CCJ

Cameco Corporation: 2006 MD&A Summary (Filed March 2007)

Business Context and Reporting Period

This summary covers Cameco Corporation's 2006 Management's Discussion & Analysis (MD&A), filed on Form 6-K on March 19, 2007. Cameco is the world's largest uranium producer and a global supplier of nuclear fuel and clean electricity. The company operates four business segments: Uranium, Fuel Services, Nuclear Electricity Generation (via a 31.6% interest in Bruce Power Limited Partnership), and Gold (via a 52.7% interest in Centerra Gold Inc.). All financial figures are in Canadian dollars unless otherwise noted.

Key Financial Metrics (2006)

Note: Adjusted Net Earnings excludes a $73 million non-cash tax recovery and a $29 million gain on the sale of a joint venture interest.

Material Changes vs. Prior Period

• Uranium Segment: Revenue increased 16% to $803 million, driven by a 33% rise in the average realized price ($20.62/lb US) despite a 6% decline in reported sales volume due to accounting deferrals on product loans. Gross profit rose 49% to $237 million.
• Fuel Services: Revenue surged 42% to $224 million, primarily due to the acquisition of Zircatec (fuel fabrication) and higher volumes. However, earnings before taxes declined 12% to $22 million due to higher costs of purchased conversion services.
• Nuclear Electricity (BPLP): Earnings before taxes dropped 25% to $388 million (100% basis) due to a 32% decrease in Ontario electricity spot prices, partially offset by a higher capacity factor (91% vs 79%).
• Gold Segment: Revenue remained flat at $414 million. Production decreased 25% to 587,000 ounces due to pit wall movement at the Kumtor mine, but higher gold prices ($597/oz vs $433/oz) maintained revenue levels.
• Accounting Changes: Cameco moved to proportionate consolidation for its Bruce Power investment in late 2005, significantly impacting revenue and cost reporting compared to the equity method used previously.

Guidance, Outlook, and Risks

2007 Outlook:

• Revenue: Consolidated revenue is expected to grow approximately 25% in 2007, driven by higher uranium and fuel services prices.
• Uranium: Revenue expected to rise ~45% (excluding product loan deferrals, ~50%) due to higher realized prices. Production projected at 21.0 million pounds.
• Gold: Production expected to rebound to 700,000–720,000 ounces; revenue up ~20%.
• Capital Expenditures: Total CapEx projected at $577 million (up 25%), with $256 million for growth projects (including Cigar Lake and Inkai) and $286 million for sustaining capital.

• Cigar Lake Water Inflow: A rockfall in October 2006 flooded the underground development. Total construction costs are now estimated at $508 million (Cameco's share). Remediation costs of $32 million are expected to reduce 2007 pre-tax earnings. Production startup is targeted for 2010.
• Regulatory Approvals: Delays in environmental assessments (EA) for McArthur River/Key Lake expansion and Blind River refinery capacity could constrain production growth.
• Political Risk: Operations in Kazakhstan (Inkai) and the Kyrgyz Republic/Mongolia (Centerra) face risks related to political instability, tax law changes (e.g., Mongolia's windfall tax), and labor disputes.
• Market Volatility: Significant exposure to uranium, gold, and electricity spot prices, as well as the US/Canadian exchange rate (a 1-cent change impacts net earnings by ~$6 million).

Investor Verification Checklist

• Cigar Lake Timeline: Verify the progress of the five-phase remediation plan and the likelihood of the 2010 production start date.
• Product Loan Deferrals: Monitor the status of the $80 million deferred revenue from standby product loans and the potential for recognition in 2007 if loans are terminated.
• Regulatory Status: Track the Canadian Nuclear Safety Commission (CNSC) decisions on the McArthur River/Key Lake capacity expansion and Blind River refinery upgrades.
• Centerra Political Exposure: Review developments regarding the stability agreement and tax disputes in Mongolia and the Kyrgyz Republic.
• Uranium Contract Mix: Assess the shift in the contract portfolio from fixed-price to market-related pricing and its impact on future earnings volatility.