Russia's ARMZ targets Uranium One rerating

TORONTO (miningweekly.com) – Uranium prices will need to gain by around 50% from current levels to make new mining projects economic, at least outside of low-cost Kazakhstan, Vadim Zhivov, the director-general of Russia's State-owned uranium miner told Mining Weekly Online on Wednesday.

Zhivov, whose Atomredmetzoloto (ARMZ) agreed earlier this year to buy a controlling stake in Canadian miner Uranium One, said in an interview in Toronto that that he expects uranium spot prices will rise to at least $50/lb or $55/lb in the next couple of years, with further, “steady” increases beyond that.

Uranium spot prices rose last week to $45,25/lb, according to data from TradeTech. The price has increased from $41/lb or so in May this year. It peaked in 2007 as high as $136/lb.

Zhivov is in Toronto on a marketing tour, meeting with analysts and investors ahead of Uranium One's shareholder meeting to approve the deal later this month. (Details of the transaction here.)

The company was relatively unknown in North American markets until recently, and investors were a little taken aback when Uranium One announced in June it was selling control to the Russian government company.

But Zhivov and Uranium One spokesperson Chris Sattler said that the market is feeling increasingly comfortable with the transaction.

The deal, which involves TSX- and JSE-listed Uranium One buying stakes in two Kazakh mines from ARMZ in exchange for shares, will put the company among the top-five uranium producers in the world.

Uranium One's stock, which traded at C$2,62 a share the day before the deal was announced, dropped as low as C$2,19 in the wake of the news, but has since recovered and increased to C$2,87 a share at the close in Toronto on Wednesday.

“We have been on the road since day one, talking to investors in the UK, in France, in Germany, Switzerland, Canada, the US... and the more that we explain the deal, the better reaction we get,” Zhivov said.

He expects the shares will see further rerating going forward, including potential benefit from increased exposure and investor interest in the UK and Europe, where markets are more comfortable with Russian and Kazakh companies and operating environments.

In fact, one of the things on the table is a stock exchange listing in London, Sattler told Mining Weekly Online.

“It is something we are considering after closing of the transaction,” he said.

The backing of a Russian government company may also help lower perceptions of political risk over Uranium One's operations in Kazakhstan.

ARMZ has said that it plans to use Uranium One as a vehicle for international expansion, but Zhivov indicated that he first wants to see a better market value ascribed to the Canadian company before launching into merger and acquisition activity.

He was reluctant to go into details regarding when or where the next deal might be, emphasising rather that the immediate focus will be bedding down the transaction.

The most important thing is ensuring Uranium One remains a low-cost, profitable producer, “and by doing that we will grow the market capitalisation of the company,” he said.

“And after that, merger and acquisition activities will be really accretive for shareholders.”

All ARMZ's international activities will go through Uranium One, and Uranium One will have the right of first refusal on any opportunities which arise outside the Russian Federation.

The focus for growth will likely be Kazakhstan and Africa, Zhivov said.

ARMZ's parent company is nuclear group Rosatom, the biggest State-owned company in Russia, and also the largest vertically integrated nuclear company in the world.

It already operates more than 30 nuclear reactors inside Russia, has built 36 nuclear power plants abroad, with five units under construction, decisions already made on another 29, and negotiations under way for a further 16.

ARMZ's own assets are currently enough to meet Rosatom's domestic needs, so material supplied through the offtake agreement will fuel new power plants being built outside the Russian Federation, he said.

MARKET OUTLOOK

The primary supply of uranium from mines currently falls short of global demand, but the balance is made up by uranium supplied into the market from inventories held by governments, mainly the US and Russia.

However, these supplies are expected to decline over the next ten years, as Russia reaches the end of its programme to recycle highly-enriched uranium from nuclear warheads into low-enriched-uranium fuel for sale to US nuclear power plants.

The so-called 'Megatons to Megawatts' programme is scheduled to conclude at the end of 2013, and Zhivov said it is not likely to be extended.

This will take about 9 000 t, or some 15% of the global supply, out of the market.

At the end of the day, though, uranium is widely available, it just depends on whether the price justifies the cost of building and operating mines, he commented.

Kazakhstan, “the Saudi Arabia” of uranium, offers a unique, low-cost operating environment, but will not be able to supply the world's needs.

“All the Kazakh plans are already announced and built into the picture, and I don't think there will be any significant increase beyond what is already announced,” Zhivov said.

And to develop any other mines outside Kazakhstan, the price will need to be higher.

“In the medium term, we expect prices to go beyond $50, $55, and steadily grow after that,” he commented.

“And I think that the long-term prices will be higher still than the spot prices going forward.”

The uranium spot market accounts for a small percentage of global trade, compared with longer term contracts entered into by producers. But the spot price is often used as a marker for long-term contract terms.