Uranium One acquires 50% of Russian mine in Kazakhstan

With the spectre of rising Russian influence in the democratically challenged former Soviet republic of Kazakhstan, Uranium One (UUU-T) has formed a strategic alliance with a Russian state-owned uranium mining company.

Uranium One will buy JSC Atomredmetzoloto’s (ARMZ) 50% stake in the producing Karatau uranium mine in exchange for 117 shares or 16.6% stake in the company and US$90 million in cash. (ARMZ has agreed not to acquire more than 19.95% of Uranium One for a five-year period without Uranium One’s consent.)

ARMZ’s director, Vadim Zhivov, will get a seat on the board of Uranium One as soon as the transaction is completed, and the Russian company will receive a second board seat in May 2010.

The two companies have signed a long-term off-take agreement as well in which ARMZ has the option to purchase, on an annual basis, either 50% of Karatau’s annual production or 20% of Uranium One’s available attributable production from assets for which it holds marketing rights, whichever is larger.

Under a separate framework agreement, Uranium One gets the exclusive right to negotiate the acquisition of ARMZ’s 50% interest in a uranium property adjacent to the Karatau mine. The Akbastau uranium project is at the pilot production stage. Uranium One also receives the right of first offer on ARMZ’s assets outside the Russian Federation should ARMZ decide to sell any of them in the future.

Finally, ARMZ has agreed to help Uranium One open accounts with Russian uranium converters and to use Russian uranium conversion and enrichment facilities for the benefit of Uranium One’s customers.

Currently Uranium One receives payment for its production at conversion facilities in North America and Europe so access to Russian facilities could shorten the time it takes to turn production into sales proceeds and assist utility customers with access to enrichment services, especially customers in Europe and Asia. On a conference call Uranium One’s president and chief executive, Jean Nortier, estimated that  the time required could drop from the current 5-6 months to 4-6 weeks.

Nortier also told investors and analysts that Karatau has some of the lowest cash costs of any uranium mine in Kazakhstan and would be accretive to net asset value, cash flow, earnings and production per share according to Uranium One’s internal analysis.

Uranium One’s partner in Karatau will be Kazatamprom, the Kazakh state-owned uranium mining company, which also holds joint venture interests in Uranium One’s other Kazakh mines and projects.

The acquisition boosts the company’s 2010 production guidance by 35% from 5.6 million pounds uranium oxide to 7.5 million lbs, he said, and puts the company’s weighted average cash operating costs at less than US$20 per lb. sold.

Karatau produced 1.7 million lbs of U₃0₈ last year and is expected to reach a steady production rate of 5.2 million lbs of U₃0₈ by 2011.

The money for the acquisition will come from a financing deal Uranium One announced in February involving a private placement of 117 million shares (for proceeds of C$270 million) with a Japanese consortium of The Tokyo Electric Power Company, Toshiba Corporation; and the Japan Bank for International Cooperation.

The Japanese consortium has the option in an off-take agreement to purchase up to 20% of Uranium One’s available production from assets in which Uranium One owns the marketing rights.

And like its deal with Russia’s ARMZ, the Japanese consortium has the right to appoint two directors to Uranium One’s board. The Japanese companies also have a right of first opportunity to invest in any uranium mining asset that Uranium One makes available to third parties.

Both agreements give Uranium One long-term strategic partnerships with the governments of Russia, Japan and Kazakhstan, as well as some of the most influential customers and suppliers in the global nuclear industry, Nortier told investors and analysts.

Zhivov of ARMZ added that the deal is “viewed positively” in Kazakhstan. The significance of that statement wasn’t lost on anyone who watched Uranium One’s share price tank in late May following news that Kazakhstan’s volatile president, Nursultan Nazarbayev, had arrested the president of Kazatomprom and launched a police investigation into charges of improper sales of uranium assets.

At the time, Reuters news agency reported that Kazakhstan’s security service had specifically pointed to the sale of a 30% stake in the Kyzylkum uranium joint venture as an example of an illegal transaction. Uranium One owns 30% of the joint venture, which runs Khorasan, Kazakhstan’s largest uranium mine. Kazatomprom owns another 30% share and a group of Japanese firms hold the remaining 40%.

Uranium One is cooperating fully with the police investigation Nortier said on the conference call, adding that comments he had received in Kazakhstan seemed to indicate that foreign contracts would be honored.

In a subsequent telephone interview with The Northern Miner Nortier said political risk is something that companies face in whatever developing country they are in and that Uranium One has a good relationship with the Kazakh authorities.

“We get along really well with the government of Kazakhstan,” he said. “We don’t share all the concerns about Kazakhstan that other people do. The key is to have good partnerships [and] we have two very strong partners…We support them when they want to root out corruption in their country.”

Zhivov of ARMZ added his company has “excellent relations with the new head of Kazatomprom” and cited the “excellent relationship” between Russia and Kazakhstan.

The Karatau uranium mine is about 60 km from the South Inkai mine of Uranium One’s 70%-owned Betpak Dala joint venture. This year Uranium One forecasts the mine will produce about 3.3 million lbs of U₃0₈, at a total cash cost per lb. sold of about US$15.

“Even by Kazakh standards total cash costs are low,” Nortier said during the conference call. Uranium One is already expected to be the lowest cash cost producer and with the acquisition of Karatau we expect to improve on this position.”

In a technical report written by Scott Wilson Roscoe Postle Associates, as of November 2007, Karatau had indicated resources of 9.8 million tonnes grading 0.115% U₃0₈ for total contained U₃0₈ of 29.3 million pounds.

In the inferred category Karatau had 0.9 million tonnes at a grade of 0.088% U₃0₈ for a total of 2 million pounds of uranium oxide. The resource was based on about 59,000 metres of drilling.

Uranium One gained 8¢ a share or 2.8% on the news to close at $2.91 per share with 10.5 million shares changing hands.

The company has a 52-week trading range of 60¢-$5.04 per share and has 469.62 million shares outstanding.