Wednesday, March 31, 2010

Mining: Russia's insatiable hunger for uranium

By Alexandra Terentieva
Photo: Rosatom
Republished courtesy of IDN-InDepth NewsInterview

MOSCOW (IDN) – Russia’s hunger for uranium is apparently insatiable. In fact, Vadim Zhivov, the director general of ARMZ Uranium Holding Company (ARMZ), AKA Atomredmetzoloto – one of the leaders in the world uranium mining industry – fears that the country might be faced by a deficit of uranium.

ARMZ is the primary supplier of uranium feedstock to the Russian nuclear industry, having produced 4,624 tonnes of uranium in Russia and Kazakhstan in 2009. The State Nuclear Power Corporation Rosatom controls more than 80 percent of the shares.

It is also among top five uranium mining companies in terms of uranium output ranking second by resource base, 546,000 tons as of January 1, 2009. Together with its affiliates and subsidiaries, the company employs over 14,000 people.

Zhivov took part on March 29, 2010 in the commemorative events of Namibia’s independence’ 20th anniversary and attended the ceremony of inauguration of President Hifikepunye Pohamba of the Republic of Namibia, as well as the swearing in of Prime Minister Nahas Angula.

Zhivov visited Namibia as part of the Rosatom State Corporation’s official delegation headed by Director General Sergey Kirienko, Special Envoy of President Dmitry Medvedev of the Russian Federation.

The significance of the visit is underscored by the fact that Namibia is the fourth largest exporter of non-fuel minerals in Africa and the world's fifth largest producer of uranium. There has been significant investment in uranium mining and Namibia is set to become the largest exporter of uranium by 2015.

Following a complete version of an interview by Alexandra Terentieva with Vadim Zhivo. The interview, which appeared on February 9, 2010 in the business newspaper ‘Vedomosti’ is posted on the website of the State Atomic Energy Corporation Rosatom. It provides a deep insight into Russia’s uranium plans – and it does so in an exceptionally frank manner.

Question: How did the uranium industry work during the Soviet times and what it looks like today?

Vadim Zhivov (VZ): During the Soviet times our country was the largest producer of uranium in the world. After 1991, the majority of uranium-mining enterprises turned out to be outside Russia. The country’s only asset – Priargunsky Industrial Mining and Chemical Union (PIMCU) – joined TVEL. In Russia, natural uranium output was swaying at 2,500 tons per year against 15,500 tons per year in the peaking 1998. In fact, that output didn’t meet even the needs of operated nuclear power plants (NPPs). The gap was bridged with stockpiles and other secondary supplies. After the beginning of the nuclear industry reforming in 2007, PIMCU, along with enterprises being under construction and design, joined the ARMZ system. Since that time we have managed to triple reserves and ramped up mining output.

Q: How were uranium prices changing? What is your forecast as to what will they be?

VZ: In the early 2000’s, in the background of emerging massive plans of building NPPs, uranium spot prices were going up. Many bulling, non-related stakeholders, primarily financial investors, came to the market. As a result, in summer 2007 prices were peaking at US$130 per lb U3O8. When the world financial crisis had started, non-related investors started leaving the market to force spot prices down to the current US$45 per lb U3O8. The spot market features just 10% of all natural uranium sales. But these quotas influence also long-term contracted supply prices in many respects. We believe that in coming years the situation must change and the price will be striving up again. Otherwise, the market would be faced by a deficit of uranium in future. The current price level hinders development of many projects and exploration.

Q: Do active acquisitions by ARMZ mean an attempt to monopolize the uranium market and make a good penny out of it or we are short of our own feed?

VZ: We are the second in the world in terms of reserves. However, a high development cost of many deposits doesn’t allow mining them at the current price level. Therefore, we are interested in acquiring assets with competitive mining cost, primarily, in African states.

Q: What is the Russia’s strategy in the world uranium market?

VZ: The State Corporation Rosatom controls about 40% of the world enrichment capacities. Our positions in the natural uranium market are somewhat weaker so far. We want to change the situation and eliminate this imbalance.

Q: Last year, ARMZ bought out interests of entrepreneur Vasili Anisimov in Kazakhstani projects Akbastau and Karatau and later exchanged the interest in the latter for Uranium One’s shares, claiming to continue acquiring assets. Where are you heading at? To be ahead of BHP Billiton and to become the first in reserves?

VZ: It is a more difficult task. Normally, each company is trying to compensate for a lack of this or that constituent which is required to ensure competitiveness. In Russia we have unique uranium deposits, for example, Elkonsky Uranium Region. In terms of reserves, it is just the second to the Australian Olympic Dam, but in terms of the cost of mining it is not most attractive. In this regard, we need to diversify our mineral feed sources.

Q: How? What is the goal?

VZ: We have all possibilities to be among the first three companies in terms of mining output. As to mining cost we must be, at least, among the first four producers. This will allow solving strategic tasks of the nuclear industry development. Specifically, to supply SC Rosatom divisions with feed to fabricate fuel for nuclear power plants in Russia and abroad, while remaining one of the largest players in the natural uranium market. SC Rosatom is a largest stakeholder in the enrichment and nuclear fuel market. Thereat, it so happened in the 1990’s that a Russia’s share of the natural uranium market was significantly smaller than that in conversion. The task is to achieve the balance here and enter the leaders’ club, while increasing labor efficiency. Last year, mining grew by over 25%. It was due to larger mining at our Russian and Kazakhstani enterprises and mergers and take-overs of the last year.

Q: And cash raised through the additional issue of the company’s shares in favor of SC Rosatom was spent for acquisitions?

VZ: Yes, to diversify mineral feed sources, to buy foreign assets.

Q: The crisis, perhaps, made the negotiations easier for you...

VZ: Investments in uranium industry are of strategic nature. In this sense the crisis did not produce the immediate impact on the market [of uranium] as on the exchange commodities. But in any case, uranium spot prices went down; hedge funds, wildcatters, the stakeholders who were bulling have left. As a result, natural uranium prices came back to levels allowing to supply utilities and make investments in mining. Low-capital companies, juniors disappeared from the market and put their assets on sale.

Q: Is the deal to buy-off Anisimov’s Effective Energy N.V.’s shares in Akbastau and Karatau an effect of the crisis?

VZ: We agreed on the deal when the crisis was peaking, in November-December 2008. Our FIGs started raising own liquidity and the uranium assets had never been related for the former owner. At the moment, we had 25% plus 1 share in Akbastau, while they had 25% minus 1 share. We were interested in raising our interest and immediately started the negotiations. Having closed the deal, we consolidated the Russian interest in uranium mining JVs in Kazakhstan and became one of largest mineral miners in that country.

Q: Doesn’t the Kazakhstani government have questions about this? Since uranium is a strategic industry for them as well.

VZ: The Kazakhstani government agreed on the acquisition of these assets. We discuss all deals with our strategic partner in advance... The integration continues. Russia and Kazakhstan have many joint projects in the nuclear industry; in particular, ARMZ has mining companies Akbastau and Zarechnoye in that country.

Q: Do you plan for new projects with Kazakhstan?

VZ: Yes, we do. It is difficult to say now what would be the next step, but we are considering a number of options.

Q: Was it hard to bargain with Uranium One?

VZ: This deal took a long time to prepare. Apart from the gold market, the uranium market doesn’t feature many facilities attractive for take-over. Thus, in principle, all players know each other and negotiate. Once, Effective Energy N.V. had been negotiating with Uranium One before we bought it. Our negotiations with the Canadian company took nearly a year... Since it was one of our first deals, we, certainly spent rather mush time to explain on our role and strategy.

Q: It goes much difficult with buying Khan Resources. The company management believes you have offered a too low price. How did you calculate the price?

VZ: We don’t think the price has been lowered. In fact, we offered the double price for Khan’s shares, i.e. C$0.65 per share. This means a premium of 103% against the weighted average price of Khan Resources’s shares over the 20 trading days before our offer had been announced. Our neighbors to this property - Western Prospector – were bought by the Chinese investors at a premium of about 70%. We did not only an independent assessment but also were actively working with investment banks and thoroughly analyzing financial models Khan had suggested to its shareholders. As a result, we had serious issues to raise. This deposit was explored by the Soviet geologists. Many of current PIMCU specialists took part in its development. We believe Khan did take full account of the infrastructure-related problems, for example, of sulfuric acid supplies, water supply, and other aspects. In this regard, we think that we offered a large premium and insist that this is a fair price.

Q: Could you explain why did you make the offer to the Canadian Khan Resources while having state-level arrangements that Dornod Deposit is to be mined by ARMZ and MonAtom’s JV Dornod Uran?

VZ: The deposit’s license is held by the Central Asia Uranium Company where we have just 21%. Another 21% are owned by the Mongolians and Khan has 58%. Therefore, we agreed with the Mongolians to buy the company to continue developing deposits of Dornod Uranium region.

Q: How to consider the recent statement by Khan on the signing of a memorandum with the state-owned MonAtom under which Khan would get back its exploration licenses and even have them converted into mining licenses and a Canadian-Mongolia JV would be set to mine the deposit without the Russian participation or with the Russian share in the deposit being significantly reduced?

VZ: Recently, the Mongolian government confirmed that the document included provisions that contradicted the legislation and policy of Mongolia; therefore, it cannot be implemented. The Khan’s statement on setting up the JV and obtaining licenses to use subsoil resources of Dornod deposit is false and misleads the market and investment community. The Mongolian government did not approve that memorandum. According to the Mongolian law on atomic energy, the licenses are not to be reissued until at least 51% of the uranium miner’s shares have been actually transferred to become a property of the Mongolian government. The said memorandum has no legal force and was not agreed upon by the MonAtom’s board of directors; moreover, it was signed regardless of Mongolia’s international commitments on the joint development of Dornod Deposit with Russia under the intergovernmental agreement concerning the setting up the Dornod Uran Ltd. signed on August 25, 2009.

Q: Khan announced that it has an arrangement with the Chinese CNNC on selling all shares at a price that was one and a half times lower than you had offered. Will you raise your price?

VZ: Technically, we have extended validity period of our offer regarding the buying of Khan Resources’ shares till March 1. We need to assess the situation and make a decision on how to make the deal at commercially beneficial terms and within a fair price when there is a rivaling offer made by CNNC. If we look at the situation from the point of view of the world uranium mining, we are a part of SC Rosatom, a public company with vast uranium reserves and enterprises on three continents of the Earth; we cooperate and continue the cooperation with Mongolia on a mutually beneficial interstate basis. But when a small Canadian company has interfered all of a sudden and decides to play a wildcatting game, quite a different talk starts.

Q: You have mentioned the government had helped ARMZ in Kazakhstan-related projects. Do you hope for a help in Mongolia?

VZ: I would reemphasize that the State Corporation Rosatom and its uranium mining division JSC Atomredmetzoloto acted and act in frames of existing agreements between the heads of states and governments of Russia and Mongolia.

Q: Does ARMZ have a plan of further acquisitions?

VZ: We are not alone in the market of mergers and take-overs and have to take account of the competitive environment. Cameco has just sold its gold mining assets having raised hundreds of millions of dollars. Areva has also sold some of its assets. As a result, our competitors have large resources for further expansion. Our strategy is not unique. Areva is also diversifying its mineral feed sources and expands its global presence. Due to a number of problems with developing own deposits, Cameco is also considering opportunities for diversification of its sources. We are negotiating with many market stakeholders, but it is an uneasy process. However, we are firmly sticking to our path. Though, there are many barriers for a Russian public company in the merger and take-over market. The corporation legislation is one of them. In Australia and Canada, when you buy a certain package you need to make a proposal on the consolidation of the entire company. This needs to be supported by the board of directors; there are many other procedures. Being a Russian company, we must coordinate all our acquisitions with regulators of the countries which host companies which assets we would like to buy. For example, to make the deal with Uranium One we sought for approval from the regulators in Kazakhstan, Australia, the USA and Canada.

Q: Whom do you specifically negotiate with?

VZ: I wouldn’t like to name the companies because we are bound by confidentiality agreements.

Q: Whom do you have to compete with, in addition to Areva and Cameco, in the merger and take-over market?

VZ: With South Korean, Chinese, Indian, Japanese companies. In some cases, even with juniors. It would be easier to say who are not competitors. It is well-known what nuclear development programs have been announced in South East Asia. Building of hundreds reactors implies secured resources. Meantime, these countries have insufficient resources. Therefore, there is a tough competition.

Q: What competitive advantages does ARMZ have in this struggle?

VZ: Firstly, we are a part of SC Rosatom which has a colossal nuclear construction program in Russia and abroad. Therefore, we can guarantee a stable demand for natural uranium. Secondly, we are miners rather than a financial investor; we mine uranium using all techniques available: underground, heal leaching, in-situ leaching, we mine at minus 50 degrees Celsius. We incorporate the largest designer-company VNIPIpromtekhnologii. We come with our expertise and necessary resources. SC Rosatom has about 49% of the world enrichment capacities. Therefore, when we come to a uranium mining asset we ensure enrichment for the potential uranium buyer, as well. And these are critically vital technologies which only a limited number of countries have...

Q: Does ARMZ need additional cash from SC Rosatom for new buys? In 2009 the company has received RUB50bn (about US$ 1.6bn) and then another RUB14.2bn (about US$468.6m). Could you expect more additional subsidies?

VZ: When we select assets and deal-making options, the actual financing of our investment program from the federal budget imposes special responsibility on us. For us it is essential that the deals we make would be economically effective and create added value for our shareholders. An example can be the deal to acquire Effective Energy N.V. and subsequent exchange of its assets for the package of Uranium One shares. In January, the stock exchange value of 117 mln of common shares of Uranium One we had acquired exceeded US$390m. Given US$90m of the cash compensation received from the Canadian company, the deal cost its money. And, in addition to a share in TOO Karatau, we, having acquired Effective Energy N.V., also got 25% minus one share of Akbastau and, by this, have consolidated the Russian share in this JV which is actively developing... As a result, commercial effectiveness of these deals is apparent.

Q: It seems it is beneficial for ARMZ to remain a part of SC Rosatom rather than to become a private company?

VZ: We can become a private company, while remaining a part of SC Rosatom. For example, in PIMCU we have about 79% of interest. Certainly, it would be more beneficial for Uranium Holding ARMZ that the controlling block, as maximum, of stock is owned by the state.

Q: And the rest can be offered to investors on the stock exchange?

VZ: It is difficult to say. We operate within the nuclear industry legislation, which assumes that our company is owned by the state.

Q: Could this situation change?

VZ: There is no need so far. The company becomes a private one when it needs funds and has a strategy that is different from ours. Today, the state provides for all prerequisites for the company development. ARMZ is the only miner which is 100% owned by the state. Add here, we are a part of the state corporation which today stands on the verge of innovative development of economy. Moreover, we are a profitable company and the state has no reason to refuse this profit. That is why, as of today, I see no any reasons to sell a part of our company to private investors.

Q: Did you evaluate the company in some way; how much does it cost?

VZ: Numbers are not officials and there is no sense to voice them. But we believe, billions of dollars.

Q: So far, you are the only uranium miner in Russia. Could any competitors appear?

VZ: Why not? There are a number of companies which are working to obtain relevant licenses. Certainly, it is interesting but is not easy everywhere. For example, in Australia a number of such licenses are limited, in principle. It takes years and years to get a license in the USA. To a certain extend we are interested in licensed uranium mining partners to spin off, because we have difficult-to-develop deposits. Our company employs more than 14,000 people; the business is expanding with years. With new stakeholders coming in, it would be easier for us to develop small properties. We already have a cooperation experience, i.e. Lunnoye deposit where we work with Zoloto Seligdara. This is one of largest companies, a perfect property operator. We demonstrate viability of such public-private partnerships to the business community. The more such companies exist, the easier for us would be to develop the mineral basis of the country.

Q: Who could be your partner for Elkonsky Deposit development?

VZ: We negotiated with different companies, including Russian ones. Today, we are interested in strategic players in the market, in the first place. For example, Mitsui. The cooperation with such players would allow SC Rosatom expanding its presence in the market of products resulted from advanced process stages. We are not in a hurry to select the partner; each day of our work must add to the project capitalization and cost of entering it for the investor.

Q: How much uranium does ARMZ delivers to SC Rosatom and how much of it is sold in the market?

VZ: First of all, we meet the needs of the Russian nuclear industry; this is our top priority. However, if our mining output exceeds SC Rosatom’s needs, we could sell the surplus in the external market. We entered the world natural uranium market last year. In 2009 a share of Techsnabexport-targeted deliveries was about 12% in the total sales volume, with TVEL had over 70%, and the rest was sold to market players.

Q: How do you determine the price for SC Rosatom’s divisions?

VZ: Today, when doing pricing, we get oriented by market quotes, and commencing 2011, we plan to fully shift to market relations.

Q: What would happen with the uranium business and ARMZ when the world uranium resources exhaust?

VZ: It is of vital importance for us to retain prices for uranium at the levels that allow financing necessary exploration and construction of new factories in full. In this case we cannot speak of a natural uranium deficit in the next decades.

Q: Did you work in private companies? Is it more difficult in a public one?

VZ: Personally, it is more interesting and, certainly, more difficult. I think the transition to a public company from a private one is one step up. Because of a scale of tasks, first of all. At the same time, many things are easier to accomplish in here. The weight and the state machine give the assurance in tomorrow and even the day after tomorrow. The lessons you learn in non-public business are very interesting if applied in a public company. This is a natural process, i.e. the transition from one stair to a position in a large public company like SC Rosatom or ARMZ.

Published by i On Global Trends - Mike Hitchen Online - news, opinion, analysis
See also Sydney Irresistible and for personal comment, Mike Hitchen Unleashed
Putting principles before profits