CCJ

Cameco Corporation: 2003 Annual Results & 2004 Outlook Summary

Business Context and Reporting Period

This Form 6-K filing, dated January 28, 2004, reports Cameco Corporation's financial results for the fourth quarter and full year ended December 31, 2003. Cameco is the world's largest producer of uranium and a major supplier of uranium conversion services, with significant interests in gold mining (Kumtor, Boroo) and nuclear electricity generation (Bruce Power). The reporting period covers the year 2003, with specific highlights for the quarter ended December 31, 2003.

Key Financial Metrics

Note: All dollar amounts are in Canadian dollars unless otherwise specified.

Material Changes vs. Prior Period

• Record Earnings: Full-year 2003 net earnings attributable to common shares surged 366% to $205 million compared to $44 million in 2002. This was driven by record revenues in uranium and conversion, and significantly higher gold earnings.
• Gold Segment Growth: Gold revenues reached a new high, increasing 77% in Q4 and 31% for the full year. Production at Kumtor increased 46% in Q4 due to higher mill feed grades and recovery rates.
• Bruce Power Contribution: Bruce Power contributed $108 million in pre-tax earnings for 2003, a substantial increase from $16 million in 2002, following the restart of Bruce A Unit 4 and improved capacity factors (85% in 2003 vs. 75% in 2002).
• Uranium Segment: While uranium revenue increased 9% for the full year due to higher sales volumes, earnings before taxes decreased by $13 million. This was due to a 3% decline in gross profit margin, impacted by rehabilitation costs at McArthur River ($26 million) and a stronger Canadian dollar offsetting higher spot prices.
• Tax Adjustments: The 2003 results included a one-time non-cash income tax benefit of $86 million due to a reduction in the federal corporate tax rate on resource activities. Conversely, a $5 million charge was recorded in Q4 due to an increase in the Ontario provincial tax rate.

Guidance, Outlook, and Risks

2004 Outlook

• Uranium: Production is expected to rise 12% to 20.9 million pounds. Revenue is projected to decline ~5% due to a 10% drop in sales volume (reduced spot market purchases), partially offset by a 5% increase in average realized price. Margins are expected to improve as McArthur River remediation costs subside.
• Gold: Kumtor production is forecast to decrease 10% to 610,000 ounces due to lower average ore grades. Unit cash costs are expected to rise to $220/oz. The Boroo mine is expected to begin commercial production in Q1 2004.
• Electricity: Bruce Power capacity factor is targeted at 80% in 2004 (down from 85%) due to planned maintenance. Results are projected to decline modestly compared to 2003.
• Capital Expenditures: Total 2004 capital spending is expected to remain at $154 million, with sustaining capital increasing to $94 million and development capital decreasing to $51 million.

Management Commentary & Risks

• Gold Restructuring: Cameco finalized negotiations to create Centerra Gold Inc., a new joint venture with the Kyrgyz government, to hold its gold assets (Kumtor and Boroo). An IPO is planned for Q2 2004.
• Market Sensitivities:
  • Uranium Price: A $1.00 increase in spot price improves revenue by ~$9 million; a decrease reduces it by ~$11 million.
  • Gold Price: A $10/oz change impacts revenue and earnings by ~$3 million.
  • Electricity Price: A $1.00/MWh change in Ontario spot price impacts after-tax earnings by ~$4 million.
• Operational Risks: Ongoing water inflow management at McArthur River; potential delays in regulatory approvals for Cigar Lake; and exposure to spot market volatility in electricity and uranium.

Investor Verification Checklist

• Tax Adjustments: Verify the impact of the $86 million federal tax benefit and $5 million Ontario tax charge on the reported net earnings of $205 million.
• Bruce Power Accounting: Confirm the equity method accounting treatment for Bruce Power, noting that its operating cash flows ($117 million in 2003) are not consolidated into Cameco's cash flow statement.
• Gold Asset Spin-off: Monitor the progress of the Centerra Gold Inc. IPO and the final ownership structure post-IPO.
• McArthur River Costs: Track the completion of water inflow remediation and the stabilization of water treatment costs to validate 2004 margin improvement forecasts.
• Contract Mix: Review the proportion of fixed-price vs. spot-market-linked uranium contracts to assess exposure to future price ceiling limitations.