Kazatomprom – The Kazakhstan state-owned uranium producer is going public. Kazakhstan has been hit hard by the sharp drop in oil and gas prices since 2014. In response, the Kasakh government has put together an anti-crisis plan and in the center is a privatization drive that will see more than 175 state-owned companies go public. In addition to Kazatomprom, this will include flagship airline Air Astana, oil and gas producer KazMunaiGaz and state railways Temir Zholy.
A number of investment banks are involved in IPO planning. The IPO is expected to start no earlier than 2018, but could still be scrapped if market response is not satisfactory. The maximum shareholding which will be offered to the market is 25%. Latest signals indicate that Air Astana will be first out with an IPO scheduled for Q3 2018 with what likely will be a dual listing in Astana and London.
With by far the lowest producing costs of all uranium producing countries and a world marked share of 39%, Kazatomprom is the dominant player in the uranium space. Until now, they have due to regulations been forced to sell most of their uranium into the spot market. This has had an depressing effect on the uranium price which is hovering at $20/lb at the time of writing.
Kasakh Transfer Pricing Laws
The regulation which are meant to fight corruption and tax avoidance, restrict sale of commodities to publicly verifiable prices. For the uranium producer, this means selling into the spot market. The majority of the uranium transactions worldwide are however done on long-term contracts which are priced considerably higher.
Not only are they missing out on a potentially higher return, but at the same time they are depressing the spot market by flooding the market with large amounts of low-cost uranium.
Swiss Marketing arm
To bypass these regulatory restrictions Kazatomprom are planning to set up a Swiss marketing subsidiary. This will allow them to sell the low-cost uranium at spot price to their own Swiss subsidiary which again will be able to negotiate long-term contract with utilities abroad.
This will also allow them to exercise better inventory control, instead of dumping it in the spot market. It could to a bigger degree enable them to use their position as the worlds major producer to control the market price.
With the current prices, it does however seem unlikely that they would want to lock in large long-term contracts at the time being. I suspect they will, at least for now, continue to sell the majority of their inventory in spot market. However, with this new set-up, they will have the tool to better influence the market pricing.
Better access to European markets
Kazatomproms newly created subsidiary Trading House Kazatomprom (THK) is an attempt to give the producer better access to the European markets. By setting up THK in Switzerland it will enable them to enter contracts without the bureaucracy in Kazakhstan as well offering a wider range of options to the utilities in terms of contracts.
The commercialization of Kazatomprom is likely to bring much needed liquidity into to spot market. The problem at the moment is that the transactions being done are so small that very small transactions could move the market significantly. The kasakhs increased price flexibility will put the on even terms with the other market participants and could allow them to better penetrate the US and European markets.
Umirzak Shukeyev, chairman of Kazakhstan’s wealth fund, Samruk-Kazyna, has stated that the key objective of the strategy include “trebling the company’s value by 2025”. Samruk-Kazyna is at the moment the sole owner of Kazatomprom. Kaztomproms strategy of rapid production increase and low-price spot sales has seen them become the worlds dominant uranium producer in a little over a decade. From 2001 to 2013 production rose from 2 022 to a whopping 22 550 tonnes Uranium per year.
The next phase with privatizing and modernizing the company will likely see them adopt a more sophisticated strategy to improve their margins while maintaining their market share. They have also expressed a desire to participate in a bigger part of the nuclear fuel cycle by adding products to their value chain rather than just selling raw material. In addition to an existing major nuclear fuel pellets plant, the construction of a new uranium hexafluoride conversion plant is expected to commence in 2018.
Kazatomprom has expressed that it aims to supply up to a third of the world fuel market by 2030.
Will these strategy changes from the worlds dominant uranium producers affect the uranium price? It’s hard to know, but with the current supply/demand condition this could be the catalyst that finally moves the depressed uranium price and sparks the long expected uranium bull market.