TORONTO (miningweekly.com) – After a tumultuous first year or so at the helm, delivering solid good news to the market in the early part of this year was like a novel but highly gratifying experience for Uranium One CEO Jean Nortier.
The Vancouver-based miner, which reported a spate of production cuts and writedowns and eventually closed a disappointing South African mine in October 2008, began this year with its tail in the air.
The firm achieved record sales for the first three months and watched its share price swell 84% between January 1 and May 26.
Unfortunately, just as investors and analysts were starting to warm to the idea that the company had put the dark days of negative surprises behind it, Uranium One is once again making headlines for the wrong reasons.
On May 27, an unfolding scandal in Kazakhstan, where all its producing assets are located, sent the company’s share price plummeting by a heart-wrenching 40% by the time trading closed in Toronto.
Investors were spooked by news that a Kazakh security agency is investigating illegal sales of uranium assets to foreign companies, despite assurances by Nortier that any perceived link to the company and its operations is “a big misunderstanding”.
After arresting the head of State uranium company (and Uranium One’s joint venture partner on all three Kazakh assets) Kazatomprom, Kazakhstan’s National Security Committee (KNB) said that it was investigating deals made by the disgraced CEO, who had “illegally” sold stakes in uranium assets.
The KNB said that the sale of 30% in the Kyzylkum joint venture, which owns the Kharasan mine, was one of the transactions being investigated.
“Well, we do own a 30% stake in Kyzylkum, but we most certainly did not buy it from Kazatomprom,” a patently frustrated Nortier tells Mining Weekly.
“We are not worried about this at all,” he asserted.
At the time of going to press, the firm was seeking an explanation and had requested a high-level meeting with the new leadership of Kazatomprom.
TSX- and JSE-listed Uranium One acquired its Kazakh assets when it bought Canada’s UrAsia Energy in 2007.
UrAsia bought the Kyzylkum stake from a group of private investors for $75-million, and both transactions were approved by the government at the time, Nortier says.
FUNDAMENTALS REMAIN
Despite the sharp share price decline, some of which had already been recouped at the time of going to press, Nortier emphasises that Uranium One’s mines and the company’s fundamentals are strong.
The firm has two low-cost operations running smoothly in Kazakhstan and one more ramping up, a new mine under construction in Australia, and plans to start production in the US within a couple of years.
The Vancouver-based miner will also boast nice and heavy pockets in the coming months, after agreeing to sell a 19,95% stake in the company to a Japanese consortium for C$270-million.
The agreement with Tokyo Electric Power Company, Toshiba Corporation and the Japan Bank for International Cooperation also includes an offtake option on up to 20% of Uranium One’s available production from assets where it has the right to market output.
The private placement transaction is scheduled to close by midyear, and add to the firm’s cash and cash-equivalent reserves of some $200-million at the end of the first quarter.
Nortier tells Mining Weekly that Uranium One would like to use its strong balance sheet to acquire additional low-cost uranium assets, and is particularly keen on opportunities in Africa.
On the other hand, the firm is also not wanting for internal growth prospects, with mines and projects spanning three continents, and the extra cash could also go towards speeding up development of the company’s assets in the Powder River and Moor Ranch basins, in Wyoming, in the US.
Based on currently installed capacity, Uranium One’s share of production from its three operations in Kazakhstan will eventually be seven-million pounds a year.
“Add to that some two-million to four- million pounds from Wyoming and our share of production from Honeymoon, in Australia, and we are targeting production of around 10-million pounds of uranium a year,” Nortier comments.
ROBUST OUTLOOK
There is no denying that 2008 was a tough year for Uranium One.
Besides the problems with the now-shuttered Dominion mine, the firm suffered when the spot uranium prices – to which most of the company’s sales are linked – dropped heavily in the second half of the year, and also had to battle supply shortages of the sulphuric acid that it uses in its in situ leach operations.
Now, however, the acid supply situation has eased considerably, to the point where deliveries are exceeding expectations, which was one of the reasons for the strong operational performance during the early months of this year, COO Steve Magnuson told analysts and investors on the company’s earnings conference call this month.
Uranium One is also taking the matter into its own hands, by participating in the construction of a new sulphuric acid plant in Kazakhstan, in which it will have a 19% interest.
Further, despite recent volatility and weakness in the spot price for the nuclear fuel, Nortier is adamant that the supply-demand metrics in the uranium industry remain “robust”.
“We still do think that we should see a medium- to long-term rise in the uranium price, simply because there will not be enough uranium to meet the demand that will be out there.”
The spot price of uranium, which touched an all-time high of $136/lb in 2007, decreased during the first quarter of this year from $53/lb at the end of December, to $42/lb on March 31, and continued to decline to as low as $40/lb in April.
The price had strengthened to $51/lb at the time of going to press.
However, the longer-term price for uranium sales contracts has remained relatively flat, at around $70/lb over the past several months.
Nortier says that he expects the so-called spot and term prices will move closer together.
“The fact that they have departed from each other in the way that they have done over the last 18 months to two years is a little bit of an anomaly.
“So, although there will still be volatility, I think that you are going to see the two tracks much closer to each other.”
He points out that, with some 95% of its existing contract book related to the spot price at the time of delivery, Uranium One provides “excellent leverage” to future gains in the uranium price.
The company currently has sales contracts for 25-million pounds on an attributable basis, 16-million pounds of which has floor price protection at a weighted average floor price of about $47/lb.
However, the company expects to put in increased floor price protection as it signs new contracts, and also expects to enter into more fixed-price contracts.
The reason for this is simple: “Most of the world’s uranium at the moment gets sold on term contracts, so for us to be able to sell our uranium, we will have to look at more term contracts,” Nortier tells Mining Weekly.
The firm does not want to disclose the mix of fixed- and spot-price contracts it expects to achieve, but Nortier points out that it would still take a long time for the pendulum to swing to a majority of term contracts.
UPS AND DOWNS
Uranium One was created by Nortier’s predecessor – Neal Froneman – in 2005, when he merged what was then Aflease Gold & Uranium Resources with Canada’s Southern Cross Resources, and spun out the South African firm’s gold assets into a new vehicle called Aflease Gold.
The combined uranium company was named sxr Uranium One, and boasted the South African Dominion project as its flagship asset.
Two years later, Froneman brokered another deal, this time to acquire UrAsia. The enlarged company dropped the ‘sxr’ from its name a few months later.
Back in South Africa, Dominion started production in 2007, amid predictions from Froneman that the mine would grow to rival BHP Billiton’s mammoth uranium and copper Olympic Dam mine, in Australia.
However, the jubilation was short lived, and the mine started missing targets, which meant that Uranium One was forced to lower its production forecasts repeatedly, beginning in November 2007, when it chopped its 2008 guidance from 7,4-million pounds, to 4,6- million pounds, although the acid shortage was also partly to blame for the cuts.
Nortier was appointed interim CEO after Froneman resigned suddenly in February, and the appointment was made permanent in August.
At the end of the day, the group produced just 2,86-million pounds of yellowcake last year, after putting the Dominion mine on care and maintenance in October, with the project yet to achieve commercial production.
EYES ON AFRICA
Operationally, at least, this year promises to be a different story.
Five months into the year, Uranium One is sticking to its production forecast of 3,5-million pounds, and the cash injection from its new Japanese partners will mean that it is well positioned to take advantage of any acquisition opportunities that crop up.
Nortier says that, although the company’s current operations all use in situ leach technology, the firm will not exclude buying conventional uranium mining assets.
“From a geography perspective, what interests us is the fact that more than half of the world’s uranium will be mined out of Kazakhstan and Africa from around 2010 forward,” he tells Mining Weekly.
“We obviously already have a good footprint in Kazakhstan, and I think that Africa is an interesting place to be.”
One thing the firm is not looking at is greenfield opportunities, but everything else is fair game, he indicates.
As for Uranium One’s existing African asset – the beleaguered Dominion operation – Nortier says the company continues to have discussions with potential buyers for the mine.
There are some parties conducting due diligence on the project, and others have indicated they would like to begin due diligence, but Nortier is hesitant to comment on how long it could take before the mine’s fate is decided.
“To be honest, it is not the most important thing for us right now.”
Depending on how the negotiations unfold with prospective buyers, Uranium One could also consider holding onto the asset and keeping it on care and maintenance for an extended period, until market con- ditions warrant reopening it.
However, because of South Africa’s ‘use it or lose it’ legislation governing mineral rights, this would require a special concession to be made by government.
According to the law, companies must either develop a resource or give it up.
“But in this economic climate, that is not the best outcome for either Dominion or a number of other mines,” Nortier argues.
The company has not raised the issue with government, but might consider initiating discussions, depending on how the due diligence processes develop.
KAZAKHSTAN
Uranium One has three main assets in Kazakhstan: 70% stakes in the Akdala and South Inkai mines, as well as the 30% in Kharasan.
At Akdala, where Uranium One’s share of production in the first quarter was 455 800 lb, a precipitation and filtration circuit installed last year helped to curtail overall production costs, particularly after recent gains in off-site processing costs, Magnuson says.
The mine reported costs of just $13/lb, compared with $15/lb in the last three months of 2008.
Later this year, Uranium One expects Akdala will be also able to use excess drying capacity being installed at South Inkai, which will reduce the need to use third-party processing facilities for drying and calcining.
Commercial production has been declared at South Inkai, effective January 1, and the operation is expected to ramp up to an attributable production rate of 3,6-million pounds a year by 2011.
The well-acidification programme at South Inkai is actually about one month ahead of schedule, thanks to better-than-expected sulphuric acid deliveries, says Magnuson.
Inventories are expected to increase during the second quarter, as South Inkai ramps up and because most of the remaining sales for 2009 are scheduled to take place in the second half of the year.
At the moment, converting production into cash takes four to six months, taking into account transportation and shipping timelines, as well as contract terms for payment from Uranium One’s utility customers.
The company’s third mine in Kazakhstan is Kharasan, in which it owns 30% and the balance is held by State-owned Kazatomprom (30%) and by a Japanese consortium.
Last month, Nortier attended the ceremonial opening of the mine, along with Kazakh Prime Minister Karim Masimov, the CEO of Kazatomprom and senior executives, including the CEO of Toshiba.
The mine will ramp up to a full design capacity of 1,6-million pounds attributable to Uranium One, by 2012.
The project has run into some early hiccups, but a study launched in December concluded that the underperformance and slower-than-anticipated ramp-up was caused by a misinterpretation of the geology and “unsatisfactory controls” over well installation, says Magnuson.
Experienced personnel have since been appointed, the wellfield has been reinterpreted and modifications are being made to a number of drill holes.
By the end of the first quarter, half of the required number of holes had been installed, and additional drill rigs have also been deployed to assist in the ongoing programme.
The changes have already had a positive effect, and the concentration of uranium in solution has been increasing so far in the second quarter, Magnuson reports.
The operation currently has an installed capacity of 2 000 t/y, but the partners plan to increase the metallurgical processing capacity to up to 3 000 t/y, potentially by 2014.
NEW TAX REGIME
As of January 1, Kazakhstan introduced a new mineral tax regime, which will see some taxes decreasing, while others show up under the cost-of-sales column.
The corporate income tax rate has decreased from 30% to 20% this year, which will be followed by a further reduction to 17,5% in 2010, says Uranium One CFO Robin Merrifield.
From 2011 onwards, the corporate income tax rate will be 15%.
However, the country has introduced a new mineral extraction tax (MET), which will be reported as an element of cash costs, and will be calculated based on the cost structure at each mine.
At Akdala, the MET is expected to comprise $2/lb of the forecast total cost of $16/lb for this year, and at South Inkai Uranium One’s guidance for the average cash cost per pound sold in 2009 is now $22/lb, including about $4/lb of MET.
The third significant component of the new tax regime is the excessive profits tax (EPT), although there remains uncertainty regarding the interpretation and the applicability of the new tax code with respect to this tax, says Merrifield.
Based on what Uranium One believes are “reasonable estimates”, the life-of-mine average EPT rate for the company’s operations in Kazakhstan is expected to be about 22%.
WYOMING
In the US, Uranium One recently completed a new conceptual plan that envisages a central processing plant in each of the Powder River and Great Divide basins of Wyoming.
The company plans to spend $21-million this year on its Wyoming assets, and is aiming to produce between two-million and four-million pounds a year of yellowcake in the US within five years.
At the Moore Ranch project, in the Powder River Basin, the company expects to receive a licence and a permit by the end of this year to construct and operate a facility with an annual production capacity of two-million pounds a year of uranium.
If all goes to plan, this would put the company on schedule to begin production during 2011.
Any excess plant capacity would be used to process uranium-bearing resins from other Uranium One properties in the Powder River Basin, and the company plans to submit licence and permit applications for its Ludeman project to the authorities during the second quarter.
The Ludeman project will be licensed as three satellite operations that can feed either the Moore Ranch central processing plant or another plant.
In the Great Divide Basin, the permitting process with the US Nuclear Regulatory Commission and the Wyoming Department of Environmental Quality for Uranium One’s JAB and Antelope projects is continuing.
The firm also plans to build a two-million pound-a-year central processing facility at Antelope, with a satellite facility at JAB.
HONEYMOON DOWN UNDER
Finally, in Australia, major construction work has now begun on the Honeymoon mine, with first production expected in the second half of 2010.
Last year, Uranium One agreed to sell 49% of its Honeymoon project and other exploration prospects in Australia to Tokyo-based Mitsui & Co, for at least A$104-million.
The capital estimate to complete construction of the mine is A$118-million, of which some A$42-million has already been spent, Magnuson said earlier this month.
The project has a design capacity of 880 000 lb/y with an expected project life, including initial production ramp-up, of about six years. |
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