CCJ

Cameco Corporation Q2 2004 Financial Summary

Business Context and Reporting Period

This Form 6-K filing reports the unaudited financial results for Cameco Corporation for the three and six months ended June 30, 2004. Cameco is the world's largest uranium producer and a significant supplier of conversion services. The company also holds a majority interest in Centerra Gold Inc. (gold mining) and a 31.6% interest in Bruce Power (nuclear electricity generation). A major corporate development during the period was the restructuring of gold assets and the initial public offering of Centerra Gold Inc., which began trading on the Toronto Stock Exchange on June 30, 2004.

Key Financial Metrics

Balance Sheet & Liquidity: Total long-term debt was $591 million at June 30, 2004, a decrease of $6 million from year-end 2003. The net debt to capitalization ratio improved to 19% from 26%. Cash and cash equivalents totaled $130.7 million. Working capital was $585 million.

Commodity Prices: The average uranium spot price rose 65% to $17.99/lb (US). The average realized gold price increased to $360/oz (US). The average realized electricity price was $46/MWh.

Material Changes vs. Prior Period

• Net Earnings Decline: Reported net earnings decreased 38% in Q2 and 26% YTD compared to 2003. This decline is primarily due to a non-recurring, non-cash income tax recovery of $86 million recorded in Q2 2003 related to Canadian resource sector tax legislation changes.
• Operational Improvement: Excluding the 2003 tax adjustment, net earnings increased by $47 million in Q2 and $50 million YTD. Earnings from operations surged 300% in Q2 (from $10M to $40M) and 227% YTD.
• Margin Expansion: The aggregate gross profit margin increased to 26% in Q2 (from 13% in 2003) and 24% YTD (from 17% in 2003), driven by higher uranium and gold prices and improved production.
• Cash Flow Volatility: Cash provided by operations turned negative in Q2 (-$19M) and declined YTD (-$54M vs prior year) due to a $103 million increase in product inventories as production exceeded sales volumes.
• Segment Performance:
  • Uranium: Revenue declined 11% in Q2 due to lower sales volumes, but earnings before tax (EBT) increased 175% due to higher realized prices.
  • Gold: Revenue tripled in Q2 due to the commissioning of the Boroo mine and higher production at Kumtor. Gross profit margin rose to 35%.
  • Bruce Power: Earnings before tax increased significantly (from $19M to $133M in Q2) following the restart of two A reactors, increasing output by 77%.

Guidance, Outlook, and Risks

2004 Outlook: Consolidated revenue is expected to rise approximately 20% in 2004, driven by the full consolidation of Kumtor's revenue in the second half and new gold production. Gross profit margins are projected to be similar to 2003 (approx. 20%). The effective tax rate is expected to be 20-25%.

Third Quarter Outlook: Revenue is expected to be 20% higher than Q2. However, earnings from Bruce Power are expected to decline due to planned maintenance outages on B units.

Key Risks and Contingencies:

• Labour Dispute: A strike commenced on July 28, 2004, at the Port Hope conversion facility after employees rejected a contract offer. This may impact annual production targets and revenue, though the company has inventory to mitigate short-term effects.
• Regulatory Approvals: The Cigar Lake project received a limited construction license, but full construction licensing is pending. Production is targeted for 2007. Project costs are expected to exceed the initial $350 million estimate.
• Market Sensitivity: Net earnings are sensitive to uranium spot prices, gold prices, and the US/Canadian exchange rate. A $1.00/lb increase in uranium spot price could increase 2005 net earnings by $3 million.
• Ontario Electricity Reform: The Ontario government's "Bill 100" proposes restructuring the electricity sector, which could impact Bruce Power's pricing and operations.

Investor Verification Checklist

• Strike Impact: Monitor the duration of the Port Hope conversion facility strike and its effect on Q3/Q4 conversion revenue and costs.
• Inventory Build-up: Verify the timing of uranium sales deliveries to understand when the $103 million inventory increase will be converted to cash flow.
• Gold Consolidation: Confirm the full consolidation of Kumtor results in Q3 financials following the Centerra restructuring.
• Bruce Power Outages: Track the schedule of planned maintenance outages for Bruce Power B units in late 2004 and their impact on capacity factors.
• Cigar Lake Costs: Review updated capital cost estimates for the Cigar Lake project as construction proceeds.