Russia gears up for uranium boom
Putin has a uranium plan, but he has rivals. If there is to be a global investment boom in uranium mining, the Kremlin, custodian of the third largest uranium resource in the world, sees no reason to miss out. Does anyone?
Posted: Tuesday , 01 May 2007
To pass through the Spassky Gate, and enter inside the Kremlin Wall, you need only to know how to count: the current market capitalization of the leading international uranium companies, producers and explorers, sums to $64 billion. The market capitalization of Russia's sole shareholding company engaged in the mining of uranium is $1.4 billion. Bridging that gap, and pocketing it, are two of the factors driving Russia's new uranium policy. Whose pocket, of course, isn't decided yet.
And so, the Putin administration, with less than twelve months left in its term, is on the point of deciding how much of a punt on domestic uranium resources it will allow western portfolio and strategic investors; and how much it will set aside for their domestic peers.
Last Friday, President Vladimir Putin signed legislation to establish Atomenergoprom ("Atomic Energy Industry"), which will be the state-owned holding that controls the country's rapidly expanding nuclear energy generation assets. This, in turn, is to be controlled by Rosatom ("Russian Atom"), which will manage all nuclear military and research assets, mining, and yellowcake refining and fuel trade.
The day before the signing, Putin gave his annual state-of-the-nation speech to parliament, and here's what he had to say about nuclear energy. "Over the entire Soviet period, 30 nuclear power plant units were built, but we plan to build 26 such units over the next 12 years, and to do so using the most advanced technology available."
"I propose establishing a special corporation to carry out this project, a corporation that would bring together nuclear energy and industrial companies. This corporation will work on the
domestic and foreign markets and will also take part in ensuring the state's defence interests. This will require a special law to be adopted. This is the nuclear energy industry I am talking about here."
As "special corporations" go, it appears Putin is talking about loose holdings or shareholding corporations comprised of units that are also shareholding companies. How management power is to be shared in these outfits between the administrative "vertical" and the shareholding "horizontal" may be known in the Kremlin, or by a group of inside shareholders. Officially, it hasn't been decided yet.
Moreoever, what is fully state-owned today may become partially, or even fully privatized, in future. Whether Putin has any say in that future remains to be seen. What he had to say last week is ambitious, but ambiguous, undecided, unclear.
A little clearer is the opportunity now presenting itself by the establishment of the United Uranium Mining Company (UUMC, or UMC for short). This is to be another state-owned holding comprising all of Russia's current and potential uranium mines.
On the drawing-board, UMC is to be subordinate to Rosatom, and supplier to Atomenergoprom. For the time being also, UMC is dependent on two state owned enterprises, TVEL, which combines the yellowcake refining plants and fuel processors, and TENEX (formerly Techsnabexport), which trades uranium fuel and fuel processing services abroad. TVEL has an acting president, Anton Badenkov; TENEX is run by Vladimir Smirnov.
In pecking order, from top to bottom, Rosatom is headed by Sergei Kirienko; Atomenergoprom is likely to be headed by a Kirienko man, Vladimir Travin; Badenkov and Smirnov are on equal footing, and probably not subordinate to Travin, reporting directly to Kirienko. UMC is headed by Alexander Shkarovsky, who may be subordinated by all of the above, though this isn't certain.
While the administrative hierarchy can be set down in regulation, and on paper, practical power is likely to depend on the amount of capital invested. And that's where Russia's electricity-hungry smelter oligarchs -- including Mikhail Prokhorov of Norilsk Nickel, Oleg Deripaska of Rusal, and Victor Vekselberg of Renova -- are trying to establish themselves by signing nuclear reactor financing agreements to fix long-term pricing for nuclear power supplies. If they manage to do that, they will effectively force the upstream mining assets into transfer pricing their uranium ores and fuels at below-market value. That's the poisoned chalice that's being prepared at the moment; and there's no sign that Putin realizes what's being done with his drinkware.
If Shkarovsky isn't ready to swallow, it's understandable. He told Mineweb he doesn't want to answer questions before his board of directors session. There are many questions; not least of all, the relationship between UMC's mining assets, and those already announced by TVEL and TENEX; the latter include projects that are in negotiation with BHP Billiton, and with South African concerns, including state, private, and ANC-controlled.
According to recent public announcements from TVEL, it plans to develop mineable uranium deposits in Russia and Mongolia. The Russian target is Buryatia, in southeast Siberia, where TVEL says it plans to get five licences; these have estimated reserves of 18,000 tonnes (Russian reserve categories C1+C2), and estimated resources of another 12,000 tonnes. These deposits lie within 10 kilometres of Khiagda, a mining project already under development by TVEL. Exploration at Khiagda has already fixed C1+C2 reserves at 11,300t. Design capacity for the mine is 1,000t pa. TVEL's other two domestic mines are Dalur and, the most important of all in Russia at the moment, Joint Stock Company Priargunsky Industrial Mining and Chemical Union (PGHO, or Priargunsk for short), in the neighbouring Chita region. In all, TVEL's mines will turn out 3,400t of uranium this year.
The Mongolian mining scheme was the subject of an MoU signed in mid-April with the Mongolian Minister of Trade and Industry, Bazarsad Jargalsaikhan, In addition, according to TVEL, to fill the current gap between domestic uranium output and demand for domestic consumption and foreign export contracts, TVEL plans to import ore concentrates from Kazakhstan and Uzbekistan.
Operating in parallel, Tenex has signed a joint venture agreement with Mitsui to help fund costs of about $250 million to open the Yuzhnaya mine at the Elkonsoye uranium in fareastern Sakha (Yakutia). Production there is targeted to startr in 2009, and to reach 1,000t pa by 2015. A second jv agreement has been signed with Cameco to enable TENEX to fund new uranium prospects in Russia, and possibly elsewhere; no selection has yet been made.
Asked what is the relationship between TVEL's and TENEX's mining plans and UMC's future, a TENEX source told Mineweb: "Currently, all assets and new projects are developed separately by each of the companies, but in future they all will be passed to UUMC." Before that can happen, there must be an independent valuation of the projects and assets; a tender to select a valuer is under way, the source said. What relationship UMC has to TVEL's projects is less clear.
A TVEL source told Mineweb there has been no decision yet on transferring its mine assets to UMC; it appears that TVEL is reluctant, and may prefer instead to include its new exploration deposits within one of its existing mine companies.
TENEX told Mineweb it isn't in competition with TVEL, but since TENEX appears to be the more willing of the two to make the asset transfer to UMC, TENEX management must be thinking they will have more control over UMC in the end."We do not compete with TVEL on projects," said the TENEX source, "and it does not threaten our plans with Cameco and others. TVEL is doing theirs, and we ours. Mainly, TVEL is working on previously launched deposits, while we are working on new ones."
It is generally assumed that TVEL will have no choice but to transfer the Priargunsk mine to UMC. As a new report by Alfa-Bank of Moscow makes clear, Priargunsk is the investors' window of opportunity, because it is the only publicly listed share in the entire state-controlled batch.
Reporting on April 18, Alfa analyst Vladimir Zhukov wrote that UMC is intended to be the national uranium mining champion, "formed by the Russian government to combine the uranium assets of TVEL, the Russian monopoly producer of nuclear fuel, and TENEX, the state monopoly exporter of nuclear products and services. PGHO is the only publicly listed uranium mining company to be included into UMC. PGHO is developing a world-class reserve base and accounts for 8% of global uranium production and 90-95% of Russian output."
On extremely thin and inaccessible trading, Priargunsk shares currently have a market capitalization of $1.4 billion, with a price/earnings ratio of 75.9 for 2006, and an estimated P/E of 41.2 for this year. According to Zhukov, the company is "grossly undervalued relative to international peers on operating multiples: The company is trading at EV/attributable resources of $2.7/lb and EV/attributable output of $129/lb. This is 6.1x and 6.3x times cheaper than international peers, respectively."
Exactly why buying shares in Priargunsk would be the intelligent thing to do is capably spelled out in Zhukov's report (firstname.lastname@example.org). The company reports annual output of 3,100 tonnes of uranium (8 million pounds of uranium oxide) per annum; reserves of 147,000 tonnes; and annual revenues approaching $300 million; Ebitda of $70 million.
But why the Kremlin should oblige the mining investment market by opening up Priargunsk to foreign share-buyers is another question -- and it isn't being answered by anyone in the Russian uranium sector - yet.
On the one hand, Russia's nuclear energy expansion plans, ambitious though they are, do not create an urgent need to find and mine new domestic uranium deposits. At the current consumption rate, according to Zhukov, the huge uranium inventories which the Soviet leadership set aside to fuel its war-fighting capacities, will last for another 60 years. Factor in the Putin acceleration, and a 70% increase in the demand for uranium concentrate would cut the inventory life to 30 years.
More pessimistic estimates suggest depletion of the stockpiles by the year 2020. That triggers preparedness, but not urgency. Zhukov differs. There is, he says, a case of "an urgent need for significant development of Russia's uranium mining in order to simply match domestic demand, as well as that from Russian-built nuclear reactors abroad."
On the other hand, if TVEL and TENEX regard reactor, fuel, and fuel services exports as their most profitable operations, then it is clear they should, and will, want to limit input prices from the mines. They are going to be reluctant to pass their assets to UMC, if UMC has its eye on the uranium spot price, and dreams of becoming a profit centre all by itself.
The investment requirement for the additional domestic mine output needed to meet the forecast fuel requirement is currently projected at about $10 billion. It has been one of Kirienko's ideas, which TENEX is pursuing, to raise part of that sum in 50/50 joint ventures with Mitsui and Cameco, and possibly BHP Billiton and others. Such schemes have also the advantage, in terms of the Russian national interest, of directing the foreign capital into the exploration of greenfields, where Soviet geologists haven't trod; and of reserving the ore that may be uncovered for domestic consumption. The strategic investors in such mines are to get their payback in cash, not uranium.
For Priargunsk, however, this capital is not available. And if it is to raise cash by issuing new shares, can it do so persuasively?
Zhukov concedes there is a risk that new shareholders might end up subsidizing TVEL and TENEX, or the new reactor owners, elsewhere in the uranium chain. "The risk is that the new uranium contracts, albeit with higher realized prices, will be signed on the UMC level, so that PGHO [Priargunsk] as part of the new holding company will transfer a substantial portion of future profits to the corporate profit center."
And there is another risk, too -- that of the non-transparency of not being able to follow where the cash goes inside the mining operation. Priargunsk, Zhukov warns, "only provides financial reporting under Russian Accounting Standards (RAS) and discloses very little of its operating and reserves data..."