Sunday, November 06, 2005

Cameco Corporation --- Uranium -

Cameco Corporation --- Uranium - Gold - Fuel - Electricity - Mining - Milling - Refining

Good afternoon and thank you to Merrill Lynch for the chance to speak with you about the attractive dynamics in the nuclear fuel market, as well as Cameco's prospects for delivering excellent results for our shareholders.

I notice quite a few familiar faces, which is gratifying, as it's been sometime since we've been out to speak to our Toronto audience.

Since we last met, there have been a number of encouraging developments within the nuclear energy industry ?a continued recharge if you will, reconfirming the optimism we share as we pursue our vision to become a dominant nuclear energy company producing uranium fuel and generating clean electricity.

My talk today has several tracks. First, a snapshot of nuclear energy's nearer-term developments, and second how Cameco plans to produce 30 million pounds of U3O8 by 2010 to supply the industry's expanding need for a secure fuel source. Of course the market conditions are top of mind, as is the situation at Bruce Power ? I will discuss both of these topics as well.

Nuclear Industry

Countries representing half the world's population are now constructing new nuclear power plants. And many countries without nuclear power have begun to plan for it, seeking reliability, clean air and energy independence.

Short term, which for this industry is a ten year horizon, we expect the number of reactors in operation by 2015 to increase to, at least 506 from the current 433. If you add capacity gained through uprates, life extensions and refurbishment, conservatively speaking, nuclear power is certain to experience solid, albeit, modest growth.

But, accelerated growth for this industry is becoming much more likely. Here we shift our attention to Asia, where 92 reactors are under construction, on order or planned to help meet the rapidly expanding economic needs, primarily of India and China. Other Asian countries with large populations and burgeoning economies will follow including Vietnam and Indonesia to name two.

In Western Europe, countries are quietly backing away from nuclear phase-outs, while Finland has started construction on its fifth reactor, a 1,600 MW behemoth, with a twin unit planned for France. Italy has also been encouraging its utility to invest in nuclear generation outside of the country. More central, the Czech Republic recently announced their intent to build a new reactor. And in the east, Bulgaria will be building two units, Slovakia completing two, and the Ukraine has announced plans for four units.

In the US, a total of 35 reactors have been granted 20-year license extensions, and operators of an additional 40 have applied for or have stated their intent to apply for life extensions. In total, this accounts for over 70% of their nuclear generating capacity, which for the fourth consecutive year was the lowest-cost baseload electricity other than hydropower. US nuclear electricity production costs were down 7% from 2003, averaging 1.68 cents (US) per kilowatt-hour.

Even more encouraging in the US, is the signing of a New Energy Policy Act ? the first in over a decade. This Legislation includes provisions recognizing the clean air contribution of nuclear energy and its critical role in meeting energy security going forward. To quote President Bush "we will start building nuclear power plants again by the end of this decade." Indeed, a number of US utilities executives believe the first order will be placed before the end of 2006.

Closer to home here in Canada, our Bruce Power partnership is in discussions with the Ontario government regarding the restart of Bruce A units 1&2. I'll return to this in a few minutes. Meanwhile, the Ontario government is moving ahead with plans to close three of the four remaining coal-fired generating stations by 2007, we're hopeful the two A units will help fill this void in the ever tight Ontario electricity market.

As for the Bruce Power partnership's interest in the Point Lepreau generating station ? it is another positive sign for the nuclear industry that the New Brunswick government has chosen to make a substantial investment in refurbishing this reactor after carefully considering the alternatives. We are only disappointed that we could not be a part of it.

So we've got the nuclear industry experiencing a rediscovery, with positive development and expansion all over the world. In anticipation of these growth opportunities, Cameco has been building a supply portfolio to take advantage of the shifting industry fundamentals. For us, this means growing our production to reach, at least, 30 million pounds of U3O8 by 2010, the equivalent of 26% of expected world uranium production. The question is how?

30 million pounds by 2010

Our flagship operations, McArthur River & Key Lake are located 80 kilometers apart in northern Saskatchewan, some 600 kilometers north of Cameco's corporate office in Saskatoon. Utilizing a mining method called raiseboring, McArthur River reams out about 150 tonnes daily at an average ore grade of 25% from 640 meters below surface. The ore is ground and pumped as a slurry to surface where it is then hauled in specially designed vessels to the Key Lake mill for processing.

Together, this mine/mill combination produces 18.7 million pounds annually, Cameco's share is 70%. But the two sites can do more. We're currently seeking a production licence increase to 22 million pounds, with a decision expected in 2006 and a ramp up period to follow. This higher thru-put at the Key Lake mill can be achieved with a relatively small capital expenditure.

We own 100% of Rabbit Lake, Saskatchewan and Canada's longest running uranium operation. There we're producing another 5.8 million pounds annually, while drilling for additional reserves is ongoing. We hope to extend the life of the Rabbit Lake mine for at least several more years adding considerable value to Cameco. In the latter part of the decade, the Rabbit Lake mill will be mostly occupied with the final processing of a majority shareof Cigar Lake's ore?but more on this in a minute.

In the US, we have two wholly owned subsidiary insitu leach mines ? Smith Ranch-Highland in Wyoming and Crow Butte in Nebraska, making Cameco the largest uranium producer in the US. Together these two operations contribute about 2.2 million pounds to Cameco's current production portfolio, and we intend to double their annual production by 2010.

With disciplined strategic growth as our driver, we have two large uranium projects in the construction queue that are expected to begin commercial production in 2007.

First Cigar Lake, Cameco's fourth uranium mining property in northern Saskatchewan. After years of "care and maintenance" the price and market conditions have cooperated, and Cigar Lake is in full construction mode. Similar to McArthur River, Cigar Lake presents a challenging orebody at 420 meters below surface.

The mine will use jet boring to extract the high-grade ore. Jet boring is essentially the use of extremely high-pressure water jets that pulverize the uranium bearing ore. At 19% U3O8, Cigar Lake is the world's largest undeveloped mine with a production capacity of 18 million pounds annually, Cameco's share is 50%. Total capex for the project is estimated at $450 million (Cdn).

Second, Cameco is involved in the Inkai insitu leach uranium project in Kazakhstan. In August, the joint venture received permission to complete construction on all facilities, with production expected in late 2007. Followed by a ramp up period, Inkai will produce 5.2 million pounds annually by 2010; Cameco's share is 60%. Total capex for the project is estimated at $83 m ( US).

Does it add up? As shown Cameco's share of uranium production will be at least 30 million pounds by 2010?

McArthur River and Key Lake ramped up to 21 ? Cameco's share 14.7
US ISL doubling to 4.4
Cigar Lake ramped up to 17.5 ? Cameco's share 8.8
Inkai ramped up to 5.2 ? Cameco's share 3.1
Total 48.1 ? Cameco's share 31

Rabbit Lake you will note is not listed and is a wild card. We hope that we continue to extend the mine life year by year for many more years.

Securing our position as world leader on the supply side appears sustainable as we pursue our strategy to remain a low-cost producer, protect and grow our market share, and maintain supply flexibility. But where will the next McArthur River or Cigar Lake come from and do we have the skill, expertise and land position to be successful in the much longer term? I firmly believe the answer is yes?we intend to remain the leader.

Cameco's exploration activity and spending has greatly increased in the past few years, for 2005 we plan to expend about $23 million locating the next generation of uranium reserves and resources. Even in the recent past when markets were less than supportive, we maintained an active exploration program, staking claims and maintaining land positions in favourable areas. There is no shortage of uranium in the world, only a shortage of known economic deposits.

Currently, we're drilling on numerous exploration projects in Saskatchewan and Australia. More advanced projects in northern Saskatchewan, include plans with our partners, to initiate a pre-feasibility study at the Dawn Lake deposit, located near Rabbit Lake. And, drilling is on going at McArthur River in an attempt to convert resources to reserves.

With the uranium spot price just over $30, we're seeing a "uranium" rush?and a rush it is to stake land throughout the resource rich Athabasca basin in northern Saskatchewan. At last count, there were over 30 junior uranium companies as well as individuals looking for uranium in the north. One of the more experienced junior's, UEX, formed by Cameco and Pioneer Metals has announced some significant assay results at Shea Creek, notably on the Western edge of the basin.

It is this new exploration cycle that over the next decade, will find the orebodies required to power the world's growing reactor fleet.


In conversion, as with uranium, our objectives are similar?maintain our low-cost position, grow market share and improve supply flexibility. We've made notable progress. We are one of only three western world suppliers of UF6, with 28% of the western world's UF6 capacity. This capacity will increase to 40% when the Springfields plant begins receiving shipments of U0 3 from our Blind River refinery in 2006. Cameco will then become the world's largest supplier of UF6.

For UO2, the fuel used in Candu reactors, Cameco remains the only commercial supplier, with 100% of the market.

Cameco continues to build on its competitive advantage of delivering both uranium and conversion as a single product. We're also diversifying our product list at Port Hope with a new fuel for the Bruce B reactors called SEU, or slightly enriched uranium.

To recap, we've got the substantial merits of nuclear energy being rediscovered and Cameco's production portfolio poised to take advantage of the growing demand for our core products. And market conditions remain robust, exhibiting a buoyancy that is pushing even the cynic's expectations.

Market Conditions

The uranium market is characterized by inelastic consumption, which has exceeded mine production by wide margins for the past 20 years?steadily drawing down finite inventories.

Forecasting demand for the world's existing reactor fleet is a fairly predictable exercise. Annual uranium consumption is about 180 million lbs ? experiencing a growth rate of about 1% annually.

Supply, on the other hand is less predictable and is divided into two categories. Primary mine production, and secondary sources ? this is made up of military materials, excess inventories and recycled products.

With the exception of recycled products, these secondary supplies are limited and insufficient to bridge the future shortfall between consumption and primary mine supply. The uranium price momentum over the past two years reflects the long anticipated shift in supply/demand fundamentals.

During the last twenty-four months, the uranium spot price has nearly tripled, from $11.20 to $30.50.

Similarly, conversion spot prices have more than doubled in both the North America and European markets.

Obviously this dramatic increase in price affects Cameco's existing and future contracts.

As we've previously reported, sensitivity in many of our contracts to rising prices is limited in the near term by both fixed and ceiling prices negotiated when uranium prices were much lower.

In 2005, less than 5% of our sales volume remains sensitive to spot price increases above $29.50 per pound. In 2006, about 22% of our sales volume will be sensitive to such spot price increases. By 2008, we should be realizing most of the benefit of the recent price run up assuming prices remain at current levels.

25-30% of our existing contract portfolio rolls off annually, and we are writing new contracts with both fixed and market-related pricing. We are also seeing longer-term contracts and securing more favourable terms, including floor prices in the mid $20s. With these, we are building significant downside protection.

In addition, as we succeed in obtaining floor price protection, we're reviewing our traditional blend of pricing mechanisms, which is 40% of the sales volume with fixed pricing escalated by inflation, and 60% with pricing related to market prices at the time of delivery.

For conversion, most of Cameco's UF6 commitments are sold under fixed-price contracts, with a duration of four to five years. Today we continue to sign new contracts in the much-improved market.

In short, we expect significant increases in uranium and conversion price realizations over the next several years as older contracts expire and the supply/demand gaps in both markets become more evident.

Bruce Power

Finally a few words on our nuclear generation investment. As most of you know, Cameco is involved in a partnership that operates North America's largest nuclear generating station located here in southern Ontario. With 4,700 MW capacity, Bruce Power provides enough electricity to meet 20% of Ontario's needs?and after this summer you clearly do need it!

As I mentioned earlier, the Bruce Power partnership has reached a tentative agreement with the Ontario government to restart the remaining two reactors at the Bruce site to deliver a further 1,500 MW of clean electricity. All parties are now reviewing the agreement to see if the project meets their respective financial expectations. Meanwhile contract negotiations continue with announcements expected within the next month.

As for the existing 6 Bruce units, we've almost completed the major refurbishment phase and continue to work toward our long-term objective of a 90% capacity factor.

Growth Summary

We know nuclear power generation holds great potential for profit from the enormous amount of energy contained in uranium. Our strategy for growth in the nuclear industry is articulated in our vision?to become a dominant nuclear energy company. To date, we've gained some valuable experience with Bruce and we continue to seek further integration in nuclear fuel supply beyond uranium and conversion in markets that make sense.

Wrap up

To close off my remarks today, Cameco is enthusiastic about the many opportunities for nuclear energy in the coming years - opportunities underpinned by the world's growing need for clean, secure and affordable electricity.

With the rediscovery of nuclear energy, Cameco's vision holds great potential for shareholders. Markets are responding to the supply/demand imbalance, and will grow with the world's ambitious construction program. Cameco is well positioned with high-quality, low cost, long-life assets.

And with clear objectives and financial discipline, we are building on our considerable strengths to become an integrated nuclear investment that will deliver the great potential of this energy source to our shareholders.

Thank you for being here today, I appreciate your interest in Cameco.


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