EUR 850.00 For Business Accounts Only

Morningstar | Raising Our Cameco FVEs to $19.50 and CAD 25.50 on Favorable Tax Dispute Ruling

On Sept. 26, Cameco announced that it had received a favorable ruling from the Tax Court of Canada in its dispute with the Canada Revenue Agency. The news has sent shares 15% higher as we write. At the heart of the dispute is Cameco’s use of intercompany purchase agreements with a European subsidiary. The CRA alleged that Cameco used the subsidiary to purposely evade taxes, using transfer pricing to reduce its tax bill in Canada.

The CRA had assessed Cameco with roughly CAD 2 billion in unpaid taxes for tax years 2003-12, with additional penalties and interest on delayed payments. Although this  ruling only focused on tax years 2003, 2005, and 2006, it should give Cameco stronger footing against the CRA for all tax years considered. Nevertheless, the issue may linger for a few more years, especially if the CRA chooses to appeal the decision or pursue a case for the other tax years.

We’re increasing our Cameco fair value estimates to $19.50 per share from $17 and to CAD 25.50 per share from CAD 22. We had previously assumed a 75% chance that Cameco would lose its dispute against the CRA. However, with this favorable ruling, we’ve lowered the probability that Cameco will lose the dispute against CRA to 50%. We believe this probability also captures the potential outcome of a settlement for a lower amount than CRA's original assessment, as well as the uncertainty surrounding the timing of the final resolution. Cameco’s narrow moat based on its cost advantage is unchanged.

Spot market uranium prices have been improving steadily through the second half of the year. As recently as April, uranium prices remained stuck at around $21 per pound in the spot market. Since then, the spot price has risen nearly 30% to more than $27 per pound. Yet, before the court decision announcement, the stock had fallen roughly 15% over the same period. Higher prices in the spot market reflect a tightening market--signs of early recovery. Nevertheless, we think today’s uranium price continues to underestimate the heft that an expanding Chinese nuclear fleet will bring to the market.

For details on our uranium supply and demand forecasts, please see our report "Cameco: Down but Not Out.”