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or Name
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CA



Cameco Corp
Symbol CCO
Shares Issued 395,792,522
Close 2016-02-05 C$ 17.16
Market Cap C$ 6,791,799,678
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Cameco earns $65-million in 2015

2016-02-05 18:45 ET - News Release

Ms. Rachelle Girard reports

CAMECO REPORTS FOURTH QUARTER AND 2015 FINANCIAL RESULTS

Cameco Corp. has released its consolidated financial and operating results for the fourth quarter and year ended Dec. 31, 2015, in accordance with international financial reporting standards.

"In 2015, the company continued to perform well, in the context of the global challenges our industry faces," said president and chief executive officer, Tim Gitzel. "But despite the challenges, we continued to concentrate on the aspects of our business that are within our control, which has led us to once again deliver on and, in some cases, exceed our annual guidance.

"We are still waiting on a market recovery that was expected to come sooner, but we've learned to put those expectations aside and prepare for whatever comes our way. Looking ahead, our strategy is to continue focusing our capital on Tier 1 assets, because it's those world-class, low-cost mines that will position us to quickly respond when the market calls for more production, and we believe that the question is not if the market will make that call, but when, as we continue to see a bright long-term outlook for the nuclear industry."

                        HIGHLIGHTS
            ($ millions except where indicated) 

                                   Three months                              
                                          ended     Year ended         
                                        Dec. 31,       Dec. 31, 
                                     2015  2014    2015   2014

Revenue                              $975  $889  $2,754 $2,398
Gross profit                          282   251     697    638
Net earnings (loss) attributable
to equity holders                     (10)   73      65    185
$ per common share
(diluted)                           (0.03) 0.18    0.16   0.47
Adjusted net earnings (non-IFRS)      151   205     344    412
$ per common share
(adjusted and diluted)               0.38  0.52    0.87   1.04
Cash provided by operations (after
working capital changes)              503   236     450    480
Average
realized uranium ($U.S./lb)         
prices                              46.36 50.57   45.19  47.53
$Cdn/lb                             61.24 56.78   57.58  52.37
Fuel
Services ($Cdn/kgU)                 21.88 16.92   23.37  19.70
Nukem     ($Cdn/lb)                 52.22 52.12   48.82  44.90

The 2015 annual financial statements have been audited; however, the fourth quarter 2014 and 2015 financial information presented is unaudited. You can find a copy of the company's 2015 annual management's discussion and analysis and the company's 2015 audited financial statements, on the Cameco website.

Full year

The company's net earnings attributable to equity holders (net earnings) in 2015 were $65-million (16 cents per share diluted) compared with $185-million (47 cents per share diluted) in 2014, mainly due to:

  • Greater losses on foreign exchange derivatives due to the weakening of the Canadian dollar;
  • Lower tax recoveries, primarily due to the write-off of the company's deferred tax asset in the United States.

These were partially offset by:

  • Lower impairment charges ($215-million in 2015 and $327-million in 2014);
  • Higher earnings in the company's uranium and fuel service segments due to higher average realized prices;
  • Higher earnings in the company's Nukem segment as a result of higher volumes and average realized price;
  • Reduction of the provision related to the company's Canada Revenue Agency (CRA) litigation.

In addition, in 2014, there were a number of one-time items that contributed to the higher net earnings in 2014 compared with 2015, including:

  • The sale of the company's interest in Bruce Power Limited Partnership (BPLP) resulting in a $127-million gain in 2014;
  • A favourable settlement of $66-million in 2014 with respect to a dispute regarding a long-term supply contract with a utility customer.

These were partially offset by:

  • Payment of an early agreement termination fee of $18-million as a result of the cancellation of the company's toll conversion agreement with Springfields Fuels Ltd. (SFL), and $12-million for settlement costs with respect to an early redemption of the company's Series C debentures in 2014;
  • The write-off of $41-million of assets under construction in 2014 as a result of changes made to the scope of a number of projects.

On an adjusted basis, the company's earnings were $344-million (87 cents per share diluted) (non-international financial reporting standard measure) in 2015 compared with $412-million ($1.04 per share diluted) in 2014.

The 17-per-cent decrease from 2014 to 2015 resulted from:

  • Greater losses on foreign exchange derivatives due to the weakening of the Canadian dollar;
  • Lower tax recoveries, primarily due to the write-off of the company's deferred tax asset in the United States.

These were partially offset by:

  • Higher earnings in the company's uranium and fuel service segments mainly due to a higher average realized price;
  • Higher earnings from the company's Nukem segment mainly due to higher sales volumes and a higher average realized price;
  • A reduction of the provision related to the company's CRA litigation.

In addition, in 2014, there was a favourable settlement of $66-million with respect to a dispute regarding a long-term supply contract with a utility customer that contributed to the higher adjusted net earnings in 2014 compared with 2015. The impact of the settlement was partially offset by an early termination fee of $18-million incurred as a result of the cancellation of the company's toll conversion agreement with SFL and settlement costs of $12-million with respect to the early redemption of the company's Series C debentures in 2014.

Fourth quarter

In the fourth quarter of 2015, the company's net loss was $10-million (or three cents per share, diluted), a decrease of $83-million compared with net earnings of $73-million (18 cents per share, diluted) in 2014, mainly due to:

  • Greater losses on foreign exchange derivatives resulting from the weakening of the Canadian dollar;
  • Lower income tax recovery due to the reduction of the company's deferred tax asset in the United States;
  • Higher impairment charges in 2015 ($210-million in 2015 and $131-million in 2014).

These were partially offset by:

  • Higher uranium gross profits resulting mainly from a higher average realized price and higher sales volumes;
  • Higher gross profits from the company's fuel service segment due to a higher average realized price;
  • Lower exploration expenditures;
  • The reduction of the company's provision related to the CRA litigation.

In addition, in the fourth quarter of 2014, there was a favourable settlement of $37-million with respect to a dispute regarding a long-term supply contract with a utility customer that contributed to the higher net earnings in the fourth quarter of 2014 compared with the same period in 2015. The impact of the settlement was partially offset by the write-off of $41-million of assets under construction as a result of changes made to the scope of a number of projects in the fourth quarter of 2014.

On an adjusted basis, the company's earnings this quarter were $151-million (38 cents per share, diluted) compared with $205-million (52 cents per share, diluted) (non-IFRS measure) in 2014, mainly due to:

  • A lower income tax recovery, primarily due to the reduction of the company's deferred tax asset in the U.S.

This was partially offset by:

  • Higher uranium gross profits resulting mainly from a higher average realized price and higher sales volumes;
  • Higher gross profits from the company's fuel service segment mainly due to a higher average realized price;
  • Lower exploration expenditures;
  • The reduction of the company's provision related to the CRA litigation.

In addition, in the fourth quarter of 2014, there was a favourable settlement of $37-million with respect to a dispute regarding a long-term supply contract with a utility customer that contributed to the higher adjusted net earnings in the fourth quarter of 2014 compared with the same period in 2015.

Impairment charge on producing assets

During the fourth quarter of 2015, the company recognized a $210-million impairment charge related to the company's Rabbit Lake operation. The impairment was due to increased uncertainty around future production sources for the Rabbit Lake mill as a result of the continuing economic conditions. The amount of the charge was determined as the excess of carrying value over the recoverable amount. The recoverable amount of the mill was determined to be $69-million.

Market developments in 2015

As has been the case in recent years, a lot happened over the course of 2015, although the general state of the market did not see much change.

Making positive news for nuclear, as usual, was China. Not only did the country continue with its rapid reactor new build program and bring eight reactors on-line, but Chinese companies also signed agreements with Argentina, Romania and the United Kingdom for new reactors, illustrating the country's commitment to nuclear and its intent to become a major international player in the nuclear industry.

Undoubtedly, the biggest headline of 2015 was the long-awaited first reactor restarts in Japan. Sendai units 1 and 2 were the first reactors in Japan to restart since 2013, and it is hoped they are the first of many to come.

New builds in the United Kingdom and the United States continued to be bright spots for the industry, in addition to a number of reactor life extensions approved in Japan, and the U.S., with utilities now considering additional extensions that could see reactor lives reaching 80 years.

However, these positive developments could not outweigh the more powerful influence of a continued sluggish global economy, geopolitical issues, concerns around growth in China and flat electricity demand. These more general drivers had help from industry-specific factors as well, such as slower new reactor construction, eight reactor shutdowns, the continued high level of inventories held by market participants and France's policy to reduce nuclear in its energy mix to 50 per cent by 2025 becoming law.

In addition, supply performed relatively well, with only minor disruptions and one curtailment, unlike 2014, which saw six projects tempered or curtailed.

The end result was a market seemingly indifferent to the commotion of events that occurred throughout the year.

Contracting

Market contracting activity was modest. Spot volumes were normal, but long-term contracting was well below historical averages, and current consumption levels about half of current annual reactor consumption estimates, similar to 2014. Long-term contracting is a key factor in the timing of market recovery, and its pace will depend on the respective coverage levels, market views, and risk appetite of both buyers and sellers.

Japan

The big news in Japan was the restart of Sendai units 1 and 2, which occurred in August and October. In addition, the court injunction against the two Takahama units was overturned in December, 2015, clearing the way for Takahama unit 3 to restart on Jan. 29, 2016, with Unit 4 expected to restart later in the first quarter. Ikata Unit 3 has also cleared a safety inspection by the Nuclear Regulatory Authority, and four more units are in the final stages of approval. In all, three reactors are now in operation, while 23 remain under evaluation for restart.

Over the long term, Japan's energy policy states that nuclear will make up 20 to 22 per cent of the energy mix in the country. The billions of dollars in investment being made by Japan's utilities suggest a high degree of confidence in reactors coming back on-line and meeting this target; however, public sentiment toward nuclear in Japan remains somewhat uncertain.

Other regions

China's remarkable nuclear growth program remains on track and the U.K.'s plans for new reactor construction continue to move forward. India and South Korea are also among several key regions expanding their nuclear generation fleet.

In 2015, growth was tangible as 10 reactors came on-line, double that of 2014. These included the eight noted in China, one in Russia and one in South Korea. Seven more reactors began construction: six in China and one in the United Arab Emirates, a formerly non-nuclear country with four reactors now under construction.

To round out the picture, however, eight units shut down. Five of these were in Japan, plus one in Sweden and one in Germany as part of its phase-out plans, and one in the U.K., the last Magnox reactor operating in the world. In addition, there were announcements for future shutdowns in the U.S., where nuclear struggles to remain competitive in deregulated electricity markets and in the context of low natural gas prices.

One event that could have an effect on the future of nuclear in the U.S. and other western countries is the UN Climate Conference COP-21 agreement, finalized in 2015. As a non-GHG emitter, nuclear could play a significant role in achieving climate change prevention goals.

Outlook for 2016

The company's strategy is to focus on the company's Tier 1 assets and profitably produce at a pace aligned with market signals, while maintaining the ability to respond to conditions as they evolve.

The outlook for 2016 reflects the expenditures necessary to help the company achieve its strategy.

Financial outlook for 2016

The company expects consolidated revenue to decrease up to 5 per cent in 2016, based on currently committed sales volumes, due to a planned decrease in uranium and fuel service sales volumes. If the company makes additional sales with deliveries in 2016, the company would expect the company's revenue outlook to increase.

The company expects administration costs (not including stock-based compensation) to be 5 per cent to 10 per cent higher compared with 2015 due to increased costs related to the northern collaboration agreements and increased project work. In 2016, the company is continuing to negotiate new collaboration agreements with northern communities, which could result in additional one-time payments. Due to the uncertainty of the timing for the potential signing of agreements, the cost is not included in the company's outlook. If agreements are signed and there is an impact on administrative costs, the company will update its outlook.

The company expects exploration expenses to be about 15 per cent to 20 per cent higher than they were in 2015 due to increased exploration activity at Cigar Lake.

On an adjusted net earnings basis, the company expect a tax recovery of 25 per cent to 30 per cent in 2016 from the company's uranium, fuel services and Nukem segments.

The company's consolidated tax rate is a blend of the statutory rates applicable to taxable income earned or tax losses incurred in Canada and in the company's foreign subsidiaries. The company has a global customer base, and it has established a marketing and trading structure involving foreign subsidiaries, which entered into various intercompany purchase and sale arrangements, as well as uranium purchase and sale agreements with third parties. Cameco and its subsidiaries made reasonable efforts to put arm's-length transfer pricing arrangements in place, and these arrangements expose the parties to the risks and rewards accruing to them under these contracts. The intercompany contract prices are generally comparable with those established in comparable contracts between arm's-length parties entered into at that time.

This year, many of the existing intercompany purchase and sale arrangements in the company's portfolio expire. The company has started to replace these contracts and will continue to put new intercompany arrangements in place, which, as the existing arrangements did, will reflect the market at the time they are signed.

As a result, in 2017, the company expects its consolidated tax rate will transition to a modest expense, and trend toward a tax expense of approximately 20 per cent over the next five years. The actual effective tax rate will vary from year to year, primarily due to the actual distribution of earnings among jurisdictions and the market conditions at the time transactions occur under both the company's intercompany and third party purchase and sale arrangements.

Royalties

The company pays royalties on the sale of all uranium extracted at its mines in the province of Saskatchewan. Two types of royalties are paid:

  • Basic royalty: calculated as 5 per cent of gross sales of uranium, less the Saskatchewan resource credit of 0.75 per cent;
  • Profit royalty: a 10-per-cent royalty is charged on profit up to and including $22.70 per kilogram triuranium octoxide ($10.30 per pound), and a 15-per-cent royalty is charged on profit in excess of $22.70 per kilogram U3O8. Profit is determined as revenue less certain operating, exploration, reclamation and capital costs. Both exploration and capital costs are deductible at the discretion of the producer.

As a resource corporation in Saskatchewan, the company also pays a corporate resource surcharge of 3 per cent of the value of resource sales.

During the period from 2013 to 2015, transitional rules for the new profit royalty regime were applied whereby only 50 per cent of capital costs was deductible. The remaining 50 per cent was accumulated and will now be deductible beginning in 2016. In addition, the capital allowance related to Cigar Lake under the previous system was grandfathered and is also now deductible beginning in 2016. Based on the expected application of transitional and grandfathered capital allowance deductions, the company anticipates that only the first tier of the profit royalty (10 per cent) will apply in 2016 and 2017. As capital pools are depleted, the company expects to also be subject to the top tier of the profit royalty (15 per cent) in 2018.

Capital spending

The company classifies capital spending as sustaining, capacity replacement or growth. As a mining company, sustaining capital is the money the company spends to keep its facilities running in their present state, which would follow a gradually decreasing production curve, while capacity replacement capital is spent to maintain current production levels at those operations. Growth capital is money the company invests to generate incremental production, and for business development.

The company expects total capital expenditures for uranium and fuel services to decrease by about 11 per cent in 2016.

Major sustaining, capacity replacement and growth expenditures in 2016 include:

  • McArthur River/Key Lake: At McArthur River, the largest projects are the expansion of freeze capacity and mine development. Other projects include site facility and equipment purchases. At Key Lake, work will be done to expand capacity in the solvent extraction and crystallization circuits of the mill.
  • U.S. in situ recovery (ISR: Well field construction represents the largest portion of the company's expenditures in the U.S.
  • Rabbit Lake: At Eagle Point, the largest component is mine development, along with mine equipment upgrades and purchases. At the mill, the company plans to optimize tailings capacity and work on various mill facility and equipment replacements.
  • Cigar Lake: Work to expand freezing capacity makes up the largest portion of capital at the Cigar Lake site. The company is also paying its share of the costs to modify and expand the McClean Lake mill.

The company previously expected to spend between $350-million and $400-million in 2017. The company now expects to spend between $300-million and $350-million in 2017. Due to the continued market uncertainty, the company has reduced growth capital to focus on its Tier 1 properties.

Revenue, cash flow and earnings sensitivity analysis

For 2016:

  • An increase of $5 (U.S.) per pound in each of the Ux spot price ($34.65 (U.S.) per pound on Feb. 1, 2016) and the Ux long-term price indicator ($44 (U.S.) per pound on Jan. 25, 2016) would change revenue by $72-million and net earnings by $56-million. Conversely, a decrease of $5 (U.S.) per pound would decrease revenue by $69-million and net earnings by $54-million.
  • A one-cent change in the value of the Canadian dollar versus the U.S. dollar would change adjusted net earnings by $8-million and cash flow by $1-million, with a decrease in the value of the Canadian dollar versus the U.S. dollar having a positive impact.

Uranium segment outlook

The company expects to produce 30.0 million pounds in 2016 and have commitments under long-term contracts to purchase approximately nine million pounds.

Based on the contracts the company has in place, and not including sales between the company's segments, it expects to deliver between 30 million and 32 million pounds of U3O8 in 2016. The company expects the unit cost of sales to be up to 5 per cent higher than in 2015, primarily due to the planned purchases during the year. If the company makes additional discretionary purchases in 2016 at a cost different than its other sources of supply, then the company expects the overall unit cost of sales to be affected.

The company expects revenue to be up to 5 per cent lower than in 2015 as a result of an expected decrease in deliveries, not including sales between its segments, partially offset by a higher average realized price.

In the company's uranium and fuel service segments, customers choose when in the year to receive deliveries. As a result, the company's quarterly delivery patterns and, therefore, the company's sales volumes and revenue can vary significantly. The company expects the quarterly distribution of uranium deliveries in 2016 to be weighted to the second half of the year. However, not all delivery notices have been received to date, and the expected delivery pattern could change. Typically, the company receives notices six months in advance of the requested delivery date.

Price sensitivity analysis: uranium segment

The company's portfolio includes a mix of fixed-price and market-related contracts, which the company targets at a 40 to 60 ratio. Those that are fixed at lower prices or have low ceiling prices will yield prices that are lower than current market prices.

The company's portfolio is affected by more than just the spot price. The company made the following assumptions (which are not forecasts):

Sales:

  • Sales volumes on average of 27 million pounds per year, with commitment levels in 2016 through 2018 higher than in 2019 and 2020;
  • Excludes sales between the company's uranium, fuel services and Nukem segments.

Deliverie:

  • Deliveries include best estimates of requirements contracts and contracts with volume flex provisions.

Annual inflation :

  • Two per cent in the U.S.

Prices:

  • The average long-term price indicator is the same as the average spot price for the entire year (a simplified approach for this purpose only). Since 1996, the long-term price indicator has averaged 19 per cent higher than the spot price. This differential has varied significantly.

Fuel service outlook

In 2016, the company plans to produce eight million to nine million kilograms uranium, and the company expects sales volumes, not including intersegment sales, to be up to 5 per cent lower than in 2015. Overall revenue is expected to increase by up to 5 per cent as lower sales volumes will be more than offset by an increase in the average realized price. The company expects the average unit cost of sales to increase by 10 per cent to 15 per cent; therefore, overall gross profit will decrease as a result.

Nukem outlook

For 2016, Nukem expects to deliver between nine million and 10 million pounds of uranium. Total revenue and unit cost of sales, not including intersegment sales, are expected to increase by 5 per cent to 10 per cent compared with 2015; however, the overall gross profit percentage is expected to be slightly lower than 2015 at 4 per cent to 5 per cent.

Transfer pricing disputes

The company has been reporting on its transfer pricing disputes with the Canada Revenue Agency since 2008, when it originated, and with the U.S. Internal Revenue Service (IRS) since the first quarter of 2015. Below, the company discusses the general nature of transfer pricing disputes and, more specifically, the continuing disputes it has.

Transfer pricing is a complex area of tax law, and it is difficult to predict the outcome of cases. However, tax authorities generally test two things:

  • The governance (structure) of the corporate entities involved in the transactions;
  • The price at which goods and services are sold by one member of a corporate group to another.

The company has a global customer base, and it established a marketing and trading structure involving foreign subsidiaries, including Cameco Europe Ltd. (CEL), which entered into various intercompany arrangements, including purchase and sale agreements, as well as uranium purchase and sale agreements with third parties. Cameco and its subsidiaries made reasonable efforts to put arm's-length transfer pricing arrangements in place, and these arrangements expose the parties to the risks and rewards accruing to them under these contracts. The intercompany contract prices are generally comparable with those established in comparable contracts between arm's-length parties entered into at that time.

For the years 2003 to 2010, CRA has shifted CEL's income (as recalculated by CRA) back to Canada and applied statutory tax rates, interest and instalment penalties and, from 2007 to 2009, transfer pricing penalties. There has not yet been a decision regarding a transfer pricing penalty for 2010. The IRS also allocated a portion of CEL's income for the years 2009 through 2012 to the U.S., resulting in such income being taxed in multiple jurisdictions. Taxes of approximately $320-million for the 2003 to 2015 years have already been paid in a jurisdiction outside Canada and the U.S. Bilateral international tax treaties contain provisions that generally seek to prevent taxation of the same income in both countries. As such, in connection with these disputes, the company is considering its options, including remedies under international tax treaties that would limit double taxation; however, there is a risk that the company will not be successful in eliminating all potential double taxation. The expected income adjustments under the company's tax disputes are represented by the amounts claimed by CRA and IRS and are described below.

CRA dispute

Since 2008, CRA has disputed the company's corporate structure and the related transfer pricing methodology the company used for certain intercompany uranium sale and purchase agreements. To the end of 2014, the company received notices of reassessment for its 2003 through 2009 tax returns, and, in the fourth quarter of 2015, the company received a notice of reassessment for its 2010 tax year. The company has recorded a cumulative tax provision of $50-million (Sept. 30, 2015: $92-million), in which an argument could be made that its transfer price may have fallen outside of an appropriate range of pricing in uranium contracts for the period from 2003 through 2015. The company has reduced the provision to reflect management's revised estimate, which takes into account additional contract information. The company is confident that it will be successful in its case and continues to believe the ultimate resolution of this matter will not be material to its financial position, results of operations and cash flows in the year(s) of resolution.

For the years 2003 through 2010, CRA issued notices of reassessment for approximately $3.4-billion of additional income for Canadian tax purposes, which would result in a related tax expense of about $1.1-billion. CRA has also issued notices of reassessment for transfer pricing penalties for the years 2007 through 2009 in the amount of $229-million. The Canadian income tax rules include provisions that require larger companies like Cameco to remit or otherwise secure 50 per cent of the cash tax plus related interest and penalties at the time of reassessment. To date, under these provisions, after applying elective deductions, the company has paid a net amount of $232-million cash. In addition, the company has provided $332-million in letters of credit (LC) to secure 50 per cent of the cash taxes and related interest amounts reassessed in 2015.

Interest

Using the methodology the company believes CRA will continue to apply, and including the $3.4-billion already reassessed, the company expects to receive notices of reassessment for a total of approximately $7.0-billion of additional income taxable in Canada for the years 2003 through 2015, which would result in a related tax expense of approximately $2.1-billion. As well, CRA may continue to apply transfer pricing penalties to taxation years subsequent to 2009. As a result, the company estimates that cash taxes and transfer pricing penalties for these years would be between $1.65-billion and $1.70-billion. In addition, the company estimates there would be interest and instalment penalties applied that would be material to it. While in dispute, the company would be responsible for remitting or otherwise providing security for 50 per cent of the cash taxes and transfer pricing penalties (between $825-million and $850-million), plus related interest and instalment penalties assessed, which would be material to it.

Under the Canadian federal and provincial tax rules, the amount required to be paid or secured each year will depend on the amount of income reassessed in that year and the availability of elective deductions and tax loss carry-overs. Recently, the CRA decided to disallow the use of any loss carry-backs for any transfer pricing adjustment, starting with the 2008 tax year. This does not impact the anticipated income tax expense for a particular year, but does impact the timing of any required security or payment. As noted above, for the 2010 tax year, as an alternative to paying cash, the company used letters of credit to satisfy its obligations related to the reassessed income tax and related interest amounts. The company expects to be able to continue to provide security in the form of letters of credit to satisfy these requirements.

In light of the view of the likely outcome of the case as described above, the company expects to recover the amounts remitted, including the $564-million already paid or otherwise secured to date.

The company is expecting the trial for the 2003, 2005 and 2006 reassessments to commence during the week of Sept. 26, 2016, with final arguments in April, 2017. If this timing is adhered to, the company expects to receive a Tax Court decision within six to 18 months after the trial is complete.

IRS dispute

In the fourth quarter of 2015, the company received a revenue agents report (RAR) from the IRS for the tax years 2010 to 2012. Similar to the 2009 RAR received in the first quarter of 2015, the IRS is challenging the transfer pricing used under certain intercompany transactions pertaining to the 2010 to 2012 tax years for certain of the company's U.S. subsidiaries. The 2009 and 2010 to 2012 RARs list the adjustments proposed by the IRS and calculate the tax and any penalties owing based on the proposed adjustments.

The current position of the IRS is that a portion of the non-U.S. income reported under the company's corporate structure and taxed in non-U.S. jurisdictions should be recognized and taxed in the U.S. on the basis that:

  • The prices received by the company's U.S. mining subsidiaries for the sale of uranium to CEL are too low.
  • The compensation earned by Cameco Inc., one of the company's U.S. subsidiaries, is inadequate.

The proposed adjustments result in an increase in taxable income in the U.S. of approximately $419-million (U.S.) and a corresponding increased income tax expense of approximately $122-million (U.S.) for the 2009 through 2012 taxation years, with interest being charged thereon. In addition, the IRS proposed cumulative penalties of approximately $8-million (U.S.) in respect of the adjustment.

The company believes that the conclusions of the IRS in the RARs are incorrect, and the company is contesting them in an administrative appeal, during which it is not required to make any cash payments. Until this matter progresses further, the company cannot provide an estimation of the likely timeline for a resolution of the dispute.

The company believes that the ultimate resolution of this matter will not be material to its financial position, results of operations and cash flows in the year(s) of resolution.

              
                      URANIUM RESULTS                                                             
                                                                            
                                Three months                                 
                                       ended       Year ended         
                                     Dec. 31,         Dec. 31,         
Highlights                      2015    2014     2015    2014
Production
volume
(million lb)                     9.6     8.2     28.4    23.3
Sales volume
(million
lb)                             11.2    10.7     32.4    33.9
Average spot
price            ($U.S./lb)   $35.45  $37.13   $36.55  $33.21
Average long-
term price       ($U.S./lb)    44.00   48.00    46.29   46.46
Average
realized price   ($U.S./lb)    46.36   50.57    45.19   47.53
($Cdn/lb)                      61.24   56.78    57.58   52.37
Average unit
cost of sales
(including
D&A)              ($Cdn/lb)    38.25   34.27    38.83   34.64
Revenue ($ millions)             687     606    1,866   1,777
Gross profit ($ millions)        257     240      608     602
Gross profit
(%)                               37      40       33      34

Fourth quarter

Production volumes this quarter were 17 per cent higher compared with the fourth quarter of 2014, mainly as a result of higher production from the ramp-up of Cigar Lake production, offset by lower production at McArthur River/Key Lake, Rabbit Lake and the company's U.S. ISR operations.

Uranium revenues were up 13 per cent due to a 5-per-cent increase in sales volumes, which represents normal quarterly variance in the company's delivery schedule, and an 8-per-cent increase in the average realized price.

Average spot and long-term prices decreased, as did the company's U.S.-dollar average realized price due to lower prices under fixed-price contracts, and the mix of market and fixed contracts. However, the effect of foreign exchange resulted in an 8-per-cent-higher Canadian-dollar average realized price than the prior year. In the fourth quarter of 2015, the company's realized foreign exchange rate was $1.32 compared with $1.12 in the prior year.

Total cost of sales increased by 17 per cent ($429-million compared with $366-million in 2014). This was the result of a 12-per-cent increase in the average unit cost of sales and a 5-per-cent increase in sales volumes.

The unit cost of sales increased due to an increase in the volume of material purchased throughout the year at prices higher than the company's average cost of inventory and an increase in the unit production costs related to the addition of higher-cost production from Cigar Lake during ramp-up.

The net effect was a $17-million increase in gross profit for the quarter.

Full year

Production volumes in 2015 increased by 22 per cent compared with 2014. Lower production at the company's U.S. ISR operations was more than offset by the ramp-up of Cigar Lake production.

Uranium revenues this year were up 5 per cent compared with 2014 due to an increase of 10 per cent in the Canadian-dollar average realized price, partially offset by a decrease in sales volumes of 4 per cent. The spot price for uranium averaged $36.55 (U.S.) per pound in 2015, an increase of 10 per cent compared with the 2014 average price of $33.21 (U.S.) per pound; however, the company's U.S.-dollar average realized price was lower mainly due to lower prices under fixed-price contracts. The effect of foreign exchange resulted in a higher Canadian-dollar average realized price than in the prior year. The realized foreign exchange rate was $1.27 compared with $1.10 in 2014.

Total cost of sales increased by 7 per cent ($1.26-billion compared with $1.18-billion in 2014) due to higher unit cost of sales offset by lower sales volumes. The higher unit cost of sales was mainly the result of an increase in the volume of material purchased at prices higher than the company's average cost of inventory, and an increase in unit production costs related to the addition of higher costs from Cigar Lake during ramp-up.

The net effect was a $6-million increase in gross profit for the year.

Fourth quarter

Total revenue decreased by 21 per cent due to a 39-per-cent decrease in sales volumes, partially offset by a 29-per-cent increase in average realized price.

The total cost of sales decreased by 28 per cent ($78-million compared with $109-million in the fourth quarter of 2014) mainly due to a 39-per-cent decrease in sales volumes, partially offset by an increase of 16 per cent in the average unit cost of sales, primarily as a result of the mix of products sold.

The net effect was a $5-million increase in gross profit.

Full year

Total revenue increased by 4 per cent due to a 19-per-cent increase in the realized price, partially offset by a 12-per-cent decrease in sales volumes.

The total cost of products and services sold decreased by 4 per cent compared with 2014 ($258-million compared with $268-million in 2014), as a 12-per-cent decrease in sales volumes was partially offset by a 9-per-cent increase in the average unit cost of sales. When compared with 2014, the average unit cost of sales was 9 per cent higher due to the mix of fuel service products sold.

The net effect was a $23-million increase in gross profit.

Fourth quarter

Nukem delivered 3.7 million pounds of uranium, an increase of 300,000 pounds compared with 2014. Nukem revenues amounted to $192-million compared with $159-million in 2014 due to an increase in volumes delivered.

Gross profit percentage was 3 per cent in the fourth quarter of 2015, compared with 2 per cent in the fourth quarter of 2014.

The net effect was a $3-million increase in gross profit.

Full year

During 2015, Nukem delivered 10.7 million pounds of uranium, an increase of 2.6 million pounds compared with the previous year due to an increase in market activity. Revenues from Nukem amounted to $554-million, 59 per cent higher than in 2014 as a result of higher sales volumes and an increase in the average realized price, mainly due to weakening of the Canadian dollar. Gross profit percentage was 8 per cent for 2015, compared with 6 per cent for 2014.

The net effect was a $20-million increase in gross profit.

Production outlook

The company remains focused on taking advantage of the long-term growth it sees coming in the industry, while maintaining the ability to respond to market conditions as they evolve. The company's strategy is to focus on Tier 1 assets and profitably produce at a pace aligned with market signals to increase long-term shareholder value.

The company plans to:

  • Ensure continued safe, reliable, low-cost production from the company's Tier 1 assets: McArthur River/Key Lake, Cigar Lake and Inkai;
  • Complete ramp-up of production at Cigar Lake;
  • Seek to expand production at McArthur River/Key Lake in conjunction with market signals;
  • Manage the rest of the company's sources of supply in a manner that retains the flexibility to respond to market signals and take advantage of value-adding opportunities within the company's own portfolio and the uranium market;
  • Maintain the company's low-cost advantage by focusing on execution and operational excellence.

McArthur River/Key Lake

Production

Production from McArthur River/Key Lake was 19.1 million pounds. The company's share was 13.3 million pounds. This was 3 per cent lower than the company's forecast for the year due to unplanned maintenance outages to repair the calciner at Key Lake. Annual production was unchanged from 2014.

Licensing and production capacity

In 2015, the CNSC approved the company's application to increase McArthur River's licensed annual production to 25 million pounds (100-per-cent basis) to allow flexibility to match the approved Key Lake mill capacity. The licence condition handbooks for these operations now allow both operations to produce up to 25 million pounds (100-per-cent basis) per year.

Key Lake extension and McArthur River production expansion

In support of the company's strategy to maintain the flexibility to respond to market conditions as they evolve, the company continues to advance projects that are necessary to sustain and increase production when the market signals that additional production is needed.

The Key Lake mill began operating in 1983, and the company continues to upgrade circuits with new technology to simplify operations and improve environmental performance. The extension project involved increasing the company's tailings capacity and the mill's nominal annual production rate to closely follow production from the McArthur River mine. As part of the mill upgrades, the company continues to construct and commission a new calciner circuit, and expects to begin operating with the new calciner in 2016. The existing calciner circuit will remain in place until operational reliability of the new calciner is achieved. The calciner replacement project was planned in a way that temporarily allows the company to use either calciner, which will help to mitigate risks to the company's production rate during the commissioning phase. To increase production at Key Lake, the company also needs to optimize and expand the solvent extraction and crystallization circuits in the mill (projects planned for 2017).

At McArthur River, the company must continue to transition into new mine areas through mine development and investment in support infrastructure. The company plans to:

  • Improve the company's dewatering system and expand water treatment capacity as required to mitigate capacity losses, should mine development increase background water volumes;
  • Expand the concrete distribution systems and batch plant capacity.

New mining areas

New mining zones and increased mine production require increased freeze capacity and ventilation. In 2015, the company continued to upgrade its electrical infrastructure on surface as part of its plan to address these future needs. The company advanced groundworks to prepare for the next freeze plant, which is scheduled to begin freezing the south end of the orebody (Zone 4) in 2017.

The company also made changes in Shaft 2 to increase airflow, resulting in a 15-per-cent to 20-per-cent improvement in ventilation capacity. The improved ventilation eliminates the need for a new ventilation shaft to support a higher production rate.

Tailings capacity

The company expects to have sufficient tailings capacity to mill all the known McArthur River mineral reserves and resources, should they be converted to reserves, with additional capacity to toll mill ore from other regional deposits.

Planning for the future at McArthur River/Key Lake

Production

The company plans to produce 20.0 million pounds in 2016. The company's share is 14.0 million pounds.

Expansion progress

As previously disclosed in the company's 2012 technical report, Cameco plans to reach an annual capacity of 22 million pounds by 2018. The capital required to do so is shown in the company's 2016 capital spending plan, and in the company's outlook for investing activities in 2017 and 2018.

As the company increases to 22 million pounds per year, it will optimize the capacity of both the Key Lake mill and McArthur River mine with a view to further increasing production to 25 million pounds per year (100-per-cent basis), as market conditions improve. Using this approach, the company does not expect significant additional growth capital will be required to increase from annual production of 22 million pounds to an annual rate of 25 million pounds. The company expects that this paced approach will allow it to extract maximum value from the operation as the market transitions.

Exploration

In 2015, underground drilling further delineated the Zone A mineral resources. Underground definition drilling of Zone B will be conducted in 2016 and 2017 to provide the information required for engineering work to develop more detailed mining plans.

Cigar Lake

Production

Total packaged production from Cigar Lake was 11.3 million pounds U3O8. The company's share was 5.7 million pounds. The operation exceeded the forecast of 10 million pounds (100-per-cent basis) as a result of higher productivity and the company's intention to adjust annual production as necessary, based on operating experience during ramp-up.

During the year, the company:

  • Completed commissioning of the equipment required to operate three JBS units at a production scale;
  • Brought on additional slurry haul trucks to ensure a sufficient quantity of ore slurry can be transported to the McClean Lake mill;
  • Completed final commissioning of underground processing circuits and updated the company's production ramp-up plan based on commissioning experience;
  • Modified mine and project plans to reflect the company's decision to exclusively freeze from surface;
  • Declared commercial production.

Commercial production

Commercial production signals a transition in the accounting treatment for costs incurred at the mine. Cigar Lake met all of the criteria for commercial production, including cycle time and process specifications, in the second quarter of 2015. Therefore, effective May 1, 2015, the company began charging all production costs, including depreciation, to inventory and subsequently recognizing them in cost of sales as the product is sold.

Underground development

As a result of the company's decision to exclusively use surface freezing going forward, and the resulting change in the mine plan, the bulk of the development and freeze drilling required for mining in 2016 are already complete. The company is continuing to plan for future expansion of surface freezing infrastructure in late 2016.

McClean Lake mill update

Additional estimated expenditures of $50-million (100-per-cent basis, the company's share $25-million) are expected to be required at the McClean Lake mill in 2016, primarily to complete upgrades in the tailings neutralization area in support of the continued ramp-up to full production of 18 million pounds per year.

Planning for the future at Cigar Lake

Production

In 2016, the company expects to produce 16.0 million packaged pounds at Cigar Lake. The company's share is 8.0 million pounds.

In 2016, the company also expects to:

  • Extend the current surface freeze pad and advance planning for freeze plant infrastructure expansion to support future production;
  • Advance underground development according to the new mine plan and backfill drifts no longer required for underground freezing operations;
  • Continue ramping up toward the planned full annual production rate of 18 million pounds (100-per-cent basis) in 2017.

Exploration

The company is planning to conduct delineation drilling from surface to confirm and upgrade resources contained in the western portion of the deposit. Approximately 65,000 metres of diamond drilling is planned over a three-year period, starting in 2016, to complete a detailed geological and geotechnical interpretation, a resource estimate, and a technical study for the western portion of the deposit.

Rampup schedule

In 2017, the company expects to reach full annual production of 18 million pounds (100-per-cent basis, nine million pounds the company's share).

The McClean Lake mill's operating licence currently has an annual production limit of 13 million pounds. Areva has submitted an application to the CNSC to increase the mill's licensed annual production limit. The company's 2016 and 2017 production outlook for Cigar Lake is therefore subject to Areva securing the regulatory approvals necessary to increase mill production.

Labour relations

The current collective agreement between Areva and unionized employees at the McClean Lake operation expires in May, 2016. There is risk to the company's 2016 and 2017 production outlook for Cigar Lake if Areva is unable to reach an agreement and there is a labour dispute.

Inkai

Production

Total production from Inkai was 5.8 million pounds. The company's share was 3.4 million pounds. Production was 17 per cent higher than the company's production in 2014. During 2015, the subsoil use law in Kazakhstan was amended to allow producers to produce within 20 per cent (above or below) their licensed capacity in a year. As a result, Inkai produced 5.8 million pounds in 2015, 11 per cent higher than its licensed capacity. The increase in production was the result of a higher head grade and an increase in well field development efficiency compared with 2014.

Project financing

As of Dec. 31, 2015, Inkai had fully repaid the outstanding loan under the company's agreement to finance its project development costs related to blocks 1 and 2. In 2015, Inkai paid the remaining $800,000 (U.S.) in interest on the loan and repaid $55-million (U.S.) of principal.

The company is currently advancing funds for Inkai's work on block 3 and as of Dec. 31, 2015, the principal amounted to $148-million (U.S.). Under the loan agreement, Inkai is to repay Cameco from the net sales proceeds from the sale of production from block 3.

Production expansion

In 2012, the company entered into a binding memorandum of agreement (2012 MOA) with the company's joint venture partner, Kazatomprom, setting out a framework to:

  • Increase Inkai's annual production from blocks 1 and 2 to 10.4 million pounds (the company's share 5.2 million pounds) and sustain it at that level;
  • Extend the term of Inkai's resource use contract through 2045.

Kazatomprom is pursuing an objective to develop uranium-processing capacity in Kazakhstan to complement its leading uranium mining operations. Its primary focus is now on uranium refining, which is an intermediate step in the uranium conversion process. A nuclear co-operation agreement between Canada and Kazakhstan is in place, providing the international framework necessary for applying to the two governments for the required licences and permits. Cameco expects to pursue further expansion of production at Inkai at a pace measured to market opportunities. Discussions continue with Kazatomprom.

Block 3 exploration

In 2015, Inkai completed construction of the test leach facility and began pilot production from test well fields, as well as advancing work on a preliminary appraisal of the mineral potential of block 3 according to Kazakhstani standards.

Block 3 licence extension

The block 3 test leach facility is now operational, and state commissioning of the test well fields was accomplished during 2015. The company's application for an extension of the block 3 evaluation period is still pending final approval from the Ministry of Energy of the Republic of Kazakhstan. Inkai continues working on the final appraisal of the mineral potential of block 3 according to Kazakhstani standards. Although a number of extensions of the licence term have been granted by Kazakhstani regulatory authorities in the past, there is no assurance that a further extension will be granted. Without such extension, there is a risk the company could lose its rights to block 3, and a risk the company will not be compensated for the funds the company advanced to Inkai to finance block 3 activities.

Planning for the future at Inkai

Production

The company expects total production from blocks 1 and 2 to be 5.2 million pounds in 2016. The company's share is 3.0 million pounds. The company expects to maintain production at this level until the potential growth plans are finalized with Kazatomprom.

Block 3 exploration

In 2016, Inkai expects to continue with pilot production from the test leach facility and to continue working on a final appraisal of the mineral potential according to Kazakhstani standards.

Rabbit Lake

Production

Production this year was unchanged from the company's 2014 production as a result of planned timing of production stopes, coupled with slightly improved ore grades.

Development and production continued at the Eagle Point mine. At the mill, the company continued to improve the efficiency of the mill operation schedule.

Temporary mining restrictions

On Dec. 17, 2015, the company announced that underground mining activities at Eagle Point were being restricted due to a rockfall in an inactive area of the mine. As a precautionary measure, non-essential personnel were removed from the mine while the condition of the affected area was evaluated. Mine production was suspended, although milling of previously mined and transported ore continued through to year-end.

The assessment determined that repairs were necessary to support the ground in the affected area of the mine. The repairs were completed, along with some further assessment of stability in other areas of the mine. The mine was reopened, and normal operations resumed on Feb. 3, 2016.

Planning for the future at Rabbit Lake

Production

The company expects to produce 3.6 million pounds in 2016. The decrease, compared with 2015, is the result of the restriction of mining activities at the end of 2015, which extended into 2016.

Tailings capacity

Under the current licence, the company expects to have sufficient tailings capacity to support milling of Eagle Point ore until about late 2017, based upon expected ore tonnage, milling rates and tailings properties.

The company's plan for fully utilizing the available tailings capacity of the Rabbit Lake in-pit tailings management facility requires regulatory approval in 2016, for which the company has submitted the required applications. With these regulatory approvals and after the company completes the necessary work on the existing pit, it expects to then have sufficient tailings capacity to support milling of Eagle Point ore until at least 2021 based upon expected ore tonnage, milling rates and tailings properties.

Exploration

The company plans to continue its underground drilling reserve replacement program in areas of interest north and northeast of the current mine workings in 2016. The drilling will be carried out from underground locations.

Reclamation

As part of the company's multiyear sitewide reclamation plan, the company spent over $700,000 in 2015 to reclaim facilities that are no longer in use and plans to spend over $500,000 in 2016.

Fuel services

Update for 2015

Production

Fuel services produced 9.7 million kilograms uranium, 16 per cent lower than 2014. This was a result of the company's decision to decrease production in response to weak market conditions and the termination of the company's toll milling agreement with SFL in 2014.

Port Hope conversion facility cleanup and modernization (Vision in Motion)

The Vision in Motion project is currently in the feasibility stage and will continue with the CNSC licensing process in 2016, which is required to advance the project.

Labour relations

Approximately 100 unionized employees at Cameco Fuel Manufacturing Inc.'s operations in Port Hope and Cobourg, Ont., accepted a new collective bargaining agreement in the second quarter of 2015. The employees, represented by the United Steelworkers, Local 14193, agreed to a three-year contract that includes a 7-per-cent wage increase over the term of the agreement. The previous contract expired on June 1, 2015.

Planning for the future at fuel services

Production

The company has decreased its production target for 2016 to between eight million and nine million kilograms uranium in response to the continued weak market conditions.

Labour relations

The current collective bargaining agreement for the company's unionized employees at the Port Hope conversion facility expires on June 30, 2016. The company will commence the bargaining process in early 2016.

Regulatory

The current operating licence for the Port Hope conversion facility expires in February, 2017. The CNSC relicensing process will take place in 2016.

Qualified persons

The technical and scientific information discussed in this document for the company's material properties (McArthur River/Key Lake, Cigar Lake and Inkai) was approved by the following individuals, who are qualified persons for the purposes of NI 43-101:

McArthur River/Key Lake:

  • Alain G. Mainville, director, mineral resources management, Cameco;
  • David Bronkhorst, vice-president, mining and technology, Cameco;
  • Baoyao Tang, technical superintendent, McArthur River, Cameco.

Cigar Lake:

  • Mr. Mainville, director, mineral resources management, Cameco;
  • Leslie Yesnik, general manager, Cigar Lake, Cameco;
  • Scott Bishop, manager, technical services, Cameco.

Inkai:

  • Mr. Mainville, director, mineral resources management, Cameco;
  • Darryl Clark, general manager, joint venture, Inkai;
  • Lawrence Reimann, manager, technical services, Cameco Resources;
  • Bryan Soliz, principal geologist, mineral resources management, Cameco.

Conference call

The company invites you to join its fourth quarter conference call on Feb. 8, 2016, at 11 a.m. Eastern Time.

The call will be open to all investors and the media. To join the call, please dial 800-769-8320 (Canada and the U.S.) or 416-340-8530. An operator will put your call through. A live audio feed of the conference call will be available from a link at the Cameco website. See the link on the company's home page on the day of the call.

A recorded version of the proceedings will be available:

  • On the company's website, shortly after the call;
  • On postview until midnight, Eastern Time, March 13, 2016, by calling 800-408-3053 (Canada and the U.S.) or 905-694-9451 (passcode 5846753).

Quarterly report release dates in 2016

The company plans to announce its 2016 quarterly results as follows:

  • First quarter consolidated financial and operating results: before markets open on April 29, 2016;
  • Second quarter consolidated financial and operating results: before markets open on July 28, 2016;
  • Third quarter consolidated financial and operating results: before markets open on Nov. 2, 2016.

The 2017 date for the announcement of the company's fourth quarter and 2016 consolidated financial and operating results will be provided in the company's third quarter 2016 management's discussion and analysis. Announcement dates are subject to change.

Additional information

The company's 2015 annual management's discussion and analysis and annual audited financial statements will be available shortly on the company's website, on SEDAR and on EDGAR. The company's 2015 annual information form is expected to be available later in March.

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