CONSOLIDATED EARNINGS

EARNINGS

In 2005, Cameco recognized an after-tax gain of $69 million ($0.20 per share) on the disposal of our 12.8 million shares in Energy Resources of Australia Ltd (ERA). We also recorded an after-tax loss of $62 million ($0.18 per share) related to the restructuring of the Bruce Power Limited Partnership. In 2004, Cameco recorded an after-tax gain of $94 million ($0.27 per share) related to certain restructuring transactions that led to the creation of Centerra. The following discussion of consolidated earnings excludes these items to provide a more representative comparison of operating results.

Our results reflect the new partnership structure that was created on October 31, 2005, following the division of the Bruce Power site assets between Bruce B operations (Bruce Power Limited Partnership or BPLP) and Bruce A operations (Bruce A Limited Partnership or BALP). Effective November 1, 2005, Cameco's 31.6% interest in BPLP includes the four Bruce B units and does not include the A units.

Also on November 1, 2005, Cameco began to proportionately consolidate its share of BPLP's financial results. This change in the method of accounting was driven by incremental changes to the partnership agreement, which resulted in joint control among the three major partners. Proportionate consolidation is required for investments in jointly controlled entities.

Consequently, our financial results for the first 10 months of 2005 reflect a six-unit operation, which is accounted for on an equity basis. For the remaining two months in the year, our results reflect a four-unit operation, which is accounted for on a proportionately consolidated basis.

For 2005, our adjusted net earnings were $211 million ($0.58 per share), $26 million higher than the adjusted net earnings of $185 million ($0.51 per share) reported in 2004 due largely to improved results in our uranium business and higher earnings from BPLP. The improved earnings were partially offset by higher charges for administration and exploration.

The improvement in the uranium business was due to a higher realized price, mainly due to the significant increase in the spot price for uranium. Earnings from Bruce Power improved due to higher realized prices because of strong demand.

Our earnings from operations were $123 million in 2005 compared to $125 million in 2004. Cameco's aggregate gross profit was unchanged at 23%.

CORPORATE EXPENSES

Administration

In 2005, administration costs were $108 million, an increase of $38 million due to stock compensation charges from increased share prices ($12 million), administration and business development costs at Centerra ($11 million), Sarbanes Oxley (SOX) compliance ($2 million), post-retirement benefits ($2 million) and community donations ($1 million). The remaining increase in administrative expenses was related largely to business process improvements, regulatory compliance and an increase in workforce.

Interest and Other

In 2005, interest and other costs declined by $2 million compared to 2004 due to lower gross interest charges ($5 million) and higher interest income on cash balances ($5 million). These improvements were partially offset by expenses related to the ineffective portion of derivative hedging instruments ($8 million). Refer to note 11 in the notes to consolidated financial statements.

Income Taxes

In 2005, total income tax expense amounted to $30 million compared to $73 million for 2004. In 2005, the company recorded a benefit related to a court decision finding that the resource surcharge paid to the government of Saskatchewan was deductible in calculating federal and provincial taxable income. Previously, the surcharge had not been a tax-deductible expense. As a result, the company recorded a $10 million recovery of income tax expense.

Excluding the tax recovery related to resource surcharges and other adjustments, the effective rate for income taxes in 2005 increased to 20% from 17% in 2004 as a higher proportion of earnings came from jurisdictions with higher tax rates.

Income tax expense also includes the large corporation tax and other capital taxes, which amounted to about $6 million in each of 2005 and 2004. Refer to note 13 in the notes to consolidated financial statements.

CASH RESOURCES

OPERATING ACTIVITIES

In 2005, Cameco generated record cash from operations of $278 million compared to $228 million in 2004. The increase of $50 million was mainly attributable to higher revenues in the uranium and gold businesses compared to the previous year and cash distributions received from BPLP. This was partially offset by a significant increase in accounts receivable year-over-year. Due to the timing of sales, the accounts receivable balance increased to $340 million at December 31, 2005, compared to $183 million at December 31, 2004.

INVESTING ACTIVITIES

In 2005, Cameco generated $21 million from its investing activities primarily due to the restructuring of BPLP ($200 million) and the sale of its shares in ERA ($102 million). Excluding these inflows, cash used in investing activities increased to $280 million from $161 million in 2004. This increase of $119 million was largely attributable to the development activity at Cigar Lake and Inkai as well as greater capital expenditures by Centerra. In addition, investing activities reflect $23 million in capital expenditures at BPLP.

For 2005, investing activities included $22 million for sustaining capital at McArthur River/Key Lake, $81 million in development costs at Cigar Lake and $26 million in capitalized interest charges.

FINANCING ACTIVITIES

In 2005, Cameco generated $101 million through its financing activities. In 2005, Cameco completed a debenture offering that netted proceeds of $298 million. Through the year, the company repaid a total of $181 million in short-term and long-term debt. In addition, $150 million in debentures were redeemed in January 2006.

BALANCE SHEET

The proportionate consolidation of BPLP had a significant impact on our balance sheet at December 31, 2005, causing many of the reported amounts to increase considerably. The largest of the incremental values are provided in the following table.

CASH

At December 31, 2005, our consolidated cash balance totalled $623 million with Centerra holding about $236 million of this amount.

INVENTORIES

Compared to the end of 2004, our product inventories increased by $13 million to $400 million at the end of 2005. Most of the increase in inventory was attributable to higher unit costs due to increased costs for purchased uranium and conversion. See note 3 to the consolidated financial statements.

DEBT

At December 31, 2005, our total debt was $859 million, an increase of $340 million compared to December 31, 2004. At December 31, 2005, our consolidated net debt to capitalization ratio was 9%, down from 13% at the end of 2004. On January 17, 2006, we used cash on hand to redeem a total of $150 million in debentures.

INVESTMENTS

Cameco has a number of investments in publicly traded entities. The following table illustrates the book and market values for its more significant holdings.

OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of operations, Cameco enters into certain transactions that are not required to be recorded on its balance sheet. These activities include the issuing of financial assurances, derivative instruments and long-term product purchase contracts. These arrangements are discussed in the following sections of this MD&A and the notes to the financial statements:

• Financial assurances:
  • Nuclear Electricity Generation Business,
  • Liquidity and Capital Resources,
  • Risks and Risk Management, and
  • notes 6, 7 and 22 of the consolidated financial statements.
• Derivative instruments:
  • Uranium Business,
  • Risks and Risk Management,
  • Critical Accounting Estimates, and
  • note 22 of the consolidated financial statements.
• Long-term product purchase contracts:
  • Uranium Business,
  • Liquidity and Capital Resources, and
  • note 21 of the consolidated financial statements.