Cameco President and Chief Executive Officer Tim Gitzel speaks with media following the company's annual general meeting in Saskatoon, May 28, 2014.Liam Richards/The Canadian Press
A court ruling in favour of Cameco Corp. in its long-simmering tax dispute with Canada Revenue Agency has lifted a concern that had weighed on the uranium producer’s share price for several years, sending its stock soaring on Thursday.
The share price jumped 15.7 per cent, to $14.80 in Toronto, for its biggest gain in nearly 10 years, and executives beamed.
“I do not think it could have been more clear on any of the issues,” Tim Gitzel, Cameco’s chief executive officer, said during a conference call. “So we’re absolutely delighted with the decision.” The Tax Court of Canada ruling released on Wednesday said Cameco had not violated Canadian law by selling uranium through a European subsidiary to reduce its tax bill.
Some analysts also responded favourably: “The decision likely removes a significant overhang from the stock and should reinstate its position as the premier investment for uranium exposure,” Alexander Pearce, an analyst at BMO Nesbitt Burns, said in a note.
Mr. Pearce upgraded his recommendation on the stock to “outperform” from “market perform,” and raised his expectation of where the shares should be trading within 12 months to $16 from a target of $14.
After disappointing investors for more than a decade, is Cameco becoming an attractive long-term holding?
Analysts had long cited Cameco’s dispute with the CRA as a key risk for the stock.
In 1999, Cameco set up a subsidiary in Switzerland called Cameco Europe. The parent company produced uranium in Canada and elsewhere and sold it to the subsidiary, which handled the final sales to global customers. The benefit: Swiss taxes are lower.
In 2008, the CRA began to reassess Cameco’s tax filings year by year, looking at the subsidiary’s sales as though they originated in Canada and charging back taxes as it went along. The company challenged the reassessments, incurring an estimated $57-million in legal fees on top of more than $300-million in CRA charges, at a time when uranium prices were depressed.
“As a result of this dispute, we have had to fight through a seven-year trough in our industry with what feels like having our hands tied behind our backs,” Mr. Gitzel said during Thursday’s conference call with analysts.
The decision in favour of Cameco covers only 2003, 2005 and 2006, and the CRA could appeal. Nonetheless, Cameco expects the decision will stand and determine the outcome for the other disputed tax years.
Thursday’s impressive gains certainly reflect a sigh of relief from the stock market. However, the long-term outlook for Cameco still rests on global demand for uranium – a notoriously complex market that has bedevilled investors for more than a decade.
Cameco shares traded at a high of $59.46 in 2007, when the global economy was humming and commodity prices were riding powerful long-term growth some observers called a supercycle. But the financial crisis, declining political enthusiasm for nuclear energy and the disaster at Japan’s Fukushima Daiichi power plant in 2011 changed everything.
Lean inventories became bloated, the price of uranium collapsed from more than US$130 a pound to a low of about US$20 and investors lost interest. Cameco’s share price fell as much as 83 per cent by late 2016, when it dipped below $10.
As good as the tax ruling is for Cameco, and for investors who had been turned off by the uncertainty, what matters more over the longer term is whether the market for uranium is becoming more attractive.
Even before Wednesday’s ruling, some analysts said supply and demand were working in Cameco’s favour. Production cuts in the sector, including Cameco, supported prices, as did political uncertainties in some regions where uranium is produced, they believed. If the price of uranium rebounded, Cameco could take advantage and restart its McArthur River uranium operation in northern Saskatchewan.
“Sorting through all the moving parts, uranium prices have clearly bottomed over past six to 12 months and are entering a recovery phase,” Andrew Wong, an analyst at RBC Dominion Securities, said in a note in late July.
However, Mr. Wong left his target price for Cameco shares unchanged at $15 on Thursday, according to Bloomberg. Cameco’s tax headache may have eased, but improvement in the long-term fundamentals of uranium production is still an unknown.