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Cameco, the world's largest uranium producer, recently released its 2005 annual report. Being a person greatly interested in the uranium sector, I have begun to read this 104 page masterpiece.

Here are some of the highlights I would like to pass along to you:

What news or events in 2006 would represent a major breakthrough for the nuclear industry?

[CEO's answer]The last year was distinguished by a number of astonishing developments in the world of nuclear energy – developments that set the stage for additional breakthroughs in 2006.

Countries representing over one-half the world's population are now building new nuclear power plants, and several others without the benefit of nuclear energy are planning for them. China and India are notable with their aggressive building programs to meet insatiable energy appetites. Energy legislation passed in the United States last August recognized, for the first time at a national level, the clean air benefits of nuclear energy and provided the encouragement to jump-start the construction of a new generation of nuclear plants. And, remarkably, several icons of the environmental movement abandoned their anti-nuclear dogma and came out strongly in favour of an accelerated nuclear construction program to mitigate the consequences of global warming.

So, with the nuclear renaissance firmly under way, I believe that a major breakthrough in 2006 could include such things as new plant designs. New plant designs will advance toward certification and additional plants will be ordered from vendors, providing irrefutable evidence that the next generation of plants can be competitive. A number of countries with burgeoning energy demand will announce their first entry into nuclear plant construction. Already we've seen announcements from Indonesia, Vietnam and Turkey. And utilities in the US will advance their site licensing initiatives, positioning themselves to join Asia and Europe in ordering new plants.

Three other things of notable significance could occur in 2006. First, trade in nuclear technology with India is likely to be approved by the vast majority of countries who are signatory to the Non-Proliferation Treaty. If so, India will be able to purchase uranium from other countries to supply its rapidly escalating requirements for its nuclear power program. Second, several countries are likely to make significant progress in demonstrating the safe disposal of used fuel while preserving the option of recycling for future energy requirements. And third, countries that have stepped outside the bounds of the Non-Proliferation Treaty will be encouraged to return.

Will Cameco change its contracting strategy to get more benefit from higher uranium prices?

Marketing uranium and conversion services is a relationship business. Unlike gold and base metals, there is no central selling organization or exchange. Cameco's uranium, then, is sold under long-term contracts negotiated individually with each of our valued utility customers. Volumes sold on the spot market in aggregate represent only 10% to 15% of annual global uranium consumption, and are far too small and infrequent for a major producer like Cameco to rely on. Customers with highly valued nuclear plants that now have life extensions and only operate on uranium, eschew dependence on the spot market, preferring the security provided by long-term contracts with a reliable supplier. It is very unlikely that customers would leave themselves exposed in any significant way to the vagaries of the spot market.

When prices were low due to inventory liquidation and with the abundance of supply, contracting favoured the buyer with quantity flexibility and low fixed and ceiling price protection. Now that supplies are more difficult to find, fixed prices have increased and ceiling price protection has either disappeared or been lifted to very high levels. Quantity flexibility has been eliminated or severely curtailed and more recently floor price protection for the seller has been available. Perhaps the most significant change is contract duration. When prices were low, utilities had little concern about uranium supplies and Cameco kept contract delivery terms short (three to four years). Today, contract durations of five to 10 years are common as both customer and supplier are placing much greater emphasis on long-term relationships.

During the recent period of rapid price increase, Cameco has retained its traditional portfolio weighting – 40% fixed pricing adjusted for inflation and 60% related to the market price (spot and long-term) at the time of delivery. Given the investments in growth we are making and the volatility inherent in any commodity, with uranium being no exception, we believe this balance is prudent. As we succeed, however, in obtaining meaningful floor price protection in our market-related contracts we review this strategy in light of our market expectations.

Do you believe current uranium prices adequately reflect the value of uranium? Do you believe forward demand will further increase the price of uranium?

These two questions are frequently asked and five years ago were much easier to answer. Although one can legitimately argue that uranium has never found its true value given past government procurement practices and price regulation, followed by decades of inventory liquidation, uranium will eventually find an equilibrium value. Perhaps the most important factor in determining this will be the future value of the US dollar since most production is located outside the borders of the US. As the dollar depreciates, producer revenue shrinks, offsetting some of the appreciation in uranium price. Compound this currency uncertainty with changing inventory policies, the presence of speculators and the prospects for demand acceleration due to increased capacity utilization and new construction, and the crystal ball gets even more opaque.

Events over the past year reflect the strong market fundamentals, as existing and new producers responded to the rising price. Many of the uranium deposits being evaluated and reactivated today were last produced 25 years ago. But perhaps the bigger unanswered questions for producers are: what is the price required to bring these properties into production and what is the timing by which that production could be supplied to the market?

Inventories in large quantities still exist and whether they are considered strategic or available is a function of one's view of future price and, in the case of Russia, internal requirements. Undeveloped lower-cost deposits also exist and their availability will be determined by such factors as permitting lead times, politics, co-product pricing and technical constraints. We now expect demand will grow at a faster rate given the renewed interest in nuclear technology and, toward the beginning of the next decade, the "first core" effect will place an added burden on supply. Uranium prices, like any commodity, will rise and fall over time as answers to the many uncertainties appear and the struggle for equilibrium unfolds between growing demand and the range of available supplies.

How high can the uranium price go?

I've heard and seen some pretty high numbers recently. Every time I encounter such prognostications, I am reminded of the last uranium price boom when there were many pundits predicting $100 per pound or higher. My answer to the previous question illustrates the many variables and just how difficult it is to forecast price. Inventories remain exceedingly important and any significant shift toward rebuilding inventories would add near-term pressure to the market. Similarly, any lengthy disruption to a major supply source, for technical or political reasons, could see prices rise dramatically. And, finally, we have already seen the market effect from speculators. Any significant increase in this activity could produce a price response in the spot market, given its lack of depth. But, any of these are temporary and, over time, the longer term price will depend on supply and demand fundamentals.

Are you confident Cameco will discover the next high-grade uranium mine?

Yes. I have great confidence in our ability to discover the next high-grade deposit. During the low-price environment of the past two decades, Cameco invested sufficient funds to:

• retain its large land position in the best hunting ground, Saskatchewan's Athabasca Basin,
• establish a large property position in Arnhem Land in the Northern Territory of Australia outside Kakadu National Park, and
• look more globally for prospective areas.

Even more important, we maintained and broadened our unique expertise in uranium exploration and discovery, contained within our talented exploration group. As the uranium price increased during the last two years, we have almost doubled our exploration budget and aggressively recruited new talent. Today, we are exploring in both northern Saskatchewan and in Australia, and land positions have been secured elsewhere in areas having promise. Perhaps most prospective in the near-term, are areas around our existing mines as exemplified by the resource additions at Rabbit Lake and by the promising drilling results last year adjacent to our McArthur River mine.

Uranium is an abundant element, some 40 times more common than silver. We know that significant deposits are out there to meet the expanding needs of the rejuvenated industry. It is just a matter of money, time and talent.

Is Cameco's share price over valued? Why should we expect it to rise over the coming year or two?

The share price of Cameco has appreciated in excess of 200% over the past three years delivering to our shareholders considerable value. Its rise has been correlated mostly with the increase in the price of uranium, but at times with energy and precious metal prices. Some observers argue that Cameco shares are expensive. Whether true or not, it is something over which we have little or no control. The best we can do is run the business competently, always mindful of adding value.

High valuations often reflect scarcity, but I would argue that in the case of Cameco, it is a manifestation of our vision of a robust nuclear future and the quality of our underlying assets. In pursuit of its vision, Cameco has put together a low-cost, geographically diversified suite of production assets in both uranium refining and conversion. They are long-lived and their output is delivered into a portfolio of contracts which now reflect much improved market conditions.

The confidence our shareholders have shown in us also represents, I believe, confidence in the future of nuclear energy and in our ability to seize opportunities. If this past year illustrated anything, it was the agility we show in pursuing our vision. The combination of Springfields, Zircatec, Energy Resources of Australia Ltd (ERA), and Bruce Power restructuring demonstrate the range of decisions and their underlying rationale as we pursue growth relentlessly.

Cameco has a 52.7% interest in Centerra Gold Inc. (Centerra), which began trading on the Toronto Stock Exchange in June 2004. Cameco transferred substantially all its gold assets to Centerra as part of the strategy to unlock the value of those assets. Centerra is a growth-orientated Canadian-based gold producer focused on acquiring, exploring and developing gold properties in Central Asia, the former Soviet Union and other emerging markets. Centerra operates two gold mines, located in the Kyrgyz Republic and Mongolia.

REACTORS – OPERATING, PLANNED AND UNDER CONSTRUCTION

There are 440 reactors operating worldwide, and a total of 82 new reactors that are under construction or planned for completion within the next 10 years (as of January 2006). This more than offsets 16 anticipated closures for a net increase of 66 reactors during the period. Given that new reactors tend to have higher capacities than older units, this represents 19% growth in nuclear generating capacity.

Highlights include:

• 57 reactors are scheduled to be built in Asia, as energy demand is driven by rapid economic expansion. More than half of this growth will occur in China and India with plans to build 18 and 15 reactors respectively,
• in Russia, Ukraine and several other eastern European countries, it is anticipated that nine reactors will be built, offset by two closures in Bulgaria as a result of their accession to the European Union, for a net gain of seven reactors,
• Finland is building a new European Pressurized Water Reactor (EPR). Upon completion, the country will have five nuclear reactors. France has also announced the construction of the new EPR beginning in 2007, and
• in Canada, Bruce Power has committed to restart the two shutdown A units. The Province of New Brunswick will proceed with refurbishing the Point Lepreau reactor, a 680 MW Candu. The refurbishment is expected to extend the life of the unit by 25 years.

REACTORS – PENDING

A number of non-nuclear countries including Belarus, Italy, Indonesia, Poland, Turkey and Vietnam are considering nuclear programs. Additionally, South Africa is developing a new type of reactor, called the Pebble Bed reactor that, if successful, will be smaller and targeted at regions requiring electricity, but lacking critical distribution and transmission capability.

That's as far as I've gotten so far. Like I said, this document is over 100 pages. It will take me a couple days to get through it all but if you are serious about investing in uranium, I think this is one of the best documents you could read to prime you about the uranium market.

There are 2 points I would like to elaborate on though. First is Cameco's large investment in Centerra Gold. I think this is a bit of a hidden asset for cameco. If they were to sell their entire holding in Centerra, that would net them approximately 1.7 billion, or 10% of cameco's current market cap.

But until cameco decides to sell Centerra for every "$25.00 (US) per ounce change in the gold spot price would change Cameco revenue by about $21 million (Cdn), cash flow by about $20 million (Cdn) and net earnings by about $9 million (Cdn).

Since gold has moved up very quickly recently, this will be an overlooked revenue and profit driver for cameco.

The second thing is that Cameco's management openly says that if they find a company with great prospects for productions they would love to partner with them. This is very good news for many of us junior uranium investors because the company we own could be cameco's next partner. 

Cameco has already partnered with Hornby Bay this year and I think we will see many more partnership deals like this struck between cameco and smaller companies.

You can view the cameco annual report here.