CCJ

Cameco Corporation: Q3 2006 Financial Summary

Business Context and Reporting Period

This Form 6-K filing reports unaudited financial results for Cameco Corporation for the third quarter and nine months ended September 30, 2006. Cameco is the world's largest uranium producer and a significant supplier of conversion services and nuclear fuel. The reporting period includes the proportionate consolidation of Bruce Power Limited Partnership (BPLP) results, a change from the equity method used in the prior year.

Key Financial Metrics

Note: All figures are in Canadian dollars. Adjusted net earnings excludes a $29 million gain on the sale of the Fort à la Corne interest (Q3) and a $73 million tax recovery (YTD).

Material Changes vs. Prior Period

• Revenue Growth: Q3 revenue increased 27% year-over-year, driven by higher uranium prices and the consolidation of BPLP revenue. YTD revenue surged 67%.
• Operating Earnings: Earnings from operations jumped 393% in Q3 and 358% YTD, primarily due to the inclusion of BPLP results and higher commodity prices.
• Cash Flow Volatility: Q3 operating cash flow declined 47% to $79 million due to lower gold/electricity cash flows and increased inventory. However, YTD cash flow increased 118% to $405 million.
• Segment Performance:
  • Uranium: Q3 revenue fell 12% due to a 26% drop in sales volumes, despite a 30% increase in realized prices. Revenue deferral of $58 million occurred due to standby product loan agreements.
  • Electricity (BPLP): Pre-tax earnings dropped significantly to $31 million (from $97 million) due to lower realized electricity prices ($48/MWh vs $70/MWh).
  • Gold: Revenue decreased 8% in Q3 due to production cuts at the Kumtor mine following a pit wall movement, partially offset by higher gold prices.

Outlook, Risks, and Unusual Items

• Cigar Lake Incident: On October 23, 2006, a significant water inflow occurred at the Cigar Lake project, flooding all underground areas. No injuries were reported. Management is developing a remediation plan involving surface drilling and grouting. The value of lost assets will be expensed in Q4 2006. Reserve classification may be downgraded from "proven" to "probable" pending the remediation plan.
• Revenue Deferrals: Cameco deferred $58 million in revenue and associated costs related to 2.8 million pounds of U3O8 sold to counterparties of standby product loan agreements. This is an accounting treatment and does not impact cash flow.
• Guidance:
  • Q4 2006: Consolidated revenue expected to be ~50% higher than Q3 due to higher uranium/conversion volumes.
  • Full Year 2006: Revenue expected to grow ~50% over 2005. Gross profit margin projected to improve to 30% (from 23% in 2005). Gold production forecast revised down to 570,000–575,000 ounces due to Kumtor issues.
• Contingencies: Legal proceedings regarding royalties in Wyoming (Mountain West Mines) and steam generator defects at Bruce Power (British Energy) are ongoing, though management does not anticipate a material financial impact.

Investor Verification Checklist

• Cigar Lake Remediation: Verify the timeline and cost estimates for the remediation plan and the potential impact on reserve classification and future production schedules.
• Revenue Deferral Impact: Confirm the timing of revenue recognition for the $58 million deferred amount and the terms of the standby product loan agreements.
• Gold Production Recovery: Monitor the re-sequencing of mining at Kumtor and the ability to meet the revised 2006 production guidance of 300,000 ounces.
• Electricity Price Sensitivity: Assess the exposure of BPLP earnings to Ontario spot electricity prices, which are projected to remain lower than 2005 levels.
• Debt and Liquidity: Review the utilization of the $500 million revolving credit facility and the status of the $300 million letter of credit facilities supporting product loans.