It has been four years since the meltdown at the Fukushima Daiichi Nuclear Power Station in Japan. Part of the fallout was the shutdown of all 48 of the country’s nuclear reactors, a move that sent shock waves through the uranium sector, with companies such as Cameco Corporation (TSX: CCO)(NYSE: CCJ) seeing an unpredictable drop in demand.
However, things appear to be changing in the island nation, as news has emerged that two nuclear reactors located in the city of Satsuma Sendai would be reopened. Not only does this begin to open the doors to uranium imports, but it also eases fears of the Japanese unloading their reserves back onto the market — a move that would have degraded the already low price of uranium and added to the current oversupply of the radioactive metal.
But is this enough to restore investor confidence in Cameco, or is this just a ray of sunshine during an ongoing storm?
This quarter for Cameco has divided most investors into two camps: those who see a devalued stock with an eventual upside, and those who see too much trouble to touch the stock.
In Q3 2014, Cameco saw a drop in revenue, with only $587 million hitting the books, compared to $597 million in the prior year’s quarter. This is far below the $628 million projected by analysts. Gross profit was almost cut in half, totaling $143 million this quarter, down from $228 million.
Worst of all was a net loss of $146 million ($0.37 per share) compared to net earnings of $211 million ($0.53 per share) in Q3 2013.
Write-downs
A large portion of the net loss has been attributed to a pair of write-downs. The first one is a $184 million charge stemming from Cameco’s part in GE-Hitachi Global Laser Enrichment in North Carolina following the news that the project’s majority partner was drastically reducing its funding.
Cameco also suffered a $12 million charge from its investment in GoviEx Uranium Inc. following its debut on the Canadian Securities Exchange. Cameco stated that there was a “significant decline in the fair value of our investment in GoviEx.”
The taxman cometh
Cameco is also embroiled in a tax-avoidance dispute with the Canadian government. The Canadian Revenue Agency believes that — thanks to some clever Swiss accounting — Cameco has circumvented declaring $5.7 billion in taxable income attributable to Canada.
In 1999, Cameco created Cameco Europe in Zug, Switzerland. The new entity was created to be a reseller, but is accused of being nothing more than a rented office at the law firm representing Cameco in Europe. Cameco would sell uranium to Cameco Europe for US$10 per pound. Cameco Europe would in turn sell it to Cameco’s customers.
The issue is that while US$10 per pound was the market rate in 1999, things have changed; in 2007, uranium was priced at US$140 per pound. This difference of $130 per pound became taxable at Switzerland’s 10% tax rate instead of Canada’s 27% tax rate.
While the CRA case is not resolved, Cameco is still required to submit $650 million to the CRA, which equals half of the proposed amount, until the matter is settled. It is believed that Cameco has handed over only about 10% of the charge, and if found guilty, this would cripple the company’s cash flow.
What hope remains?
While 2014 revenues are expected to drop by 5%, Cameco still has over 31 million pounds of U3O8 already contracted between 2014 and 2028. This appears impressive at first, but Cameco is expected to produce 22.8 million pounds this year alone, down from earlier estimates of 23.3 million.
The capital budget has also been slashed from $550 million to $490 million. But on the bright side, the long-awaited Cigar Lake mine is finally producing.
