Uranium One Boosts Output : Kaz Tax Impact Still Unclear

Uranium One’s strategy of shedding less productive assets in order to tighten its focus on kicking up production at its more fertile properties in Kazakhstan seems to have paid off, judging by the strong results it posted in its first-quarter financial statement this week. Attributable commercial production of U3O8 as of March 31 has reached 700,900 pounds, 62% above the 431,500 pounds hit during the first quarter of 2008. 

There is more to this extraordinary gain than meets the eye. Last year’s first-quarter output figures reflect the commercial production of only one mine, Uranium One’s 70%-owned Akdala. This year’s first-quarter figures show for the first time the contribution of the newly minted South Inkai mine, in which the company also holds a 70% interest (state-owned miner Kazatomprom holds a 30% share in each mine).
“From an accounting perspective, a new mine only enters into commercial production once it has gone through a period of initial production and can demonstrate that it can operate profitably,” wrote Uranium One’s Senior Vice President for Investor Relations Chris Sattler, in an e-mail to FCW. “The upshot of the accounting rules is once a mine is in commercial production you start to see the impact in our Income Statement. So as of today, Uranium One has two mines in commercial production—Akdala and S. Inkai—and one mine in pre-commercial production—Kharasan.” 

This shows up in Uranium One’s first-quarter revenue and sales as well. Revenue came to $43 million, nearly double the $22.5 million in the same period last year. Attributable sales volumes totaled 880,000 pounds, a striking 211% above the attributable sales volumes of 282,100 pounds in the same period of 2008. 

But this did not proportionately improve quarterly earnings, due to this year’s much lower average realized sales price: $49/pound U3O8 compared to the $79/pound average realized price in Q1 2008. That is why in Q1 2009 earnings amounted to $15.9 million, 2% below the $16.3 million earned during Q1 2008.

Overcoming Output Obstacles
In presenting its first-quarter results on Monday Uranium One executives highlighted how the miner had surmounted obstacles that had held back production last year. A dearth of sulfuric acid that had limited 2008 production in Kazakhstan was no longer a problem, President and CEO Jean Nortier told analysts; in fact, “Sulfuric acid deliveries are exceeding our expectations,” allowing the miner to retain its 2009 U3O8 production forecast of 3.5 million pounds, which it projects will rise to 5.6 million pounds in 2010.
To prevent future acid shortages Uranium One also has a joint venture with Kazatomprom to build a sulfuric acid plant near the Kharasan mine. The partners have funded about 30% of the $217 million cost, and expect to pay the rest through debt financing. Officials also stressed continuing improvements at the production sites. For example, the mining team last year installed additional processing capacity and a precipitation and filtration circuit at Akdala, which helped keep down production costs in the first quarter of 2009 and lower the company’s dependence on offsite processing. 

In addition Akdala would use drying facilities to be installed later this year at South Inkai, instead of continuing to use external facilities. Chief Operating Officer Steve Magnusen told analysts that in the final quarter of 2008 Akdala had seen “its best quarter ever”—having turned out 524,400 attributable pounds of U3O8. 

The South Inkai mine meanwhile put out 245,100 pounds U3O8 (attributable) in Q1 2009, its first operational quarter. The Betpak Dala joint venture of Uranium One and Kazatomprom will invest $43 million in the mine this year, primarily on the new drying circuit and well field development. 

Uranium One also owns a 30% interest in the Kharasan project, which, having officially opened on April 24, is now in pilot production. Others in the joint venture, known as Kyzylkum, are Kazatomprom, with a 30% interest, and Energy Asia (BVI) Ltd., a consortium of Japanese utilities plus trading company, which owns the other 40%. 

But since initial pre-commercial operations began last year U3O8 production has lagged behind target at Kharasan, as shown in first-quarter 2009 figures. Total pre-commercial U3O8 output amounted to 25,600 pounds, of which 7,600 pounds were attributable to Uranium One. 

Last December the company launched an investigation of these early results and found out that “misinterpretation of the geology” along with “unsatisfactory control over well installation” had contributed to underperformance at the wells. The company said it had hired more-experienced team members and had modified the location of 18 holes in the field layout, installing nine by the end of Q1 2009. It has also added stronger pumps and more flow meters to improve wellfield management.
At full ramp-up, which the company expects to achieve by 2012, Kharasan is projected to produce 1.6 million pounds (attributable) per year. 

In response to an analyst’s question regarding the Japanese consortium’s Kharasan offtake agreement, company officials would not directly reveal how much was involved but offered some details. The maximum offtake of the Japanese consortium will be 20% of the total production; one portion of the contract is at fixed price, and consists of a relatively small amount to be supplied from 2014-2018. For the rest of the offtake, each year the consortium must commit to the percentage of production they would require five years ahead. 

New Tax Structure to Affect Cost/Pound 

Uranium One proudly depicted its production costs in Kazakhstan as the “lowest in the world,” as Nortier said, directly contradicting the recent presentation Kazatomprom official Alexander Gagarin delivered a few weeks ago at conference in Sydney (FCW #325, April 29).
According to the quarterly statement, production cost in the first quarter was $13/pound U3O8, up from $12/pound U3O8 in the same period last year. At South Inkai the production cost was $20/pound U3O8 in the first quarter of 2009.
But these figures will go up as a result of Kazakhstan’s new tax code, which went into effect on Jan. 1. It has three components: a 22% mineral extraction tax, which is like a royalty; an income tax, which decreased from 30% to 20% this year; and an excess profits tax. Magnusen said the mineral extraction tax, which is derived via extraction costs, not revenue, would bump up Akdala’s production cost by $2/pound U3O8, and South Inkai’s cost by $4/pound U3O8. 

In its financial statement the miner noted that there was “considerable uncertainty surrounding the interpretation and application” of the new taxes. Consequently the company “has not fully given effect” to the tax code in its financial statement, it said.