Cameco risks losing $1.3B in revenue as Tokyo Electric moves to terminate contract
The CEO of Cameco Corp. says the decision by a Japanese utility to terminate a uranium supply contract worth about $1.3 billion in revenue from now through 2028 came “out of the blue.”
Tim Gitzel said Tokyo Electric Power Co. sent a notice on Jan. 24 saying it wanted to terminate the long-term contract signed in 2009 and would not accept delivery of a shipment due Wednesday.
He said TEPCO confirmed the notice on Tuesday despite Cameco’s interim attempts to discuss remedies for the situation.
“We were very surprised to get that notice,” Gitzel said in an interview, adding Saskatoon-based Cameco (TSX:CCO) considers TEPCO to be in default and will pursue all legal “rights and remedies.”
He said the Japanese power company cited forces beyond its control – specifically government regulations arising from the 2011 Fukushima nuclear accident – that have prevented the operation of its nuclear plants.
“You know, the Fukushima accident happened six years ago and we’ve been dealing with them since then,” Gitzel said.
“They’ve taken delivery under this contract in 2014, 2015 and 2016, so we’re a bit perplexed as to why now all of a sudden they think there’s a case of, as they say, ‘force majeure.’”
Shares in Cameco opened more than 10 per cent lower on the Toronto Stock Exchange on Wednesday morning after the company announced receipt of the termination notice. They fell to $14.54, off 12 per cent from Tuesday’s close, at 1 p.m. ET.
The company estimated the revenue at risk this year is $126 million, out of $2.1 billion and $2.2 billion of revenue coming from all sources including TEPCO, but said it has sufficient financial capacity to manage the loss.
A termination would affect about 9.3 million pounds of uranium supplied by Cameco through 2028, including about 855,000 pounds annually in 2017, 2018 and 2019.
The company recently reported overall deliveries of about 31.5 million pounds of uranium at an average realized price of $54.46 per pound in 2016.
Gitzel said the short notice won’t cause any logistical problems for Cameco because the delivery is actually made through a “book transfer” and likely involves no physical movement of product. He said TEPCO, like other customers, has been stockpiling its reactor fuel in licensed storage to await approval to restart its Japanese power plants.
Financial analysts pointed out Cameco has a winning record in previous contract disputes with customers.
“Cameco will protect itself – it has gone to arbitration before against companies that tried to walk from contracts and Cameco has come out on top,” analyst David Talbot of Dundee Capital Markets wrote in a note to investors.
He added the company reported cash payments of $46.7 million and $12.3 million last year to allow two customers to cancel long-term contracts for deliveries through to 2020 and 2022.
Analyst Fraser Phillips of RBC Capital Markets said in a note to investors that TEPCO’s contract implies a value of C$140 per pound overall and C$147 per pound for 2017, much higher than the current spot uranium price of about C$32 per pound.
Nick Carter, vice-president of uranium at Ux Consulting Co., an American firm that monitors the industry, said he believes TEPCO is the first Japanese utility to terminate a long-term contract – although many others have tried to renegotiate contracts to reduce volumes or prices or delay shipments, he added.
“This is sort of a one-of-a-kind that we’ve seen in terms of an outright cancellation,” Carter said.
Gitzel said he’s optimistic that Cameco will be able to find other customers if necessary to replace the TEPCO volumes.
Cameco, which reports 2016 financial results on Feb. 9, warned on Jan. 18 that analyst earnings estimates were too high.
It also announced it expected to lay off 120 employees or 10 per cent of staff at its McArthur River, Key Lake and Cigar Lake mining operations in stages through to the end of May to reduce costs and improve efficiency.
© 2017 The Canadian Press