CCJ

Cameco Corporation Q2 2006 Financial Summary

Business Context and Reporting Period

This Form 6-K filing reports unaudited financial results for Cameco Corporation for the second quarter and six months ended June 30, 2006. Cameco is the world's largest uranium producer and a significant supplier of conversion services and nuclear fuel. The reporting period reflects a change in accounting for the Bruce Power Limited Partnership (BPLP), which is now proportionately consolidated rather than equity accounted, significantly impacting revenue recognition.

Key Financial Metrics

Liquidity and Debt: Total debt decreased to $707 million at June 30, 2006, from $859 million at year-end 2005, following the redemption of $150 million in debentures. The net debt to capitalization ratio improved to 8% from 9%. Cash and cash equivalents totaled $481 million.

Material Changes vs. Prior Period

• Revenue Growth: Q2 revenue increased 45% year-over-year, driven by higher uranium and gold prices and the consolidation of BPLP revenue. YTD revenue grew 91%.
• Earnings Surge: Net earnings rose 366% in Q2 and 351% YTD. A significant portion of this increase ($73 million in Q2) was a non-cash recovery of future income taxes due to Canadian federal and provincial tax rate reductions.
• Adjusted Earnings: Excluding the tax recovery, adjusted net earnings increased 138% in Q2 and 227% YTD, reflecting improved operational performance in electricity and gold segments.
• Cash Flow: Operating cash flow turned positive, generating $40 million in Q2 compared to a $45 million usage in Q2 2005.

Outlook, Risks, and Management Commentary

Guidance: Cameco expects full-year 2006 consolidated revenue to grow approximately 50% over 2005. Gross profit margins are projected to improve to 30% from 23% in 2005. However, Q3 revenue is expected to be lower than Q2 due to decreased gold production and lower uranium sales volumes.

Segment Updates:

• Uranium: Revenue is expected to be 15% higher in 2006. Spot prices rose 57% to $43.42/lb in Q2. Revenue recognition for 4 million pounds of uranium is deferred in Q3 and Q4 due to new standby product loan agreements.
• Gold (Centerra): Full-year 2006 production guidance was lowered to 570,000–575,000 ounces (from 680,000–695,000) following a pit wall ground movement at the Kumtor mine in July 2006.
• Electricity (BPLP): Earnings are projected to be moderately lower than 2005 due to lower electricity prices, despite a high capacity factor of 95% in Q2.

Risks and Contingencies:

• Operational: Pit wall failure at Kumtor (July 2006) and water inflow at Cigar Lake (April 2006) have delayed production schedules.
• Legal: Cameco is defending against a $75 million claim by Rio Algom regarding historical tailings costs (dismissed without costs) and an appeal regarding royalty claims by Mountain West Mines Inc.
• Regulatory: Delays in increasing production limits at McArthur River/Key Lake due to environmental assessments regarding effluent treatment.

Investor Verification Checklist

• Tax Impact: Verify the sustainability of earnings by analyzing the $73 million non-cash tax recovery; this is a one-time item not reflective of operational cash generation.
• Revenue Deferral: Confirm the impact of the new standby product loan agreements which defer revenue recognition for 4 million pounds of uranium in the second half of 2006.
• Gold Production: Monitor the Kumtor mine recovery plan and the revised 2006 production guidance following the July pit wall failure.
• Debt Reduction: Validate the $150 million debenture redemption and the resulting improvement in the net debt-to-capitalization ratio.
• Accounting Change: Ensure comparisons with prior years account for the shift from equity accounting to proportionate consolidation for BPLP.