Cameco

by

Sneha Batavia, Christian Bravo, Rob Huang, Ehsanul Mahmud, and Bella Yoro

One would assume that a company would have a difficult time paying dividends to its shareholders if it was making really low profits. Yet, Cameco Corporation is doing exactly that. In this report, we examine how the company manages to do so using a clever mix of policies and methods that might not meet the eye at first glance.

Cameco Corporation, a publicly traded company based in Saskatchewan, is one of the world’s largest uranium producers. It provided around 17% of the world’s uranium products in 2015 to nuclear energy plants.

Currently the demand (and market price) for uranium is falling due to environmental concerns related to nuclear power plants. However, Cameco believes the demand will eventually pick up, as India and China will rely heavily on nuclear power plants to support their rapidly growing economies.

In the table above, we can see that Cameco made losses before income taxes in both 2014 and 2015, which were offset by income tax recoveries leading to positive net earnings each year. Cameco had net earnings of $63.4 million in 2015, and yet it paid dividends of $158 million (the same amount of dividends the company had paid in the two years before). In short, Cameco is committed to declaring very regular dividends.

One cannot help but wonder a few things. Where is the money for dividends coming from? Where is the income tax recovery coming from? And, what does the future of Cameco look like? In this report, we have tried to dig deep and find some answers.

Cash flows

Certain items that contributed to the net earnings turning out low can be rediscovered in a different context in Cameco’s cash flow statements for 2015.

Net income takes non-cash expenses into account when calculating net earnings. Items such as depreciation (a non-cash expense) are written as expenses in the income statement, but it does not lead to an actual cash outflow. Therefore, we add this non-cash expense back in the cash flow statement to get a more accurate picture.

Impairment charges, apart from depreciation, are the highest expense for the company in both 2014 and 2015, and yet it is a non-cash expense. This impairment charge was mainly driven by a $210 million impairment charge relating to its Rabbit Lake mill in northern Saskatchewan, a result of increased uncertainty around future production sources due to ongoing economic conditions.

In the cash flow statement, the impairment charge of $215 million is added back as an adjustment to get an amount of net cash from operations of $450 million in 2015. This is slightly lower than the net cash from operations in 2014, but it proves that Cameco’s operations are performing well enough to generate a good amount of cash, considerably more than the statement of income would have its viewer think. A similar event also took place in the year before where dividends were also paid out despite a loss before income taxes, with impairment charges of $327 million being recognized.

The cash flow statements also provide further insight into the company’s future in terms of its investing and financing activities. Cameco makes regular use of debentures to take on debt. In June 2014, Cameco issued $500 million of new debentures, and announced the early redemption of their then-outstanding older debentures. This is reflected (after expenses) in cash flows as an increase in debt of $496 million. In 2014, Cameco also sold its 32% limited partnership interest in Bruce Power LP, which resulted in net proceeds of $447 million. These increases in cash from investing and financing are crucial because they contribute to investing cash outflows, even in a period of low profits for the company.

In both 2014 and 2015, Cameco made significant additions to property and equipment (for $480 million and $359 million respectively). These additions were primarily facilitated by the new debentures and sales proceeds. Therefore, despite low profits, the company is still very hopeful in its future and is thus taking the necessary measures to cope with rising demand in the future.

Tax Loss Carry-forward and Deferred Tax Assets

When exploring the additional notes for Cameco, we see that the company has around $2.18 billion in total tax loss carry-forwards. A tax loss carry-forward is a policy that allows an organization to use realized capital losses (the loss incurred when a capital asset decreases in value) to offset the taxation of capital gains in future years. This means that due to capital losses, Cameco will be able to offset future tax expenses. A large portion of the carry-forwards do not expire for the next 20 years.

In Table 2, we also see the amount of deferred tax assets that Cameco has.  Generally, if a business occurs a loss in a financial year, it usually is entitled to use that loss in order to lower its taxable income in following years (making it an asset). Cameco has the option of using these deferred tax assets to lower its taxable income in the future.

Income Tax Recovery

In 2015, based on the combined federal and provincial tax rate, Cameco had a computed income tax recovery of $21.3 million based on the $79 million loss from continuing operations.

However, the income tax recovery amount is far greater than $21.3 million, at $142.6 million. This number is important because the large amount of tax recovery allowed Cameco to post positive net earnings for the year. (We have noted that there was a loss before income taxes were applied. The income tax recovery led to a positive net earning in both 2015 and 2014.) So, what happened?

It is key to remember that while Cameco’s operations are headquartered in Canada, they have operations in many other countries worldwide (such as the United States and Kazakhstan). These countries have different tax regulations and rates. In order to avoid double taxation from the same income in both the source and Canada, Canadian companies are entitled to relief in the form of a credit or exemption. This difference drives up the recovery by $198 million, and through other adjustments we arrive at the final income tax recovery amount of $143 million.

As for the future potential of the company, including deferred tax in their consolidated balance sheet implies that they are hopeful of using this asset in the future. In essence, if Cameco thinks it will keep making losses, it will not able to use this tax asset to pay lower taxes in the event of future profits, and would thus not state this in the financial statement. Based on this, Cameco is expecting to make profit in the near future.

Parting Thoughts

The accounting procedures and business methods used by Cameco to pay out dividends are fully legitimate. However, there are other questions that a viewer of Cameco’s financial statements can ask. Should the company focus more on the shareholders’ interests (via fixed dividends) over other stakeholders such as employees? Lots of mining companies including Cameco lay off their employees and close down mines when the commodity market price is low, waiting to reopen the mine once the commodity's market price rise back up.

For example, in 2015, Cameco laid off 500 employees when it recognized its $209 million impairment charge at their Rabbit Lake mill. The Canadian government helps cover some of Cameco’s risks through its Employment Insurance (EI) program for the unemployed. Should Cameco proceed to operate in this manner?

Additionally, Cameco has a policy of paying a fixed amount of dividends per year. This is perhaps a method of keeping shareholders content while uranium prices have been falling over the past couple of years. Should the company continue in this direction or seek to create value in other methods?

Through the instances of seeing deferred tax assets being included in the consolidated balance sheet, and the regular acquisition of mines and other large fixed assets in recent years, one can assume that Cameco is optimistic about the future. The uranium market expects to see rising demand by the end of the decade, but until the time arrives, we cannot fully know whether Cameco’s strategies and dividend declarations will end up giving them a significant payoff.

About the Authors

Sneha Batavia earned her Bachelor's degree from New York University and is currently pursuing an MBA at the Schulich School of Business. She has worked for PricewaterhouseCoopers and Deloitte as a Consultant/Senior Associate for over four years and aspires to continue working in the same field.

Christian Bravo is passionate about technology. He moved to Toronto with 12 years experience as a technology consultant and sales manager to pursue an MBA in technology and entrepreneurship. He aims to start a Tech startup in Canada and a non-profit organization in Peru, fostering and supporting the involvement and development of Tech startups for low income people.

Po Hsiang (Rob) Huang worked for the past three years in the finance sector as an financial advisor and US equity trader. Now an MBA candidate at York University's Schulich School of Business, he is working towards his CFA designation and a future career in FinTech.

Ehsanul Mahmud is an MBA candidate at the Schulich School of Business.

Bella Yoro is a well-rounded healthcare strategist who is pursuing her career in strategic management within the life sciences sector. She is passionate about improving patients' quality of life, and takes initiative to improve the community by running charity events, mentoring in schools and serving on an ethics board.

References

Cameco 2015 Annual Report.

Cameco logo is from Wikipedia.

Photos of Cameco mines are from the "Media" secction of Cameco's website. They show Cameco's Cigar Lake and Rabbit Lake facilities in Saskatchewan.