Quarterly Report - 2020 - Q2
On July 29, 2020, Cameco reported its consolidated financial and operating results for the second quarter ended June 30, 2020 in accordance with International Financial Reporting Standards (IFRS).
“The coronavirus (COVID-19) pandemic has had a significant impact on people and the economy around the world.” said Tim Gitzel, Cameco’s president and CEO. “Cameco too has felt the impact with the proactive shutdown of our operations resulting in an additional $37 million in care and maintenance costs and an increased reliance on the spot market for uranium supply, which are reflected in our results. However, we continue to do our part to keep people safe and help rebuild the economy. We believe that the pro-active actions we have taken to slow the spread of the COVID-19 virus are prudent and reflect our values – placing priority on the health and safety of our employees, their families and their communities.
“We expect our business to be resilient. Our customers continue to need uranium fuel to power the carbon-free nuclear electricity that will be part of the critical infrastructure needed to ensure hospitals, care facilities and other essential services are available during this pandemic. However, the COVID-19 pandemic has disrupted global uranium production adding to the supply curtailments that have already occurred in the industry due to the lack of production economics. The industry is reliant on supply that has become highly concentrated both geographically and geologically. With the ongoing uncertainty about supply during the pandemic and trade policy issues, we think the risks to supply are greater than the risk to demand.
“Therefore, we think our plan to restart Cigar Lake at the beginning of September is prudent. While health and safety are the primary considerations for the timing of our Cigar Lake mine restart decision, there were also commercial considerations, including market-related factors and the impact on our cost structure. We will not be able to make up the lost production and are therefore targeting our share of 2020 production to be up to 5.3 million pounds in total. With the uncertainty remaining about our ability to restart and continue operating the Cigar Lake mine, the delays and deferrals of project work and therefore the resulting production rate in 2020 and 2021, we believe the current plan represents an appropriate balance of the commercial considerations affecting our decision.
“We have the tools we need to deal with the current uncertain environment. We are well positioned to self-manage risk. We have $878 million in cash and short-term investments on our balance sheet and a $1 billion undrawn credit facility, which we do not anticipate we will need to draw on this year. And, we believe our risks have been significantly reduced with the Federal Court of Appeal’s unanimous decision in our favour in our tax case with the Canada Revenue Agency (CRA) for the tax years 2003, 2005 and 2006. Based on our belief that the principles in the decision apply to all tax years subsequent to 2006, we expect to recover the $303 million in cash paid and $482 million in letters of credit secured with the CRA in relation to this dispute.
“We remain resolved in our strategy to build long-term value. We continue to expect that security of supply will be a priority for our customers and a rising price environment will provide us with the opportunity to add value with our tier-one assets.
“Embedded in all our decisions is a commitment to addressing the environmental, social and governance risks and opportunities that we believe will make our business sustainable over the long term. In these uncertain times, perhaps more than ever, it will be critical that we continue to work together to build on the strong foundation we have already established.”
Summary of second quarter results and developments:
- Net loss of $53 million; adjusted net loss of $65 million: Results are driven by normal quarterly variations in contract deliveries and our continued execution on all strategic fronts. This quarter was also impacted by increasing uranium prices, increased purchase activity and additional care and maintenance costs of $37 million resulting from proactive decisions to suspend production at the Cigar Lake mine, Blind River refinery and Port Hope UF6 conversion plant in response to the COVID-19 pandemic. Adjusted net earnings is a non-IFRS measure, see page 4 of news release.
- Expect higher average unit cost of sales due to impacts of the COVID-19 pandemic: Given the production interruptions at the Cigar Lake mine and at the Inkai operations, we expect an increase in our required spot market purchasing in 2020 to meet our delivery commitments and to maintain our desired inventory levels. Combined with the additional care and maintenance costs associated with the temporary closure of the Cigar Lake mine we expect the average unit cost of sales in our uranium segment to be higher than disclosed in our 2019 annual MD&A. However, the exact magnitude of the increase is uncertain and will be dependent on our ability to achieve the 5.3 million-pound (our share) production target at Cigar Lake and on the volume of purchases made. See Outlook for 2020 in our second quarter MD&A for more information.
- Planned Cigar Lake restart: Providing it is safe to do so, we plan to restart the Cigar Lake mine at the beginning of September. If we are able to restart and maintain continued operations, we are targeting our share of production for 2020 to be up to 5.3 million pounds in total. The restart will be dependent on our ability to establish safe and stable operating protocols among other factors, including availability of the necessary workforce and how the COVID-19 pandemic is affecting northern Saskatchewan.
- Fuel services division benefiting from conversion market transition: With the restart of the Blind River refinery and Port Hope UF6 conversion plant in May, and despite a slight decrease in expected production due to the temporary COVID-19 pandemic-related suspension, weaker performance in our uranium segment is being partially offset by the strong performance of our fuel services division.
- Strong balance sheet: As of June 30, 2020, we had $878 million in cash and short-term investments and $1.0 billion in long-term debt with maturities in 2022, 2024 and 2042. In addition, we have a $1 billion undrawn credit facility. We expect our cash balances and operating cash flows to meet our capital requirements during 2020, therefore, we do not anticipate drawing on our credit facility this year.
- Federal Court of Appeal upheld Tax Court decision: On June 26, 2020, the Federal Court of Appeal decided unanimously in our favour in our dispute with CRA. The decision upholds the September 26, 2018 decision of the Tax Court of Canada, which was unequivocally in our favour for the 2003, 2005, and 2006 tax years and it sustains the corresponding decision on the cost award. As a result, we expect to receive refunds totaling $5.5 million plus interest for the three tax years and $10.25 million for legal fees incurred plus an amount for disbursements of up to $17.9 million. Timing of any payments is uncertain. We believe the principles in the decision apply to all subsequent tax years. See Transfer pricing dispute in our second quarter MD&A for more information.
- Spot prices holding, and long-term fundamentals remain strong: Low uranium prices, government-driven trade policies and the COVID-19 pandemic are having an effect on the security of supply in our industry. In addition to the supply curtailments that have occurred in the industry for many years, we have seen a number of unplanned supply disruptions since March, including our suspension at the Cigar Lake mine and the reduction in operational activities across all mines in Kazakhstan. The duration and extent of these disruptions are still unknown. Following the announcements, the uranium spot price initially increased by more than 35%. Recently prices have held at a level that is averaging close to $10 (US) per pound higher than spot prices in 2019. As noted recently by the International Atomic Energy Agency, while electricity demand in the near-term has declined, the proportion of nuclear power has increased relative to fossil fuel sources which demonstrates the resilience of the clean, carbon-free, base-load electricity generation that nuclear power provides.