CCJ

Cameco Corporation: Q3 2004 Financial Summary

Business Context and Reporting Period

This Form 6-K filing reports the unaudited financial results for Cameco Corporation for the third quarter and nine months ended September 30, 2004. Cameco is the world's largest uranium producer and a significant supplier of conversion services, nuclear electricity generation (via Bruce Power), and gold (via Centerra Gold Inc.). All financial figures are presented in Canadian dollars unless otherwise noted.

Key Financial Metrics

Balance Sheet Highlights: Total long-term debt was $529 million at September 30, 2004, a decrease of $68 million from year-end 2003. Consolidated cash balance totaled $197 million, with approximately 80% held by Centerra Gold Inc.

Material Changes vs. Prior Period

• Quarterly Performance: Revenue increased 35% and net earnings rose 58% compared to Q3 2003. This was driven by higher realized prices in uranium and gold, and increased gold production.
• Year-to-Date Performance: While revenue rose 24% YTD, reported net earnings declined 11% to $156 million. This decline is primarily due to a one-time $86 million tax adjustment recorded in Q2 2003. Excluding this item, YTD net earnings increased 75%.
• Segment Drivers:
  • Uranium: Sales volume declined 16% QoQ, but realized prices rose 18% (USD) due to spot prices hitting a 20-year high of $20.00/lb.
  • Gold: Revenue surged due to the full consolidation of Kumtor (effective June 2004) and commercial production at the Boroo mine.
  • Conversion: Revenue was stable, but earnings were nil due to a seven-week strike at the Port Hope facility. Production resumed in late October.
  • Bruce Power: Pre-tax earnings attributable to Cameco declined 24% due to scheduled outages (vacuum building inspection) and higher operating costs, despite a 34% increase in output.
• Unusual Items: Q3 included a $6 million after-tax gain from the Centerra IPO over-allotment and a $5 million after-tax gain from a break fee related to an unsuccessful bid for the South Texas Project.

Guidance, Outlook, and Risks

• 2004 Outlook: Consolidated revenue is expected to exceed 2003 levels. Gross profit margins are projected to improve from the 20% reported in 2003. Uranium revenue is expected to be marginally higher due to price increases offsetting lower volumes.
• Q4 2004 Outlook: Revenue is expected to be ~15% higher than Q3. Earnings from Bruce Power are expected to be lower due to maintenance outages. A $4 million charge to net earnings is anticipated in Q4 related to the redemption of preferred securities.
• Key Risks & Contingencies:
  • Commodity Prices: Significant exposure to uranium, gold, and electricity spot prices. A $1.00/lb change in uranium spot price impacts Q4 revenue by ~$1-2 million.
  • Foreign Exchange: Revenue is largely USD-denominated while costs are CAD-denominated. A 1-cent change in the USD/CAD rate impacts net earnings by ~$1 million for the remainder of 2004.
  • Operational: Risks include regulatory approvals for Cigar Lake and Inkai projects, and potential delays in reactor outages.
  • Legal: An ongoing royalty dispute in Wyoming (Mountain West Mines Inc.) is considered unlikely to have a material impact.

Investor Verification Checklist

• Adjusted Earnings: Verify the impact of the $86 million 2003 tax adjustment on year-over-year comparisons; adjusted YTD earnings growth is 75%.
• Conversion Segment Recovery: Confirm the ramp-up of the Port Hope conversion facility post-strike and its impact on Q4 margins.
• Gold Consolidation: Review the full consolidation of Centerra Gold Inc. (Kumtor and Boroo) and the resulting minority interest charges.
• Debt Redemption: Monitor the December 17, 2004, redemption of $125 million (USD) in preferred securities and the associated $4 million charge.
• Uranium Contract Mix: Assess the sensitivity of future revenue to spot prices, noting that 91% of 2005 sales targets are currently price-insensitive.