Notes to Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

28. Financial instruments and related risk management

Cameco is exposed in varying degrees to a variety of risks from its use of financial instruments. Management and the board of directors, both separately and together, discuss the principal risks of our businesses. The board sets policies for the implementation of systems to manage, monitor and mitigate identifiable risks. Cameco’s risk management objective in relation to these instruments is to protect and minimize volatility in cash flow. The types of risks Cameco is exposed to, the source of risk exposure and how each is managed is outlined below.

Market risk

Market risk is the risk that changes in market prices, such as commodity prices, foreign currency exchange rates and interest rates, will affect the Company’s earnings or the fair value of its financial instruments. Cameco engages in various business activities which expose the Company to market risk. As part of its overall risk management strategy, Cameco uses derivatives to manage some of its exposures to market risk that result from these activities.

Derivative instruments may include financial and physical forward contracts. Such contracts may be used to establish a fixed price for a commodity, an interest-bearing obligation or a cash flow denominated in a foreign currency. Market risks are monitored regularly against defined risk limits and tolerances.

Cameco’s actual exposure to these market risks is constantly changing as the Company’s portfolios of foreign currency and commodity contracts change. Changes in fair value or cash flows based on market variable fluctuations cannot be extrapolated as the relationship between the change in the market variable and the change in fair value or cash flow may not be linear.

The types of market risk exposure and the way in which such exposure is managed are as follows:

  • A. Commodity price risk

As a significant producer and supplier of uranium and nuclear fuel processing services, Cameco bears significant exposure to changes in prices for these products. A substantial change in prices will affect the Company’s net earnings and operating cash flows. Prices for Cameco’s products are volatile and are influenced by numerous factors beyond the Company’s control, such as supply and demand fundamentals and geopolitical events.

Cameco’s sales contracting strategy focuses on reducing the volatility in future earnings and cash flow, while providing both protection against decreases in market price and retention of exposure to future market price increases. To mitigate the risks associated with the fluctuations in the market price for uranium products, Cameco seeks to maintain a portfolio of uranium product sales contracts with a variety of delivery dates and pricing mechanisms that provide a degree of protection from pricing volatility.

Cameco does not hold any significant financial instruments that expose the Company to material commodity price risk as of the reporting date.

  • B. Foreign exchange risk

The relationship between the Canadian and US dollar affects financial results of the uranium business as well as the fuel services business. Sales of uranium product, conversion and fuel manufacturing services are routinely denominated in US dollars while production costs are largely denominated in Canadian dollars.

Cameco attempts to provide some protection against exchange rate fluctuations by planned hedging activity designed to smooth volatility. To mitigate risks associated with foreign currency, Cameco enters into forward sales and option contracts to establish a price for future delivery of the foreign currency. These foreign currency contracts are not designated as hedges and are recorded at fair value with changes in fair value recognized in earnings. Cameco also has a natural hedge against US currency fluctuations because a portion of its annual cash outlays, including purchases of uranium and conversion services, is denominated in US dollars.

Cameco holds a number of financial instruments denominated in foreign currencies that expose the Company to foreign exchange risk. Cameco measures its exposure to foreign exchange risk on financial instruments as the change in carrying values that would occur as a result of reasonably possible changes in foreign exchange constant. As of the reporting date, the Company has determined its pre-tax exposure to financial instruments to be as follows based on a 5% weakening of the Canadian dollar:

  Currency Carrying value 
(Cdn) 
Gain (loss) 
Cash and cash equivalents EUR $13,537  $677 
Cash and cash equivalents USD 46,958  2,348 
Accounts receivable USD 346,331  17,317 
Accounts receivable EUR 14,798  740 
Long-term receivables, investments and other USD (91,672) (4,584)
Accounts payable and accrued liabilities USD (97,508) (4,875)
Accounts payable and accrued liabilities GBP (18,999) (950)
Net foreign currency derivatives USD (67,005) (104,479)

A 5% strengthening of the Canadian dollar against the currencies above at December 31, 2014 would have had an equal but opposite effect on the amounts shown above, assuming all other variables remained constant.

  • C. Interest rate risk

The Company has a strategy of minimizing its exposure to interest rate risk by maintaining target levels of fixed and variable rate borrowings. The proportions of outstanding debt carrying fixed and variable interest rates are reviewed by senior management to ensure that these levels are within approved policy limits. At December 31, 2014, the proportion of Cameco’s outstanding debt that carries fixed interest rates is 80% (2013 – 84%).

Cameco is exposed to interest rate risk through its interest rate swap contracts whereby fixed rate payments on a notional amount of $300,000,000 of the Series D senior unsecured debentures were swapped for variable rate payments. The swaps terminate on September 2, 2019. Under the terms of the swaps, Cameco makes interest payments based on the three-month Canada Dealer Offered Rate plus an average margin of 3.7% and receives fixed interest payments of 5.67%. To mitigate this risk, Cameco entered into interest rate cap arrangements, effective March 18, 2013, whereby the three-month Canada Dealer Offered Rate was capped at 5.0% such that total variable payments will not exceed, on average, 8.7%. At December 31, 2014, the fair value of Cameco’s interest rate swaps and caps was $2,978,000 (2013 – $3,616,000).

Cameco is also exposed to interest rate risk on its loan facility with Inkai and on NUKEM’s multicurrency revolving loan facility due to the variable nature of the interest rates contained in the terms therein.

Cameco measures its exposure to interest rate risk as the change in cash flows that would occur as a result of reasonably possible changes in interest rates, holding all other variables constant. As of the reporting date, the Company has determined the impact on earnings of a 1% increase in interest rate on variable rate financial instruments to be as follows:

  Gain (loss) 
Interest rate contracts $(4,028)
Advances receivable from Inkai 867 

No amounts were withdrawn against NUKEM’s revolving load facility as of December 31, 2014.

Counterparty credit risk

Counterparty credit risk is associated with the ability of counterparties to satisfy their contractual obligations to Cameco, including both payment and performance. Cameco’s sales of uranium product, conversion and fuel manufacturing services expose the Company to the risk of non-payment.

Cameco manages the risk of non-payment by monitoring the credit worthiness of its customers and seeking pre-payment or other forms of payment security from customers with an unacceptable level of credit risk. To mitigate risks associated with certain financial assets, Cameco will hold positions with a variety of large creditworthy institutions.

The maximum exposure to credit risk, as represented by the carrying amount of the financial assets, at December 31 was:

  2014 2013
Cash and cash equivalents $566,583 $229,135
Accounts receivable 435,479 416,031
Advances receivable from Inkai [note 33] 91,672 95,319
Derivative assets 3,889 7,391

At December 31, 2014, there were no significant concentrations of credit risk and no amounts were held as collateral. Historically, Cameco has experienced minimal customer defaults and, as a result, considers the credit quality of its accounts receivable to be high. All accounts receivable at the reporting date are neither past due nor impaired.

Liquidity risk

Financial liquidity represents Cameco’s ability to fund future operating activities and investments. Cameco ensures that there is sufficient capital in order to meet short-term business requirements, after taking into account cash flows from operations and the Company’s holdings of cash and cash equivalents. The Company believes that these sources will be sufficient to cover the likely short-term and long-term cash requirements.

The table below outlines the Company’s available debt facilities at December 31, 2014:

  Total amount Outstanding and committed Amount available
Unsecured revolving credit facility $1,250,000 $ — $1,250,000
Letter of credit facility 1,068,420 950,716 117,704
Inkai revolving credit facility (Cameco’s share) 13,921 13,921
NUKEM multicurrency revolving loan facility 140,380 413 139,967

The tables below present a maturity analysis of Cameco’s financial liabilities, including principal and interest, based on the expected cash flows from the reporting date to the contractual maturity date:

  Carrying amount Contractual cash flows Due in less than 1 year Due in 1-3 years Due in 3-5 years Due after 5 years
Accounts payable and accrued liabilities $316,258 $316,258 $316,258 $ — $ — $ —
Long-term debt 1,491,198 1,500,000 500,000 1,000,000
Foreign currency contracts 67,916 67,916 53,873 14,043
Total contractual repayments $1,875,372 $1,884,174 $370,131 $14,043 $500,000 $1,000,000
  Total Due in less than 1 year Due in 1-3 years Due in 3-5 years Due after 5 years
Total interest payments on long-term debt $613,770 $69,390 $138,780 $138,780 $266,820

Measurement of fair values

  • A. Accounting classifications and fair values

The following tables summarize the carrying amounts and accounting classifications of Cameco’s financial instruments at the reporting date:

As at December 31, 2014
  Fair value 
through 
profit 
or loss 
Loans and receivables Available for sale Other 
financial 
liabilities 
Total 
Financial assets          
Cash and cash equivalents $ —  $566,583 $ — $ —  $566,583 
Accounts receivable [note 8] —  455,002 —  455,002 
Derivative assets [note 12]          
Foreign currency contracts 911  —  911 
Interest rate contracts 2,978  —  2,978 
Investments in equity securities [note 12] —  6,601 —  6,601 
Advances receivable from Inkai [note 33] —  91,672 —  91,672 
  3,889  1,113,257 6,601 —  1,123,747 
Financial liabilities          
Accounts payable and accrued liabilities [note 14] —  316,258  316,258 
Derivative liabilities [note 17]          
Foreign currency contracts 67,916  —  —  67,916 
Long-term debt [note 16] —  —  1,491,198  1,491,198 
  67,916  1,807,456  1,875,372 
Net $(64,027) $1,113,257 $6,601 $(1,807,456) $(751,625)
As at December 31, 2013
  Fair value
through
profit
or loss
Loans and receivables Available for sale Other 
financial 
liabilities 
Total 
Financial assets          
Cash and cash equivalents $ — $229,135 $ — $ —  $229,135 
Accounts receivable [note 8] 431,375 —  431,375 
Derivative assets [note 12]          
Foreign currency contracts 3,775 —  3,775 
Interest rate contracts 3,616 —  3,616 
Investments in equity securities [note 12] 22,805 —  22,805 
Advances receivable from Inkai [note 33] 95,319 —  95,319 
  7,391 755,829 22,805 —  786,025 
Financial liabilities          
Bank overdraft 41,226 —  41,226 
Accounts payable and accrued liabilities [note 14] 437,941  437,941 
Short-term debt [note 15]          
Commercial paper 24,974  24,974 
Promissory note 10,601  10,601 
NUKEM short-term loan 14,655  14,655 
Derivative liabilities [note 17]          
Foreign currency contracts 30,907 —  30,907 
Share purchase options 16 —  16 
Long-term debt [note 16] 1,293,383  1,293,383 
  72,149 1,781,554  1,853,703 
Net $64,758 $755,829 $22,805 $(1,781,554) $(1,067,678)

Cameco does not have any financial instruments classified as held-for-trading, or held-to-maturity as of the reporting date.

The following tables summarize the carrying amounts and fair values of Cameco’s financial instruments that are measured at fair value, including their levels in the fair value hierarchy:

As at December 31, 2014
    Fair value
  Carrying value  Level 1  Level 2  Total 
Derivative assets [note 12]        
Foreign currency contracts $911  $ —  $911  $911 
Interest rate contracts 2,978  —  2,978  2,978 
Investments in equity securities [note 12] 6,601  6,601  —  6,601 
Derivative liabilities [note 17]        
Foreign currency contracts (67,916) —  (67,916) (67,916)
Net $(57,426) $(6,601) $(64,027) $(57,426)
As at December 31, 2013
    Fair value
  Carrying value  Level 1  Level 2  Total 
Derivative assets [note 12]        
Foreign currency contracts 3,775  —  3,775  3,775 
Interest rate contracts 3,616  —  3,616  3,616 
Derivative liabilities [note 17]        
Foreign currency contracts (30,907) —  (30,907) (30,907)
Share purchase options (16) (16) —  (16)
Net $23,532  $16  $23,516  $23,532 

The preceding tables exclude fair value information for financial instruments whose carrying amounts are a reasonable approximation of fair value.

There were no transfers between level 1 and level 2 during the period. Cameco does not have any financial instruments that are classified as level 3 as of the reporting date.

  • B. Financial instruments measured at fair value

Cameco measures its short-term investments, derivative financial instruments and material investments in equity securities at fair value. Short-term investments and investments in publicly held equity securities are classified as a recurring level 1 fair value measurement and derivative financial instruments are classified as a recurring level 2 fair value measurement.

Short-term investments represent available-for-sale money market instruments. The fair value of these instruments is determined using quoted market yields as of the reporting date. The fair value of investments in equity securities is determined using quoted share prices observed in the principal market for the securities as of the reporting date.

Foreign currency derivatives consist of foreign currency forward contracts, options and swaps. The fair value of foreign currency options is measured based on the Black Scholes option-pricing model. The fair value of foreign currency forward contracts and swaps is measured using a market approach, based on the difference between contracted foreign exchange rates and quoted forward exchange rates as of the reporting date.

Interest rate derivatives consist of interest rate swap contracts and interest rate caps. The fair value of interest rate swaps is determined by discounting expected future cash flows from the contracts. The future cash flows are determined by measuring the difference between fixed interest payments to be received and floating interest payments to be made to the counterparty based on Canada Dealer Offer Rate forward interest rate curves. The fair value of interest rate caps is determined based on broker quotes observed in active markets at the reporting date.

Where applicable, the fair value of the derivatives reflects the credit risk of the instrument and includes adjustments to take into account the credit risk of the Company and counterparty. These adjustments are based on credit ratings and yield curves observed in active markets at the reporting date.

Cameco previously measured its investment in GoviEx at cost due to the unavailability of a quoted price in an active market. GoviEx is now listed on the Canadian Securities Exchange and as a result the Company has measured its investment at fair value as of the reporting date.

  • C. Financial instruments not measured at fair value

The carrying value of Cameco’s cash and cash equivalents, receivables, payables and accrued liabilities is assumed to approximate the fair value as a result of the short-term nature of the instruments. The carrying value of Cameco’s short-term debt (commercial paper and promissory notes) and long-term debt (debentures) is assumed to approximate the fair value as a result of the variable interest rate associated with the instruments or the fixed interest rate of the instruments being similar to market rates.

Derivatives

The following tables summarize the fair value of derivatives and classification on the consolidated statements of financial position:

  2014  2013 
Non-hedge derivatives:    
Foreign currency contracts $(67,005) $(27,132)
Interest rate contracts 2,978  3,616 
Share purchase options —  (16)
Net $(64,027) $(23,532)
Classification:    
Current portion of long-term receivables, investments and other [note 12] $500  $3,775 
Long-term receivables, investments and other [note 12] 3,389  3,616 
Current portion of other liabilities [note 17] (53,873) (30,923)
Other liabilities [note 17] (14,043) — 
Net $(64,027) $(23,532)

The following tables summarize different components of the losses on derivatives included in net earnings:

  2014  2013 
Non-hedge derivatives:    
Foreign currency contracts $(126,069) $(62,578)
Interest rate contracts 4,893  624 
Share purchase options 16  (16)
Net $(121,160) $(61,970)