Development project

Cigar Lake

Cigar Lake is the world's second largest high-grade uranium deposit, with grades that are 100 times the world average. We are a 50% owner and the mine operator.

Cigar Lake, which is being developed, is one of our three material uranium properties.

Location	Saskatchewan, Canada
Ownership	50.025%
End product	uranium concentrates
Mine type	underground
Estimated reserves (our share)	108.4 million pounds (proven and probable) average grade U₃O₈: 18.30%
Estimated resources (our share)	1.1 million pounds (measured and indicated) average grade U₃O₈: 2.25% 62.2 million pounds (inferred) average grade U₃O₈: 12.59%
Mining method	jet boring
Target production date	begin commissioning in ore mid-2013; first packaged pounds in the fourth quarter of 2013
Target annual production (our share)	9 million pounds at full production
Estimated decommissioning cost	$27.7 million (to the end of construction)

Background

Development

We began developing the Cigar Lake underground mine in 2005, but development was delayed due to water inflows (two in 2006 and one in 2008). The first inflow flooded shaft 2 while it was under construction. The second inflow flooded the underground development and we began remediation late in 2006. In 2008, another inflow interrupted the dewatering of the underground development. We sealed the inflows and completed dewatering of shafts 1 and 2. In 2011, we completed remediation of the underground.

Mining method

We will use a number of innovative methods and techniques to mine the Cigar Lake deposit:

Bulk freezing

The sandstone that overlays the deposit and basement rocks is water-bearing, with large volumes of water under significant pressure. We will freeze the ore zone and surrounding ground in the area to be mined to prevent water from entering the mine and to help stabilize weak rock formations.

To meet our production schedule, the ground has to be fully frozen in the area being mined before we begin jet boring. We have divided the orebody into production panels, and will have one jet boring mining unit operating in a panel. At least four production panels need to be frozen at one time to achieve the full production rate of 18 million pounds per year. Two jet boring machines will be working at a time, while the other two are being moved or set up, or in the backfill cycle.

In the past, bulk freezing has been done from underground. In 2010, however, we tested and began to implement an innovative surface freeze strategy. The strategy reduces the risk to the production schedule for two reasons:

the surface freeze process can start before developing the underground tunnels
construction activities underground are simplified by moving some of the freezing infrastructure to surface

Our plan is to use a hybrid freezing approach. We will use surface freezing to support the rampup period and underground freezing for the longer term development of the mine. In 2011, we restarted freezing the ore from underground and used freezing around shaft 2 to support the sinking and subsequent break through on the 480 metre level. We also began to freeze the ground from surface.

Jet boring

After many years of test mining, we selected jet boring, a non-entry mining method, which we have developed and adapted specifically for this deposit. Overall, our initial test program was a success and met all initial objectives. This method is new to the uranium mining industry. It involves:

drilling a pilot hole into the frozen orebody, inserting a high pressure water jet and cutting a cavity out of the frozen ore
collecting the ore and water mixture (slurry) from the cavity and pumping it to storage (sump storage) allowing it to settle
using a clamshell, transporting the ore from the sump storage to a grinding and processing circuit, eventually loading a tanker truck with ore slurry for transport to the mill
filling each cavity in the orebody with concrete once mining is complete
starting the process again with the next cavity

Milling

We have signed agreements with the owners of the Cigar Lake project and McClean Lake mill to process all Cigar Lake ore at McClean Lake.

Under the previous toll milling agreements, both the McClean Lake mill and the Rabbit Lake mill would process uranium from Cigar Lake. Under the new milling arrangement, the McClean Lake mill will process and package 100% of Cigar Lake uranium. The Rabbit Lake mill will continue to process ore mined on that site and has the flexibility to process ore from other potential sources.

2011 update

During the year, we:

completed remediation of the underground
resumed underground construction in the south end of the mine
completed the sinking of shaft 2 to the 480 metre level in early 2012
substantially completed the ore loadout facility
procured additional equipment for the jet boring system
obtained regulatory approval to change the discharge location for the release of treated water to Seru Bay of Waterbury Lake
obtained regulatory approval for the Cigar Lake mine plan

Costs

As of December 31, 2011, we had:

invested about $675 million for our share of the construction costs to develop Cigar Lake
expensed about $86 million in remediation expenses, including about $4 million in 2011
expensed about $35 million in standby costs

We expect to spend an additional $484 million (our share) to complete this project, which requires us to:

invest about $429 million for our share of the remaining capital costs, bringing our total share to about $1.1 billion
expense about $55 million for our share of the remaining standby costs, bringing our total share to about $90 million

This would bring our total share of the cost for this project to about $1.3 billion since we began development in 2005.

Exploration

We completed a surface drilling program this year, which increased the mineral reserves and average ore grade slightly, and extended the orebody further to the west. It also increased our confidence in the geology and the grade we can expect during the rampup period. We also initiated a drilling program to further delineate the west end of the mineralization.

Planning for the future

In 2012, we expect to:

complete the sinking of shaft 2 to its final depth of 500 metres
begin installing shaft 2 infrastructure, including construction of a concrete ventilation partition, installation of electrical cable, water services, ore slurry pipes and hoist systems
complete the surface ore loadout facility
resume underground development in the north end of the mine
move the jet boring system to site and begin testing underground
develop two mining tunnels using the mine development system
complete the Seru Bay pipeline
complete all engineering designs and drawings for the project
construct the clarifier

Technical report

Cigar Lake continues to be a key part of our plan to increase our annual production to 40 million pounds by 2018 and we are pleased with the progress we are making to bring this valuable orebody into production. Over the year, we implemented a number of changes to the project, which have enhanced the overall economics of the project. These changes have put Cigar Lake on the path to becoming another high-grade, low-cost source of production, similar to our McArthur River operation.

We are updating the March 2010 Cigar Lake technical report to reflect these changes, including the impact of the new milling arrangement, surface freezing and other developments. We plan to file the updated technical report with our February 2012 annual information form. The highlights of the technical report are:

a decrease in the estimated average cash operating cost to about $18.60 per pound from about $23.10 per pound estimated in 2010. The reduction is primarily due to the new milling arrangement.
an increase of about $190 million in our share of the total estimated capital cost at completion to $1.1 billion. The increase is mainly due to the implementation of the surface freeze strategy, general cost escalation, costs to upgrade and expand the McClean Lake mill and improvements to the mine plan.
a change to the production profile, with slightly lower production expected in the first years of the project offset by higher production in the later years. We expect our share of production in 2013 to be about 0.3 million pounds. This compares to our previous estimate of 1 million pounds. This and the other revisions to our production schedule on page 65 represent an 8.7% decrease in our production forecast through 2016 and are a result of the extended period required for remediation and a better understanding of the geology and lower grades in the initial production panels.
first commissioning in ore expected in mid-2013 and the first pounds expected to be packaged at the McClean Lake mill in the fourth quarter
rampup to the full production rate expected by the end of 2017
a 4% increase in our share of the mineral reserves estimate from 104.7 million pounds to 108.4 million pounds and an 8% increase in the estimated average ore grade
an upgrade of probable mineral reserves to proven minerals reserves

Given the scale of this project and the challenging nature of the geology and mining method, we have made significant achievements since 2010. We will continue to develop this asset in a safe and deliberate manner to ensure we realize the economic benefits of this project.

Note Concerning Forward-Looking Information Regarding Our Development Projects

Our expectations and plans regarding Cigar Lake, the expected benefit of milling Cigar Lake ore at the McClean Lake mill, the estimated average cash operating cost, our expected share of the total project and capital cost at completion for Cigar Lake and our mineral reserve estimate, are forward-looking information. They are based on the assumptions and subject to the material risks discussed here, and specifically on the assumptions and risks listed here.

Assumptions

our expectation that the new milling arrangement will result in the expected reduction in the operating cost
there is no material delay or disruption in our plans as a result of a ground movements, cave ins, additional water inflows, a failure of seals or plugs used for previous water inflows, natural phenomena, delay in acquiring critical equipment, equipment failure or other causes
there are no labour disputes or shortages
we obtain contractors, equipment, operating parts, supplies, regulatory permits and approvals when we need them
processing plants are available and function as designed and sufficient tailings facility capacity is available
our mineral reserves estimate and the assumptions it is based on are reliable
our Cigar Lake development, mining and production plans succeed
our expectation that the jet boring mining method will be successful and that we will be able to obtain the additional jet boring system units we require on schedule

Material risks

the new milling arrangement does not result in the expected cost savings or other benefits
an unexpected geological, hydrological or underground condition or an additional water inflow, further delays our progress
ground movements or cave ins
we cannot obtain or maintain the necessary regulatory permits or approvals
natural phenomena, labour disputes, equipment failure, delay in obtaining the required contractors, equipment, operating parts and supplies or other reasons cause a material delay or disruption in our plans
processing plants are not available or do not function as designed and sufficient tailings facility capacity is not available
our mineral reserves estimate is not reliable
our development, mining or production plans for Cigar Lake are delayed or do not succeed for any reason, including technical difficulties with the jet boring mining method or our inability to acquire any of the required jet boring equipment

Managing our risks

Cigar Lake is a challenging deposit to develop and mine. These challenges include control of groundwater, weak rock formations, radiation protection, water inflow, mining method uncertainty, regulatory approvals, tailings capacity, surface and underground fires and other mining-related challenges. To reduce this risk, we are applying our operational experience and the lessons we have learned about water inflows at McArthur River and Cigar Lake.

Water inflow risk

A significant risk to development and production is from water inflows. The 2006 and 2008 water inflows were significant setbacks.

The consequences of another water inflow at Cigar Lake would depend on its magnitude, location and timing, but could include a significant delay in Cigar Lake's development or production, a material increase in costs or a loss of mineral reserves.

We take the following steps to reduce the risk of inflows, but there is no guarantee that these will be successful:

Bulk freezing: Two of the primary challenges in mining the deposit are control of groundwater and ground support. Bulk freezing reduces but does not eliminate the risk of water inflows.
Mine development: We plan for our mine development to take place away from known groundwater sources whenever possible. In addition, we assess all planned mine development for relative risk, and apply extensive additional technical and operating controls for all higher risk development.
Pumping capacity and treatment limits: We have pumping capacity to meet our standard for this project of at least one and a half times the estimated maximum inflow.

We believe we have sufficient pumping, water treatment and surface storage capacity to handle the estimated maximum inflow.

Jet boring mining method and units

We have successfully demonstrated the jet boring mining method in trials. This method, however, has not been proven at full production. We have developed and adapted this method specifically for this deposit. As we ramp up production, there may be some technical challenges, which could affect our production plans. There is a risk the rampup to full production may take longer than planned and that the full production rate may not be achieved on a sustained and consistent basis. A comprehensive testing, pre-commissioning, commissioning and startup plan has been implemented to assure successful startup and on-going operations. We are confident we will be able to solve challenges that may arise, but failure to do so would have a significant impact on our business.

Our mining plan requires four jet boring system units. We currently have one unit and in 2011 agreed to purchase an additional three units. There is a risk that rampup to full production at Cigar Lake may take longer than planned if the manufacture or delivery of these three units does not take place as scheduled. As part of our startup plan noted above, we are working with our supplier to assure timely delivery of these units.

We also manage the risks listed here.