In his interview Mr. Vasily Konstantinov, the President of Uranium One Group, speaks about the specific features of the uranium market, the challenges faced by the producers, and the connection of African elephants to uranium mining.
- Mr. Konstantinov, do you think the uranium market will recover?
- Let me first explain some reasons for the falling demand. The commissioning of nuclear plants in Japan turned out to be not as fast as predicted by the IAEA and anticipated by the market. The current uranium market is also under high pressure from secondary uranium sources. Lower enrichment (SWU) prices have led to rather inexpensive and efficient uranium production using centrifuges. Uranium tailings (a waste by-product of uranium enrichment arising from fuel manufacturing – ed.) are accumulated in large amounts. Uranium from the tailings sites is now in demand; it is processed and used to produce reactor fuel, which increases the supply and reduces the market price of uranium.
We should also take into account the uranium stock created by consumers while awaiting development of the market and extensive commissioning of nuclear generation facilities. The unused uranium stock held by the Japanese consumers is particularly large. This uranium is also coming onto the market, increasing the supply. All these factors obviously put pressure on the demand, prevent a price increase, and finally make investments in new deposits unprofitable.
Now my answer to your question: the market will recover when there is a balance between the fuel demand of nuclear generation and the uranium supply to the market from different sources. This is certain to happen because uranium production will decrease while no new deposits are being developed.
- What are the specific features of the uranium business today? What are the main problems in this sector?
- Uranium is a market product, and the market of today is rather depressed and volatile. Not only do large producers set the pace in the uranium market, but there is also a large group of traders whose profiteering with small amounts of uranium often pushes the spot market down, affecting even the producers’ price. This is one of the reasons for the excessive volatility of the market, apart from the fundamental factors. I would like to point out that the uranium market behaves as it does because of a variety of diverse problems; however the above stated features seem to be specific enough.
- Your company has recently sold a share in the Australian project. Is it time to sell or temporarily freeze low-profit mines as a result of reduced demand for uranium?
- Our major production base includes joint ventures in Kazakhstan where the mining cost is rather low, providing efficient operations of the company even at such low market prices. We suspend the production or sell the assets at deposits where efficient operation in the current price situation is impossible because of low profitability. This is the case with the USA today where we are forced to suspend production. It can be resumed once the uranium prices exceed 50 dollars.
The situation in Australia was more pessimistic because of an even higher increase in the price threshold required to ensure effective use of the assets. Therefore, we decided to sell the Australian Honeymoon, which enabled us to avoid the costs associated with suspending and maintaining the project as required by local regulatory authorities. For the same reason, last year we parted with a portfolio of uranium assets in the USA that did not involve the ISL (in situ leaching – ed.) mining method. Currently, we intend to continue our work with cost-effective assets, maintaining and developing them, and to abandon inefficient ones.
- But the depressed market means a good time for buying. Are you not planning to acquire new assets?
- Indeed, the prices of shares in public companies today are not so high today because of the lower uranium prices. However, a comprehensive analysis of such assets is required including an assessment of their development potential following recovery of the market, and of the advantages Rosatom would gain in purchasing them, such as sales growth, entry into new niches, and expansion of the customer base. Then a conclusion can be made as to the advisability of such transactions.
- Are you experiencing any problems with debt financing? Does your company plan any borrowings in the current year and – if any – what are your objectives?
- It all depends on the reasons for raising the funds. If we speak about debt servicing and further repayment, our financial restructuring program is being implemented successfully. As far as fund raising for new projects is concerned, I think that our project will be interesting and competitive both in payback and profitability as compared with other State Corporation projects, which means that we have every chance that Rosatom will find it effective and will allow the use of the investment resource.
- Are you considering the possibility of extending your participation in non-core businesses for the purpose of diversification, for example, getting into the rare earth or precious metals market?
- Development of new businesses is one of the tasks set by ROSATOM together with revenue growth, broadening the portfolio, and cost saving. We cannot operate as a single product company, which for us today means uranium. In this case, our dependence on market conditions is too great. Therefore, we should look to new mining and extraction businesses, and this is correct from the diversification standpoint. Such strategy will help us occupy new market niches and increase the company value.
Yes, today this is a really good time to enter into new businesses as metal prices have fallen and assets can be bought at affordable prices. However, we should basically understand when the asset could “take off”, when the demand for this mineral resource will grow, the payback period, and the impact on the value of the company. According to our analysis, copper, gold and platinum-group metals seem most attractive. One of our advantages is that we can apply our expertise in uranium mining by in situ leaching methods, using the latter to develop non-uranium deposits. We will also develop other extraction methods, if required.
- In spite of the problems and the depressed market, U1 closed 2015 with a twofold increase in revenue. Is further growth anticipated in the 2016 results?
- 2015 was not an easy year for our company and for many other ROSATOM enterprises. Nevertheless, the year ended with positive results. The net income of the company amounted to 6.7 billion rubles against 10.9 billion rubles net loss the previous year. The revenue in ruble equivalent more than doubled to 45 billion rubles. The main growth occurred as a result of increased commercial activities in foreign markets. The EBITDA also almost doubled in 2015 against 2014 to 18 billion rubles, and this enabled the operational efficiency of the company to be maintained at a high level. It should be mentioned that today we have the best cost figures compared with global leaders in natural uranium production. Due to joint efforts with Kazatomprom, the production cost last year was brought down below 12 dollars per pound of uranium compared with 14 dollars in 2014. The cost reduction program was launched for 5 years and we expect excellent results from its implementation. The mining output during recent years has been approximately at the same level of 4.8 thousand tons, taking into account our Kazakhstan JV shares. And the total mining output jointly with Kazatomprom is approximately twice as high. We operate under contractual obligations that limit the maximum and minimum production output. Nevertheless, we should focus on an output of about 6 thousand tons under a comprehensive program.
- What is the progress of the Mkuju River project involving the construction of a uranium mining enterprise in the south of Tanzania?
- We are keeping the project running and are working with the relevant ministries of Tanzania, promoting an efficient and cost-effective mining method, which is new to this country but conventional for us: in situ leaching. Pilot tests are being carried out to prove its viability. This technology will enable us to reduce the costs and when prices in the market rise to an acceptable level, start to develop this asset.
- I can’t help asking about the elephants. We know that Uranium One takes an active part in protection of nature, in particular, by rendering assistance to the Selous Game Reserve near Mkuju River…
A part of the deposit is indeed located in the close vicinity of the Selous Game Reserve, one of the largest African nature reserves. At the request of the Tanzanian government, we joined their anti-poaching program aimed at saving the elephant population in the reserve. The number of these animals fell from 100 thousand in the 1970s to 13 thousand in 2013 because of their barbaric extermination by poachers killing the elephants for ivory. A migration corridor used by the elephants travelling from the north of Africa to the south and back crosses the area of our operations. We support a detachment of 20 scouts, helping them with equipment and training. The young people patrol the territory of the national park on a regular basis. As a result, they have helped to neutralize seven groups of poachers only last year.
- What is the most interesting for you in your work?
- Making the company a global leader in the uranium market. This is a challenging yet very interesting task. For this, we’ll need total mobilization of the internal resources, the ability to find and take full advantage of new opportunities even under depressed market conditions. The challenges in growing the revenue and broadening the portfolio of assets have to be met. Expressing this in figures means the company achieving a sales volume of 1.5 billion dollars. Our current consolidated revenues are 740 million dollars, which means that we have to double it. This is indeed an ambitious and interesting task!