Cameco Corporation v. The Queen

Cameco Corporation v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2018-09-26
Neutral citation
2018 TCC 195
File numbers
2009-2430(IT)G, 2014-3075(IT)G, 2015-1307(IT)G
Judges and Taxing Officers
John R. Owen
Subjects
Income Tax Act
Decision Content
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 26th 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 UF6 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 U308 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, [1993] O.J. No. 2802 (QL), 68 O.A.C. 22, the Ontario Court of Appeal explained the importance 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 witness is credible. Although there are at times inconsistencies between the oral testimony of a witness and the documentary record as accepted by me, I consider these inconsistencies to be a reflection on the reliability of the evidence of the witness and not the credibility of the witness. 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 the assets of Saskatchewan Mining Development Corporation, a provincial Crown corporation, and Eldorado Nuclear Limited, a federal Crown 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 largest uranium 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 and uranium refining and processing (conversion) facilities in Ontario. United States subsidiaries of the Appellant owned uranium mines in the United States.
[15] The Cameco Group also explored for, developed and operated gold properties, but those undertakings are not relevant to these appeals.
(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 ore produces uranium concentrate or yellow cake.[6] The uranium concentrate contains anywhere from 75% to 99% U3O8 depending on the producer.[7] U3O8 is comprised of essentially two uranium isotopes: uranium-238 (approximately 99.3% of the total uranium) and uranium-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 through 2006 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 for uranium 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 of fissionable 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 fuel cycle.[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 provides conversion services (a “converter”). The owner of the U3O8 must have an account with the converter or must have the use of such an account. 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 to the 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 a purchaser 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 from one location to another in order to effect the sale at the converter. It also allows, because it’s not physically transported, that you can conclude 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 not constrained by the cylinders or the canisters that are used for transport. And the other one is that it allows for confidentiality, because you 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 considerations uranium is typically placed into two categories according to its country of origin: restricted and unrestricted. Restricted uranium is not subject 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 1999 through 2006, Russian source uranium was unrestricted uranium and Canadian source uranium was restricted uranium.[20]
[24] U3O8 and UF6 are each a fungible product.[21] U3O8 or UF6 from one producer is physically interchangeable with U3O8 or UF6 from another producer. The uranium content of U3O8 varies according to where it is produced, but this variation is removed from the determination of price when the U3O8 is assayed at a converter.[22] However, the price of U3O8 or UF6 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] U3O8 is sold at a price per pound and UF6 is sold at a price per kilogram (kgU).[25] The price per kgU of UF6 is calculated by multiplying the price per pound of uranium as U3O8 by a factor of 2.613 and then adding the price for creating one kilogram of UF6 from U3O8.[26] The conversion factor is essentially the amount of U3O8 required to produce one kilogram of UF6, taking into account the loss of uranium that occurs in the conversion process, and therefore the formula yields an approximation of the price of UF6. The price of UF6 in a particular contract for UF6 may vary slightly from the result produced by the formula.[27]
[26] The conversion services required to convert U3O8 into UF6 may be sold separately, in which case the purchaser delivers U3O8 to the converter and the seller delivers UF6 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 U3O8 or UF6:[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 U3O8). 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 UF6 that could be used to fuel light water nuclear reactors. To do this, HEU is blended with natural (i.e., unenriched) UF6 to create the LEU.
[41] The blending down of the HEU took place in Russia and the resulting LEU (i.e., enriched UF6) was delivered to USEC. In exchange, USEC was to deliver an equivalent quantity of natural (unenriched) uranium in the form of UF6, which I will refer to as the “HEU feed”,[45] and credits for the enrichment services that would be required to convert the natural UF6 into enriched UF6 (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 UF6 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 UF6 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 U3O8) 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 U3O8 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 UF6 Feed Component Implementing Contract (the “HEU Feed Ag