Where are the markets for uranium?
Where does the supply of uranium come from?
What factors affect uranium demand?
How are uranium sales contracts structured?
What is the spot market?
How does the long-term market operate?
What is the US-Russia HEU agreement?

Where are the markets for uranium?

The only significant commercial use for uranium is to fuel nuclear power plants for the generation of electricity. There are about 440 reactors operating worldwide, and a total of 115 new reactors that are under construction or planned for completion within the next 10 years (as of January 2009).

Before uranium is ready for use as nuclear fuel in reactors, it must undergo a number of intermediary processing steps which are identified as the front end of the nuclear fuel cycle:

1. Mining and milling to produce U₃O₈;
2. Refining and conversion to produce UF₆ and UO₂;
3. Enrichment to produce low-enriched uranium; and,
4. Fuel fabrication to produce fuel assemblies or bundles.

Nuclear utilities, the ultimate users of nuclear fuel, purchase uranium in all of these intermediate forms. Typically, a fuel buyer from power utilities will contract separately with suppliers at each step of the process. Sometimes, the fuel buyer may purchase enriched uranium product, the end product of the first three stages, and contract separately for fabrication, the fourth step.

Sellers consist of suppliers in each of the four stages as well as brokers and traders. Cameco's involvement comprises selling uranium in the first two steps, and in some cases has unique supply and trading arrangements with customers to manage the latter two steps.

In addition to being sold in different forms, uranium markets are differentiated by geography. The global trading of uranium has evolved into two distinct marketplaces shaped by historical and political forces. The first, the western world marketplace comprises the Americas, Western Europe and the Far East. A separate marketplace comprises countries within the former Soviet Union, or the Commonwealth of Independent States (CIS), Eastern Europe and China. Most of the fuel requirements for nuclear power plants in the CIS are supplied from the CIS's own stockpiles. Often producers within the CIS also supply uranium and fuel products to the western world, increasing competition.

Cameco sells uranium products and services exclusively for the generation of electricity to utilities throughout the western world. There are fewer than 100 companies that buy and sell uranium in the western world. Because the number of uranium producers is small and few among them are publicly traded companies, Cameco believes it prudent to not disclose certain business data in the uranium and conversion segments of its business, including unit production costs.

Where does the supply of uranium come from?

Production from world uranium mines supplies only 67%¹ of the requirements of power utilities. The balance comes from secondary sources. Secondary supply is essentially inventories of various types and include inventories held by utilities and other fuel cycle companies, inventories held by governments, used reactor fuel that has been reprocessed, recycled materials from military nuclear programs and uranium in depleted uranium stockpiles.

Primary production

The uranium production industry is international in scope with a small number of companies operating in relatively few countries. In 2008 ten companies provided approximately 87%² of the estimated world uranium mine production of 115 million pounds U₃O₈.

Secondary sources

Secondary sources are a common feature in commodity markets, but they assume a particular importance with uranium. Since 1985, western world uranium production has been less than western world utility uranium consumption. The resulting shortfall has been covered by a number of secondary sources. Excess inventories held by utilities, producers, other fuel cycle participants and governments (including Russian government inventories) have been and continue to be a significant source of supply but availability is declining. Recycled products include reprocessed uranium, mixed oxide fuel and re-enriched tails materials. Some utilities use reprocessed uranium and plutonium derived from used reactor fuel as a source of supply. In recent years, another source of supply has been the use of excess Russian enrichment capacity to re-enrich depleted uranium tails held by European enrichers. Finally, highly enriched uranium (HEU) derived from the dismantling of Russian nuclear weapons has become a significant source of supply equivalent to a large mine. A limited amount of uranium from the US weapons program has been introduced into the market but is not expected to become a significant supply source.

With the exception of recycled material, secondary supplies are finite and will be depleted over the next few years. The Russian HEU will continue to supply annual quantities to the western market (See What is the US-Russia HEU Agreement?) until 2013.

What factors affect uranium demand?

Demand for uranium is directly linked to the level of electricity generated by nuclear power plants. Reactor capacity is growing slowly, and at the same time the reactors are being run more productively, with higher capacity factors, and reactor power levels.

An external factor expected to have a particularly important impact on the prospects for nuclear power, is the trend towards the liberalization of electricity markets in many countries. Historically, electric power utilities in the western world have operated in regulated electricity markets. Typically, a government regulator allowed each utility to serve a captive market area and earn a prescribed rate of return on its assets. The focus was on delivering a reliable supply of electricity. Since the mid 1990s, however, there has been a transition toward market liberalization. This trend began in the US and has been adopted to varying degrees in Europe and the Far East.

Generally, deregulation in the electrical generation industry has resulted in utilities competing for market share on the basis of price. This new bottom line focus has necessitated changes in utilities' planning and operations including improved operating methods, lower unit production costs and optimizing the use of assets. Faced with the challenge of deregulation, electric utilities worldwide have been restructuring through mergers and acquisitions. Often restructuring has resulted in larger utilities, some of which are strongly committed to nuclear power.

Nuclear utilities have dramatically improved the operating performance of their reactors. One measure of performance is the capacity factor. Across the entire US fleet of reactors, the average capacity factor has increased from 66% in 1990 to 91.5% in 2008. Improved reactor performance translates into greater uranium consumption and to more demand for nuclear services in general.

How are uranium sales contracts structured?

Unlike other metals such as copper or nickel, uranium is not traded on an organized commodity exchange such as the London Metal Exchange. Instead it is traded in most cases through contracts negotiated directly between a buyer and a seller.

The structure of uranium supply contracts varies widely. Pricing can be as simple as a single fixed price, or based on various reference prices with economic indices built in. Contracts traditionally specify a base price, such as the uranium spot price, and rules for escalation. In base-escalated contracts, the buyer and seller agree on a base price that escalates over time on the basis of an agreed-upon formula, which may take economic indices, such as GDP or inflation factors, into consideration.

Delivery quantities, schedules, and prices vary from contract to contract and often from delivery to delivery within the term of a contract.

What is the spot market?

A spot market contract usually consists of just one delivery and is typically priced at or near the published spot market price at the time of contract award. When a contract is priced at spot, it is usually the value quoted by one of the several market information services such as Ux, TradeTech or Nukem, at the end of the month prior to the delivery date. Spot market delivery quantities vary from 50,000 to a few hundred thousand pounds U₃O₈.

Over the last few years, about 15% of the western world's uranium requirements have been procured in the spot market, that is, for delivery within 12 months of contract award. In 2008, about 43 million pounds U₃O₈ were traded on the spot market.

How does the long-term market operate?

Historically, some 85% of all uranium has been sold under long-term, multi-year contracts with deliveries starting one to three years after contract award. In 2008, about 130 million pounds of U₃O₈ were contracted in the long-term market.

Long-term contract terms range from two to 10 years or more, with deliveries to begin two to five years after contracts are finalized. Other commercial terms are specified in the contract.

To diversify market risks, producers and utility customers often maintain a mix of contract terms and pricing mechanisms in their contract portfolios. Buyers are often willing to pay a premium in long-term contracts, compared to spot prices, because they can achieve secure supply at prices that are more predictable.

Cameco sells uranium on the long-term market. However, spot prices do affect Cameco's revenue, as about 65% of its contracts have pricing mechanisms that reference the spot market price at the time of delivery or the long term price indicator. The remaining 35% of Cameco's contract portfolio is sold at fixed prices escalated by an inflation index.

What is the US-Russia HEU agreement?

HEU stands for highly enriched uranium. In 1993, the US and Russia entered into an agreement whereby the Russians would dismantle a significant portion of their nuclear weapons by 2013. This agreement is known as the US-Russia Highly Enriched Uranium agreement or the megatons-to-megawatts agreement. It stipulates the annual quantities of HEU that may be delivered to the US by Russia. The dismantled weapons contain a valuable resource for Russia. HEU can be blended down into low enriched uranium (LEU) and sold in the western world market as reactor fuel for hard currency.

There are three main components that make up LEU: natural uranium (the mine concentrates or U₃O₈); conversion services that convert U₃O₈ to UF₆; and enrichment, the process of enriching UF₆ to LEU. Together, U₃O₈ plus UF₆ conversion is referred to as the natural uranium feed component of the fuel. This feed displaces primary U₃O₈ production and uranium conversion services.

This agreement provided a major source of new supply - the equivalent of one major mine. Since new supplies of this magnitude can be disruptive in the uranium market, Cameco placed a high priority on ensuring this material was marketed in the western world market in a disciplined fashion and sought participation in the marketing of the natural feed component.

In 1994, the United States Enrichment Corporation (USEC) as agent for the US government, and Russia, signed an agreement whereby USEC would purchase the enrichment component of the LEU upon delivery to the US. In 1999, Cameco and two other western companies, AREVA and NUKEM, Inc. concluded an agreement with Russia whereby they have the option to purchase the majority of the natural feed component of LEU. This agreement is officially called the UF₆ Feed Component Implementing Contract. In November 2001, the western companies agreed to exercise a portion of their options to bring predictability to the program - predictable supply to the western market and predictable revenue to the Russians.

As of December 31, 2009 382 metric tons of weapons grade HEU from the former Soviet Union has been recycled which is equivalent to eliminating 15,294 nuclear warheads. For a chronology and progress report please go to www.usec.com.