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Corporate Expenses

Restructuring

As a result of our restructuring activities, we saw improvements in our direct administration and exploration costs during the year. The benefit of these savings has been partially offset by the one-time costs associated with restructuring; however, we have achieved efficiencies we expect will be sustainable over time.

Administration

($ millions) 2013 2012 Change
Direct administration 160 163 (2)%
Restructuring 5
Stock-based compensation 20 18 11%
Total administration 185 181 2%

Direct administration costs in 2013 were $3 million lower than in 2012. The decrease in the year reflects the effects from our restructuring activities. These were partially offset by:

  • the addition of NUKEM’s administration ($15 million)
  • advisory fees with respect to the NUKEM acquisition ($3 million)

We recorded $20 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 $18 million in 2012. See note 25 to the financial statements.

Outlook for 2014

We expect administration costs (not including stock-based compensation) to be relatively stable (0% to 5% higher) compared to 2013, as restructuring benefits offset inflation.

Exploration

In 2013, uranium exploration expenses were $73 million, a decrease of $24 million compared to 2012 due largely to decreased activity at our Kintyre project in Australia. Our exploration efforts in 2013 focused on Canada and Australia.

Outlook for 2014

We expect exploration expenses to be about 35% to 40% lower than they were in 2013 due to:

  • decreased activities in Australia
  • a general reorganization of our global exploration portfolio that has allowed us to focus on our core projects in Saskatchewan

Finance costs

Finance costs were $62 million compared to $68 million in 2012. The decrease from last year largely reflects lower foreign exchange expenses partially offset by higher interest on long-term debt and higher reclamation charges. See note 20 to the financial statements.

Finance income

Finance income was $7 million compared to $14 million in 2012 due to lower levels of short-term investments in 2013.

Gains and losses on derivatives

In 2013, we recorded $62 million in losses on our derivatives compared to gains of $41 million in 2012. The losses reflect the weakening of the Canadian dollar compared to the US dollar in 2013. See note 27 to the financial statements.

Income taxes

We recorded an income tax recovery of $90 million in 2013 compared to $51 million in 2012. The increase was primarily due to a change in the distribution of earnings between jurisdictions compared to 2012. In 2013, we recorded losses of $603 million in Canada compared to $337 million in 2012, whereas earnings in foreign jurisdictions increased to $830 million from $538 million. The tax rate in Canada is higher than the average of the rates in the foreign jurisdictions in which our subsidiaries operate. See note 22 to the financial statements.

On an adjusted earnings basis, we recognized a tax recovery of $61 million in 2013 compared to $46 million in 2012. The increase was related to the items noted above. Our effective tax rate was a recovery of 16% in 2013 compared to 12% in 2012. The table below presents our adjusted earnings and adjusted income tax expenses attributable to Canadian and foreign jurisdictions.

($ millions) 2013  2012 
  1. 1 Pre-tax adjusted earnings and adjusted income taxes are non-IFRS measures.
  2. 2 Our IFRS-based measures have been adjusted by the amounts reflected in the table in adjusted net earnings (non-IFRS).
Pre-tax adjusted earnings1    
Canada2 (466) (320)
Foreign2 849  706 
Total pre-tax adjusted earnings 383  386 
Adjusted income taxes1    
Canada2 (94) (74)
Foreign 33  28 
Adjusted income tax expense (recovery) (61) (46)
Effective tax rate (16)%  (12)% 

CRA disclosure

Since 2008, the Canada Revenue Agency (CRA) has disputed the offshore marketing company structure and related transfer pricing methodology we used for certain intercompany uranium sale and purchase agreements, and issued notices of reassessment for our 2003 through 2008 tax returns. We believe the ultimate resolution of this matter will not be material to our financial position, results of operations and cash flows in the year(s) of resolution.

Transfer pricing is a complex area of tax law, and it is difficult to predict the outcome of a case like ours as there are only a handful of reported court decisions on transfer pricing in Canada. However, tax authorities generally test two things:

  • the governance (structure)
  • the price

As the majority of our customers are located outside Canada, we established an offshore marketing subsidiary. This subsidiary entered into intercompany purchase and sales agreements as well as uranium supply agreements with third parties. We have arm’s-length transfer price arrangements in place, which expose both parties to the risks and the rewards accruing to them under this portfolio of purchase and sales contracts.

With respect to the contract prices, they are generally comparable to those established in sales contracts between arm’s-length buyers and sellers entered into at that time. We have recorded a cumulative tax provision of $73 million, where an argument could be made that our transfer price may have fallen outside of an appropriate range of pricing in uranium contracts for the period from 2003 to 2013.

We are confident that we will be successful in our case; however, for the years 2003 through 2008, CRA issued notices of reassessment for approximately $2.0 billion of additional income for Canadian tax purposes, which would result in a related tax expense of about $590 million. The Canadian Income Tax Act includes provisions that require certain companies to pay 50% of the cash tax plus related interest and penalties at the time of reassessment. To date, under these provisions, after applying elective deductions and tax loss carryovers, we have been required to pay a net amount of $103 million to CRA ($59 million as of December 31, 2013; $44 million in January 2014), which includes the amounts shown in the table below and described subsequently.

Year ($ millions) Cash Taxes Interest and
Instalment Penalties
Transfer Pricing
Penalties
Total
Prior to 2013 13 13
2013 1 9 36 46
2014 16 28 44
Total 17 50 36 103
  • approximately $13 million for interest and instalment penalties paid prior to 2013. These amounts were not reported separately as they were not material in any given year.
  • approximately $27 million in January 2013, representing 50% of the amount owed for the amounts reassessed in December 2012—$20 million of this payment was refunded in the second quarter of 2013 when it was determined by CRA that they had reassessed amounts outside of the allowable review period
  • approximately $36 million in December 2013 that related to a $72 million transfer pricing penalty we were assessed for the 2007 taxation year. This was the first transfer pricing penalty assessed since CRA began to issue reassessments with respect to the transfer pricing dispute.
  • approximately $3 million paid in 2013. This amount would have been refundable in the year, but instead was applied as a credit against the amounts reassessed in December 2013 (for which a further payment was made in January 2014).
  • approximately $44 million in January 2014, representing 50% of the amount owed as reassessed in December 2013 and related to the 2008 taxation year

Using the methodology we believe CRA will continue to apply, and including the $2.0 billion already reassessed, we expect to receive notices of reassessment for a total of approximately $5.7 billion in income as taxable in Canada for the years 2003 through 2013, which would result in a related tax expense of approximately $1.6 billion. As well, CRA may continue to apply transfer price penalties to taxation years subsequent to 2007. As a result, we estimate that cash taxes and transfer pricing penalties would be between $1.25 billion and $1.3 billion. In addition, we estimate there would be interest and instalment penalties applied that would be material to Cameco. We would be responsible for remitting 50% of the cash taxes and transfer pricing penalties (between $625 million and $650 million) plus related interest and instalment penalties assessed, which would be material to Cameco.

Under the Canadian federal and provincial tax legislation, the amount required to be remitted each year will depend on the amount of income reassessed in that year and the availability of elective deductions and tax loss carryovers; however, we expect it will generally follow the schedule in the table below.

December 31, 2013 ($ millions) 2003-2013 2014-2016 2017-2023 Total
  1. 1 These amounts do not include interest and instalment penalties, which totaled approximately $22 million to December 31, 2013.
50% of cash taxes and transfer pricing penalties payable in the period1 37 250-275 325-350 625-650

In light of our view of the likely outcome of the case as described above, we expect to recover the amounts remitted to CRA, including the $103 million already paid to date.

The case on the 2003 reassessment is expected to go to trial in 2015. If this timing is adhered to, we expect to have a Tax Court decision in 2015 or 2016.

Caution about forward-looking information relating to our CRA tax dispute

This discussion of our expectations relating to our tax dispute with CRA and future tax reassessments by CRA, including the amounts of future additional taxable income, additional tax expense, cash taxes payable, transfer pricing penalties, and interest and possible instalment penalties thereon and related remittances, and timing of a Tax Court decision, is forward-looking information that is based upon the assumptions and subject to the material risks discussed under the heading Caution about forward-looking information and also on the more specific assumptions and risks listed below. Actual outcomes may vary significantly.

Assumptions
  • CRA will reassess us for the years 2009 through 2013 using a similar methodology as for the years 2003 through 2008, with the time lag for the reassessments for each year being similar to what has occurred to date
  • we will be able to apply elective deductions and tax loss carryovers to the extent anticipated
  • CRA will seek to impose transfer pricing penalties (10% of the income adjustment) in addition to interest charges and instalment penalties
  • we will be substantially successful in our dispute with CRA and the cumulative tax provision of $73 million to date will be adequate to satisfy any tax liability resulting from the outcome of the dispute to date
Material risks that could cause actual results to differ materially
  • CRA reassesses us for years 2009 through 2013 using a different methodology than for years 2003 through 2008, or we are unable to utilize elective deductions and loss carryovers to the same extent as anticipated, resulting in the required cash payments to CRA pending the outcome of the dispute being higher than expected
  • the time lag for the reassessments for each year is different than for those to date
  • we are unsuccessful and the outcome of our dispute with CRA results in significantly higher cash taxes, interest charges and penalties than the amount of our cumulative tax provision, which could have a material adverse effect on our liquidity, financial position, results of operations and cash flows
  • cash tax payable increases due to unanticipated adjustments by CRA not related to transfer pricing

Outlook for 2014

We have contractual arrangements to sell uranium produced at our Canadian mining operations to a trading and marketing company located in a foreign jurisdiction. These arrangements reflect the uranium markets at the time they were signed, with the risk and benefit of subsequent movements in uranium prices accruing to the foreign trading and marketing company.

On an adjusted net earnings basis, we expect a tax recovery of 30% to 35% in 2014 from our uranium, fuel services and NUKEM segments, as taxable income in Canada is expected to decline. Subject to our success in the litigation with CRA, we expect our tax recovery to continue in accordance with the 2014 outlook until the contractual arrangements noted above expire in 2016. As these arrangements expire and are replaced by new contracts that reflect the uranium market at the time of signing, our tax expense is expected to rise over time.

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 sales less US dollar cash expenses and product purchases) 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).

At December 31, 2013:

  • The value of the US dollar relative to the Canadian dollar was $1.00 (US) for $1.06 (Cdn), up from $1.00 (US) for $0.99 (Cdn) at December 31, 2012. The exchange rate averaged $1.00 (US) for $1.03 (Cdn) over the year.
  • Our effective exchange rate for the year was about $1.00 (US) for $1.03 (Cdn), up from $1.00 (US) for $1.00 (Cdn) in 2012.
  • We had foreign currency forward contracts of $1.6 billion (US), EUR 63 million, AUD 4 million at December 31, 2013. The US currency contracts had an average exchange rate of $1.00 (US) for $1.05 (Cdn).
  • The mark-to-market loss on all foreign exchange contracts was $27 million compared to a $15 million gain at December 31, 2012.

We manage counterparty risk associated with hedging by dealing with highly rated counterparties and limiting our exposure. At December 31, 2013, 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, 2013, every one-cent change in the value of the Canadian dollar versus the US dollar would change our 2014 net earnings by about $5 million (Cdn), with a decrease in the value of the Canadian dollar versus the US dollar having a positive impact. This sensitivity is based on an exchange rate of $1.00 (US) for $1.00 (Cdn).