WORLDWIDE URANIUM SUPPLY AND DEMAND

The uranium market supply and demand fundamentals remained strong in 2005, indicating a need for more primary mine production over the coming decade. During the past 20 years, uranium consumption has exceeded mine production by a wide margin, with the difference being made up by secondary supply sources such as various types of inventory and recycled products. While there are still inventories, they are considerably reduced and in many cases might be classified as strategic rather than excess and, therefore, are not available to be used or sold.

URANIUM DEMAND

Current nuclear power trends are generally positive. However, it is difficult to know whether these trends and the national debates on the long-term future of nuclear power will result in more or less favourable conditions for the nuclear industry. New plant construction, improved reactor operations, uprates and the extension of reactor lives make it highly likely that, at a minimum, the current demand for uranium will continue for several decades.

World uranium consumption totalled about 175 million pounds in 2005. Cameco estimates that annual world uranium consumption will reach 217 million pounds in 2015 reflecting an annual growth rate of about 2%. In 2006, world demand is expected to increase to about 176 million pounds.

Growth in demand could be tempered somewhat as uranium price increases encourage utilities to order more enrichment services. 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. In essence, utilities may 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. Of course, if enrichment prices increased, utilities would likely use less enrichment and more uranium. The tails assay (percentage of uranium left after processing) is an indication of the mix of uranium and enrichment used. The lower the tails assay, the less uranium being used.

For example, if world utilities choose to decrease tails assay by 0.01%, this would decrease annual uranium requirements by 2% or about 4 million pounds of uranium per year and increase the demand for enrichment services by 2%. The decrease in uranium consumption to 175 million pounds in 2005 was due primarily to lower tails assay, offset somewhat by new reactors coming online. 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 2005, four reactors were connected to the electricity grid, two in Japan, one in India, and a refurbished reactor restarted in Canada. Three of these units entered commercial operation in 2005, and the other is expected to enter commercial operation in the first quarter of 2006. There were two reactor closures in 2005, both as a result of nuclear phase-outs, one in Germany and one in Sweden. The net result was a 2,570 MW increase in nuclear capacity.

URANIUM SUPPLY

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

Mine Production

World production in 2005 was estimated at about 108 million pounds U₃O₈, up 3% from 105 million pounds in 2004, largely as a result of incremental increases in production at existing mines. World production is expected to increase to 110 million pounds in 2006.

It is expected that with higher uranium prices, new mines will startup, but the lead-time before they enter commercial production may be lengthy depending on the region. As a result, primary supply cannot significantly increase 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,
• currency exchange rates in producer countries compared to the US dollar, and
• prices for other mineral commodities produced in association with uranium (i.e. byproduct or co-product producers).

Secondary Sources

Secondary sources of supply consist of surplus US and Russian 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 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 that these recycled products will account for about 10% of world requirements over the next 10 years. With the exception of recycled material, 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 (LEU) capable of being used in western world nuclear power plants. Uranium derived from Russian HEU could meet 10% of world demand over the next 10 years based on the current Russian HEU commercial agreement. In parallel, the US has made some of its military inventories available to the market, albeit in quantities much smaller than those derived from the Russian HEU agreement.

Historically, the other large source of secondary supply has been the use of excess inventories. Prior to 1985, uranium mine production exceeded reactor requirements due, in large part, to government incentive programs that anticipated rapid growth of nuclear generated electricity. The result was a buildup of large inventories, both in the commercial and government sectors.

Over the past 20 years, uranium mine production has been less than annual requirements by a wide margin and the company believes that most of these excess inventories have been consumed. In fact, in 2005 there was evidence of this trend starting to reverse, with some utilities purchasing uranium to build strategic inventories.

With 2005 uranium production about 60% of uranium requirements, secondary supplies – such as recycling and blended down HEU – continue to bridge the gap between production and requirements and this is expected to continue in the near future.

URANIUM MARKETS

Utilities secure most of their uranium requirements (80% to 90% in recent years) by entering into long-term contracts with uranium suppliers. These contracts usually provide for deliveries to begin up to four years after contracts are finalized. In awarding contracts, utilities consider the commercial terms offered, including price, and the producer's record of performance and uranium reserves.

There are a number of pricing formulas, including fixed prices adjusted by inflation indices, reference prices (generally spot price indicators, but also long-term reference prices) and annual price negotiations. Many contracts also contain floor prices, ceiling prices and other negotiated provisions that affect the amount ultimately paid.

Utilities acquire the remainder of their uranium requirements through spot purchases from producers and traders. Spot market purchases are those that call for delivery within one year. Traders and investors or hedge funds are active in the market and generally source their uranium from organizations holding excess inventory, including utilities, producers and governments.

URANIUM SPOT MARKET

The industry average spot price (TradeTech and Ux) on December 31, 2005 was $36.38 (US) per pound U₃O₈, up 77% from $20.60 (US) at the end of 2004. Spot market volume totalled approximately 35 million pounds in 2005, compared to about 20 million pounds for 2004.

Discretionary purchases, or purchases not for immediate consumption, accounted for about two-thirds of the 2005 spot volume – with about 25% of total purchases attributable to investment and hedge funds. The large gap between spot and long-term prices early in 2005 resulted in a number of buyers building inventory through discretionary spot purchases. The increase in 2005 spot market volumes is largely attributable to these discretionary purchases.

LONG-TERM URANIUM MARKET

Long-term contracting in 2005 is estimated to have been in excess of 240 million pounds U₃O₈, more than two and a half times the 90 million pounds contracted in 2004. Contracts written in 2005 were generally for much longer durations than in the recent past – up to 10 years in comparison to three-to-five years, resulting in higher volumes of U₃O₈ under contract.

The industry average long-term price (TradeTech and Ux) on December 31, 2005 was $36.13 (US) per pound U₃O₈, up 45% from $25.00 (US) at the end of 2004.

We expect long-term contracting activity in 2006 will remain quite strong as utilities attempt to mitigate the risk of potential future supply shortfalls by securing long-term contracts with reliable primary suppliers. Currently we estimate that more than 150 million pounds will be contracted in the long-term market in 2006.

URANIUM BUSINESS – KEY PERFORMANCE DRIVERS

The major factors that drive Cameco's uranium business results are:

• prices – spot and long-term,
• volume – sales, production and purchases,
• costs – production and purchases, and
• the relationship between the US and Canadian dollars.

PRICES – SPOT/LONG-TERM

Background

While Cameco generally does not sell uranium in the spot market, about 60% of the company's uranium under its long-term contracts is sold at prices that reference the spot market price near the time of delivery. The remaining 40% is sold at fixed prices escalated by an inflation index. Uranium market price indicators are quoted by the industry in US dollars per pound U₃O₈.

Uranium contract terms generally reflect market conditions at the time the contract is negotiated. After a contract negotiation is completed, deliveries under that contract typically do not begin for up to four years. As a result, many of the contracts in our current portfolio, particularly those signed prior to 2005, reflect market conditions when uranium prices were significantly lower. For example, 2003 was the first year that the spot price averaged over $11.00 (US) since the 1995-1997 period. Before that they were much lower, and only exceeded $11.00 (US) on a sustained basis in 1988 and earlier. To the extent contracts have fixed or low ceiling prices, they will yield prices lower than current market prices.

As a result, Cameco's average realized price for uranium sales was $15.45 (US) per pound of uranium compared to an average spot price of $28.67 (US) and average long-term price of $30.66 (US). In 2005, the benefit of improved spot prices was also partially offset by a less favourable foreign exchange rate. Our average realized selling price rose by 20% in US dollars but only 12% in Canadian dollars over 2004.

As in previous years, we are continually in the market signing new contracts with deliveries beginning one to four years in the future. Generally, Cameco continues to maintain the target portfolio mix of 40% fixed prices (escalated by inflation) and 60% market-related prices, and recently, is obtaining floor prices that escalate over time. In the current market environment of rapidly increasing uranium prices, this strategy has allowed Cameco to add increasingly favourable contracts to its portfolio while maintaining sensitivity to future price movements.

Uranium Price Sensitivity 2006

For deliveries in 2006, a $1.00 (US) per pound change in the uranium spot price from $33.00 (US) per pound would change revenue by about $4 million (Cdn) and net earnings by $2 million (Cdn). This sensitivity, which accounts for our currency hedge program (discussed in this MD&A under "Foreign Exchange"), is based on an expected effective exchange rate of $1.00 (US) being equivalent to about $1.22 (Cdn).

Uranium Price Sensitivity Analysis 2006 to 2008

The table below shows an indicative range of average prices that Cameco would expect to realize under the current sales portfolio. The prices shown in the table are intended to show how various market price scenarios may impact Cameco's uranium revenue. This analysis makes a number of assumptions that are included as table footnotes.

As shown in the $35.00 (US) spot price scenario, Cameco would expect to realize an average price of $28.25 (US), or about 81% of the spot price, by 2008 if prices remain at or close to $35.00 (US). If spot prices rose to $45.00 (US), Cameco would expect to realize an average price of $32.75 (US), or about 73% of the spot price, by 2008. On the other hand, if prices fell to $25.00 (US), Cameco would expect to realize an average price of $23.50 (US), or about 94% of the spot price, by 2008.

VOLUME – SALES, PRODUCTION AND PURCHASES

Sales Volume

In 2005, Cameco sold 34.2 million pounds of uranium, representing a 6% increase from 2004 sales of 32.3 million pounds. The higher sales volumes were in response to strong market demand. Cameco's uranium sales volumes are expected to total more than 35 million pounds in 2006 with similar levels for 2007 and 2008.

Cameco sells more uranium than it produces from its mines and meets its contractual delivery commitments through a combination of mine production, long-term purchase arrangements, spot purchases and inventory.

Uranium Operations

McArthur River/Key Lake

Production at McArthur River/Key Lake reached the licensed annual production capacity limit of 18.7 million pounds in 2005, identical to 2004 levels. Cameco's share was 70% or 13.1 million pounds.

The collective agreement for unionized employees at the McArthur River and Key Lake operations expired on December 31, 2005. Cameco has entered into negotiations with representatives of the United Steelworkers of America.

We have applied for an increase in the annual licensed capacity at McArthur River and Key Lake to 22 million pounds U₃O₈ per year from the current 18.7 million pounds. The Canadian Nuclear Safety Commission (CNSC) is considering the appropriate process to complete its review of the potential impacts associated with this proposed expansion. Once the process is determined, we will be in a better position to estimate the time required for a decision. If approval is received, we expect it will take about two years to ramp-up production to a sustained planned production rate of approximately 21 million pounds per year. This production rate may change as we gain experience in ramping up production at this operation.

Production at McArthur River/Key Lake in 2006 is expected to remain at the same level as 2005. Production would increase modestly if the CNSC approves the capacity increases at these facilities in 2006. Refer to the section titled "Uranium Exploration" in this MD&A for information on exploration programs near McArthur River.

Rabbit Lake

Rabbit Lake produced 6.0 million pounds U₃O₈ in 2005, an 11% increase from 2004. The additional production resulted from a significant increase in milled tonnage. Rabbit Lake production is expected to decline slightly to 5.9 million pounds U₃O₈ in 2006.

Work continues on the environmental assessment (EA) to process a little over half of the uranium from Cigar Lake ore at the Rabbit Lake mill beginning in 2009. Guidelines that define the scope of the EA were approved by the province in November 2005 and were approved by the CNSC with minor modifications in December 2005.

Refer to the section titled "Uranium Exploration" in this MD&A for information on exploration programs near Rabbit Lake.

Smith Ranch-Highland and Crow Butte

The Smith Ranch-Highland (Wyoming) and Crow Butte (Nebraska) in situ leach (ISL) mines produced a total of 2.1 million pounds of U₃O₈ in 2005. Production is expected to increase 14% in 2006 to 2.4 million pounds. We are in the process of increasing production from the Smith Ranch mine over the next several years to help meet the need for new uranium supply.

Uranium Projects

Cigar Lake

Construction began on January 1, 2005 and remains on schedule for completion and commencement of operations in the first half of 2007, subject to regulatory approval and securing skilled tradespeople. Once production begins, there will be a ramp-up period of up to three years before the mine reaches expected full production of 18 million pounds per year. Cameco's share is 50%.

The capital costs for the Cigar Lake project are currently forecast at $520 million. Our share is 50% or $260 million. The permanent access road was connected to Saskatchewan provincial road 905 in November 2005 and is currently being utilized for material transport. The final grading of the road is planned for 2006. The development of the second shaft is approximately 85% complete and development of the underground workings is approximately 55% complete.

Inkai

The ISL test mine at Inkai in Kazakhstan produced 0.5 million pounds of uranium in 2005 (Cameco's share is 60%).

Approval was received in the third quarter of 2005 to increase the test mine's capacity to 0.8 million pounds U₃O₈. Planned production for 2006 is 0.65 million pounds U₃O₈. Construction to facilitate this increase is expected to be complete in the first quarter of 2006.

The regulatory authorities have approved the EA and design plan for the commercial processing facility to be located in another area at Inkai, called block 1. Initial civil work at the main processing plant and well field drilling has begun. Commercial operation is scheduled for 2007. The costs, net of sales proceeds from Inkai test mine production, are being capitalized until commercial production is achieved. We expect Inkai to ramp-up to full production of 5.2 million pounds U₃O₈ per year by 2010.

The capitalized cost to bring the new ISL mine to commercial production is estimated at $92 million (US), up about 10% due primarily to inflation. Subject to executing formal amendments, Cameco has agreed in principle to increase its loan to the Joint Venture Inkai from $40 million (US) to a maximum of $100 million (US). We also agreed to reduce our financing fee from an effective 10% interest rate to one based on the three-month London inter bank offered rate (LIBOR) plus 2% (equal to 6.54% using the December 31, 2005 LIBOR rate). The earlier loan amount was based on constructing a smaller plant with an annual production capacity of 2.6 million pounds annually. Repayment of the loan will begin when the mine achieves commercial production. Legal work continues on formalizing these amendments.

Purchase Volumes

Cameco also has purchase commitments for uranium products and services from various sources. Most of these purchase commitments are in the form of UF₆. At the end of 2005, these purchase commitments totalled 59 million pounds uranium equivalent from 2006 to 2013. Of this, 54 million pounds are from exercising options under our agreement to purchase uranium from dismantled Russian weapons (the Russian HEU commercial agreement).

Costs

Cameco's cost of supply is influenced by its mix of produced mine material and uranium purchases

Production costs at our Saskatchewan uranium mines, our largest source of production, are primarily fixed, with about one-third attributable to labour. The largest variable operating cost is production supplies, followed by maintenance materials.

Uranium mine production costs are driven mostly by the complexity of the operation. Unit costs of production are driven primarily by the grade and size of the reserves. McArthur River is the world's largest, high-grade uranium mine. Its ore grade averages 24% U₃O₈ which means it can produce more than 18 million pounds per year by extracting only 100 to 120 tonnes of ore per day. While Rabbit Lake's average ore grade of 1% U₃O₈ is much lower, it compares favourably to other operating mines in the world where ore grades are generally below 0.5%.

ISL extraction methods can make even lower-grade orebodies commercially attractive. Worldwide, ISL mines typically recover uranium from orebodies with an average grade in the range of 0.1% U₃O₈. Cameco's cost of supply is influenced only modestly by the two US ISL operations, as the production from the ISL operations accounts for a small percentage of its total primary output. In 2006, US ISL production is expected to account for about 11% of the company's planned primary output.

Purchased product also affects Cameco's cost of supply. Most of Cameco's purchase commitments are under long-term, fixed-price arrangements reflecting prices significantly lower than the current published spot and long-term prices. These purchase commitments totalled $661 million (US) at December 31, 2005. Refer to note 21 in the notes to the consolidated financial statements. A significant portion of these purchased pounds will be delivered into existing sales contracts.

Foreign Exchange

The relationship between the Canadian and US dollars affects financial results of the uranium business as well as the conversion services business. For that reason, the effect on both businesses will be discussed in this section.

Cameco sells most of its uranium and conversion services in US dollars while most of its uranium and conversion services are produced in Canada. As such, these revenues are denominated mostly in US dollars, while production costs are denominated primarily in Canadian dollars.

During 2005, the Canadian dollar strengthened against the US dollar from $1.20 at December 31, 2004 to $1.17 at December 31, 2005.

We attempt to provide some protection against exchange rate fluctuations by planned currency hedging activity designed to smooth volatility. Therefore, our uranium and conversion revenues are partly sheltered against declines in the US dollar in the shorter term.

In addition, Cameco has a portion of its annual cash outlays denominated in US dollars, including uranium and conversion services purchases, which provide a natural hedge against US currency fluctuations. While natural hedges provide this protection, the influence on earnings from purchased material in inventory is likely to be dispersed over several fiscal periods and is more difficult to identify.

At each balance sheet date, Cameco calculates the mark-to-market value of all foreign exchange contracts with that value representing the gain or loss that would have occurred if the contracts had been closed at that point in time. We account for foreign exchange contracts that meet certain defined criteria (specified by generally accepted accounting principles) using hedge accounting. Under hedge accounting, mark-to-market gains or losses are included in earnings only at the point in time that the contract is designated for use. In all other circumstances mark-to-market gains or losses are reported in earnings as they occur.

At December 31, 2005, we had foreign currency contracts of $1,112 million (US) and 132 million that were accounted for using hedge accounting, and foreign currency contracts of $20 million (US) that did not meet the criteria for hedge accounting. The foreign currency contracts are scheduled for use as follows:

	2006	2007	2008	2009
$ millions (US)	467	370	195	100
€ millions	9	11	7	5

These contracts have an average effective exchange rate of $1.25 (Cdn) per $1.00 (US), which reflects the original spot prices at the time contracts were entered into and includes deferred revenue. At December 31, 2005, the mark-to-market value on all foreign exchange contracts was $37 million.

Timing differences between the maturity dates and designation dates on previously closed hedge contracts may result in deferred revenue or deferred charges. At December 31, 2005, deferred revenue totalled $26 million. The schedule for deferred revenue to be released to earnings, by year, is as follows:

Deferred revenue (loss)	2006	2007	2008	2009
$ millions (Cdn)	29	3	(6)	–

In 2005, most of the net inflows of US dollars were hedged with currency derivatives. Net inflows represent uranium and conversion sales less outlays denominated in US dollars. For the uranium and conversion services businesses in 2005, the effective exchange rate, after allowing for hedging, was about $1.30 compared to $1.39 in 2004. Results from the gold business are translated into Canadian dollars at prevailing exchange rates.

For 2006, every one-cent change in the US to Canadian dollar exchange rate would change net earnings by about $4 million (Cdn).

URANIUM STRATEGIES

Cameco's overall objective is to build on and leverage our competitive advantage in uranium. In doing so, we strive to meet three major goals:

• remain the low-cost producer,
• protect and expand our market position, and
• maintain supply flexibility.

There are a number of key strategies the company uses to achieve its goals. We strive to maintain our low-cost position by adding economically attractive reserves and improving our margins. We look to expand our low-cost reserves through acquisition, exploration around existing operations and by identifying geological regions that will provide the next tier of low-cost production.

We improve our margins by optimizing production to yield the highest rate of return, gaining cost efficiencies through quality and business process improvements, and pursuing fundamental productivity gains through technological development.

We seek to protect and grow market position by acquisition, seeking to accelerate production from existing operations, and participating in new uranium opportunities at exploration and development stages.

To maintain our supply flexibility, we are building a geographically diverse production base. This includes accelerating the production at Inkai, bringing Cigar Lake into production, and continuing to pursue a global exploration program. This program identifies the most prospective regions and maximizes options to access and/or control land positions for future business advantage. To ensure we have adequate production, we identify the optimal resource mix (i.e. different types of deposits such as unconformity versus in situ leach), and replace reserves through exploration and acquisition.

Given Cameco's leadership role in the uranium market, the company wants to successfully maximize uranium market growth. Our goals in this regard are to:

• protect and expand market position,
• optimize price realization over time, and
• improve supply flexibility.

To grow our market position, we build on our customer relationships and expand the range of services available to customers while maintaining the company's reputation as a reliable supplier. In addition, we maintain participation in secondary supplies including, enhancing our relationship with Russia, influencing the timing of sales of secondary supplies to the market, and using market intelligence to achieve early notice of new supply sources.

A key element for Cameco is our contracting strategy, which is influenced by the supply and demand outlook for uranium. Since mid-2003, the supply side has experienced significant impacts that caused uranium prices to rise rapidly. This upward trend has been due, in large part, to the realization by market participants that excess secondary supplies will not contribute as much to future uranium supply as they had previously expected. Consequently, a greater volume of new primary mine production will be needed.

The rise in prices has triggered predictable supply side responses. The most notable is the increase in companies exploring for new uranium deposits and the construction of new mines and the proposed expansion of existing ones. However, given the low prices of the last two decades, very little exploration was undertaken on a global basis, and relatively little investment was made in advancing new uranium projects. Producers were operating at close to full capacity to minimize unit costs. Undeveloped deposits, identified in previous exploration cycles, were mostly uneconomic or located in jurisdictions with political challenges. With higher prices, existing projects and newly discovered deposits will be developed, but the lead time before they enter commercial production may be lengthy depending on the region. Consequently, the primary supply industry cannot significantly increase supply in the near-term.

Future market prices will depend on a number of supply and demand factors, the more notable ones being:

• additional production from the successful expansion of existing production, startup of mines currently under construction and development of existing deposits yet to be developed,
• the success of exploration programs in identifying new commercial uranium deposits that can be developed in a reasonable period of time,
• the exchange rate in various producer country currencies relative to the US dollar,
• the timing and extent of expansion of uranium produced as a byproduct or co-product of other commodities, particularly in Australia and South Africa,
• availability of existing and possible new secondary materials, such as blended down uranium from military stock including dismantled weapons,
• the extent enrichment services are substituted for natural uranium feed, and
• the growth rate of nuclear power.

Our goal in uranium contracting is to secure contracts that will maximize our realized price, support our ongoing operations and fund new mine developments over the long term. Given the uncertainty surrounding the foregoing supply/demand factors and the impact on price, we believe it is prudent to continue to target a 40/60 mix of market-related and fixed price mechanisms. As market conditions change, we may adjust this ratio. The overall strategy will continue to focus on achieving longer duration contracts. Today, new contracts tend to reflect contract terms of up to 10 years or more. Current market-related contracts contain floor prices (at about 80% of the spot price prevailing at the time of contract negotiation) which provide significant downside protection and no or very high ceiling prices.

In the current market environment of rapidly increasing uranium prices, this strategy has allowed Cameco to add increasingly favourable contracts to its portfolio while maintaining sensitivity to future price movements. Cameco believes its current contracting strategy will provide solid value for shareholders over the long term.

CAPABILITY TO DELIVER RESULTS

Cameco will continue to enhance its capabilities in a number of areas to execute our strategies and deliver on our goals. We need to ensure that:

• other mining methods and other technologies continue to be advanced to allow us to maintain or expand our annual production,
• timely regulatory approval is secured under an increasingly stringent regulatory regime,
• skilled tradespeople continue to be available,
• adequate human resources are available to replace an aging workforce,
• capital is readily available over the longer term given our expansion plans, and
• adequate resources are allocated to exploration.

MINING METHODS

Currently, McArthur River uses only raise boring to extract ore from the mine. As we expected from the start of mining, other mining methods will be used to maintain or expand production. In 2005, we determined that the boxhole boring method would be better suited for the upper zone #4 at McArthur River, because it would allow development from a preferred location. Production from this zone is scheduled to begin in 2012.

Until Cameco has fully developed and tested the boxhole boring method, there is uncertainty in the estimated productivity. Cameco plans to develop and test the boxhole boring method over the next four years, beginning in 2006. We do not expect this change to significantly impact our long-term uranium production plans at McArthur River.

At Cigar Lake, we plan to use the jet boring method, which has been examined through extensive test mining programs. Overall, the test mine programs were considered highly successful with all initial objectives fulfilled. However, as the jet boring mining method is new to the uranium mining industry, the potential for technical challenges exist. We are confident that our engineers will be able to solve the challenges that may arise during the initial ramp-up period.

REGULATORY APPROVAL

Cameco's growth plans depend on regulatory approvals such as environmental assessments, and obtaining construction licences and operating licences in various jurisdictions including Canada, Kazakhstan, and the US. The timing for approvals can be impacted by various factors such as, the regulator's assessment of current performance, the comprehensiveness of the documentation submitted to support the application, assessment of the significance of any anticipated incremental impacts, the number of industry approval applications being assessed at any given time by the regulator, and other factors.

Cameco expends significant financial and managerial resources to comply with laws and regulations. We seek to find solutions that best respond to regulatory concerns.

SKILLED TRADESPEOPLE

Cameco has significant experience in developing uranium mines. One of the biggest challenges in meeting our Cigar Lake construction timetable is securing skilled tradespeople. This shortage of qualified people also affects our other operations. Cameco is examining various options to accelerate our extensive apprenticeship programs.

HUMAN RESOURCES

Cameco's workforce reflects the global demographics where a large part of the eligible workforce is nearing legal retirement. Approximately 25% of the workforce at our Saskatchewan uranium mines was age 50 or older at December 31, 2005. Cameco's challenge is to compete for the limited number of people entering the workforce to replace retiring employees. We have developed a strategy to meet the challenge.

READY ACCESS TO CAPITAL

Cameco has an ambitious plan to grow in the nuclear energy industry. Opportunities to invest are unpredictable and often capital intensive. We intend to maintain financial flexibility to pursue opportunities as they arise. For that reason, we maintain a conservative financial structure with a target of no more than 25% net debt to total capital.

EXPLORATION PROGRAMS

Cameco continues to pursue a focused exploration program to identify additional uranium reserves for the future to maintain the company's position as the world's largest uranium producer.

Cameco retained an exploration program and its expertise during the depressed market. As uranium prices have risen we have increased our investment in exploration to achieve our goal of expanding our reserve base to grow our uranium market leadership position.

We plan to invest about $32 million in uranium exploration during 2006. This is up 25% compared to the $25.7 million invested in 2005.

For more information on our exploration activities, see the section titled "Uranium Exploration" in this MD&A.

URANIUM BUSINESS RESULTS

Cameco's uranium business consists of the McArthur River, Key Lake and Rabbit Lake mine and mill operations in Saskatchewan, two ISL mines in the US, the Inkai ISL test mine in Kazakhstan, the Cigar Lake development project in Saskatchewan and uranium exploration projects located primarily in Canada and Australia.

REVENUE

In 2005, we established a new record for uranium revenue for the fourth consecutive year. Revenue from the uranium business increased by 19% to $690 million in 2005 due to a higher realized selling price, which rose 12% in Canadian dollar terms (20% in US dollars) over 2004. The increase in the average realized price was mainly the result of higher prices under fixed-price contracts and a higher uranium spot price, which averaged $28.67 (US) per pound in 2005 compared to $18.60 (US) in 2004. A 6% increase in sales volume also contributed to higher revenue in 2005.

COST OF PRODUCTS AND SERVICES SOLD

For 2005, the cost of products and services sold was $429 million compared to $378 million in 2004, reflecting the 6% increase in sales volume. On a per unit basis, the cost of product sold was about 7% higher than in the previous year due primarily to higher costs for purchased uranium.

DEPRECIATION, DEPLETION AND RECLAMATION

In 2005, depreciation, depletion and reclamation (DD&R) charges were $102 million compared to $100 million in 2004, due to the higher sales volume. On a per unit basis, DD&R costs were similar to those of 2004.

GROSS PROFIT

In 2005, our gross profit from the uranium business amounted to $159 million compared to $104 million in 2004, an increase of 53%. This was attributable to the increase in the realized price for uranium and was partially offset by higher unit costs for purchased uranium. Our earnings before taxes from the uranium business improved to $130 million from $91 million last year, while the profit margin rose to 23% from 18% in 2004 again due to the higher realized selling price.

2006 OUTLOOK FOR URANIUM

In 2006, we expect uranium revenue to be 20% higher than in 2005 due to a projected 16% improvement in the expected realized selling price (in Canadian dollars) and a 4% increase in deliveries. Uranium sales volume is expected to total more than 35 million pounds in 2006. Cameco's share of uranium production for 2006 is projected to increase slightly to 21.4 million pounds of U₃O₈ from 21.2 million in 2005. Uranium margins are expected to improve to about 29% compared to 23% in 2005.

The financial results outlook for the uranium business segment is based on the following key assumptions:

• no significant changes in our estimates for sales volumes, costs, and prices,
• no disruption of supply from our mines or third-party sources, and
• a US/Canadian spot exchange rate of $1.16.

URANIUM EXPLORATION

Cameco carries out mineral exploration for new uranium resources on substantial landholdings, principally located in two areas: the Athabasca Basin of northern Saskatchewan, and the Arnhem Land region in Northern Territory, Australia. Subsidiary land positions are also held in the US and Canada.

Cameco owns a range of participating interests in its exploration lands, and either owns or has the right to earn a majority interest in most of the company's projects. At year-end 2005, Cameco operated approximately 75% of its exploration projects, including joint ventures. The majority of Cameco's exploration projects are early to middle stage, on which indications of economic grades or quantities of uranium have not yet been identified. The nature of mineral exploration is such that discovery of economic deposits on new projects is uncertain and can take many years.

In 2005, Cameco also carried out surface exploration near existing mines, specifically the Rabbit Lake and McArthur River operations, with the intent to locate new resources that could be developed to expand or extend these operations. This exploration was successful at both locations.

At Rabbit Lake, the underground diamond-drilling reserve replacement program was again successful in 2005. Over 75 kilometres of drilling was completed, contributing to a net increase of 2.8 million pounds U₃O₈ in reserves and 7.2 million pounds U₃O₈ in resources after accounting for the 2005 mine production. With further definition and test-hole drilling in 2006, we expect to extend the mine life of Rabbit Lake. Production mining of two zones discovered from the reserve replacement program will be under way in the first quarter. More than four kilometres of underground lateral development were completed in 2005, with most of the development focused on these two zones.

Continued exploration at the north end of the existing McArthur River deposit has outlined significant new results that have the potential to further expand resources with ongoing exploration drilling. We are conducting additional confirmatory drilling from surface in 2006.

Winter and summer drilling programs on another advanced exploration project, the Cree Extension project, has increased indicated resources in pounds U₃O₈ by 32% at the Millennium deposit, initially discovered in 2000. The Cree Extension Joint Venture will undertake a pre-feasibility study on Millennium during 2006. Positive 2005 results on the Collins Creek zone, part of the Dawn Lake Joint Venture, will also be followed up in 2006, while a pre-feasibility study carried out on the small Dawn Lake deposit itself found development to be uneconomic at this time.

Since the recovery of the world uranium market, and corresponding higher prices for uranium, the competitive environment for uranium exploration has changed. There are more than 300 uranium exploration companies listed on stock exchanges and most of these are actively funding new exploration programs in Canada and other regions. In the newly active sector, Cameco maintains an ongoing dialogue with numerous companies, with the objective of positioning the company for future participation in areas with promising results, and leveraging Cameco's recognized position in the sustainable development of uranium resources worldwide. Cameco's approach to future resource replacement is to combine its own exploration activities with partnerships, joint ventures, or equity holdings in other companies with assets that meet the company's investment criteria.

At December 31, 2005, Cameco owned a 21.7% interest in UEX Corporation, a TSX listed junior exploration company formed in 2002 from a combination of exploration assets previously held by Cameco and Pioneer Metals Corporation. Cameco has, as long as it maintains a 20% or higher interest in UEX, certain rights related to financing, and marketing production from future uranium deposits. As well, Cameco has the right to mill uranium produced from properties it contributed to UEX at the time of its formation in 2002. In February 2006, Cameco participated in a private placement financing for UEX on a pro rata basis with its equity interest. This participation involved the purchase of 2,222,600 common shares of UEX at a price of $5.00 per share, and leaves Cameco's interest in UEX unchanged at 21.7%.