Annual Report / 2018


Kazatomprom’s mission is to develop uranium deposits and the components of the uranium value chain, creating long-term value for all of the Company’s stakeholders, in accordance with the principles of sustainable development.

Kazatomprom’s vision is to become the preferred partner of the global nuclear industry. This vision allows the Company to operate in step with the priorities of its customers and partners in the industry.

In 2018, the Company adopted a new development strategy, focusing on five strategic objectives for 2018-2028:

  1. Focus on uranium mining as the main activity;
  2. Optimise production, processing and sales based on market conditions;
  3. Create value by enhancing the marketing function and expanding sales channels;
  4. Apply best practices in business activities;
  5. Develop a corporate ethics culture commensurate with an industry leader.

Focus on mining
operations as the core

Kazatomprom’s core business activity is uranium mining. The Company believes that mining — in particular, the ISR extraction method — is the most attractive segment of the nuclear-fuel value chain in terms of sustainable profitability and returns on capital. It further expects it to remain so for as long as current market fundamentals persist. The Company’s access to ISR-conducive uranium deposits in Kazakhstan gives it a natural competitive advantage in ISR uranium mining. Accordingly, Kazatomprom intends to maintain its primary focus on its uranium mining operations, while retaining the option to expand its presence in other segments of the front-end cycle, such as conversion, as well as in its rare metals operations.

To streamline its operations, Kazatomprom has progressively disposed of a significant number of non-core assets, including– more than 30 non-core subsidiaries over the past five years. Most recently, these included MAEK, the utility company, which accounted for a material portion of the Group’s revenue (but a small share of profit) in the periods under review. The Company aims to complete its non-core asset disposal programme by the end of 2019.

Kazatomprom has also increased its interest in a select number of uranium mining joint ventures. Most notably, as of 1 January 2018, it increased its equity stake in its joint venture with Cameco, JV Inkai LLP, from 40% to 60%, while in December 2018, it raised its equity stake in Baiken-U LLP, a joint venture with the Energy Asia Limited consortium, from 5.0% to 52.5% and increased its equity interest in JV Kharasan-U LLP, a joint venture with RosAtom and Marubeni Corporation, from around 34% to 50%.

Kazatomprom is currently engaged in the construction of a fuel assembly plant in Kazakhstan together with China General Nuclear (CGN). Expansion into new segments of the nuclear value chain could allow Kazatomprom to offer a broader range of products to its customers and capture additional margins. The Company may consider further strengthening its market position by selectively acquiring or investing in high-quality assets in the nuclear-fuel chain.

Continue to pursue a market-centric
approach to uranium production, optimizing
production, processing and sales
volumes based on market conditions

In the past two years, Kazatomprom has substantially changed its strategic approach to become a market-centric, rather than a production-led operator. Crucially, this involves setting production targets based upon market and sales-volume forecasts, as well as adapting production plans to changing market conditions.

The Group’s use of ISR technology allows it to respond to changes in uranium market conditions by ramping up or reducing its uranium production far more rapidly and cost effectively than most of its peers, which rely on conventional mining methods to develop non-ISR-amenable deposits. The Group’s uranium deposits can be developed exclusively using ISR technology, giving it the flexibility to react rapidly to uranium market prices and adjust its production accordingly, without a meaningful impact on the per-unit cost of production.

For example, in the year ended 31 December 2017, the Group cut its uranium output by 8% from the previous year. In November 2017, it announced its intention to reduce its planned contractual obligations production volumes by 20% for 2018–2020. While the Company’s production plans beyond 2020 currently envisage a return to ‘pre-production-cut’ levels, the Company enjoys full technical and legal flexibility to keep production at reduced levels if market conditions dictate, as long as any amendments to its subsoil-use agreements with the Government are approved.

Continue to enhance sales
and marketing capabilities and optimise
the contracts portfolio

Kazatomprom has strengthened a number of areas of its sales and marketing function over the past two years. Notably, it has created a new sales channel through its wholly owned subsidiary THK in Switzerland, allowing it to engage with new categories of customer, such as US-based utility companies, which prefer to purchase uranium on the spot market. THK has also enhanced the Company’s analytical capability, enabling it to undertake arbitrage operations, and facilitating its expansion into the short-term/spot market, which requires significant operational flexibility. Moreover, Kazatomprom has expanded its physical sales presence in each of its main target regions and will continue to strengthen this sales network.

In addition, with the launch of THK’s operations in 2017, Kazatomprom became able to offer complex sales-formula pricing terms to its customers. The Company plans to build on these capabilities and offer customers a wider range of pricing options than it could before, due to certain limitations of Kazakhstan’s legislation.

The Company stopped its sales to uranium traders in 2016, in line with its strategy to bypass intermediaries and build direct relationships with customers that are contracting smaller amounts.

Maintain global leadership
in the uranium mining industry
through operational excellence

Kazatomprom prides itself on being the world’s leading uranium producer and seeks to build on this standing in future in terms of scale, operating efficiency and innovation. It intends to continue investing in the exploration and development of its reserve base to ensure sustainable low-cost production from its mines in the long term, while its current reserve base allows it to maintain current production levels for around 15 years.

The Company views its low production costs as a key competitive advantage and plans to work continuously on sustaining its attractive position on the global uranium-mining cost curve. Kazatomprom intends to achieve this by continuing to optimise its mining development plans and stringent cost controls. The Company takes a disciplined approach to production planning, focusing overwhelmingly on value and economic returns rather than maximizing production volumes.

Kazatomprom remains focused on the ongoing optimisation and digitalisation of its business processes and the further strengthening of its sales and marketing function. Kazatomprom continues to follow its Transformation Initiative for 2016 to 2025, aimed at increasing the transparency, efficiency and harmonisation of processes across the Company.

Develop an ethics culture commensurate with
an industry leader and continue to improve health,
labour and environmental policies in line with
global best practices

Kazatomprom is committed to best health and safety practices and these will remain of paramount importance to the management team going forward. Kazatomprom strives to be an employer of choice in Kazakhstan. It aims to ensure that its facilities are a completely safe working environment and that they are not inflicting damage on Kazakhstan’s natural ecosystem. Furthermore, the Company has signed up to the international Vision Zero movement to promote zero work-related injuries and is focused on maintaining a low lost time injury frequency rate and the lowest possible level of occupational accidents. In 2016-2017 Kazatomprom stepped up its investment in health and safety from KZT 5.1 billion in 2015 to more than KZT 7.1 billion in 2017 and will continue to increase this investment in the coming years.

KZT billion
investments in labour protection and occupational safety in 2018

Another one of the Kazatomprom’s strategic priorities is to ensure a balance between shareholder income and optimal capital structure. The Company runs high-margin and cash-generative operations with a relatively limited capital-expenditure profile for expansion and low leverage. Kazatomprom will, therefore, seek to pay dividends to its shareholders, while preserving a conservative balance-sheet structure that allows it to maintain a comfortable leverage level in case of adverse changes in commodity prices. The Company’s dividend policy is to distribute no less than 75% of its free cash flow if the Company’s leverage ratio is below or equal to 1.0x net debt/adjusted EBITDA and no less than 50% of its free cash flow if the ratio is above 1.0x and below 1.5x net debt/adjusted EBITDA.

Review of Company development strategy
implementation in 2018

Strategic goals Steps towards strategic goal implementation in 2018

To focus on the core business

  • The acquisition of a 40.05% stake in Energy Asia (BVI) Limited (47.5% in Baiken-U LLP and 20% in Kyzylkum LLP) and 16.02% of the share capital of JV Kharasan-U LLP was completed.
  • The increase in reserves in 2018 amounted to 96,057 tonnes, including in category C1 — 50,747 tonnes, C2 — 45,310 tonnes.
  • A Portfolio of investment projects of the Company for 2018 have been formed in accordance with the key provisions of Investment Policy of the Company

To optimise production, processing and sales based on market conditions

  • Based on forecasts of uranium market needs for 2018, the Company reduced its volume of uranium mined by 20% relative to planned volumes for 2018 set out in its subsurface use contracts.

To create value by enhancing the marketing function and expanding the sales channels

  • The Company developed and implemented a methodological base of procedures, methods, questionnaires, and standard forms of purchase and sale agreements aimed at strengthening marketing functions.
  • Planned uranium sales revenue was exceeded by 5% due to an increase in the customer base, as the Company attracted new customers in the US, Europe and South Korea, expanded the geography of uranium supplies, stopped uranium sales to traders, sold uranium derivative instruments and optimised its uranium sales-contract portfolio.

To apply best practices in business activities

  • In the area of occupational safety, processes were put in place for conducting behavioural safety audits and for identifying hazardous conditions and actions, or potentially dangerous near-miss accidents. Some 1,800 audits were conducted and 6,200 near misses registered.
  • The use of alternative chemical reagents in the process of manufacturing finished uranium products achieved savings of KZT 109.2 million.
  • The economic effect of cost optimisation in the construction of production wells amounted to KZT 107.6 million.
  • The Company developed and approved its IT strategy.
  • The Company carried out a primary inventory of digitisation projects and created a list of future priority projects.
  • The Company is implementing a portfolio approach to investment activities, in this regards the methodology on the portfolio project management have been developed and approved in 2018.
  • Twelve business processes (some automated) were implemented in the Corporate Centre and its subsidiaries. As of the end of the year, coverage corresponded to 32% of all business-process reengineering planned until 2021, in accordance with the Company’s transformation programme charter.
  • SAP ERP and EIS information systems were implemented in the Corporate Centre, as well as in certain individual subsidiaries and affiliates.
  • Supporting the International Social Security Association (ISSA) initiative to improve safety, health and well-being at work, the Company is registered as a member of the international Vision Zero program. This participation reflects the Company’s conviction that a strong safety culture can reduce accidents, injuries and illnesses at work.

To develop an ethics culture commensurate with an industry leader

  • The Company updated and approved its Human Resources (HR) Policy for 2018-2028 based on global industry best practices, designing a system of principles, key directions, approaches and human-resource management methodology based on business needs.
  • The Company formulated and approved a system of corporate values and began its dissemination to employees.
  • The Company improved its corporate governance in accordance with best international practices (based on the recommendations of independent consultants), ensuring that its corporate-governance rating was maintained.
  • Educational programme has been deployed.