Uranium One in Kazakhstan: in search for sheer clout and sheer volumes

Uranium One in Kazakhstan: in search for sheer clout and sheer volumesThe purchse of half of the Karatau uranium mine in Kazakhstan by Uranium One could shed fresh light on the ousting and imprisonment of the top executive of the other partner in the mining venture, which is state-held Kazatomprom. Its Russian counterpart Rosatomprom, through its subsidiary Atomredmetzoloto (ARMZ), is now a major shareholder in Uranium One, and thereby still exercises a certain level of control over the operation. This is likely to seal the fate of ousted and imprisoned Kazatomprom chief Mukhtar Dzhakishev – even though questions concerning the money he is thought to have embezzled remain painfully unanswered.

by Charles van der Leeuw, KZW senior contributor

ALMATY – Rather than retreating in front of what looks like a clean-up operation by the Kazakh authorities in the face of broader state involvement in business and finance and the need for transparency it brings along, Uranium One has increased its clout and commitment in Kazakhstan through a deal that may well have surprised friend and foe alike. The deal comes down to a swap for Russia’s all-powerful Rosatomprom in which it obtains a stake in the Canadian-South-African miner in exchange for its mining asset in Kazakhstan, the Karatau deposit. The site is close to those of Akdala and Yuzhd-Inkai, operated by the Betpak Dala holding in which Uranium One has a 70 per cent stake. Karatau, which has been working on a commercially viable production basis since last year, contains 9.8 million tonne of ore, set to yield 11,273 tonne of processed uranium, plus another 771 tonne from 0.9 million tonne of inferred uranium-containing ore. Through the currenet year, the mine’s production target stands at 3.3 million pound of U3O8, with peak output of 5.2 million pounds to be reached in the upcoming year.

The reasoning behind the scheme looks obvious: there is no lack of uranium ore under the Russian Federation’s territory, but there is a need for its industry to expand activity across Russia’s borders given the important near-by market of China which does offer sales growth of global importance. The deal with Uranium One places both partners in a win-win situation. “The purchase price will be paid by way of the issuance of 117 million shares of Uranium One and a cash payment of 90 million US dollar (or equivalent promissory note),” a press release by Uranium One dated June 15 reads. “The purchase agreement also provides for a contigent payment of ARMZ of up to 60 million US dollar, payable inthree equal tranches over the period between 2010 and 2012 subject to certain post-closing tax-related adjustments.” Apart from Karatau, the agreement includes a first-choice option for the new combination to purchase a 50 per cent stake in the nearby uranium block of Akbastau, now preparing for detailed exploration, and any other asset held by ARMZ outside the Russian Federation. One seat on the board of Uranium One on behalf of its new Russian partner has already been taken by Vadim Zhivov, Atomredmetzoloto’s general director, while a second one is due to be occupied in May next year.

It confirms the opinion of those who tend to think that Russia’s industrial high and mighty, since the downfall of Yukos working in close harmony with the government, are really not that much interested in getting resources of other former Soviet republics in their grip. If they are after assets, they try to get them through stakes in the western investors engaged in them, and thereby minimise their own financial risks while placing host countries with a choice between all and nothing. This has happened with Gazprom which instead of taking charge of Kazakhstan’s most important gas and gas condensate deposit of Karachaganak, where the Russian party preferred to team up with operators British Gas and Eni of Italy rather than setting sail with Kazmunaygaz on board. It only illustrates that Russia’s natural resources business realises that profitability comes before chauvinism.

The deal involving Russia’s state giant has come only weeks after the downfall and subsequent arrest on fraud and embezzlement charges of Kazatomprom’s head Mukhtar Dzhakishev. The entire story has yet to be unfolded, but the suggestion of a conflict of big, and indeed very big interests catching the hapless executive in the middle was launched shortly after his detention by one of Dzhakishev’s peers on the board in an interview with Kazakhstan’s daily Vremya, in which the head of the company’s treasurary department referred to the eventuality of a “business vendetta” inflicted by a contractor for power supplies headed by “influential people” supposed to have become “offended” in the course of tender selection procedures. Another element contributing to conspiracy theories has been Dzhakishev’s close relation with ousted banker Mukhtar Ablyazov of the now majority-nationalised Bank TuranAlem, who, like Dzhakishev, is under charges of embezzlement as well.

The story goes back in time, but not that far. It only popped up in early 2005, and involved no one less than Bill Clinton, as well as a mystery character who seems to have been to a vast extent the cause of the current trouble surrounding Dzhakishev. It also reminds one of the roaring nineties, when the disappearance of the Iron Curtain gave western business adventurers the illusion that the opening-up of the Wild East would bring them fortunes beyond imagination. And quite imaginary they were indeed: instead of post-colonial jungle-style governments, western intruders soon found out that this was neither Africa nor Latin America and that there were administrations, regulations and financial institutions in place that could not be circumvented and furthermore a vox populi that would be hard to ignore.

The mistake must have been that when a flamboyant and seemingly wealthy Canadian by the name of Frank Giustra appeared on the scene in Kazakhstan, too few people in the former Soviet Union seemed to bother too much finding out who he was – which for all it matters by and large remains a mystery up to this day. It was obvious, though, that he was not part of the establishment of world uranium miners which should have raised more eyebrows than it ever did. The rest of the story is known: Giustra, thanks to his seemingly intimate relations with Clinton managed to convince the Kazakh government that there would be no political obstacle for Kazatomprom to purchase a 10 per cent minority stake in America’s nuclear equipment manufacturer Westinghouse from majority-owner Toshiba of Japan – a deal which in the end materialised indeed.

As a reward, Giustra is supposed to have received his stake in the Kazakh uranium deposit of Khorassan for the preposterous sum of 104,000 US dollar. The fact that Uranium One paid up to $3.1 billion to take over Giustra’s UrAsia has imposed the question on Kazakh investigators where the money that makes up for the difference has gone. If their suspicions are true, Frank Giustra must now be swimming in cash, not in the least thanks to the generous cooperation of Mukhtar Dzhakishev. How generous, evidence brought into the court room is supposed to demonstrate. In any case, the ongoing quest is for nothing less than the current location of three billion ninety nine million eight hundred ninety six thousand greenbacks in what looks very much indeed like a most formidable kickback. Where that money can be found now is a most logical and also a most legitimate question.

Its Russian ally grants Uranium One exactly the foothold it needs to leave the Giustra affair to judicial authorities and concentrate on the future. And challenging they are. Increases in sales volumes seem to be the only hope for the world’s uranium delvers for some time to come, as the company’s results tend to illustrate. Through the first quarter of the current year, Uranium One’s operations (see table) together brought in almost twice the sales revenue they yielded in the same period of 2008: from $22.5 million to $43 million. But this was purely thanks to a boost in productivity from 283,300 to 880,600 pound. To an important extent it was offset by a price drop from $79 to $49 per pound. “Earnings from mine operations were $15.9 million during the first quarter of 2009, a 2 per cent decrease over earnings from mine operations of $16.3 million during the first quarter of 2008, primarily due to the decrease in the average realised sales price offsetting the increase in sales volumes,” the company’s quarterly report reads.

Global uranium price benchmarks have been increasing from no more than 10 dollar per pound some ten years ago, to an all=-time high of $136 a pound towards the end of June 2007. Last winter, they were back to $40 per pound, or about the same level as ten years earlier if one applies monetary corrections and inflation. But in contrast to oil and in line with natural gas, prices failed to pick up as either false or true prophecies about the world economy and thereby world energy demand crawling out of its depression soon wre buzzing through the media. Hopes for short- or even mid-term shifts in energy resources’ importance seem to have been dashed by the come-back of oil and – even worse – the return of speculative contract trade along with it. With production costs for the fuel compound U3O8 made of uranium amounting to $20 a pound on average ($15 for Karatau), Uranium One will not be immune to the effects of another price slump.

This also means that what is true for Uranium One, is true for Kazakhstan as a whole: only production boosts resulting in an overwhelming market share can ensure its uranium business’ profitability. In 2008, Kazakhstan’s uranium output stood at 6,637 tonne – worth a gross sales income of around 80 million US dollar at average prices through the year. This year, the government has set its nation-wide production target at 11,900 tonne generating a gross revenue in the order of $130 million. Kazakhstan is sitting on about 20 per cent of global proven uranium ore reserves. Since only the south of the country has been properly explored and vast areas in other parts of it remain unscanned, the amount could well rise – if global demand justifies it, that is.

(in million US dollar)

period Q1’08 Q1’09
revenue 22.517 42.969
mining operational income 16.294 15.927
gross overall operational income (667) 1.469
net income (114,870) 61.133

source: company data


closing prices as of 31/12’07 31/12’08 29/05’09 12/06’09
uranium (pence per tonne) 9000000 5300000 4900000 5000000
Brent crude spot (USD cent per barrel) 9444 4559 6499 7063
Euro natural gas spot (USD cent per therm) 5275 6558 2680 2710

source: FT/Reuters