Worldwide Uranium Supply and Demand

The uranium market supply and demand fundamentals remained strong in 2008, indicating a need for more primary mine production over the coming decade. During the past 23 years, uranium consumption has exceeded mine production by a wide margin, with the difference being made up from various types of inventory and recycled products, often collectively referred to as secondary sources. Based on Cameco's 10 year supply and demand outlook, cumulative uranium consumption requirements are expected to reach about 2.0 billion pounds. Total existing mine supply and secondary supplies are expected to meet approximately 80% of this demand. The remaining 20% (approximately 400 million pounds) must come from new supplies, which may include expansions of existing mines, and new mines starting production.

Uranium Demand

Overall, nuclear power trends support moderately growing demand for uranium and conversion services in the next 10 years, with the potential for more rapid growth thereafter.

Cameco estimates the world uranium consumption totalled about 172 million pounds in 2008, similar to 2007. In 2009, we expect world uranium demand to increase to about 181 million pounds. We estimate annual world uranium consumption will reach 226 million pounds in 2018, reflecting an annual growth rate of almost 3%.

Growth in demand could be tempered as uranium price increases encourage utilities to utilize more enrichment services and less uranium. Uranium demand is affected by the enrichment process, which is one of the steps in making most nuclear fuel. Utilities choose the amount of uranium and enrichment services they will use depending on the price of each. Utilities may to some extent substitute enrichment for uranium, thereby decreasing the demand for uranium and increasing the demand for enrichment. For example, when uranium prices rise, utilities tend to use more enrichment, assuming enrichment prices remain constant. If enrichment prices increase, utilities would likely use less enrichment and more uranium. The tails assay (percentage of U-235 left in the waste stream after processing) is an indication of the mix of uranium and enrichment used. At different prices for uranium, conversion and enrichment services there is a combination that minimizes the fuel cost, which is called the optimal tails assay. The lower the tails assay, the less uranium is being used.

At December 31, 2008, the uranium price had increased in excess of 250% since December 31, 2003. Over the same period, enrichment prices had increased by only 47%. Thus, utilities, where permitted, are choosing lower tails assay under their enrichment contracts, using less uranium and more enrichment services.

Based on current demand, a 0.01% decrease in tails assay would decrease uranium requirements by 2%, or about 3 million pounds of uranium per year, and increase the demand for enrichment services by 2%. It is important to note that there is a limit to the enrichment capacity that is currently available. In addition, enrichment contracts generally limit the ability to substitute enrichment for uranium. In the past, enrichers offered a wide range of tails assay, much like volume flexibilities on uranium contracts. Currently, enrichers are offering tails assays ranging from 0.25% to 0.30%, thus, over time, as old enrichment contracts expire, we expect that the average tails assay will move to this range.

Uranium Supply

World uranium supply comes from primary mine production and a number of secondary sources.

Mine Production

We estimate world mine production in 2008 was about 115 million pounds U₃O₈, up 7% from 107 million pounds in 2007. We expect world production to total in the range of 125 to 130 million pounds in 2009. However, production targets are not always easily achievable.

We expect that, with higher uranium prices, new mines will continue to start up, but the lead time before they enter commercial production may be lengthy, often up to 10 years, depending on the region. As a result, primary supply will be less than world consumption in the near-term. The level of increase in primary mine production is dependent on a number of factors, including:

• the strength of uranium prices,
• the efficiency of regulatory regimes in various regions,
• the quality and size of the mineral reserves,
• the availability and sufficiency of required infrastructure and skilled workforce,
• currency exchange rates in producer countries compared to the US dollar,
• prices for other mineral commodities produced in association with uranium (i.e. byproducts or co-products), and
• the availability of financing for exploration and mine development.

Secondary Sources

Secondary sources of supply consist of surplus US, Russian and other military materials, excess commercial inventory and recycled products. Recycled products include reprocessed uranium, mixed oxide fuel and re-enriched tails material. Some utilities use reprocessed uranium and mixed oxide fuel recovered from used reactor fuel. In recent years, another source of supply has been re-enriched depleted uranium tails generated using excess enrichment capacity. We estimate these recycled products will account for about 5% of world requirements over the next 10 years. With the exception of recycled products, secondary supplies are finite. Currently, most recycled products are a high-cost fuel alternative and are used by utilities in only a few countries.

One of the largest sources of secondary supply is the uranium derived from Russian highly enriched uranium (HEU). As a result of the 1993 HEU agreement between the US and Russia to reduce the number of nuclear weapons, additional supplies of uranium have been available to the market. Under the 20-year agreement, weapons-grade HEU is blended down in Russia to low enriched uranium capable of being used in western world nuclear power plants. We estimate that uranium derived from Russian HEU could meet about 6% of world consumption over the next 10 years based upon deliveries under the current Russian HEU commercial agreement. All deliveries are scheduled to be made by 2013, when the 1993 HEU agreement expires. In parallel, the US has made some of its military inventories available to the market, although in quantities much smaller than those derived from the 1993 HEU agreement. We expect about 3% of world demand through 2018 will be met from this source.

With respect to non-military excess inventories, we believe most of these have been consumed. In recent years, some utilities have been purchasing uranium to rebuild strategic inventories. Over the next 10 years, with new mines under development such as Cigar Lake and Inkai, this shortfall between consumption and production is expected to narrow slowly. The production response is expected to remain challenged, while demand is expected to continue growing due to better reactor operations, reactor uprates, life extensions and the construction of new units. There are a number of potential new mines and planned mine expansions that are expected to help meet this shortfall, but the timing and production rates are uncertain.

Uranium production in 2008 met about 67% of global uranium requirements. Secondary supplies (such as recycling and blended down HEU) continue to bridge the gap and this is expected to continue in the near future.