CAMECO REFUSES TO VOID DEAL

Fighting Tokyo Electric over ‘force majeure’

Cameco Corp. said Wednesday it has rejected a key Japanese customer’s attempt to cancel its contract — a move that would mean $1.3 billion in lost revenue — as the Saskatoon-based uranium giant works to protect deals signed with customers before the market tanked.

Tokyo Electric Power Company Holdings Inc. issued a termination notice for a uranium supply contract on Jan. 24. On Monday, the Japanese power company said it would not accept a delivery scheduled for Tuesday.

Cameco shares plunged 12 per cent just after the opening bell on the Toronto Stock Exchange. They closed at $14.70, down 11.3 per cent on the day.

Tepco alleges a “force majeure” event — or an act of God — has occurred because it has been unable operate its generating plants for the past 18 months due to government regulations enacted after the disastrous Fukushima nuclear accident of 2011.

“We’re confident that Tepco’s force majeure complaint is without merit,” said Cameco CEO Tim Gitzel on a last-minute conference call with investors Wednesday morning.

“It appears to us and it is our opinion that Tepco simply doesn’t like the terms they agreed to, particularly the price and want to escape from the agreement.”

The entire nuclear industry is still feeling the aftershock of that disaster, with prices in the doldrums and customers re-evaluating contracts as they eye prices much lower than those in deals previously struck with Cameco.

Cameco said there is no basis for that cancellation. It considers Tepco to be in default and will pursue legal action. Under terms of the contract, the two parties will enter a 90-day good faith negotiation period before proceeding to binding arbitration if necessary.

Cameco is evaluating options and is not set on a specific legal path yet, said spokesman Gord Struthers. The Canadian firm had warned investors that some customers were attempting to renegotiate or cancel contracts as they eye weaker spot prices.

Cameco, already struggling with a challenging market, cannot afford to lose the business and developments with Tepco are likely to be closely watched by others in the industry.

Gitzel said the company has worked for several years to restructure the contract — a move it is willing to make to secure its most important customers — and has worked with Tepco over the past week to clarify the nature of its dispute. “For the past six years, we have been working in good faith with Tepco and with other customers to help relieve financial challenges resulting from the 2011 nuclear accident at Fukushima,” he said.

“The ultimate goal is to restore the health of Japan’s nuclear industry which would be commercially beneficial to Cameco and its customers.”

Tepco has received and paid for 2.2 million pounds of uranium since 2014 under the contract. The termination would stop 9.3 million pounds of deliveries through 2028 — worth about $1.3 billion in revenue to Cameco.

The contract was negotiated before the Fukushima accident, and uses undisclosed long-term prices negotiated several years in advance. The price of uranium has fallen steadily in the years since the disaster and currently hovers around US$23 per pound, about a third of its pre-Fukushima price.

The cancellation would mean a hit of about $126 million in each year through to 2019. Cameco said it has the capacity to manage the loss of revenue for 2017, but did not say whether it could during the following two years.

It could result in a 10- to 15-per-cent decline in nearterm earnings before interest, tax, depreciation and amortization, according to BMO Capital.

BMO analyst Edward Sterck noted there is a certain irony to Tepco calling “force majeure” when it was the operator of the Fukushima plant and yet is blaming increased government regulation as the issue.

Tepco owns five per cent of Cameco’s Cigar Lake mine and has continued to provide its share of capital costs at the operation.

Gitzel said he is confident Cameco’s contract will be enforced and reminded investors it successfully defended a contract against a similar force majeure claim in 2014. That dispute took 21/2 years to settle, with Cameco ultimately receiving a penalty payment.

“We can’t see how Tepco can claim force majeure when other Japanese utilities have restarted their plants,” he said, adding the firm doesn’t expect others to follow Tepco’s move. Japanese utilities represent about 11 per cent of the Cameco’s contracts.