Annual Report / 2018

Geography and
Target Markets

Mineral
assets

The Company’s mineral assets are located in four main administrative regions of Kazakhstan (Figure 2): the Kyzylorda Region (Shieli and Zhanakorgan districts), the Turkestan Region (Sozak and Otyrar districts), the North Kazakhstan Region (Ualikhanov district) and the Akmola region (Enbekshilder district) (Figure: Location of mineral assets and mining and processing facilities).


Location of mineral assets
and mining and processing
facilities



Kazakhstan’s uranium
provinces and distribution
of uranium reserves

Uranium deposits in Kazakhstan are grouped into six
uranium provinces (Figure: Kazakhstan’s uranium provinces
and distribution of uranium reserves).



With the exception of the Semyzbay field in Northern Kazakhstan, which is located in the North Kazakhstani and Akmola regions, the Company’s fields are located in the south of Kazakhstan in the Shu-Sarysu (8) and Syrdarya (5) provinces. All mines are located in areas that are sparsely populated and have minimal vegetation cover.

Natural vegetation in mine areas varies from desert to shrub and steppe. Only six mines are located within 10km of human settlements, all of them villages. In all regions, the climate is continental, with hot summers, harsh winters and little rainfall (300mm or less).



Uranium
products market

The key factor affecting the Company’s financial results is the sales price for uranium products, as the uranium segment accounted for 84% of consolidated revenues in 2018.

Although the average annual sales price of a uranium producer depends upon the structure of sales (in particular, the share of deliveries under long-term contracts and price formulae used in each contract), in the long term, the market price for uranium products is determined by the balance of supply and demand. Based on the opinion of industry experts, Kazatomprom expects that in the long term, nuclear power, as a stable source of meeting base-load electricity demand not associated with greenhouse gas emissions, will maintain and strengthen its position in the overall structure of growing energy production, which will ensure growth in demand for uranium energy products. This, in turn, will lead to a rise in prices for these products from current levels; prices have been depressed by declining demand for uranium following the accident at the Fukushima power station in 2011, against a backdrop of rising global uranium production in previous years. A detailed analysis of factors affecting the price of uranium products is provided in the ‘industry overview’ section of the Kazatomprom IPO Prospectus.


Spot prices for uranium, 2000-2018, Source: UxC



On the demand side of the uranium products market in 2018, multidirectional factors were at play. Consumer sentiment was dented by uncertainty surrounding the ongoing investigation under Section 232 of the United States Trade Expansion Act, which could limit the access of US operators of nuclear power plants to imported uranium if it were to lead to the introduction of quotas or customs duties. In terms of the prospects for introducing additional generating capacity, demand for construction during the year was affected, on the one hand, by the delay in the construction of a nuclear reactor in the United Arab Emirates and the slow pace of restarting Japan’s reactors and, on the other, by a delay in plans to reduce the proportion of nuclear energy in France and popular opposition to plans to abandon nuclear power in Taiwan and South Korea. The persistence of an uncertain situation on the demand side led to low activity in the market for medium-term and long-term contracts: the long-term U3O8 price stagnated at around USD 30 per pound, with a small volume of purchases — just over 90 million pounds of U3O8 — significantly less than annual consumption.

On the supply side, an important factor was the reduction in supply and investment in the expansion of uranium production from the largest global producers, including Kazatomprom, as well as in supply from secondary sources. As a result, after a long period of market oversupply, in 2018, there was a shift towards market balance, or even a small deficit. As a result, in the spot market in 2018, there was an increase in price from USD 24 to almost USD 29 per pound of U3O8, with high trading volumes.


Realisation
and sales

Customers

The Group sells its products to more than 22 customers in 11 countries.

2018, the Company’s top three and top five uranium-product customers accounted for 45% and 62% of Group revenues, respectively.

In May 2018, the Company entered into a supply agreement with Yellow Cake plc, a long-term corporate buyer and holder of uranium, listed on LSE AIM. Under the agreement, the Company initially supplied 8.1 million pounds (or about 3,112 tonnes) of U3O8 worth USD 170 million and Yellow Cake will have the right to purchase additional U3O8 to a cap of USD 100 million annually from 2019 to 2027.

The Group estimates that there are around 70 end-users of uranium globally. The company is seeking to expand its client base and is negotiating with potential customers in Europe, North and South America and the Middle East.

The following table shows the geographical distribution of customers for the Group’s uranium products by revenue for the calendar years 2015 to 2018.


Group sales of uranium products by region,
2015–2018 (%)

  Year ended December 31
Regions 2015 2016 2017 2018
China 44% 47% 60% 34%
Europe 19% 16% 18% 9.2%
India 11% 8% 23.2%
South Korea 3% 6% 4%
USA 20% 12% 4% 4.5%
Other(1) 14% 8% 6% 29.1%
TOTAL 100% 100% 100% 100%

(1) Sales to other countries, to uranium funds and THK sales on the cash market.

Realisation and marketing

In 2017, Kazatomprom established Trading House Kazakatom AG (THK), a subsidiary trading company based in Switzerland, to improve the Company’s marketing function, strengthen its cooperation with partners, facilitate sales of uranium and uranium products in Kazakhstan and, more generally, increase the Company’s global reach. THK’s key activities are:

  • The sale and purchase of uranium in the cash market with the aim of generating additional profit, thanks to THK’s quick decision-making procedures;
  • Assistance in creating additional liquidity in the spot uranium market and improving the reliability of the Kazatomprom portfolio of contracts for uranium mining; and
  • Improving the global reach of the Company in the uranium market by offering a wider choice of pricing and contractual structures and providing additional market tools for Kazatomprom customers, such as offer kits and more flexible pricing structures.

Since its launch, THK has helped Kazatomprom to enjoy some tangible benefits in the uranium market. Notably, THK achieved additional spot sales on the cash market of more than USD 80 million for the year ended 31 December 2018. THK also acquired new customers for the Company during this period and concluded a number of long-term contracts for the supply of uranium (with the term of some contracts concluding in 2029).

The Company believes that, due to the scope of work and coverage of THK, the Company can more easily understand both sides of the global uranium market: the demand side, as the leading producer and seller of natural uranium, and the supply side. As a result, Kazatomprom can get a better sense of the market, improving its analytical capabilities and allowing management to make more informed decisions.


Transportation

Transportation of U3O8 is carried out in special 20-foot sealed containers and any such load is accompanied by security personnel until it reaches its destination. The Company insures risks associated with the transportation of uranium.

The Group delivers U3O8 and finished products to the following destinations for conversion or to end customers:

  • Western countries. The Group transports U3O8 to companies such as ConverDyn (US), Cameco (Canada) and Comurhex (France) by rail to the port of St. Petersburg in Russia, then by sea to various ports in the US, Canada and Europe, then, finally, by rail or road to the processing facilities in question. In some cases, the Group enters into swap (exchange) agreements to reduce transportation costs. These can include the exchange of U3O8 with partners of the Group at the conversion facility. Please see the following section on ‘realisation and sales’ for more.
  • China. When transporting materials to China, the Company delivers its cargo to the Alashankou railway station near the Kazakhstan-China border.
  • Russia. When shipping to the Russian Federation — recipients include Angarsk Electrolysis and Chemical Combine OJSC (AECC)), Siberian Chemical Combine OJSC (SCC) and Chepetsk Mechanical Plant OJSC (Rosatom) — the Group delivers its cargo to the Sukhovskaia railway station for delivery to AECC in Angarsk, to the Tomsk-2 railway station for delivery to the Siberian Chemical Combine in the city of Seversk, and to the Glazov railway station for delivery to the base of the Chepetsk Mechanical Plant OJSC (Rosatom) in Glazov.
  • India. The company delivers U3O8 to destinations in India by rail to the port in St. Petersburg, Russia, and then by sea to the port of Mumbai, India. From the port of Mumbai, the client organises their own transport to the destination.

The average cost of shipping products to specified destinations ranges from USD 0.5 to USD 3.0 per kilogram of U3O8.

As far as possible, the Group tries to enter into swap agreements to minimise delivery times (physical transportation of materials takes, on average, 100 days, while deliveries under swaps agreements take, on average, 25 days), transportation costs and the risks associated with transporting uranium products.


Illustrative delivery process to our end-customers