CCJ

Cameco Corporation 2007 Annual Financial Summary

Business Context and Reporting Period

This filing (Form 6-K) presents the 2007 Consolidated Financial Statements for Cameco Corporation, a global uranium producer and fuel services provider. The reporting period covers the fiscal year ended December 31, 2007. Cameco operates through four primary segments: Uranium, Fuel Services, Electricity (via a 31.6% interest in Bruce Power L.P.), and Gold (via a 52.7% interest in Centerra Gold Inc.). The statements are prepared in accordance with Canadian GAAP and were audited by KPMG LLP.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 26% to $2.31 billion, driven primarily by higher uranium prices and increased production volumes in the Uranium segment.
• Profitability: Net earnings rose 11% to $416 million. However, this growth was significantly impacted by non-recurring charges.
• Significant Charges:
  • Gold Business Restructuring: A $113 million charge was recorded related to the restructuring of the Centerra Gold business due to political risks in Kyrgyzstan.
  • Stock Option Plan Amendment: A $94 million charge resulted from reclassifying stock options from equity to liabilities following a plan amendment in July 2007.
  • Cigar Lake Remediation: Expenses of $29.4 million were incurred for remediation efforts following water inflow at the Cigar Lake mine.
• Cash Flow: Operating cash flow nearly doubled to $801 million, reflecting strong operational performance despite heavy capital expenditures ($494 million) and significant share repurchases ($429 million).
• Liquidity: Cash balances decreased by $202 million year-over-year due to share buybacks, capital investments, and dividend payments.

Outlook, Risks, and Contingencies

• Accounting Changes: Cameco adopted new financial instrument standards effective January 1, 2007, impacting the classification of derivatives and the presentation of comprehensive income.
• Port Hope Facility: Production at the Port Hope conversion facility was suspended in July 2007 due to soil contamination. Cleanup costs are estimated between $15 million and $20 million, with $17 million recognized in 2007 earnings.
• Legal and Political Risks:
  • Kyrgyzstan: Ongoing political uncertainty regarding the Kumtor Gold Company led to the $113 million restructuring charge. Agreements with the Kyrgyz government aim to facilitate the eventual divestiture of Cameco's interest.
  • Arbitration: Cameco is involved in arbitration regarding steam generator defects at the Bruce Power facility, claiming damages of approximately $64.6 million. Management does not expect a material financial impact.
  • Mongolia: A dispute with Gatsuurt LLC regarding the Gatsuurt property licenses resulted in a $3 million settlement charge.
• Commodity Hedging: Cameco maintains significant forward sales contracts for uranium and foreign currency hedges to mitigate price volatility. As of year-end, the net mark-to-market gain on foreign currency instruments was $139.7 million.

Investor Verification Checklist

• Non-Recurring Charges: Verify the sustainability of earnings by excluding the $113 million gold restructuring charge and $94 million stock option amendment charge.
• Port Hope Impact: Monitor the timeline and final cost of the Port Hope facility cleanup and its effect on future conversion capacity.
• Gold Segment Exposure: Assess the status of the Centerra Gold divestiture agreement with the Kyrgyz government and the associated political risks.
• Cash Utilization: Review the impact of the $429 million share repurchase program on future liquidity and capital allocation strategy.
• Derivative Valuation: Confirm the valuation of the $221.7 million net derivative asset position and the potential for reclassification to earnings in 2008.