Message to Shareholders

An interview with Bernard Michel, Cameco's chair, president and chief executive officer.

A.   This was primarily due to lower realized prices for the commodities we sold—3% for uranium and 11% for gold. We were also making the transition to our new low-cost mine at McArthur River. Until it produces at full capacity, of 18 million pounds expected in 2002, our costs will be higher than we have experienced in the past.

In addition, our income tax burden, before special items, increased by 12% in 1999, compared to last year. The 1998 results benefitted from a lower tax rate as a larger proportion of our earnings were generated outside Canada from our gold operations.

Yet, in 1999, one should note that Cameco remained a strong cash generator in the face of a very unfavourable market.

During a shift change at McArthur River, workers gather outside the headframe to wait for the cage which will take them underground to either the 530 metre level or the 640 metre level of the mine.

A.   We will continue to look for ways to reduce all costs. In addition, we will increase our production at McArthur River as quickly as possible to full capacity so we can benefit from the lower unit production costs at that operation. We will also reduce debt to lower our interest payments.

Q. Deregulation has resulted in fewer, but larger, nuclear utilities with more purchasing power. How will Cameco meet this marketing challenge?

A.   As the premier supplier of uranium and conversion services for the last 11 years, we will continue to form partnerships with these emerging mega-utilities. We are the world's largest producer and we have the diversified resources to meet utilities' need for secure, long term and predictable supplies for their growing fleet of nuclear plants.

A.   In 1998, we produced 27.5 million pounds U₃O₈, but 1999 was a year of transition at our mines with production of only 16.8 million pounds. We depleted most of the reserves at Key Lake after 16 years of operation, reduced production at Rabbit Lake to half capacity for market reasons and began mine commissioning at McArthur River. In 2000, we expect to produce at about the same rate as in 1999 from our mines in Saskatchewan and the United States.

A.   The McArthur River mine is extraordinary because of its large reserves and resources and high grades. The large reserves and resources mean that the depreciation by unit of production is going to be low. The high grade means that very few tonnes of ore extraction, say less than 150 tonnes per day, are enough to produce 18 million pounds of uranium per year.

The combination of high grade and large reserves means that McArthur River will, for the long term, position Cameco at the bottom of the cost curve.

Once McArthur River reaches full production of 18 million pounds U₃O₈ annually, we expect our costs to decline from historical levels, which were already among the world's lowest.

A.   The sale to Cogema provided Cameco with the financial flexibility which comes with a low debt to capitalization ratio and we maintained a large 70% controlling interest in the project.

A.   We will conduct additional testing of the jet bore mining system in 2000. The system, which has demonstrated its capability in previous tests, has seen considerable improvements and we are anxious to perform final validation runs—in waste rock and in ore.

We plan also to finalize the mine construction licence application for submission to the regulatory authorities and to complete the environmental impact assessment of milling Cigar Lake ore in our Rabbit Lake facility.

Revenue ($ millions) Cameco revenue increased again in 1999 to a record $742 million reflecting higher sales volumes in the nuclear business. (differences due to rounding)

The year 2000 should be an exciting year for Cigar Lake.

Q. The agreement you signed with Russia to purchase uranium from dismantled weapons did not appear to positively influence the uranium price or your share price. Do you see any benefits?

A.   I did not expect the spot price to react immediately to this agreement as very little uranium from dismantled weapons can be sold to the market in the near term. Rather, I saw the conclusion of this agreement as a way to remove a major uncertainty which affected the long-term market. This agreement will provide for the orderly marketing of this material over the next decade and probably beyond.

I believe some investors were waiting to see an improvement in the uranium price as a result of this agreement. It did not happen and the softness in our share price partly reflects their disappointment with the lack of a uranium price recovery.

% increase over 1996

Sales Volume Increase Even in a tight market, Cameco continued to secure new uranium sales.

I remain convinced that this agreement will have a positive and durable impact on Cameco and on its core business.

Q. For years you talked about the gap between supply and demand in the uranium market. Why haven't we seen evidence of this in the uranium price?

A.   Those investors who have followed Cameco for some time have heard me discuss the uranium market and the coming shortfall between supply and demand. I still firmly believe the uranium market will improve as a result of this shortfall.

I agree that it has been difficult to predict the timing of this market improvement.

I believe that three factors must be considered to put things into context:

First, the former Soviet Union republics entered the western world uranium market and sold large inventories at fire sale prices throughout the 1990s. Uranium was not the only commodity to suffer from these marketing practices in the past 10 years.

Second, the cold war ended and suddenly the large stocks of Russian and US uranium from weapons became potentially available and threatened an already weak market.

Third, many electric utilities changed their uranium inventory and procurement strategies as their markets became deregulated in the United States and elsewhere. As the utilities moved to open competition, they naturally looked for every opportunity to decrease their uranium inventories and, more than ever, their cost of uranium.

During construction of the ore receiving station at Key Lake in 1999, millwrights Gary Smith and Wilf Binsfield worked on the pipes which carry ore slurry from the station to the grinding plant. Ore from the underground mine at McArthur River is milled at Key Lake.

These three factors, over the years, have combined to make more uranium available to the market and delay the expected improvement in market prices.

It is interesting to note that these three factors were, in general, related to government actions. While political forces may still play a role, today we are dealing more with market forces, and we have a more predictable picture of how the new uranium industry will emerge.

The simple facts remain that the industry continues to produce half of what utilities consume, that almost no new mines are being developed and that inventories continue to be drawn down at high rates.

A.   There are many signs which point to a good future for nuclear power. Today, more than 400 reactors generate some 17% of the world's electricity, about as much as all of the hydro stations taken together. This is a lot of electricity and replacing these reactors with something else is not a practical consideration and would raise serious questions:

• Why phase out nuclear technology, which has no greenhouse gas emissions?
• What could replace it and match that clean air standard?
• Who will provide the necessary capital?

Additionally, the world's plants are dramatically improving their performance and delivering very low-cost, clean electricity.

I am convinced that, as the world examines its energy options, it will adopt a balanced approach. This will vary from country to country and will continue to include nuclear technology because it is proven to be safe, clean and increasingly competitive as new, more efficient and less capital-intensive reactor designs become reality.

A.   As a leader in the uranium business, Cameco must maintain its commitment to uranium exploration. We want to secure control of the most cost competitive uranium sources in the future as well as in the present. I believe that we are on the way to reaching this goal by securing the best land position that there is in Canada and in Australia. I believe also that Cameco has an outstanding exploration team.

Given the long lead time in our industry, it is not too early to search for the next large, high-grade deposit which will be mined after McArthur River and Cigar Lake.

It takes a long time once a discovery is made to delineate an orebody, plan its development, assess its environmental impact, secure the regulatory approvals necessary for mine construction and bring it to production. In some cases, this pro-cess can take up to 20 years and it is not likely to get shorter.

I believe that the schedule achieved at McArthur River, which took only 11 years from discovery to production, is not likely to occur in the future.

A.   If the Kumtor operation realizes an average gold price of about $220 (US) per ounce on all of its future production, the project would fully service its senior debt. Cameco does not expect to assume any responsibility for this debt beyond its one-third share.

A.   Gold, for Cameco, has been and is at present, a limited diversification. Since the startup of gold production in Kyrgyzstan in 1997, gold has contributed each year to Cameco's cash flow and earnings before special items.

Our strategy today is to minimize the gold risk for Cameco and to constantly evaluate the various options available to us.

I should add that Cameco Gold, in addition to Kumtor, is operating a number of promising exploration properties which should not be ignored when assessing the company.

A.    I believe there are many factors that have affected the share price over the past several years, the greatest one being the declining spot price for uranium. Since 1994, uranium prices have ranged from $8.75 to $16.50 (US) per pound U₃O₈. The share price, which is strongly correlated to the uranium spot price, peaked at the same time as the uranium price.

Yet, in spite of this long period of price weakness, Cameco has remained profitable and generated strong cash flow. Not many of our peers can see their commodity price drop by almost half and still generate profits and substantial cash flow.

A.   During 1999, Cameco's share price faced additional downward pressure from investors switching out of our shares to companies producing commodities with more near-term upside potential such as copper and nickel. It is not unusual for investors to look for the best short-term return. I expect, at some point, these investors will return to Cameco.

We have consistently said that Cameco is a quality, long-term investment and I firmly believe that this is still the case.

Total Debt to Capitalization Cameco continues to strengthen its balance sheet, with the debt to total capitalization ratio falling to 16% in 1999.

A.   I think that the best way to improve the share price is to be true to our corporate vision, to implement our corporate strategy and to manage our business wisely.

I believe in so doing we will deliver value and that it will be recognized by the market.

It is clear to me that the long-term value of the company is not reflected in the current share price of Cameco.

Cameco trades today at about its 1994 value, yet Cameco is a much different and stronger company than it was five years ago.

Let us compare the company with what it was then:

We have increased production per person by 18% at our Saskatchewan uranium mines, our uranium reserves by 76% and our production capacity by 56%. We have built the McArthur River mine—the world's best—and secured government approval to proceed with the Cigar Lake mine. We have concluded an historic agreement with Russia.   

Current Ratio A current ratio of 3.3 reflects Cameco's strong liquidity, or its ability to quickly convert assets into cash to meet near-term obligations.

We have successfully built and now operate a very large gold mine.

During that time, we expanded our presence in the market, increasing U₃O₈ sales volumes by almost 100% and our western world market share by 89%.

Cameco has positioned itself as a world leader in the uranium business. At this point, the stock market is more focused on the allure of short-term gains, or on commodities with more near-term potential, regardless of the company's financial performance.

I believe that having a track record of generating profits and cash flow will come back into fashion.

A.    We repurchased 535,000 shares in 1999 at an average price of $23.15 per share. We plan to continue purchasing shares because they represent significant value at their current price. But I cannot say how many as it will depend on a number of factors.

A.    Our results will be affected by three major factors: the uranium price, the gold price and the success we achieve in ramping up production at McArthur River.

While Cameco sells uranium only on the long-term market, about 60% of the volume is affected by the spot price at the time of delivery. In 2000, a $1.00 (US) change in the uranium spot price would change revenue by about $17 million (Cdn), earnings by $7 million (Cdn) and cash flow by $13 million (Cdn).

Our average realized gold price in 2000 will be lower, based on existing hedges which reflect the continued weak gold price in 1999.

As such, we expect revenue to fall slightly in 2000 unless prices improve during the year.

At McArthur River our teams will make every effort to overcome the unavoidable challenges which such a project always presents. They will remain focused on production and costs. I am very impressed by what they are doing.

A.    First, we will look at internal growth opportunities which still exist in Cameco and we will continue to look at synergistic acquisitions provided we can demonstrate that they achieve good returns to our shareholders.

As you know, our core business does not offer a rapidly expanding market and we recognize that our already large role limits our options somewhat.

Cameco is ready to take advantage of profitable opportunities to leverage its expertise in the nuclear business, in mining and in processing, to other profit centres.

In the future, Cameco may also return a significant portion of the cash it will generate to its shareholders.

As always our decisions will be guided by what is believed to be in the best interest of our shareholders.

A.    At some point, I believe the market sentiment will return to value-based investments and Cameco is such an investment. We have a track record of producing results, we have a strong balance sheet and we are the market leader and low-cost producer of a valuable commodity.

Our industry today remains unique—it produces only half of what is used. The potential for a uranium price increase is excellent and not very dependent on economic cycles.

For that reason, I believe Cameco is a good, long-term investment in the resource sector.