Our effective tax rate was 6% in 2011 compared to a recovery of 1% in 2010. The table below presents our adjusted earnings and adjusted income tax expenses attributable to Canadian and foreign jurisdictions.
| ($ millions) | 2011 | 2010 |
|---|---|---|
|
||
| Pre-tax Adjusted Earnings1 | ||
| Canada2 | (297) | (89) |
| Foreign | 827 | 573 |
| Total pre-tax adjusted earnings | 530 | 484 |
| Adjusted Income Taxes1 | ||
| Canada2 | (34) | (46) |
| Foreign | 67 | 43 |
| Adjusted income tax expense (recovery) | 33 | (3) |
| Effective tax rate | 6% | (1)% |
Since 2008, CRA has disputed the transfer pricing methodology we used for certain uranium sale and purchase agreements and issued notices of reassessment for our 2003 through 2006 tax returns. We believe it is likely that CRA will reassess our tax returns for 2007 through 2011 on a similar basis. Our view is that CRA is incorrect, and we are contesting its position. As a result we are pursuing our appeal rights under the Income Tax Act. However, to reflect the uncertainties of CRA's appeals process and litigation, we have provided a total of $54 million for uncertain tax positions for the years 2003 through 2011. 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 2011 could be material to our financial position, results of operations or cash flows in the year(s) of resolution. See note 24 to the financial statements.
Outlook for 2012
On an adjusted net earnings basis, we expect our effective income tax rate will reflect a net recovery of 0% to 5% as taxable income in Canada is expected to decline. For the next few years, we expect our tax rate to continue in accordance with our 2012 outlook.
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 policy is to hedge 35% to 100% of net inflows in the first 12 months. The 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, are 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, 2011:
- The value of the US dollar relative to the Canadian dollar was $1.00 (US) for $1.02(Cdn), up from $1.00 (US) for $0.99 (Cdn) at December 31, 2010. The exchange rate averaged $1.00 (US) for $0.99 (Cdn) over the year.
- Our effective exchange rate for the year was about $1.00 (US) for $1.00 (Cdn), compared to $1.00 (US) for $1.05 (Cdn) in 2010.
- We had foreign currency contracts of $1.4 billion (US) and EUR 31 million at December 31, 2011. The US currency contracts had an average exchange rate of $1.00 (US) for $1.01 (Cdn).
- The mark-to-market loss on all foreign exchange contracts was $18 million compared to a $47 million gain at December 31, 2010.
We manage counterparty risk associated with hedging by dealing with highly rated counterparties and limiting our exposure. At December 31, 2011, 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, 2011, every one-cent change in the value of the Canadian dollar versus the US dollar would change our 2011 net earnings by about $10 million (Cdn). This sensitivity is based on an exchange rate of $1.00 (US) for $1.02 (Cdn).