Business

Uranium Overview

The only significant commercial use for uranium is to fuel nuclear power plants for the generation of electricity. According to the International Atomic Energy Agency ("IAEA"), nuclear plants generated approximately 17% of the world's electricity in 1996. According to the Uranium Institute ("UI"), nuclear electric generating capacity is expected to grow modestly between now and the year 2010 at a rate somewhat below that for the total market for electricity, primarily as a result of new reactor construction outside the United States.

The major stages in the production of nuclear fuel are uranium exploration, mining and milling, refining and conversion, enrichment for light water reactors, and fuel fabrication. Once a uranium deposit is discovered and reserves delineated, uranium ore is mined and upgraded at a nearby mill to produce uranium concentrates. Mining companies usually sell uranium concentrates to utilities around the world on the basis of the contained U₃O₈. Utilities then contract with converters, enrichers and fuel fabricators to produce the required reactor fuel. Cameco provides refining and conversion (collectively referred to as "conversion services") to customers in addition to selling uranium concentrates.

In the conversion services stage at Cameco's operations, uranium concentrates are refined into UO₃ (uranium trioxide) and then converted into either UF₆ (uranium hexafluoride) or UO₂ (uranium dioxide). UF₆ is used as feed for enrichment plants. Following enrichment, the enriched UF₆ is converted to enriched UO₂ suitable for fabrication into nuclear fuel for light water reactors. Non-enriched or natural UO₂ is fabricated for use in heavy water moderated reactors, such as the Canadian CANDU nuclear reactors. The fissioning or splitting of certain uranium atoms in a nuclear reactor creates heat used to produce steam to drive generators and produce electricity. Cameco is involved in the first four stages of the nuclear fuel cycle: exploration, mining and milling, refining and conversion.

The following chart illustrates the stages.

Uranium Demand

According to the UI, nuclear capacity is projected to grow at an annual compound rate of about 1% for the period 1996 to 2010. The table below shows the Western World historical and the UI forecasted nuclear electric generating capacity.

Installed Western World Nuclear Electric Generating Capacity (Net Gigawatts Electric)
		Historical								Forecast
Country/Area		1980		1985		1990		1996		2000		2005		2010
Far East		16.3		31.3		42.3		57.4		61.0		69.7		89.7
Europe		39.3		84.5		118.2		124.4		130.2		128.4		128.9
U.S		50.9		75.6		99.5		98.8		100.5		98.0		92.1
Others		6.5		13.9		18.0		21.1		21.9		25.6		29.7
Total		113.0		205.3		278.0		301.7		313.6		321.7		340.4
Sources: In respect of the years 1980 -- 1985, Nukem Market Report, December 1989. In respect of the year 1996, the UI, Nuclear Power, Energy and the Environment, November 1997. In respect of all other years, the UI, The Global Nuclear Fuel Market -- Supply and Demand 1995-2015, prepared in 1996.

The forecasts for installed Western World electric generating capacity for 1996 to 2010 are based on the UI's analysis of replies by utilities to the UI's questionnaires on plans for nuclear capacity up to the year 2015, as well as an analysis of government announcements from countries operating, building or contemplating building nuclear reactors. In analyzing such replies and announcements and developing its forecast, the UI made many country specific assumptions about whether the utilities in each country would follow current schedules for start-ups or shut-downs of reactors and whether government pronouncements were credible and would be carried through to fruition. No assurances can be given that such assumptions are correct or that the schedules for expected start-ups and shut-downs of nuclear reactors will not be changed at any time by utilities. As a result, the UI's forecasts are subject to many risks and uncertainties and, therefore, actual results may differ materially from such forecasts.

In the period mid 1996 through early 1998 several nuclear utilities have closed or announced the closure of six reactors (five in the US and one in the Netherlands), resulting in a loss of 3.7 net GWe. A further loss of 1.2 net GWe will result from the decision by the Swedish government to close the two Barseback reactors, one in 1998 and the second in 2001. Ontario Hydro announced in April 1997 the temporary shutdown of 7 nuclear units and an overhaul of its remaining 12 units. The shut-in of the Ontario Hydro reactors is expected to result in a temporary loss of 4.6 net GWe.

The United States is the world's largest producer of nuclear-generated electricity and in 1996, 109 plants produced about 22% of the country's total electrical output. In Japan, Taiwan and South Korea, 70 nuclear plants produced approximately 33% of the total electrical output for 1996, and 6 nuclear plants are under construction. In the Far East, significant growth is forecasted by the UI to take place between 1998 and 2010. The UI expects modest expansion in France, where, in 1996, 57 nuclear plants generated about 77% of the country's electricity.

In 1996 and 1997 several advanced boiling water and pressurized water reactors (ABWR/APWR) entered commercial service in Japan and South Korea. These units represent the next generation of reactors and offer improved standardization of design with enhanced safety systems.

The Taiwanese government has approved funding for the construction of the country's fourth nuclear power station which will initially include two ABWRs. Turkey has issued a request for bids for the construction of its first nuclear power plant, with commercial operation scheduled to commence in 2005. North Korea and a US led consortium initiated construction of two nuclear plants in North Korea. China is constructing two CANDU units and has signed contracts to build two Russian designed and supplied nuclear power plants. Finland is contemplating the construction of a fifth nuclear power plant and several other countries, such as Indonesia and Vietnam, continue to evaluate the nuclear option.

The demand for U₃O₈ is directly linked to the level of electricity generated by nuclear power plants. Annual Western World uranium fuel consumption has increased from approximately 56 million pounds U₃O₈ in 1980 to about 145 million pounds U₃O₈ in 1996, the latest year for which figures are available. The UI estimates that annual uranium fuel consumption in the Western World will reach 164 million pounds U₃O₈ in 2010, reflecting an annual compound growth rate of 1% from 1996. Demand could be increased by trends toward increased plant operating capacities, or reduced by the premature closing of nuclear power plants. The UI's estimate of demand for U₃O₈ and for UF₆ conversion services is subject to the same assumptions, risks and uncertainties as those for the forecast of installed Western World generating capacity described above.

The demand for UF₆ conversion services is also directly linked to the level of electricity generated by nuclear power plants. Western World demand for UF₆ conversion services in 1996 was estimated to be approximately 53,000 tonnes of uranium. The UI estimates that this demand will increase to approximately 60,000 tonnes of uranium in 2010.

The demand for UO₂ conversion services is linked to the level of electricity generated by heavy water moderated nuclear power plants such as CANDU reactors. Demand for UO₂ conversion services in 1997 was about 1,900 tonnes of uranium.

Uranium Supply

Uranium Concentrates

The uranium production industry is international in scope and is characterized by a relatively small number of companies operating in only a few nations. In 1997, six companies, Cameco, Compagnie Generales des Matieres Nucleaires ("Cogema"), Energy Resources of Australia Ltd. ("ERA"), Rio Tinto, Uranerzbergbau-GmbH ("Uranerz" or "UEM") and WMC Limited, produced about 77% of total Western World output. Virtually all of Western World production was from only seven nations: Canada, Niger, Australia, Namibia, South Africa, United States, and France. In 1988, the former Soviet Union and mainland China began to supply significant quantities of uranium annually into Western World markets. (See also "Business -- Uranium -- Competition".)

The Canadian uranium industry has in recent years been the leading world supplier, producing about 31 million pounds U₃O₈ in 1997, or about 40% of total Western World production. Because of the high grade uranium deposits in Saskatchewan, Canada is likely to remain the leading producer into the next century. In 1997, Cameco produced about 25% of estimated uranium production in the Western World and supplied about 15% of Western World consumption.

As a result of overly optimistic expectations for new nuclear reactor construction, Western World uranium production exceeded consumption in the late 1970s and early 1980s. This led to a build-up in inventories, which was exacerbated by reactor construction delays or cancellations. The resulting inventory surplus acted to depress the market and prices, and resulted in a dramatic restructuring of the uranium production industry. There have been significant reductions in mine production as higher cost producers have closed operations. For example, mine production in the United States was reported to have declined from around 44 million pounds U₃O₈ in 1980 to slightly under 6 million pounds U₃O₈ in 1997.

Consequently, Western World uranium consumption has exceeded Western World uranium production since 1985. For example, in 1996, according to the UI, it is estimated that consumption exceeded production by approximately 69 million pounds U₃O₈, or 92% of Western World production of 75 million pounds U₃O₈ . The Company believes that for the last several years this production shortfall has been filled by, in order of magnitude, (i) the drawdown of excess inventories held by utilities and governments, (ii) supplies from certain CIS republics including uranium from dismantled weapons, and (iii) supplies from Eastern Europe and mainland China.

The graph below shows total Western World production as compared with Western World requirements for the period 1970 to 1996, based on UI data.

Source: The UI, The Global Nuclear Fuel Market -- Supply and Demand 1995-2015, prepared in 1996.

Market demand, and hence the rate of uranium contracting through the balance of the 1990s and the next decade, will be determined by utilities' uncovered reactor requirements. Reactor requirements are defined by the UI as the quantity of natural uranium, or its equivalent, needed to fabricate the fuel for reactor reloads or first cores. The UI assumes that uranium is required two years ahead of reactor fueling for first cores and one year ahead of reactor fueling for reloads.

In the Western World, particularly in Europe and Japan, limited volumes of uranium requirements are expected to be filled from reprocessing spent fuel.

CIS Uranium Supply

During the period 1991 to 1994, the CIS republics aggressively sold substantial quantities of uranium into the Western World market. United States government and European Union ("EU") responses to these sales have limited the access of CIS producers to these markets. In the United States, an ad hoc group of the Uranium Producers of America and others filed an anti-dumping suit ("CIS Anti-dumping Suit") against some republics of the former Soviet Union. The resulting settlement was effected in suspension agreements signed in October 1992 by the US Department of Commerce ("DOC") with six CIS republics (Russia, Ukraine, Kazakstan, Uzbekistan, Kyrgyzstan and Tajikistan). The Suspension Agreements applied price related quotas to CIS uranium to be imported into the US. The agreements provided for a determination by the DOC of a US market price for U₃O₈.

The Russian Suspension Agreement was amended in March 1994. The amendment allows up to 43 million pounds of Russian U₃O₈ to be imported into the US over 10 years beginning March 1994 only if it is matched with an equal volume of new US production. In total, the matched volumes could, based on current consumption rates, account for up to 20% of the annual supply to the US market.

The amended Kazak Suspension Agreement continues to use a price tied quota. Based on the October 1997 DOC determined price of $12.35 (US), Kazakhstan may expect a quota of as much as 1.0 million pounds U₃O₈ in 1998.

The amendment to the Uzbek Suspension Agreement changed the quota to one based on US production. In the first two years, commencing in 1995, the Uzbeks' were entitled to an annual sales quota of up to 940,000 pounds U₃O₈. For the remaining eight years, the sales quota is tied to US production levels. At current US production levels the annual quota is estimated to be 850,000 pounds U₃O₈ .

Although these amendments to the Suspension Agreements may increase the supply of uranium to the US market, they do not affect Cameco's current uranium supply contracts and provide increased predictability concerning CIS imports into the US. Due to declining production levels in the CIS republics, uranium from these sources has at times been difficult to obtain.

In Europe, the Euratom Supply Agency, which has approval authority over all uranium-related contracts entered into by members of the EU, has an informal policy limiting CIS sales into the EU to about 20% of annual individual utility requirements. The US and EU restrictions have no effect on the sales of CIS uranium to other countries. About 26% of Western World uranium requirements arise from utilities in countries unaffected by the US and EU restrictions, and in 1997 approximately 22% of Cameco's sales volumes were to countries not subject to US or EU restrictions.

Nuclear Disarmament Uranium Supply

In January 1994, the US and Russia entered into an agreement (the "Russian HEU Agreement") to convert highly enriched uranium ("HEU"), derived from dismantling nuclear weapons ("disarmament uranium"), into low enriched uranium ("LEU") suitable for use in nuclear power plants.

On April 26, 1996, President Clinton signed into law the United States Enrichment Corporation Privatization Act (USEC Privatization Act). Provisions in this act regulate the introduction of uranium obtained from Russian and US dismantled nuclear weapons into the US market. The Russian disarmament uranium delivered in 1995 and 1996, totaling about 14 million pounds U₃O₈, was purchased by the US government. The Russians have repurchased about 8 million pounds of this material for matched sales with newly mined US origin material under the Russian Suspension Agreement and the balance cannot be resold into the US market prior to 2002. Russian disarmament uranium delivered subsequent to 1996 can be sold in the US beginning in 1998, subject to an annual quota starting at 2 million pounds U₃O₈ and increasing in subsequent years by 2 million pounds per year, to a maximum of 20 million pounds per year beyond 2008. Sales of Russian disarmament uranium can be made outside the US, but are subject to a number of trade restrictions and policies.

In addition, the USEC Privatization Act provides for the transfer to USEC for resale of about 15 million pounds U₃O₈ of US uranium derived from dismantling nuclear weapons and up to 7,000 tonnes of UF₆ from excess US government inventory. The act restricts the sale of this uranium in the US to a maximum of 4 million pounds per year commencing in 1998. At the end of 1997, this material had not yet been transferred to USEC.

In the second half of 1996, the US Department of Energy ("DOE") declared approximately 22 million pounds U₃O₈ of uranium inventory excess to strategic needs. In addition, the DOE has the remaining 6 million pounds of Russian disarmament uranium referred to above available for sale. This inventory is in excess of the amounts to be transferred to USEC under the USEC Privatization Act. The DOE sold 1.0 million pounds of this material in 1997 and proposes to sell the balance under long term contracts, over a seven year period, commencing in 1998.

In late 1996, USEC and the Ministry of Atomic Energy For The Russian Federation (Minatom) reached agreement on the volumes of low enriched uranium (LEU) derived from dismantling weapons to be delivered to the US over the next five years. The Russians delivered LEU in 1997 containing about 9 million pounds U₃O₈, and is scheduled to deliver, in 1998 about 19 million pounds, and in 1999 through 2001 about 24 million pounds annually. USEC purchases the enrichment component of the LEU, with the Russians continuing to own the natural uranium feed component.

Minatom and a consortium of western companies including Cameco held protracted negotiations during 1997 for the controlled sale and marketing of a majority of the uranium generated through the nuclear disarmament program. The balance of the material was to be retained by Minatom to meet current sales commitments and for domestic use. In December, Minatom announced that it had terminated these negotiations and that this material would be sold through its own agents.

Uranium Conversion Services

The Western World UF₆ conversion industry consists of four commercial producers. These four producers have a total annual UF₆ conversion capacity of about 45,000 tonnes of uranium, with Cameco's annual UF₆ conversion capacity constituting approximately 28% of that total. The Western World UF₆ conversion market is currently in a relative balance between supply and demand. An additional source of UF₆ conversion is available from Russia as a component of its inventories of LEU and from HEU. (See "Business -- Uranium -- Competition".) Under the USEC Privatization Act, the conversion component of LEU from HEU is not restricted and therefore will be available to the market immediately. (See "Business -- Uranium -- Uranium Supply -- CIS Uranium Supply".)

Uranium Prices

Uranium Concentrates

The following table shows annual price ranges of spot prices and certain published average contract prices for U₃O₈ from 1988 to 1997.

Natural Uranium Prices (US $/lb of U3O8)
			1988	1989	1990	1991	1992	1993	1994	1995	1996	1997
Spot(1)
High			$16.30	$11.60	$11.70	$9.50	$10.50	$10.20	$9.60	$12.20	$16.50	$14.25
Low			11.75	9.00	8.35	7.25	7.75	9.70	9.05	9.65	13.00	$10.20
Average Spot and Contract Price
US (2)
	Domestic		26.15	19.56	15.70	13.66	13.45	13.14	10.63	10.79	13.72	n/a
	Import		19.03	16.75	12.55	15.55	11.34	10.53	8.95	10.20	13.15	n/a
Canadian (3)
	Export		25.00	24.00	24.00	21.00	19.00	15.00	14.00	13.00	15.10	14.20
Average Contract Price
Europe (4)			31.82	29.35	29.39	26.09	24.71	21.17	20.25	17.48	15.63	n/a
(1)	The Nuexco Exchange Value, formerly published monthly by Nuexco. Since January 1995, it has been published by TradeTech. Since late 1992 the spot prices reflect the spot price for all uranium other than that of CIS origin.
(2)	Average price for all deliveries to US buyers in one calendar year published by the US Department of Energy, based on a mandatory annual survey conducted by its Energy Information Administration. Prices for 1997 not available at date of issue of this document.
(3)	Average export price received by Canadian producers in one calendar year published by the Uranium Resource Appraisal group of Natural Resources, Canada.
(4)	Average price of all deliveries made to members of the European Union under medium and long-term contracts in one calendar year published by the Euratom Supply Agency. Prices for 1997 not available at date of issue of this document.

Most of the countries that use nuclear-generated electricity do not have a sufficient domestic uranium production to fuel their nuclear power reactors, and their electric utilities secure a substantial part of their requirements by entering into medium and long-term contracts with foreign uranium producers. These contracts usually provide for deliveries to begin one to three years after they are signed and to continue for several years thereafter. In awarding medium and long-term contracts, electric utilities consider, in addition to the commercial terms offered, the producer's uranium reserves, record of performance and cost competitiveness, all of which are important to the producer's ability to fulfil long-term supply commitments. Under medium and long-term contracts, prices are established by a number of methods, including base 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 which affect the amount paid by the buyer to the seller. Prices under uranium supply contracts are usually confidential.

Electric utilities procure their remaining requirements through spot and near-term purchases from uranium producers and traders. Traders source their uranium from organizations holding excess inventory, including utilities, producers and governments.

Demand in the spot market increased slightly in 1997, accounting for sales of almost 21 million pounds U₃O₈ compared to about 19 million pounds in 1996. The Uranium Exchange Company estimates that aggregate spot market activity over the years 1991 to 1997, inclusive, was approximately 214 million pounds U₃O₈.

The average spot market price for U₃O₈ declined in 1997 by about 23%, to $12.00 (US) per pound from $15.58 (US) in 1996. The price ranged from a high of $14.25 (US) at the beginning of the year, to an August low of $10.20 (US), ending the year at $12.05 (US). Due to trade restrictions described above (see "Business -- Uranium -- Uranium Supply"), a two-tier market exists such that there is a discount for uranium of CIS origin. At the end of 1997, the discounted spot price for uranium of CIS origin, as reported by TradeTech, was $9.65 (US).

The rapid rise in the price during 1996 precipitated a number of reactions by purchasers and suppliers. Utilities limited their purchases in the spot market in the first eight months of 1997 by exercising upward volume flexibility under existing long-term contracts and by entering into new long-term supply contracts in 1996 which would also cover their 1997 requirements. Utilities also reduced discretionary spot purchases for forward requirements in this period. The expected sale of excess DOE inventory and the announcement of higher near-term volumes of uranium from the dismantling of Russian weapons also caused utilities to defer discretionary spot purchases.

In contrast, suppliers were aggressive in their pursuit of spot sales in the first half of 1997. However, by the end of the third quarter, spot market demand increased resulting in upward price pressure on spot price through to December. In December 1997, the spot price declined due to traditionally low demand at the end of the year.

Future uranium prices will depend largely on the amount of incremental supply made available to the spot market from various sources. These sources include remaining excess inventories, primary production in Russia and other CIS republics, supplies from Russian disarmament uranium and its other stockpiles, excess US disarmament uranium and increased production from under-utilized capacity of other uranium producers. (See "Business -- Uranium Supply".)

The following graph shows spot prices for U₃O₈ from 1970 to 1997, as reported by Nuexco and, since January 1995, TradeTech.

Source: The Nuexco Exchange Value, formerly published monthly by Nuexco. Since January 1995, it has been published by TradeTech.

Spot prices reflect the price at which uranium may be purchased for delivery within one year. Historically, spot prices have been more volatile than long-term contract prices, increasing from $6.00 (US) per pound U₃O₈ in 1973 to $43.00 (US) in 1978, then declining from $40.00 (US) in 1980 to a low of $7.25 (US) in October of 1991.

UF₆ Conversion Services

Utilities satisfy over 95% of their demand for UF₆ conversion services under long-term contracts. The remaining 5% has been supplied from the spot market and through purchases of uranium as UF₆. Prices under long-term contracts are typically determined by escalated base prices with periodic renegotiation, although there has recently been a slight trend toward spot market related pricing with floor and ceiling protection. For most buyers, price, diversity and security of supply are the most important considerations in selecting a converter. Flexibility in quantity and timing of deliveries are also considered.

The following table shows the annual high and low spot market prices in the years indicated, as reported by Nuexco and, since January 1995, by TradeTech. These prices represent Nuexco's and TradeTech's judgment of the price at which spot and near-term transactions for significant quantities of conversion services could be concluded in the secondary market for the years indicated and is based on pending and recently completed transactions. The data is based on the high and low of the values reported on the last day of each month in each year. Future prices of UF₆ will be influenced by the availability of the conversion component from LEU and HEU.

Range of Nuexco UF6 Conversion Values For Spot and Near-Term Transactions (US$/kg U)
			1988	1989	1990	1991	1992	1993	1994	1995	1996	1997
High			$4.30	$4.30	$3.31	$3.53	$3.53	$5.35	$5.40	$5.85	$6.15	$6.10
Low			3.97	3.64	3.20	3.20	3.09	3.20	5.35	5.50	5.85	5.10
Source: The Nuexco Review, formerly published monthly by Nuexco. Since January 1995, it has been published by TradeTech.

The conversion market in 1997 was marked by a price decline. Conversion made available from excess utility inventory, excess US government inventory and Russian HEU caused the spot conversion price to decline from $6.10 (US) to $5.10 (US) per kilogram by the end of 1997. Long-term conversion prices in 1997 followed the spot price, declining in the latter half of the year.

Uranium Mining Properties

The following table shows Cameco's share of uranium production from its uranium properties for the past five years.

Cameco Share of Uranium Production (lbs U3O8)
		1993		1994		1995		1996		1997
Key Lake		9,212,000		8,793,000		9,469,000		9,409,000		9,418,000
Rabbit Lake		4,090,000		4,971,000		5,455,000		6,885,000		8,029,000
Crow Butte		--		227,000		236,000		266,000		259,000
Highland		--		--		--		--		1,551,000
Total		13,221,000		13,991,000		15,160,000		16,560,000		19,257,000