Quarterly Reports - 2018 - Q4
On February 8, 2019, Cameco reported its consolidated financial and operating results for the fourth quarter and year ended December 31, 2018 in accordance with International Financial Reporting Standards (IFRS).
“As we expected, we had a strong finish to 2018,” said Tim Gitzel, Cameco’s president and CEO. “There were some significant developments in 2018 that contributed to the strong finish, and that have strengthened our foundation, setting the course for our future success.
“In 2018, the temporary suspension of production at McArthur River/Key Lake, and the subsequent extension for an indeterminate duration, allowed us to preserve the value of our tier-one assets, drawdown our excess inventory under the protection of our contract portfolio, and build a significant cash balance, positioning the company to self-manage risk. And, of course one of those risks has been substantially diminished with the unequivocal win in our CRA tax case for the tax years 2003, 2005, and 2006.
“In addition, we saw a significant improvement in the spot market driven by substantial production cuts, cuts to some secondary supplies, a reduction in producer inventories, and an increase in demand for uranium in the spot market from producers and financial players. However, the term market remains tentative driven largely by market access and trade policy issues.
“Our outlook for 2019 is also as we expected, and reflects the deliberate decisions we have made. Our decisions come with some near-term costs, but they are the right decisions to make in order to build long-term value. Although we currently expect our gross margin could be weaker, our balance sheet will remain strong. We will continue to maintain a significant cash balance, and generate cash from operations, allowing us to self-manage risk. And, there is significant potential upside to our outlook. Remember, there are a number of moving pieces both internally and externally that could have a significant impact on the market and on our results for the year.
“These items include the result of the investigation under Section 232 of the Trade Expansion Act in the US, a potential cost award from the Tax Court based on the unequivocal win in our tax case, and a potential award for damages in our TEPCO dispute.
“We are a commercially motivated supplier, with a diversified portfolio of assets, including a tier-one production portfolio that is among the best in the world. We will continue to be disciplined and make the decisions necessary to keep the company strong and viable for the long term.”
Summary of 2018 results and developments:
- 2018 performance in line with outlook provided; net earnings of $166 million; adjusted net earnings of $211 million: As expected, production was lower than 2017 due to the suspension of production at McArthur River/Key Lake and the change in reporting for Inkai. In 2018, we undertook a number of deliberate and disciplined actions, which resulted in lower direct administration and exploration costs, lower capital expenditures and $1.1 billion in cash on our balance sheet largely as a result of our inventory drawdown.
- McArthur River/Key Lake suspended for indeterminate duration: On July 25, 2018, we, along with our partner Orano, announced the extended shutdown of McArthur River/Key Lake for an indeterminate duration removing 18 million pounds (100% basis) annually from the market. The action resulted in the permanent layoff of approximately 520 site employees. A reduced workforce of approximately 200 employees remain at the sites to keep the facilities in a state of safe care and maintenance. We incurred approximately $29 million in severance costs as a result of the permanent layoffs. Our share of the cash and non-cash costs to maintain both operations during the suspension is expected to range between $7 million and $9 million per month. In addition, to further decrease costs, the workforce at our corporate office was reduced by approximately 150 positions, resulting in severance costs of approximately $14 million.
- Unequivocal win in Canada Revenue Agency (CRA) case, awaiting cost award: On September 26, 2018, the Tax Court of Canada ruled unequivocally in our favour in our case for the 2003, 2005 and 2006 tax years. On October 25, 2018, CRA filed an appeal with the Federal Court of Appeal seeking to overturn the decision. We believe there is nothing in the decision that would warrant a materially different outcome on appeal, or for subsequent tax years. In accordance with the ruling, we have made an application to the Tax Court to recover costs in the amount of $38 million, which were incurred over the course of this case. In its response to the Tax Court regarding our cost submission, CRA is claiming $9.6 million would be an appropriate award in this case. The actual cost award will be at the discretion of the Tax Court. For more information, see Transfer Pricing Dispute on page 31 in our annual and fourth quarter MD&A.
- TEPCO dispute: In accordance with the provisions in the supply agreement, an arbitration hearing to resolve the dispute took place during January of 2019. There are a number of post hearing steps and we expect they will be completed by mid-May, 2019. The timing of the final decision will be dependent on how long the arbitrators deliberate following receipt of post-hearing submissions. The arbitration proceedings are subject to a confidentiality order which limits the information we are able to disclose. For more information, see TEPCO contract dispute on page 8 in our annual and fourth quarter MD&A.