CAMECO CORPORATION, Appellant, v. HER MAJESTY THE QUEEN,, 2018 TCC 195

Dockets: 2009-2430(IT)G 2014-3075(IT)G 2015-1307(IT)G BETWEEN: CAMECO CORPORATION, Appellant, and HER MAJESTY THE QUEEN, Respondent . Appeals heard on October 5, 2016, October 17 to 21, 2016, October 24 to 28, 2016, November 7 to 10, 2016, November 14 to 18, 2016, December 5 to 9, 2016, December 12 to 16, 2016, February 13 to 17, 2017, March 13 to 16, 2017, March 20 to 22, 2017, March 27 to 30, 2017, April 24 to 28, 2017, May 1 to 5, 2017, May 15 to 17, 2017, May 23 and 24, 2017, July 10 to 14, 2017 and September 11 to 13, 2017, at Toronto, Ontario Before: The Honourable Justice John R.

Owen Appearances : Counsel for the Appellant: Al Meghji, Joseph M.

Steiner, Peter Macdonald, Laura Fric, Mark Sheeley, Geoffrey Grove, Catherine Gleason-Mercier, Tamara Prince and Lia Bruschetta Counsel for the Respondent: Naomi Goldstein, Elizabeth Chasson, Sandra Tsui, Diana Aird, Peter Swanstrom, Alisa Apostle, Sharon Lee and Paralegal, Karen Hodges JUDGMENT In accordance with the attached Reasons for Judgment, the appeals from the reassessments made under the Income Tax Act for the 2003, 2005 and 2006 taxation years, the notices of which are dated December 17, 2010, December 27, 2013 and May 22, 2014, are allowed and the reassessments are referred back to the Minister of National Revenue (the “ Minister ”) for reconsideration and reassessment on the basis that: 1. none of the transactions, arrangements or events in issue in the appeals was a sham; 2. the Minister’s transfer pricing adjustments for each of the taxation years shall be reversed; 3. the amount of $98,012,595 shall be added back in computing the resource profit of the Appellant for its 2005 taxation year; and 4. the amount of $183,935,259 shall be added back in computing the resource profit of the Appellant for its 2006 taxation year.

The parties have 60 days from the date of this judgment to provide submissions regarding costs. Such submissions shall not exceed 15 pages for each party. Signed at Ottawa, Canada, this 26 th day of September 2018. “J.R. Owen” Owen J.

Citation: 2018 TCC 195 Date: 20180926 Dockets: 2009-2430(IT)G 2014-3075(IT)G 2015-1307(IT)G BETWEEN: CAMECO CORPORATION, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Owen J. INTRODUCTION [ 1 ] Cameco Corporation (the “ Appellant ”) appeals the reassessment of its 2003, 2005 and 2006 taxation years by notices dated December 17, 2010, December 27, 2013 and May 22, 2014 respectively (individually, the “ 2003 Reassessment ”, the “ 2005 Reassessment ” and the “ 2006 Reassessment ” respectively, and collectively, the “ Reassessments ”).

The Reassessments added the following amounts to the Appellant’s income: 2003 Reassessment: $43,468,281 2005 Reassessment: $196,887,068 2006 Reassessment: $243,075,364 [ 2 ] In addition, the 2005 Reassessment and the 2006 Reassessment increased the resource allowance of the Appellant by $12,257,611 and $16,238,233 respectively.

The outcome of the appeals regarding the resource allowance is dependent on the outcome of the appeals regarding the additions to the Appellant’s income for 2005 and 2006. [ 3 ] In issuing or confirming the Reassessments that increased the income of the Appellant for its 2003, 2005 and 2006 taxation years (the “ Taxation Years ”), the Minister of National Revenue (the “ Minister ”) relied on subsection 247(2) of the Income Tax Act [1] (the “ ITA ”). [2] In these appeals the Minister relies first on sham, second on paragraphs 247(2)(

b) and (

d) and lastly on paragraphs 247(2)(

a) and (c). THE FACTS A. The Fact Witnesses [ 4 ] The Appellant called the following fact witnesses: 1. George Assie. Mr. Assie joined the Appellant in 1981 and retired on December 31, 2010. From 1981 to late 1999, Mr. Assie held a range of positions with the Appellant, including the following: director, market planning; director, marketing North America and vice- president, marketing. In August 1999, Mr. Assie was appointed as president of Cameco Inc. (“ Cameco US ”), a newly incorporated United States subsidiary of the Appellant. At the end of 2002, Mr.

Assie was appointed as senior vice-president, marketing and business development of the Appellant, a position he held until he retired. 2. Gerhard Glattes. Mr. Glattes studied law in Germany and the United States. Mr. Glattes joined a German corporation called Uranerzbergbau GmbH (“ UEB ”) as head of its law department in 1969 and was admitted to the Bar in Germany in 1974. From 1980 to 1995, Mr. Glattes was a managing director of UEB. From 1984 to 1995, Mr.

Glattes was the chief executive officer and chairman of the board of three subsidiaries of UEB, including one Canadian subsidiary—Uranerz Exploration and Mining or UEM—that was a joint venture partner in the Key Lake and Rabbit Lake uranium mines in Saskatchewan. As well, from 1988 to 1995, Mr. Glattes was

chairman of the advisory committee of the Euratom Supply Agency (“ Euratom ”), the European nuclear regulator. In 1996, Mr. Glattes provided services to the Appellant as a consultant because of restrictions imposed by a non-compete agreement with UEB. From 1997 to June 1998, Mr. Glattes was the president of Kumtor Operating Company (“ Kumtor ”), a wholly owned subsidiary of the Appellant that operated a gold mine in Kyrgyzstan. Effective July 1998, Mr. Glattes entered into a consulting agreement with the Appellant in which he agreed to act as a senior representative of the Appellant in Europe.

From July 1999 to October 1, 2002, Mr. Glattes was the president and chairman of Cameco Europe S.A. (“ CESA ”), a Luxembourg subsidiary of the Appellant with a branch in Switzerland. After the Swiss branch of CESA was transferred to a Swiss subsidiary of the Appellant—Cameco Europe AG (SA, Ltd.) (“ CEL ”)—in October 2002, Mr. Glattes became the president and chairman of CEL and remained in that position until July 31, 2004, at which point he retired in anticipation of his 65th birthday in September 2004. After retiring as president of CEL, Mr. Glattes continued to serve as chairman of the board of CEL. Mr.

Glattes was 77 at the time he testified at the hearing of these appeals. 3. William Murphy. Prior to 2000, Mr. Murphy was the director of international marketing of the Appellant. In late 1999, Mr. Murphy was appointed as the vice-president of marketing Canada and Asia at Cameco US. In the summer of 2004, Mr. Murphy replaced Mr. Glattes as the president of CEL, a position he held until the middle of 2007 when he retired. 4. Kim Goheen. Mr. Goheen joined the Appellant in May 1997 as treasurer.

In 1999, he became vice-president and treasurer of the Appellant and in 2004 he became the chief financial officer of the Appellant. 5. Lisa Aitken. Ms. Aitken joined the Appellant in 1996 as a contract administrator but resigned in 1999. Ms. Aitken returned to the Appellant in 2010 as manager of marketing Canada, later becoming director of marketing Canada and intercompany transactions 6. Treva Klingbiel. Ms. Klingbiel is the president of TradeTech, a third-party consulting firm active in the uranium industry. 7. Ryan Chute. Mr.

Chute joined the Appellant in 2004 as an accountant in the finance department and moved to the marketing department in December 2005 as a specialist in trading and transportation. His current title is manager of inventory and transportation. [ 5 ] The Respondent called the following fact witnesses: 1. Loretta McGowan. Ms. McGowan joined Cameco in August of 1994 as a contract administrator. She subsequently became senior administrator for inventory and in 2005 she was appointed manager, marketing administration, which involved managing a team of contract administrators. In January 2010, Ms.

McGowan left the employ of the Appellant. 2. Marlene Kerr. Ms. Kerr started working at the Appellant in 1980 and held a number of positions in the accounting and marketing departments. In late 1999, Ms. Kerr was appointed as manager of marketing for Asia of Cameco US. Effective January 1, 2003, Ms. Kerr was appointed as manager, marketing Europe of Cameco US, and effective August 1, 2004 Ms. Kerr was appointed as vice-president of marketing Asia of Cameco US. At some point after November 30, 2006, Ms. Kerr was appointed vice-president of marketing Europe. Ms. Kerr retired in 2009. 3. Tyler Frederick Mayers. Mr.

Mayers joined the Appellant in January of 2001 as a contract administrator, a position he held for two and a half to three years. Subsequent to that he held a more specialized position in inventory management, focusing on UF 6 inventories. He left the employ of the Appellant on November 13, 2008. 4. Rita Sperling. Ms. Sperling joined the Appellant on September 29, 1986 as an accounting clerk. On April 12, 1999, Ms. Sperling became a specialist in marketing administration (also referred to as a contract administrator) in the marketing department of the Appellant, and in 2006 Ms.

Sperling became a senior specialist in marketing administration. 5. Tim Gabruch. Mr. Gabruch joined Cameco in 1994 as a contract administrator in the marketing department. From 1995 to 1999, Mr. Gabruch was a sales representative for North America save for a brief secondment to the Uranium Institute in 1998. In late 1999, Mr. Gabruch was appointed manager of marketing North America of Cameco US. In 2004, Mr. Gabruch was manager of marketing for Asia and Canada, and in 2005 Mr. Gabruch was manager of marketing for Europe. At the beginning of 2007, Mr.

Gabruch returned to the employ of the Appellant as manager of corporate development and in the same year became director of corporate development. In 2011, Mr. Gabruch was appointed to his current position of vice-president of marketing for Europe. 6. Shane Shircliff. Mr. Shircliff joined the Appellant in late 1998 as a contract administrator. Until 2003, Mr. Shircliff held a variety of other positions in the marketing department of the Appellant, including inventory administrator and fuel procurement and inventory specialist. From 2003, Mr.

Shircliff was first an analyst and then a senior analyst in the corporate development and power generation department of the Appellant. After 2007, Mr. Shircliff was the manager of corporate development and then the director of corporate development and power generation of the Appellant. Mr. Shircliff left the employ of the Appellant sometime after becoming the director of corporate development and power generation. 7. Raymond Dean Wilyman. Mr. Wilyman joined the Appellant on March 19, 2001 in the contract administration group where he remained until 2005.

Starting in 2005 he worked for a year in inventory management, managing U 3 0 8 inventory. Following that, he was manager of fuel supply, dealing with the Bruce Power fuel supply contracts, and then he became a member of the strategy group. All of Mr. Wilyman’s positions were in the marketing department of the Appellant. Mr. Wilyman left the employ of the Appellant in January 2012. Prior to being employed by the Appellant, Mr. Wilyman was employed by the Canada Revenue Agency (the “ CRA ”) for eleven years. 8. Sean David Exner. Mr.

Exner joined the Appellant in January 1996 as a senior accountant in the finance group. From January 2003 to January 2007, Mr. Exner was the manager of financial planning, and since January 2007, Mr. Exner has been the director of corporate development of the Appellant. 9. Gerald Wayne Grandey. Mr. Grandey joined the Appellant on January 1, 1993 as senior vice-president of marketing and business development, a position he held until 1998 or 1999 when he was appointed executive vice-president. In 2000, Mr.

Grandey was appointed president of the Appellant and in January 2003 he was also appointed chief executive officer of the Appellant. Mr. Grandey

relinquished the title of president in 2009 or 2010 to allow for succession and retired on June 30, 2011. 10. Maxine Maksymetz. Ms. Maksymetz joined the Appellant in 1990 in the internal audit group. In 1992, Ms. Maksymetz transferred to the tax and royalty group of the Appellant where she eventually became a senior accountant before leaving the employ of the Appellant in 2000. 11. Fletcher T. Newton. Mr. Newton was appointed the general counsel of Power Resources Inc. (“ PRI ”)—a United States subsidiary of the Appellant—in 1997. In 1999, Mr.

Newton was appointed president of PRI and in 2004 he was appointed chief executive officer of PRI, a position he held until he left the employ of PRI in 2007. Mr. Newton also held senior positions with two other United States subsidiaries of the Appellant: Crowe Butte Resources, Inc. and UUS Inc. 12. Randy Belosowsky. Mr. Belosowsky started his career with KPMG in 1985 where he remained until 1995. In 1995, Mr. Belosowsky joined UEM in tax and special projects. In 1998, Mr. Belosowsky joined the Appellant as a senior accountant, tax and royalties, and in 2000 he was appointed manager, tax and royalties.

In 2004, Mr. Belosowsky was appointed director, tax and insurance for the Appellant, and in 2005 he was appointed assistant treasurer of the Appellant. In 2009, Mr. Belosowsky was appointed director of special projects, tax. In addition to his positions with the Appellant, on May 6, 2004, Mr. Belosowsky was appointed managing director of CEL. [ 6 ] Pursuant to subsection 133(1) of the Tax Court of Canada Rules (General Procedure) (the “ Rules ”), the fact witnesses were excluded from the courtroom until called to give evidence.

Pursuant to subsection 146(3) of the Rules, the Respondent cross-examined those witnesses called by the Respondent who are in the current employ of the Appellant. B. The Expert Witnesses [ 7 ] The Appellant called a total of five witnesses who were qualified as expert witnesses: 1. Thomas William Hayslett. Mr. Hayslett was qualified as an expert in the uranium industry, in particular with respect to the types of contracts seen in the uranium industry and the particular contract terms and conditions seen in the uranium market during the 1999 to 2001 period. 2. Doctor Thomas Horst. Dr.

Horst was qualified as an expert in transfer pricing. 3. Carol Hansell. Ms. Hansell was qualified as an expert on corporate governance, specifically with respect to commercial relationships between parent and subsidiary corporations within multinational enterprises. 4. Doctor William John Chambers. Dr. Chambers was qualified as an expert in issues of creditworthiness, particularly in the parent- subsidiary context. 5. Doctor Atulya Sarin. Dr. Sarin was qualified as an expert in transfer pricing and financial economics. Doctor Sarin co-authored his expert reports with Doctor Alan C.

Shapiro, who was also qualified as an expert in the same areas but did not testify. [ 8 ] The Respondent called a total of three witnesses who were qualified as expert witnesses: 1. Edward Kee. Mr. Kee was qualified as an expert in the nuclear power industry for the purpose of rebutting aspects of the reports of Doctor Horst and Doctor Sarin. 2. Doctor Anthony J. Barbera. Doctor Barbera was qualified as an expert in transfer pricing. 3. Doctor Deloris Wright. Doctor Wright was qualified as an expert in transfer pricing. C.

Credibility and Reliability of Fact Witnesses [ 9 ] The credibility of a witness refers to the honesty of the witness, or the readiness of the witness to tell the truth. A finding that a witness is not credible is a finding that the evidence of the witness cannot be trusted because the witness is deliberately not telling the truth. [ 10 ] In Nichols v. The Queen , 2009 TCC 334 , the Court summarized the approach to determining credibility as follows: This is a case where the decision depends entirely on my findings of credibility taken in the context of all the evidence adduced at the hearing.

I must determine whether the Appellant has shown on a balance of probabilities that the Minister’s assessments are incorrect. In considering the evidence adduced, I may believe all, some or none of the evidence of a witness or accept parts of a witness’ evidence and reject other parts.

In assessing credibility I can consider inconsistencies or weaknesses in the evidence of witnesses, including internal inconsistencies (that is, whether the testimony changed while on the stand or from that given at discovery), prior inconsistent statements, and external inconsistencies (that is, whether the evidence of the witness is inconsistent with independent evidence which has been accepted by me). Second, I can assess the attitude and demeanour of the witness. Third, I can assess whether the witness has a motive to fabricate evidence or to mislead the court.

Finally, I can consider the overall sense of the evidence. That is, when common sense is applied to the testimony, does it suggest that the evidence is impossible or highly improbable. [3] [ 11 ] The reliability of a witness refers to the ability of the witness to recount facts accurately. If a witness is credible, reliability addresses the kinds of things that can cause even an honest witness to be mistaken. A finding that the evidence of a witness is not reliable goes to the weight to be accorded to that evidence. Reliability may be affected by any number of factors, including the passage of time. [4]

In R. v. Norman, (ON CA), [1993] O.J. No. 2802 (QL), 68 O.A.C. 22, the Ontario Court of Appeal explained theimportance of reliability as follows at paragraph 47: . . . The issue is not merely whether the complainant sincerely believes her evidence to be true; it is also whether this evidence is reliable.Accordingly, her demeanour and credibility are not the only issues. The reliability of the evidence is what is paramount. . . . [12] With respect to each fact witness, I have considered the factors identified in Nichols and I have concluded that each fact witnessis credible.

Although there are at times inconsistencies between the oral testimony of a witness and the documentary record as acceptedby me, I consider these inconsistencies to be a reflection on the reliability of the evidence of the witness and not the credibility of thewitness. I will address specific examples later in these reasons. D.

Summary of the Evidence

(1) The History of the Appellant [13] The Appellant was incorporated under the

Canada Business Corporations Act in June 1987 for the purpose of acquiring theassets of Saskatchewan Mining Development Corporation, a provincial Crown corporation, and Eldorado Nuclear Limited, a federalCrown corporation. The acquisition of these assets occurred in October 1988. [14] During the Taxation Years, the Appellant and its subsidiaries (the “Cameco Group”) constituted one of the world’s largesturanium producers and suppliers of conversion services.

The uranium-related activities of the Cameco Group included exploring for,developing, mining and milling uranium ore to produce uranium concentrates (U3O8) and selling produced and acquired uranium,uranium conversion services and uranium enrichment services to utilities. The Appellant had uranium mines in Saskatchewan anduranium refining and processing (conversion) facilities in Ontario. United States subsidiaries of the Appellant owned uranium mines inthe United States. [15] The Cameco Group also explored for, developed and operated gold properties, but those undertakings are not relevant to theseappeals.

(2) The Uranium Market [16] During the period 1999 through 2006, the uranium market was comprised essentially of producers, traders and utilities.[5] [17] Uranium is most commonly purchased and sold in the form of either U3O8 or UF6. The mining and milling of uranium oreproduces uranium concentrate or yellow cake.[6] The uranium concentrate contains anywhere from 75% to 99% U3O8 depending on theproducer.[7] U3O8 is comprised of essentially two uranium isotopes: uranium-238 (approximately 99.3% of the total uranium) anduranium-235 (approximately 0.7% of the total uranium).

U3O8 is refined into UO3 and then processed into either UO2 or UF6.[8] [18] UO2 is used in heavy water nuclear reactors and UF6 is used in light water nuclear reactors.

During the period 1999 through2006 there were approximately 100 nuclear power stations[9] in the world, of which approximately 45 were located in the United States,25 were located in Europe and 14 were located in Asia.[10] Approximately 40% to 45% of the western world’s commercial demand foruranium comes from the United States with the remainder split between Europe and Asia.[11] Light water nuclear reactors in nuclear power stations create approximately 95% of the world’s commercial demand for uranium.[12] [19] To use UF6 to generate electricity in a light water nuclear reactor, the UF6 must first be enriched to increase the content offissionable uranium-235 to approximately 4.5% and then the enriched UF6 must be manufactured into fuel assemblies which are custom-made to meet the specifications of the purchasing utility.[13] [20] The process that includes the mining and milling of uranium ore and the production of fuel assemblies is called the nuclear fuelcycle.[14] It takes approximately 12 to 18 months to go from the mining of the ore to the production of the fuel assemblies.[15] [21] To convert U3O8 into UF6, the owner of the U3O8 transports the U3O8 to the processing facility of an entity that providesconversion services (a “converter”).

The owner of the U3O8 must have an account with the converter or must have the use of such anaccount. Ms. Klingbiel testified that related parties “quite often” share accounts with a converter.[16] [22] The converter weighs and assays the U3O8 and credits the account with the number of pounds of U3O8 that were delivered tothe converter by the owner of the U3O8.[17] It is then possible for the owner of the U3O8 to sell the U3O8 by book transfer to apurchaser that also has an account with the converter.[18] Ms.

Klingbiel described the advantages of the book transfer system as follows: Well, there are a number of advantages. The primary advantage is that you don’t have to actually physically transport the material fromone location to another in order to effect the sale at the converter. It also allows, because it’s not physically transported, that you canconclude a sale on any date the two parties agree to. The other advantage is that any size lot of material can be agreed to. It’s notconstrained by the cylinders or the canisters that are used for transport.

And the other one is that it allows for confidentiality, becauseyou don’t involve other third parties like transportation companies or another third-party facility in the process.[19] [23] The uranium industry is highly regulated and because of non-proliferation treaties and political and other considerationsuranium is typically placed into two categories according to its country of origin: restricted and unrestricted. Restricted uranium is notsubject to any restrictions–the “restricted” label applies because the uranium can be sold in restricted markets.

On the other hand,unrestricted uranium is subject to restrictions—for example, import quotas or bans on importation—in many countries. During 1999through 2006, Russian source uranium was unrestricted uranium and Canadian source uranium was restricted uranium.[20]

[ 24 ] U 3 O 8 and UF 6 are each a fungible product. [21] U 3 O 8 or UF 6 from one producer is physically interchangeable with U 3 O 8 or UF 6 from another producer.

The uranium content of U 3 O 8 varies according to where it is produced, but this variation is removed from the determination of price when the U 3 O 8 is assayed at a converter. [22] However, the price of U 3 O 8 or UF 6 may be affected by the origin of the uranium–that is, whether it is restricted or unrestricted–with unrestricted uranium generally accorded a lower price than restricted uranium. [23] [ 25 ] Uranium is bought and sold under bilateral contracts and is not traded on a commodity exchange. [24] U 3 O 8 is sold at a price per pound and UF 6 is sold at a price per kilogram (kgU). [25] The price per kgU of UF 6 is calculated by multiplying the price per pound of uranium as U 3 O 8 by a factor of 2.613 and then adding the price for creating one kilogram of UF 6 from U 3 O 8 . [26] The conversion factor is essentially the amount of U 3 O 8 required to produce one kilogram of UF 6 , taking into account the loss of uranium that occurs in the conversion process, and therefore the formula yields an approximation of the price of UF 6 .

The price of UF 6 in a particular contract for UF 6 may vary slightly from the result produced by the formula. [27] [ 26 ] The conversion services required to convert U 3 O 8 into UF 6 may be sold separately, in which case the purchaser delivers U 3 O 8 to the converter and the seller delivers UF 6 to the purchaser at the same facility. [28] [ 27 ] The price at which transactions in uranium occur is not publicly disclosed.

However, two companies-Ux Consulting Company LLC (“ Ux ”) and TradeTech LLC (“ TradeTech ”) [29] -published price indicators during the period 1999 through 2006, although Ux did not start publishing long-term price indicators until May 31, 2004. [30] TradeTech was formerly Nuexco and sometimes the TradeTech price indicator is referred to as the Nuexco price indicator. [31] [ 28 ] Ms. Klingbiel provided a description of the price indicators published monthly by her company, TradeTech, during the 1999 through 2006 period: . . .

Basically there are two categories of material that are delivered in terms of time periods. There’s the spot delivery window, and there’s a long-term delivery window. The spot window will include anything that calls for delivery within the next 12 months from the transaction date. And then there are long-term contract prices, or agreements, and those are multi-year deliveries that occur at some time in the future. [32] . . . Q. And can you just read out what TradeTech’s definition is of the spot indicator. A.

It’s TradeTech’s daily, weekly, and exchange value are the company’s judgment of the price at which spot and near-term transactions for significant quantities of natural uranium concentrates could be concluded as of the close of business each day, the end of each Friday, or on the last day of the month, respectively. [33] . . . Q. The long-term TradeTech price indicator, could you read out the definition for that, that I understand is the TradeTech definition. A.

Yes. “The long-term price is the company’s judgment of the base price at which transactions for long-term delivery of that product or service could be concluded as of the last day of the month for transactions in which the price at the time of delivery would be an escalation of the base price from a previous point in time.” Q. This long-term price indicator was being published by TradeTech in the period 1999 to 2006? A. It was. [34]

(3) Overview of Contracts for the Purchase and Sale of Uranium [ 29 ] During 1999 through 2006, two broad categories of contract were used to purchase and sell uranium in the uranium market: spot contracts and long-term contracts. [35] [ 30 ] A spot contract is a contract that provides for delivery of the purchased uranium within 12 months of entering into the contract. A long-term contract is a contract that provides for delivery of the purchased uranium more than 12 months after the entering into of the contract.

Broadly speaking, these two contract types are the basis for differentiating between the spot price for uranium and the long- term price for uranium in the price indicators. [36] [ 31 ] Mr. Hayslett opined in the Hayslett Report that the following list of terms should be addressed in a long-term contract for the purchase and sale of U 3 O 8 or UF 6 : [37] 1. Contract term 2. Annual quantity 3. Quantity flexibility 4. Delivery schedule, notices, flexibility

5. Delivery location(s), method 6. Material origin 7. Material specifications 8. Pricing 9. Payment terms [ 32 ] Uranium contracts utilize four types of pricing mechanisms: fixed pricing, base escalated pricing, market-related pricing and hybrid pricing . A fixed pricing mechanism specifies a fixed price for the uranium (e.g., $15 for a pound of U 3 O 8 ). A base escalated pricing mechanism specifies a base price for the uranium that is escalated over time according to a specified formula which typically accounts for inflation.

A market-related pricing mechanism specifies a price that is determined by reference to one or more indicators of the market price of uranium (e.g., TradeTech or Ux spot price indicators) at one or more points in time. A hybrid pricing mechanism uses a combination of base escalated and market-related pricing mechanisms. [ 33 ] A spot contract typically includes either fixed pricing or market-related pricing. [38] Mr.

Hayslett states at page 3 of the Hayslett Report that “[s]pot transactions tend to be done at a fixed price agreed to between the seller and buyer at the time of contract signing. ” [ 34 ] A long-term contract may include any of the pricing mechanisms. [39] Mr. Hayslett states at page 3 of the Hayslett Report: . . . There are two basic pricing mechanisms for [long-] term contracts: base-escalated and market-related.

While there can be a number of variations (escalation mechanism, base date, market index to reference, floor price, ceiling price, etc.), pricing can generally be traced back to one, or a combination, of these two mechanisms. . . . [ 35 ] A pricing mechanism may include a floor and/or a ceiling.

A floor sets a minimum price for the uranium and a ceiling sets a maximum price for the uranium. [ 36 ] A contract will specify the quantity of uranium being purchased and may provide the buyer with a flex option which allows the buyer to increase or decrease within a specified range the amount of uranium to be delivered by the vendor under the contract. To exercise a flex option, the buyer issues a flex notice to the vendor within the time frame stipulated in the contract. [ 37 ] Mr. Hayslett states in the Hayslett Report: . . .

Utility buyers have consistently indicated that in evaluating offers price and reliability of supply are the two dominant factors. While other terms, such as quantity flexibility and delivery notice requirements, may have value, they are typically viewed as “tie-breakers” between offers that are considered essentially equivalent as to supply reliability and price. [40]

(4) The Megatons to Megawatts Agreement [ 38 ] In the late 1980’s and early 1990’s, Mr. Grandey was the president of the Uranium Producers of America. During this time frame, an anti-dumping case was brought against the former Soviet Union, which dissolved into separate states on December 25, 1991.

In 1992, in exchange for the suspension of the anti-dumping case, Russia executed a suspension agreement (the “ RSA ”), which placed restrictions on the sale of Russian source uranium in the United States. [41] [ 39 ] On February 18, 1993, the United States and Russian governments signed an agreement concerning the disposition of highly enriched uranium extracted from nuclear weapons. This agreement was also known as the Megatons to Megawatts Agreement (the “ MTMA ”). [42] The general aim of the MTMA was to provide Russia with a means to sell uranium formerly used in its nuclear arsenal.

The commercial arrangement contemplated under the MTMA was implemented through an agreement between the United States Enrichment Corporation ( USEC ) and Techsnabexport ( Tenex ) (the “ USECTA ”). [43] The RSA was amended to ease the restrictions on the sale of Russian source uranium in the United States. [44] [ 40 ] The uranium extracted from Russia’s nuclear weapons had a high percentage of fissionable uranium-235 and consequently was known as highly enriched uranium ( HEU ).

To be commercially marketable, the Russian HEU had to be blended down to low enriched uranium ( LEU ) in the form of enriched UF 6 that could be used to fuel light water nuclear reactors. To do this, HEU is blended with natural (i.e., unenriched) UF 6 to create the LEU. [ 41 ] The blending down of the HEU took place in Russia and the resulting LEU ( i.e ., enriched UF 6 ) was delivered to USEC .

In exchange, USEC was to deliver an equivalent quantity of natural (unenriched) uranium in the form of UF 6 , which I will refer to as the “ HEU feed ”, [45] and credits for the enrichment services that would be required to convert the natural UF 6 into enriched UF 6 (i.e., into the LEU delivered by Tenex). [46] The first delivery of LEU took place in June 1995. [47] [ 42 ] The MTMA and USECTA did not contemplate how the HEU feed was to be marketed or paid for, and USEC took the position that it was not required to purchase or pay for the natural UF 6 resulting from deliveries of LEU by Tenex under the MTMA/USECTA. [48] [ 43 ] In April 1996, the USEC Privatization Act (the “ USECPA ”) was enacted.

The USECPA regulated the sale of HEU feed into the United States, allowed the Russian government to regain title to the HEU feed and formally released USEC from any obligation to purchase the HEU feed. In July 1998, the United States government privatized USEC and provided uranium to it. This raised concerns that the uranium market would be negatively affected by sales of uranium by USEC. To alleviate those concerns, in September 1998 the Department of Energy (the “ DOE ”) agreed to withhold from the market for ten years approximately 30 million pounds of uranium. In

October 1998, the United States government passed legislation which provided the DOE with US$325 million to purchase the HEU feed arising in 1997 and 1998 from deliveries of LEU by Tenex to USEC. The DOE also agreed to include the 28 million pounds of HEU feed purchased with the US$325 million in the 10-year suspension of sales. In exchange, Tenex was to conclude commercial arrangements for the sale of the HEU feed. [49]

(5) The Agreement Between Tenex and the Western Consortium [ 44 ] As early as February 24, 1993, the Appellant was considering the opportunities and issues that might flow from the arrangements under the MTMA. [50] Fletcher Newton described the Appellant’s reason for this as follows: The feed deal, as it was called, was generating a tremendous amount of UF6, and the Russians needed to monetize that. So one way or another, that was going to come into the market.

And Cameco felt that it was important for them to at least, to the extent that they could, participate in that agreement to at least try to control what happened to that UF6, how it got sold, when it got sold, and where it went, because that much UF6, if you just dumped it on the market, would have a tremendous impact. [51] [ 45 ] Following the execution of the MTMA, the Appellant pursued discussions with the Russian Ministry of Atomic Energy (“ MINATOM ”) and the United States government, prepared potential financial scenarios, retained the consulting services of a company owned by Tom Neff (who had originally proposed the megatons to megawatts scenario), sought assistance from the Canadian and Saskatchewan governments to secure an interest in the HEU feed and expressed concern to the United States government about USEC being be allowed to sell the HEU feed on the spot market. [52] In discussions regarding the HEU feed, Mr.

Grandey was the lead negotiator for the Appellant. [53] [ 46 ] Until sometime in 1996, the Appellant had attempted to secure the HEU feed on its own. Other competing parties included Cogema, a French state-owned uranium producer and competitor, and Nukem Inc. (“ Nukem ”), a privately owned United States trader in uranium.

The Appellant did not want Nukem to control the HEU feed because of its concern that Nukem would dump the UF 6 on the spot market thereby depressing the price of uranium. [54] [ 47 ] On January 27, 1997, the Appellant submitted a proposal to MINATOM that had been jointly developed by the Appellant and Cogema.

The joint arrangement was considered necessary by both parties because of the magnitude of the potential commitment to Tenex to buy the HEU feed. [55] A short time later, Nukem was added as a party with an initial interest of 10 percent. [56] The three entities were colloquially known as the “ western consortium ” or the “ western companies ”. [ 48 ] On August 18, 1997, the Appellant issued a press release reporting the following: Cameco Corporation today reports that it has signed an agreement in principle to purchase uranium resulting from the dismantlement of Russian nuclear weapons.

The agreement covers the purchase by Cameco, Cogema (a French 89% state-owned private company specializing in the nuclear fuel cycle) and Nukem Inc. (a privately owned US uranium trader), of the majority of the natural uranium hexafluoride (the uranium) becoming available through 2006 as a result of the dilution in Russia of weapons grade highly enriched uranium (HEU) to commercial grade low enriched uranium for delivery to the United States Enrichment Corporation (USEC). [57] [ 49 ] The Appellant was not a party to the agreement described in the press release.

Instead, Cameco Uranium, Inc. (“CUI”)–a Barbados subsidiary of the Appellant-executed the agreement, which was in the form of a memorandum of understanding. [58] [ 50 ] The memorandum of understanding did not result in an agreement with Tenex to acquire the HEU feed, and in 1998 there were numerous discussions regarding the HEU feed among the Appellant, Cogema, Nukem, MINATOM and Tenex. [59] [ 51 ] Mr. Grandey explained the Appellant’s role in the negotiations for the HEU feed: Q. Would it be correct also that Cameco Corporation took the lead in these negotiations on behalf of the western consortium? A.

In the negotiations, Cameco was usually the lead party sort of conducting the negotiation with the French-state owned Cogema at the table and, later on, Nukem. Everybody obviously acting, but Cameco was looked at as the leader. [60] [ 52 ] In a confidential memorandum dated January 4, 1999, Mr. Grandey stated the following: The United States government has provided a strong incentive for the Russian Parties to conclude a long term commercial arrangement on the HEU feed component by offering to purchase all of the 1997 and 1998 feed component deliveries for the sum of $325 million dollars.

The purchased feed component (approximately 28 million pounds U 3 O 8 ) would be added to the inventory of the U.S. Department of Energy (“DOE”). As a further inducement to the Russian Parties, approximately 58 million pounds U 3 O 8 of DOE inventory, including the feed component purchased from the Russian Parties, would not be sold for a period of ten years. None of these DOE actions will occur unless the Russian Parties enter into a long term commercial arrangement on the displaced feed.

Negotiations between the Western Companies and the Russian Parties recommenced in earnest in Washington D.C. in early December followed by further discussions in Paris on December 21 and 22. While the specific terms being discussed are confidential, the general approach is dictated by the demands of Russian law that a certain minimum value (i.e., price) be realized for the feed component and, if not realized within 180 days after delivery to the Russian Parties by the U.S. executive agent, the feed component be returned to Russia.

In essence, the parties to the negotiations are discussing a series of options which would allow the Western Companies to purchase the feed component at prices related to the market price at the time of delivery, subject to a floor price which is equal to the “minimum” value demanded by Russian law. To the extent the options are not exercised, the feed component would be physically returned to Russia to be held in a specially designated stockpile (the “Russian Stockpile”) subject to strict oversight by the U.S. government. [61]

[ 53 ] On March 24, 1999, CESA, Cogema, Nukem [62] and Tenex entered into the UF 6 Feed Component Implementing Contract (the “ HEU Feed Agreement ”). [63] Also on March 24, 1999, the DOE and MINATOM signed an agreement facilitating the commercial arrangements under the HEU Feed Agreement. [64] [ 54 ] Mr. Grandey, as president of CESA [65] , and Mr. Bernard Michel, as authorized signatory, executed the HEU Feed Agreement on behalf of CESA. At that time, the board of directors of CESA had not approved the execution of the HEU Feed Agreement.

The board of directors of CESA subsequently ratified the agreement at a meeting held on April 6, 1999. [66] [ 55 ] The delay in the board approving the HEU Feed Agreement was the result of a delay in CESA obtaining the necessary licences, [67] events occurring on March 24, 1999 that required the Russian delegation to return to Russia a day earlier than the expected execution date of March 25, 1999, and difficulty in predicting when the HEU Feed Agreement would be executed by Tenex. [68] At the time the agreement was ratified, the regulatory issues had not been resolved and a condition of the ratification was that CESA comply with all applicable rules and regulations, including those imposed by Luxembourg. [69] [ 56 ] Mr.

Glattes was not present at the April 6, 1999 meeting of the board of directors of CESA, but he was represented by a proxy. [70] Prior to the April 6 meeting, Mr. Glattes had discussions in person and by telephone with the members of the board to inform them of the status of the negotiations with Tenex. [71] [ 57 ] On April 13, 1999, Mr.

Goheen made a slide presentation to the Executive Committee of the Appellant. [72] The notes accompanying a slide addressing the cost-benefit analysis with respect to establishing a Swiss trading company state: Marketing has estimated the gross profit from HEU to be 4% to 2002 and 6% thereafter. [73] [ 58 ] Mr. Assie provided the estimated gross profit figures to Mr. Goheen. [74] [ 59 ] On April 21, 1999, a law firm acting for CESA sent a letter prepared in consultation with Mr.

Glattes to the Swiss nuclear energy regulator (the “ BfE ”). [75] Following meetings with the BfE and Euratom, an arrangement was reached whereby the purchases and sales of UF 6 by CESA would be governed by the BfE and not by Euratom even though CESA was a Luxembourg corporation subject to the jurisdiction of Euratom. [76] However, CESA was required to obtain a specific authorization from the BfE for each purchase or sale of UF 6. [77] In cross-examination, Mr.

Glattes testified that, from a narrow legal perspective, CESA/CEL was authorized to sell uranium only to affiliated corporations but that the Swiss authorities probably did not care if CESA/CEL sold to third parties. [78] [ 60 ] On May 19, 1999, the Appellant executed a guarantee (the “ Tenex Guarantee ”) in favour of Tenex relating to CESA’s obligations under the HEU Feed Agreement. [79] The Appellant guaranteed that CESA would make “ due and punctual payment ” of all amounts owing to Tenex under the HEU Feed Agreement and that CESA would promptly and completely perform all of its obligations under the HEU Feed Agreement.

The Appellant was not called upon to honour the Tenex Guarantee. [80] [ 61 ] Mr. Assie testified that the guarantee was requested by Tenex because CESA was a new company. The Appellant asked the Russian Federation for a similar guarantee of Tenex’s obligations under the HEU Feed Agreement, which Mr. Assie understood was given to the Appellant. [81] Mr.

Grandey testified that the guarantee was required by Tenex because the structure was relatively new; historically Tenex had been dealing with the Appellant, and Tenex wanted the assurance of the Appellant regarding the performance of CESA under the HEU Feed Agreement. [82] Fletcher Newton provided the following explanation: At some point in the discussions with Tenex -- and I couldn’t tell you exactly when, but it was fairly early on -- Cameco made it clear that, hopefully, when we signed this agreement, they would use a subsidiary to actually purchase the feed.

And the Russians, having had some bad experiences with bankruptcies and subsidiaries, said, “Okay. That’s fine. Use whatever Cameco subsidiary you want, but just make sure that we get a Cameco guarantee to go with it, because ultimately we want to know that Cameco, the corporation, is standing behind this.” [83] [ 62 ] On or about August 20, 1999, Mr.

Glattes secured Euratom’s tentative agreement not to impose restrictions on the entry of the HEU feed into Europe. [84] This allowed CESA and CEL to sell HEU feed to European utilities without restriction. [ 63 ] On February 18, 2000, CESA, Cogema and Nukem [85] signed a UF 6 Feed Component Administration Agreement (the “ Administration Agreement ”). [86] The Administration Agreement was signed by Mr. Glattes on behalf of CESA. [87] [ 64 ] Under

section 8.1 of the Administration Agreement, an administrative committee was appointed to administer those aspects of the HEU Feed Agreement that required common decision making. Each of CESA, Cogema and Nukem appointed one individual to the committee. CESA initially appointed Mr. Glattes. [88] [ 65 ] Under

section 9.1 of the Administration Agreement, the administrative committee appointed an administrator. The Nukem representative on the administrative committee proposed that Cameco US be appointed the administrator, and that was approved by the committee. [89] Mr. Glattes and Mr. Assie explained that this was because Cameco US had the capabilities to fulfil this role, and Mr. Assie also stated that Cameco US was “t he face to the market ” and that Cogema and Nukem were familiar to the marketing people at Cameco US. [90] Mr.

Assie described the administrator’s role as being to provide administrative services and as involving no decision- making authority. [91] [ 66 ] Mr. Glattes attended the meetings of the administrative committee in person, by video conference or by telephone. [92] Draft minutes of each meeting were prepared and were circulated for comment before being finalized. [93] [ 67 ] In October 2002, Mr. Glattes advised the BfE that the Swiss branch of CESA would be transferred to CEL effective October 1, 2002. [94] Mr.

Glattes also negotiated with the BfE a new arrangement pursuant to which the BfE granted a global authorization for CEL’s transactions in uranium effective January 1, 2003. [95]

[ 68 ] The HEU Feed Agreement provided CESA, Cogema and Nukem with exclusive first and second options to purchase the majority of the HEU feed resulting from the delivery by Tenex to USEC of LEU in 1999 and subsequent years until Russia’s commitment under the MTMA to deliver the remaining balance of 440 metric tonnes of HEU, or the equivalent in LEU, was satisfied. [96] [ 69 ] A first option was exercised by delivering a first option exercise notice (a “ FOEN ”) to Tenex. [97] Under the default price mechanism in

section 7.02(

a) of the HEU Feed Agreement , [98] the price for the UF 6 was the greater of 92% of the “ Restricted Spot Price ” for the month of delivery and US$29 per kgU. The restricted spot price for a month was the arithmetic average of the restricted spot price per kilogram of uranium as UF 6 published by Ux and TradeTech for the immediately preceding month. [ 70 ] Under sections 7.03(

a) and (

b) of the HEU Feed Agreement, a company exercising an option could elect in the FOEN to use a base escalated price mechanism or a capped market price mechanism. [ 71 ] Under the base escalated price mechanism in

section 7.03(a), the base price was the greater of 92% of the “ Long Term Price ” for the month the FOEN was delivered to Tenex and US$29 per kgU. The long-term price was the TradeTech long-term price indicator for U 3 O 8 for the month prior to the month the FOEN was delivered to Tenex multiplied by 2.61285 plus the TradeTech long-term conversion price indicator for the same month. The base price so determined was escalated by the Gross Domestic Product Implicit Price Deflator Index published by the United States Department of Commerce. [ 72 ] Under the capped market price mechanism in

section 7.03(b), the price was the lesser of the price determined under the default price mechanism and 150% of the price that would have been determined under the default price mechanism if that price had been determined at the time the FOEN was given to Tenex. [ 73 ] Mr. Assie was asked about the anticipated profitability of the HEU Feed Agreement at the time it was entered into in March 1999: Q. What was the view within the Cameco group as to the anticipated profitability of the HEU to be acquired, that could be acquired under the HEU agreement-- A.

Well-- Q.--as at the time of entering into the agreement, in March of 1999? A. Right. Well, at the time of that the agreement was entered into, the expectation was that, at best, it would be marginally profitable. The reality was that the prices here--the floor price was right in line with where the market prices were at the time. And that’s the very reason why it was struck as an option arrangement. There were no firm purchase commitments made under the contract. [99] [ 74 ] Mr.

Goheen made a presentation to the executive committee of the Appellant on April 13, 1999 in which he stated that the “ gross profit ” from the HEU Feed Agreement was expected to be 4% through 2002 and 6% thereafter. [100] Mr. Assie testified that he provided Mr. Goheen with that estimate. [101] [ 75 ] Mr. Assie explained the low profit expectations in the following exchange with counsel: Q. Why did you have such low expectations with respect to the profitability of the HEU agreement? A.

Well, as I have just stated, the agreement contained a floor price which was, in effect, really pretty much at the level of the market price at the time the agreement was being entered into. And, you know, at that time, in the spring of 1999, those were not, I will say, heady times in the uranium market. We were not particularly optimistic about price over the next several years.

And you may recall from the marketing presentations we looked at yesterday, whenever we were giving our price projections--and they were often called hockey stick projections--we would qualify the near-term projections by saying, you know, there’s a lot of uncertainty in the near term. We would keep pointing to the longer term with the view that the secondary supplies would ultimately, you know, be consumed or drawn down and prices would be more reflective of production. But in the near term, none of us could see that happening. So we had--in our view it was, as to the profitability here, was not high.

The other thing to keep in mind is the way the pricing mechanisms worked, you elected an option, and you were going to receive either an 8 percent discount off the market at the time of delivery, or you were going to pay a--if you elected a base price mechanism, you were going to get an 8 percent discount if prices were high enough, an 8 percent discount from the long-term price at the time you elected it.

If you look at it from a, you know, in some respects, from a trader’s point of view, to the extent that you were then placing that material, turning around and placing it with utilities, what could you reasonably expect to earn on it? Well, the maximum would be 8 percent, but you would have to deal with all your costs, you know, your costs of marketing, any exchange fees, you know, market contracts, any discounts in them.

So, you know, coming up with an estimate as to the profitability of being 4 to 6 percent, that would have been with the view that, in effect, we were going to be able to elect options under the agreement. [102] [ 76 ] All of the uranium purchased by the western consortium under the HEU Feed Agreement was delivered to the western consortium at USEC and did not pass through Luxembourg or Switzerland.

The UF 6 would have been delivered to USEC even if the Appellant instead of CESA had been a party to the HEU Feed Agreement. [103] [ 77 ] The HEU Feed Agreement was amended a total of eight times between 1999 and 2006. [104] Mr. Glattes stated that the fourth and eighth amendments were important but that the fourth amendment was the most important. The other amendments were minor and addressed matters such as banking arrangements and changes of address. [105]

[ 78 ] The fourth amendment came about because Russia was not happy with the quantities of UF 6 being purchased by the western consortium in 2000 and 2001. Mr. Grandey explained the issue at a meeting of the board of directors of the Appellant on May 31, 2001: Mr. Grandey told the board under the HEU transaction, the floor price is $29 per kilogram which is the equivalent of about $9.40 per pound. We believe this is a minimum price below which the Russians would not sell. It is difficult to exercise options in a weak market and pay $9.40 a pound.

Through 2000 and 2001, the spot price was less than the Russian floor price. In 2000, Cameco, Cogema and Nukem bought the quota amount from the Russians to demonstrate to Russia and the US government that even in a weakening market, we will play our

part in the highly enriched uranium contract. In 2000, we gave notice that we would not purchase in 2001. We met with the Minister of Atomic Energy Adamov in November. He acknowledged and understood our position. If the market was too weak, the Russian feed material was to be returned to Russia. . . . Russia at the same time was looking for other sources to purchase this uranium. They were talking to USEC about buying the feed component. This would be a breach of our agreement, but we are in a difficult position. We do not want to buy it and to say no one else could buy it is difficult to present to the Russians.

Another possibility for the Russians would be to increase the delivery of LEU, to sell more enrichment to USEC. This would bring about more feed component in the market, although by the agreement it would have to be shipped back to Russia. This would put more pressure on the market. Therefore, for a variety of reasons, the western companies decided to negotiate a transaction with the Russians with a discount and for certain volumes to be paid in 2001. [106] [ 79 ] The fourth amendment to the HEU Feed Agreement was negotiated in 2001. [107] Mr.

Grandey led the negotiation of the fourth amendment on behalf of the western consortium. The negotiation included meetings with Tenex in Moscow, Sochi and Paris. Mr. Glattes did not attend the meetings with Tenex in Moscow and Sochi but did attend the meeting in Paris and signed the amendment for CESA at that meeting on November 16, 2001. [108] Mr. Glattes read the fourth amendment before signing the document. [109] Mr. Glattes kept the board of directors of CESA apprised of the negotiations and the board authorized the execution of the fourth amendment at a meeting on November 8, 2001. [110] [ 80 ] Mr.

Glattes testified that he attended a meeting of the administrative committee held on August 29, 2001, which preceded the meeting in Sochi. The purpose of the meeting was to consider a working paper that set out the framework for the discussions to be held at the meeting in Sochi. [111] Mr. Glattes also attended a breakfast meeting held in London, England in conjunction with a World Nuclear Association (WNA) conference. [112] [ 81 ] Mr.

Glattes testified that he was involved in internal discussions about the fourth amendment, as well as discussions with Cogema and Nukem, through his participation on the administrative committee. The internal discussions took place during twice-weekly sales meetings (described below) and were led substantially by John Britt but also included George Assie, Gerald Grandey, Kim Goheen and Sean Quinn. [113] Mr. Glattes received and reviewed protocols which resulted from the various discussions. [114] Mr.

Glattes testified that his main counterpart in the internal discussions was John Britt, with whom he had had a long-standing very close relationship. [115] [ 82 ] The fourth amendment required the western consortium to exercise first options for delivery of UF 6 in 2002 through 2013 in exchange for a reduction in the base price of the UF 6 . [116] In addition, the price to CESA and Nukem of 950,000 kilograms of UF 6 to be delivered in 2001 under two FOENs exercised on June 29, 2001 was reduced to $26.30 per kgU. [117] [ 83 ] CESA exercised two FOENs in compliance with the fourth amendment. [118] One covered deliveries in 2002 to 2013 and the other covered deliveries in 2004 to 2013. [ 84 ] Regarding the fourth amendment, Fletcher Newton had the following exchange with counsel for the Appellant in cross- examination: Q.

Based on your experience and knowledge having attended the negotiations there, was it a difficult decision for the western parties to enter into Amendment No. 4? A. It was extremely difficult. Remember that, as I said earlier, the price of uranium hadn’t moved for 10 years. It had not gone above $10 a pound. And now we’re in 2001, and I don’t recall exactly where the price of uranium was at that point, but it still hadn’t began to move. And none of us at that time expected to see what eventually happened. There were a few hopeful signs that maybe the price might strengthen.

But the gist of the meeting in Sochi was that the Russians wanted us, the three companies, to, number one, commit absolutely to purchase a certain amount of material, which up until then we really hadn’t; it had been more in the form of an option, and, two, agree to pay them a minimum price, and the number that sticks in my head was $29 a kilogram. You know, this is a long time ago, so maybe it was a different number. But that number, whatever it was, at that time, was still $2 or $3 above the then market price. So they’re asking us to buy a lot of material at a price that’s already above the spot market price.

And I remember we all stood around, and Gerry was in the group, and Gerry said, “Listen, you guys, we’ve got to make a decision. Either we’re going to do this, take the risk of what happens to the price, because it could have gone down just [as] easily as it went up, or not. What are we going to do?” And they agreed, after a lot of back-and forth, that, yes, we’ll go ahead and do it, but, yes, it was a difficult decision. [119] [ 85 ] Mr.

Glattes testified that he was directly involved in the negotiation of the eighth amendment with Tenex. [120] The amendment addressed issues relating to the uranium covered by the second options under the HEU Feed Agreement [121] and was signed by Mr. Glattes in Paris on April 29, 2004 with effect as of January 1, 2004. The board of directors of CEL approved the eighth amendment in a conference call held prior to April 29, 2004 and authorized Mr. Glattes to execute the amendment for CEL. [122] This approval was noted at a board of directors’ meeting held on May 6, 2004.

[ 86 ] In cross-examination, Mr. Glattes agreed with counsel for the Respondent that most if not all of the external meetings he attended in respect of the Tenex transaction were either for the purpose of signing an agreement or held in conjunction with a uranium conference. [123] [ 87 ] Mr. Murphy was not involved in any of the negotiations regarding the HEU Feed Agreement and the amendments to that agreement as those negotiations preceded his appointment as president of CEL. [124] [ 88 ] In 2006, Cameco US provided CEL with a proposal

summary dated March 17, 2006 addressing the exercise of additional FOENs provided for in the eighth amendment to the HEU Feed Agreement. Mr. Murphy reviewed and approved the proposal on behalf of CEL. [125] He testified that “ it was a reasonable proposal and a good deal for Cameco Europe ”. [126]

(6) The Urenco Agreement [ 89 ] On September 9, 1999, CESA entered into an agreement (the “ Urenco Agreement ”) with Urenco Limited and three of its subsidiaries (collectively, “Urenco”) to purchase natural UF 6 . [127] The Appellant guaranteed “ the payment to Urenco of all amounts due to Urenco ” under the Urenco Agreement. [128] [ 90 ] Urenco was a uranium enricher that had struck a deal with Tenex to have the tails resulting from its enrichment activities re- enriched to the level of natural uranium. [129] Urenco would deliver its tails to Tenex and in exchange would receive from Tenex an equivalent amount of uranium as natural UF 6 .

The natural UF 6 was considered to be of Russian origin regardless of the source of the uranium that created the tails. [130] [ 91 ] Mr. Assie testified that CESA accomplished two things by entering into the Urenco Agreement. First, the arrangement avoided Urenco dumping the UF 6 in the market. Second, the arrangement provided CESA with the opportunity to profit from the purchase and sale of the UF 6 . [131] [ 92 ] Mr. Assie testified that starting in the spring or early summer of 1999 he and John Britt led the negotiations, but that Mr.

Glattes was involved in the discussions regarding the Urenco Agreement, the regulatory issues raised by the agreement and the development of the proposal to Urenco. Mr. Assie did not recall whether Mr. Glattes attended meetings with Urenco. [132] [ 93 ] Mr. Glattes testified that he attended meetings when he could and that he had a close relationship with the head of Urenco and with the head of Urenco’s legal department. Mr. Glattes testified that the lead negotiator for the deal was John Britt but that, as with any third-party agreement, every step was addressed at the twice-weekly sales meetings. [ 94 ] Mr.

Glattes testified that the management committee of CESA was apprised of the proposed agreement with Urenco at a meeting held on September 7, 1999 and that the management committee authorized Mr. Glattes to sign the agreement. [133] The board of directors approved the agreement on September 28, 1999. [134] [ 95 ] Mr. Glattes testified that he was responsible for addressing the European regulatory issues raised by the purchase of the UF 6 from a European vendor and the sale of the UF 6 to European utilities. Mr.

Glattes dealt with the same three individuals at Euratom that he had dealt with in the context of discussions regarding the HEU Feed Agreement. [135] [ 96 ] The Urenco Agreement fixed the price of the UF 6 as a base escalated price starting at US$25.05 plus 50% of the amount by which the CIS spot price exceeded US$30.10. The CIS spot price was the average of the spot price indices for UF 6 published by Ux, TradeTech and Nukem.

Section 7.04 of the Urenco Agreement provided CESA with an option to request that the price be renegotiated if the CIS spot price remained below US$25.05 per kilogram of UF 6 for any period of six consecutive months. If the parties failed to renegotiate a price then CESA could terminate the agreement. [ 97 ] The Urenco Agreement was amended a total of five times. [136] Amending Agreement No. 1 (“ Amendment No. 1 ”) is dated August 8, 2000 with effect as of January 1, 2000.

The amendment reduced the price for 2000 from US$25.05 to US$22.50 per kgU and amended the base escalated price for 2001 and thereafter to $22.50 plus 50% of the amount by which the CIS spot price exceeded US$27.55. The amendment also changed the benchmark price in

section 7.04 of the Urenco Agreement to reflect the new base escalated price of US$22.50. [137] [ 98 ] Amending Agreement No. 2 (“ Amendment No. 2 ”) is dated April 11, 2001 with effect as of January 1, 2001. The amendment reduced the price for 2001 from US$22.50 to US$20.50 per kgU, amended the price for the first 500,000 kilograms of UF 6 delivered in 2002 and 2003 to $21.00 and amended the price for all other UF 6 to a base escalated price of US $22.50 plus 50% of the amount by which the CIS Spot Price exceeded US$25.00. The amendment also deleted

section 7.04 of the Urenco Agreement and acknowledged the continuation of certain carve-out arrangements entered into by CESA and Urenco. Exhibit A to the amendment lists a total of five carve- out agreements executed between September 13, 2000 and January 5, 2001. [138] [ 99 ] The carve-out agreements were entered into by Urenco and CESA to reduce the risk otherwise resulting from selling UF 6 purchased from Urenco to utilities under long-term contracts at base escalated prices. [139] The risk arose because of the market-linked component of the price payable under the Urenco Agreement.

In exchange for removing that component of the price, Urenco was paid a higher base price than provided for in the Urenco Agreement. Each carve-out agreement was associated with a specific agreement with a utility to sell UF 6 to that utility. [140] [ 100 ] Amending Agreement No. 3 is dated May 10, 2002 with effect as of January 1, 2002. The agreement amended the definition of CIS spot price to limit the price indices used to the Ux and Nukem indices. [ 101 ] Amending Agreement No. 4 (“ Amendment No. 4 ”) is dated February 12, 2003 and is between CEL and Urenco. The recitals

state that the Urenco Agreement was assigned to CEL by an agreement among CESA, CEL and Urenco made October 1, 2002. [ 102 ] Amendment No. 4 extends the term of the Urenco Agreement to 2009, amends

Schedule A of the Urenco Agreement, amends the price for deliveries on or after January 1, 2005, adds a clause that allows CEL to request renegotiation of the price if the CIS spot price remains below US$25.00 for 12 months or more , adds a clause that allows Urenco to request renegotiation of the price if the CIS spot price remains above US$38.00 for 12 months or more, [141] confirms the carve-out arrangements and lists in Exhibit A those carve- out arrangements entered into after Amendment No. 2.

Exhibit A lists three carve-out agreements dated June 12, 2002, October 14, 2002 and November 4, 2002. [142] [ 103 ] Amending Agreement No. 5 (“ Amendment No. 5 ”) is dated December 22, 2006 with effect as of January 1, 2007. The amendment replaces Schedules A and B of the Urenco Agreement. [ 104 ] In cross-examination, Mr.

Assie was asked about the negotiations with Urenco relating to Amendments No. 1 through No. 4 to the Urenco Agreement and relating to the carve-out agreements identified in Amendments No. 2 and No. 4. [143] Some of the e-mails from John Britt about the negotiations with Urenco were copied or forwarded to Mr. Glattes. [144] Mr. Assie testified that Mr. Glattes was kept apprised of developments during the twice-weekly sales meetings. [145] [ 105 ] Mr. Glattes testified that he was involved in the internal decision making which happened during the sales meetings and that he was kept informed by John Britt. Mr.

Glattes testified that he tried to attend meetings with Urenco but that it was not always possible, and that he could not recall any particular meeting. [146] [ 106 ] In cross-examination, Mr. Glattes agreed with counsel for the Respondent that John Britt was the lead negotiator for the amendments and the carve-out agreements. [147] Counsel for the Respondent alluded to evidence that Mr. Glattes did attend at least one meeting with Urenco but Mr. Glattes could not recall having done so. [148] [ 107 ] Mr. Murphy did not participate in the negotiations with Urenco regarding Amendment No. 5 to the Urenco Agreement.

Mr. Murphy did review a proposal

summary dated March 17, 2006 and his initials appear on the

summary. Mr. Murphy testified that he was kept apprised of developments in the negotiation of Amendment No. 5 during the twice-weekly sales meetings and probably also through activity reports. [149]

(7) The Reorganization of the Cameco Group [ 108 ] Following the creation of the Appellant in the late 1980’s, the business activities of the Appellant had been focused on Canada. By the mid-1990’s, the Appellant was pursuing opportunities elsewhere. In the fall of 1997, the Appellant undertook its first public offering of equity and in 1998 the Appellant undertook its first public offering of debt. [150] [ 109 ] In early 1999, the Appellant reorganized its corporate structure. Mr. Assie described the reason for the reorganization as follows: Q.

What was your understanding at the time of why the concept of restructuring arose? A. Well, in large part, it related to the highly-enriched uranium agreement or the Tenex agreement, whereby we were going to, hopefully at some point acquire this large quantity of natural uranium. And the concept was, as I understood it, to maximize the profits of the company in respect of that agreement by doing the transaction in as tax efficient way as possible. [151] [ 110 ] Mr.

Goheen stated that he came up with the idea to restructure the Cameco Group and he was responsible for leading the day-to- day planning of the restructuring. [152] [ 111 ] Mr. Goheen stated in cross-examination that he was not aware that the idea of using a corporation in a low-tax jurisdiction had previously been raised by Mr.

Grandey and that CUI had entered into the memorandum of understanding signed by Cogema and Nukem in 1997. [153] However, after being presented with an agreement between CUI and Trafalgar Management Services Ltd. entered into on November 6, 1997, he confirmed that as at that time using a Barbados subsidiary to hold the HEU Feed Agreement did make commercial sense. [154] He also agreed that his initial choice of jurisdiction was Barbados because he was familiar with the people there and that, as of January 5, 1999, the expectation was still that CUI would be a party to the HEU Feed Agreement and that internal discussions regarding which jurisdiction to use continued into 1999. [155] I note that Mr.

Goheen was being asked to recall events that took place 18 to 20 years ago and that minor lapses in memory are hardly surprising in the circumstances. [ 112 ] With respect to the impetus behind the reorganization, Mr. Goheen testified that in 1998 the price of uranium was low and the Appellant was seeking to contain costs. One of those costs was tax. [156] Mr. Goheen explained his initial rationale for the reorganization as follows: Q. What were your conclusions regarding how Cameco could minimize its tax expense? A. Well, we had a choice which -- you know, I had had opportunities before, comparable.

The company Cameco had a choice to make. With these new opportunities, such as HEU and offshore purchases and such, we could continue to run the company Saskatchewan focused. Everyone would remain in Saskatoon. All of this material would be brought back in to Cameco Corp., the Canadian parent. It would be sold through them and all that activity would be as it had always been. Everything ran through Cameco. Then nothing really would have changed. I would have the same tax bill. The same items would be included in the tax calculation as it always had been, so nothing would have changed.

But then I’d turn around and say, “Well, from a cost reduction perspective, I haven’t done anything. What can the company do? What can Cameco do to change that?” And the idea came up to say, well, in particularly the HEU material, it’s Russian. It’s equivalent over the life of it to about 80 million pounds for Cameco, which is a very substantial uranium mine. It had no connection to Canada. Why bring it here, subject that uranium to Canadian tax when it never was from Canada in the first place?

So that started me down the road of saying, “All right. If you move the HEU material -- or if you don’t move it. If you put the HEU material offshore so that it never, in the first place, becomes part of the Canadian company, if you make your third-party purchases other than that offshore for material that’s never part of Canada, all of that material, then, is not part of the Canadian tax system. So that was the start of it. [157] [ 113 ] Mr. Goheen also explained how his focus expanded to Canadian source uranium: Q. So take us through this. That was the start-up, and then how did you progress? A.

Well, when I’m down at that stage, I say, “Well, that’s fine. That’s a very large piece of this. But what else can we do?” And the thought came to be that there was two other aspects to this from the Canadian side. There is uncommitted production that Cameco expects to produce, you know, uranium it expects to produce in the future that has not been committed to an existing sales contract, and there’s the uranium inventory that Cameco has in its name. So the thought behind that was, well, all right.

Now that we’ve been down this road with the HEU and third-party purchases, how can we build this into an even bigger entity? And those two pieces from Cameco, I said, “Well let’s includes [ sic ] those in this pot as well.” The driver there was that, under all circumstances, the uranium coming out of Canada to this third party had to be sold across at fair market value. That was an absolute unviolatable principle. Q. Sold across to whom? A. To a wholly-owned subsidiary offshore. Q.

Why did this plan of the wholly-owned subsidiary getting the HEU and acquiring domestic uranium at fair market value make sense to you? A. Okay. Well, there was a number of avenues. The tax one, directly first, is that, again, internally, we were optimistic that prices couldn’t fall lower. In fact, they did, but that’s kind of what companies do. They’ll have multiple opinions internally as to where uranium prices are going to go or whatever commodity it is. And at the time, at $8, well, it was $16 a year ago. It can’t go much farther down. I said, well, all right.

To the extent that that may be true, then entering contracts to move this material, sell this material to our wholly-owned sub offshore at the current fair market value provides an opportunity. If subsequent to that, some of these forecasts turn out to be true and prices rise, then that difference between the transfer price and the realized price will be taxed offshore. And the offshore rate would be a lower rate. [158] [ 114 ] Mr. Goheen explained the other considerations that went into the restructuring: Q. So you have talked about the tax advantages. Were there any other considerations that went into this? A.

Well, yes. Wherever the entity would be and wherever the -- to complete the structure, you needed to choose location, country, and so on. Wherever that had to be, it had to make sense, and it had to be commercial. We weren’t going to create an entity in some part of the world just because it had a low tax rate but it made no commercial sense. That doesn’t fly. It wouldn't get anywhere with the board. I wouldn’t have proposed it in the first place. Q. Mr. Goheen, you talk about it making “commercial sense.” So in terms of the structure, as you envisaged it at the time with this plan – A. Mm-hmm.

Q. -- what did the structure look like that you envisaged, and why did it make sense? A. Sure. Sure. Well, if you will, from a single entity in Saskatchewan, we were breaking this into three pieces. The Canadian arm, the Canadian entity, would continue to be a producer and seller of uranium. The other aspect of it, being what I’ll call price risk, infiltrating, we would create an offshore entity. And then the third arm would be a brokerage equivalent who would be the marketing group that would be out looking for, you know, people that would buy the uranium or sell their uranium to us. So it’s three arms.

And how that made sense, then, is you kind of focused each piece on where they had been, or focused Cameco Corp. on what it had been, a miner, producer of uranium. It created a new entity, Cameco Europe, as the trader in a jurisdiction that I thought made a lot of sense. And then we put the sales force into the U.S., Minneapolis, because they were close to the customer base. Two-thirds of our customers are in the U.S. [159] [ 115 ] Mr. Goheen explained his view of the core functions of CESA/CEL and how other requirements would be addressed: Q.

You described to us how you envisaged the structure to be, and you described Cameco Europe as a trader. As part of your restructuring, did you have a plan or ideas on how Cameco Europe would acquire services that it needed? A. Sure. I have to come back for a moment as to what does a trader have to do. You know, to me a trader has three things. It has to be a competent trader. It has to understand the market that it’s operating within; it has to decide when to buy and sell and the terms; and it has to enter [into] contracts that fulfil its obligations to buy and sell.

Beyond that, there is nothing that a trader needs to do itself that it cannot outsource elsewhere. Q. So what was your plan with respect to the trader and the services it needed? A. We focused on the three main functions that a trader needs to do and other activities were then outsourced to Cameco for the back office aspects of things, the contracts admin, and so on. And with Cameco Inc. then on the marketing side for buying and selling, direct

contact with customers and clients, they were engaged to provide that service. [160] [ 116 ] Finally, Mr. Goheen explained how the restructuring changed the Cameco Group: Q. Mr. Goheen, how did Cameco change after the restructuring? If you were to look at the before and after pictures, what was the difference in the Cameco organization? A. Very dramatic. From everything focused through Saskatoon, all activity based there, to three separate entities doing three separate tasks, three separate businesses.

Instead of Cameco, we now had Cameco Corp., if you will, the Canadian side, being the producer, miner and producer. We have Cameco Europe being the trader, the price speculator. And we have Cameco Inc. being the broker, the one who finds the customers. That’s quite a change. [161] [ 117 ] In order to proceed with the reorganization, Mr. Goheen had to involve the management committee of the Appellant, which was comprised of the six senior officers of the Appellant and the vice-presidents that reported to them. Ultimately, Mr.

Goheen required the approval of Bernard Michel, who, as CEO, had the final say as to whether the matter would proceed to the board of directors of the Appellant. [162] [ 118 ] On February 3, 1999, Mr.

Goheen made a presentation to the management committee. [163] At that point in time, the proposal for a reorganization had been around for some time and was not new to the management committee. [164] The February 3, 1999 proposal envisioned the use of a Luxembourg corporation (temporarily) and a Swiss corporation. [165] Accordingly, the jurisdictions for the new companies had been settled by February 3, 1999. [ 119 ] On March 2, 1999, Mr.

Goheen sent a memo to the six senior officers of the Appellant summarizing the proposed reorganization and the guidelines that were to be followed by CESA/CEL and Cameco US. [166] Mr. Goheen explained the purpose of the guidelines as follows: Q. . . . What was your purpose in laying this out in the detail that you did? A. I wanted to make sure that the officers understood there were clear guidelines, rules, that had to be followed. And, again, this would not have been the first time. They were quite aware of it. I was just putting it down to make sure that there was no ambiguity.

These were the rules that had to be followed. [167] [ 120 ] The memorandum also indicated that the Appellant would provide administrative services to both CESA/CEL and Cameco US. Mr. Goheen explained the rationale for this approach as follows: Q. Let’s go to page 4 of your note, the top bullet point under “Miscellaneous”: “Cameco’s market planning and contract administration can provide services to both trading companies on a

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