Interview: Kazatomprom’s Askar Batyrbayev on Kazakh Unrest and Transition

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The world’s largest uranium-producing country experienced massive social upheaval in the first week of the year, with more than 200 dead and thousands more injured and arrested. With operational contingencies developed in response to the Covid-19 pandemic and wider supply-chain disruptions, Kazatomprom has so far evaded any significant disruption to its operations, although risks remain. More immediately, the country could see some political shifts following the ousting of Kazakh strongman Nursultan Nazarbayev and the transition of authority to President Kassym-Zhomart Tokayev. But for now, Kazatomprom is operating as normal with plans to launch a new investment vehicle for physical uranium, the ramp-up of its Ulba fuel fabrication plant, and utilities contracting for longer terms. Kazatomprom Chief Commercial Officer Askar Batyrbayev spoke with Energy Intelligence's Jessica Sondgeroth about the company’s experience with the civil unrest in Kazakhstan and its plans going forward.

Q: Starting with the civil unrest at the beginning of the year, can you explain a little bit about where Kazakh mining operations are located and how the experience might be different from the cities where we've seen a lot of protests?

A: Everything started in the west of Kazakhstan where we have the oil region, then the main venues, and Almaty with the most tragic events happening. Unlike the oil deposits, almost all the uranium deposits except for one are located in the south region very close to the cities of Shymkent and Qyzylorda but it is almost a six-hour drive by car. So 400, 450 kilometers from the big cities. From the small villages, it's almost 200 kilometers and distances from one mine to another mine could be at least 100 kilometers. So if you take the area of all those mines together it's more or less the size of Portugal. That's quite a huge area. And all of the mines are located very remotely from where people live; that’s why we have shift camps. That's why we've stated that we were not affected by any unrest. Everything happened very far from the location of the mines.

Q: Have you seen any subsequent strain on imports or exports?

A: The timing of any disruption to transportation was very short. Transportation took place during the daytime when we didn't have curfew hours set by the government. In terms of railway, they had small delays of cargo for one or two days maximum, but we had one delivery actually moving during that period and it was not heavily affected in terms of timing. This cargo was safely delivered to St. Petersburg and is going to be very soon delivered to one of the conversion facilities. It was important to get feedback from all of the agents who make deliveries like that happen. They seem to have been unshaken by the events and Kazatomprom's status in the whole arrangement. We are having several other shipments right now and nothing has stopped. All the truck transportation, railway transportation are ongoing. We have no impacts there. With all the security and safety measures, which are already paid for in the transportation of uranium, we are not seeing any delays in terms of transportation of uranium.

Q: With existing supply-chain issues, how do you mitigate uncertainty during these times?

A: In terms of commitments and sales, we were very much comfortable because we have six to seven months of attributable production inventory. And for all the material we needed to deliver and sell in the first quarter, we started all the shipments back in the fourth quarter. They were either on the way or already being delivered to conversion facilities. So in that sense, we were very comfortable and we explained this clearly to our customers. In terms of deliveries to Western converters, we're not seeing any slowdown.

It was much more challenging in 2020. Now everyone knows how to live within the Covid-19 restrictions and conditions. What we are seeing as a delay now, it's more like what was communicated last year when we had first seen those effects of late deliveries from Covid-19-related delays. Everyone in the world is feeling those delays, it's not just Kazatomprom. We were prepared for a much longer effect in the sense that we were expecting to experience some shortage of raw materials that we need for production.

Q: You and Cameco have mentioned sulfuric acid being one of those materials you were having trouble receiving. Can you tell us a little bit more about that supply chain?

A: Sulfuric acid is one of the main components we use to produce [uranium]. It is the main chemical component to dissolve the ore, acting as a pregnant solution pumped up from underground. We were seeing some delays in sulfuric acid deliveries in the second half of last year. Now, more or less, we have a stable schedule for deliveries. We were expecting that maybe if the railway system failed, we might have disruptions, but we didn't. We receive it by railway, then from that railway point we deliver it by truck. At the same time, winter is not the time for much of the well development work, so we're maintaining already-developed mine wells and oil-field polygons. The effect [or the unrest] was not that disturbing.

Q: What happens if you experience further disruptions to sulfuric acid deliveries?

A: We developed protocols in 2020 when the first wave of Covid-19 hit — we were actually very much nervous about how to operate, because we didn't cease the operations, but minimized the number of people on site at a time. We had to introduce the protocols for long shifts. We use the ISR method, which is a closed cycle, so we could still recirculate the sulfuric acid solution that we have in the system. If there is no sulfuric acid supply, that doesn't mean that everything stops. The concentration of the sulfuric acid drops, but we still have production because it's a closed cycle from well field to processing facility and back.

As we indicated, we are very much thankful to our employees who did a great job during Covid-19 and they show the same great attitudes during these days as well.

Q: Are these issues affecting prices?

A: There are these troubling signals in the long run, some items of mild concern in terms of reliability of supply. It might affect the price going forward for 2022, 2023. But it does not affect the immediate operations of Kazatomprom; it has not affected the marginal cost so far. You continue to hear from global transportation agents that things might change in the future because of pricing dynamics and bottlenecks at shipping ports and things of that nature. But that does not necessarily translate into immediate cost change or immediate disruptions.

Q: To speak of the general experience of your workers and in response to the civil unrest this month, can you give us a sense of what they're thinking and how they're feeling about all of this?

A: Since the IPO [initial public offering], we've done a lot of things to improve worker safety and it's constantly improving. Two examples. When these unfortunate events took place, the company had put together an emergency response team, which is sort of like the [US Federal Emergency Management Agency] incident commander, where they nominated designated individuals whose job it was to actually maintain an internal communications network. We had a center established at headquarters in Astana, and top management in Qyzylorda or Shymkent connecting to headquarters and the mines a couple of times per day in short communication windows. And No. 2, workers had to make a judgment call and realize that logistically it made sense for them to stay put for a couple of extra days. And that tremendously helped relieve the looming pressure to safely change shifts. The call that they made internally to actually stick around and help out the company in those troubling times was tremendous, very much appreciated.

Kazakhstan is not a nation where violence is commonplace. So folks were truly genuinely shaken up by the events, the ferociousness with which they were occurring. It took a lot of people by surprise. But by setting up those emergency response units to ensure communication was uninterrupted with the mines got people's minds off of what was going on in the streets and into the workplace.

Q: What was your personal experience of these events?

A: I was in quarantine because of a Covid-19 outbreak. With the lack of communication, I had to manage external communications with customers, partners, with all the concerned people and stakeholders to make sure that our external communication was going very well. In the first couple of days, it was very challenging. We had internet communication for a couple of hours, three hours, four hours throughout the day. We had seen some negative comments in the media, on social media, especially in communities on Twitter saying that everything will collapse in Kazakhstan. As a couple of days passed, everyone could communicate more freely to get all the necessary information. To all concerned stakeholders, we delivered the message, we showed that everything is well organized at Kazatomprom.

Q: In terms of the response from the industry, how does everybody feel now? Do you feel like your stakeholders understood, do they feel comfortable with their Kazakh supply?

A: Generally from the industry, the response was very good. We heard a lot of good supporting words from customers, from partners, from the NEI [Nuclear Energy Institute] and WNA [World Nuclear Association]. Everyone was very much worried. A couple of days later, when we had all the communications in place, we made all the calls to show that we are operating normally without any interference. At that time, everyone already understood that everything is normal in terms of operations and deliveries.

Q: Kazatomprom's board of directors is chosen by its majority shareholder, sovereign wealth fund Samruk Kazyna. Samruk has long been associated with former President Nazarbayev. With changes being made in the Kazakh government and at Samruk Kazyna, what, if any, changes can we expect at Kazatomprom?

A: Definitely there will be some changes, some impacts in the long term or midterm. Of course, Samruk Kazyna announced some changes this week, but the changes are not expected to impact KAP directly or affect SK’s ownership in KAP at this time. There are a lot of questions about taxation. I think we just have to be a little bit patient and see how it settles, what will be proposed by the government, whether the customer would be affected or not. Kazatomprom's name was not ever mentioned under proposals for additional taxes on the general mining sector and private mining sector, whereas we are kind of under Samruk's umbrella. We are waiting for the final decisions and statements by government. So we are doing our business as usual. Nothing has changed for us.

Q: And with President Tokayev strengthening his position, do you foresee any philosophical shift in how Kazatomprom is operated? Last week he made comments about continuing to privatize state entities. Do you see any offering of additional Kazatomprom shares in the future? Any restructuring?

A: Kazatomprom was the first company within Samruk's portfolio that had a successful IPO. We've had these transparency practices already in place since 2018, reporting to investors. Whether Kazatomprom will be additionally privatized to 51% or not? That's not our decision. Kazatomprom is a strategic asset and for now, the balance of the public offering is only 25%. So whether there will be additional loans or not, the question is more for Samruk or the government. But I guess the other companies will go into privatization as planned — the national telecommunication company and airline Air Astana — so in that sense something might happen.

Q: Regarding the removal of the board director Bolat Akchulakov, who left the post to serve as Kazakh energy minister, will there be a replacement board member? And can we expect any other foreseeable leadership changes at Kazatomprom or on its board?

A: He was not replaced. The other two board members are still active. We are not expecting any other changes. And for Bolat, having him as a minister of energy, with his very deep knowledge of the uranium industry and Kazatomprom as long as he was a board member, it's a good development and we expect good support. We wish him the very best of luck in that position.

Q: Speaking of which, you reported in November the Kazatomprom board approved a life-of-mine plan for the joint-venture (JV) Budenovskoye, which in late December was green-lighted for production by the energy ministry. With plans to develop Budenovskoye Blocks 6 and 7 to up to 6,000 tU per year, what needs to happen in the market to incentivize that development?

A: Our market-centric strategy is still focused on how much the market really needs material. We set our guidance target for production in 2023, we've extended our 20% reduction from subsoil lease policy for 2023 just because we don't see that material is needed by the market. We will see if the market changes our decision. But we never said that we are triggered by any price. We are very comfortable being exposed to the spot price or market-related price at the time of delivery. We think that the spot price and the market will show what should be the right price for uranium. For us, more important is our growing contract book. So as soon as we see that the interest from the market is transferred into the contracts, that kind of guarantees a safe home for our production, that's the incentivizing point for us to increase our production. Seeing that utilities need more uranium will trigger new production, in terms of brownfields or greenfields.

Q: In that statement from November, you mentioned an agreement signed by the JV partners requiring anticipated production from 2024 to 2026 to be fully committed to supplying the Russian civil nuclear energy industry. Can you tell us a little bit more about that?

A: Well, unfortunately, I cannot disclose the pricing part of the agreement, as I said, we are very comfortable to relate everything to the market price at the time of delivery. I'm not saying that we're not signing any fixed-price contracts, but for us to sign any fixed-price contract, it should be very incentivizing. For us as a lowest-cost producer, market-related contracts are still profitable and utilities are not yet ready to pay the incentivizing price that our competitors are mentioning.

Q: To clarify, is this a deal between the JV partners — Kazatomprom with 51% and Stepnogorsk Mining and Chemical Plant with 49% — for supply from 2024-26?

A: Well, that's the offtake agreement for JV.

Q: And can you give us some clarity on Stepnogorsk Mining and Chemical Combine?

A: Stepnogorsk Mining and Chemical Combine is still part of the nuclear industry within Kazakhstan and it was one of the refineries within Kazakhstan, same as Ulba.

Q: Can you give us an update on the ANU Energy fund? I know that when we reported earlier, there were some details that had to be worked out and Kazatomprom needed to be assured that the fund would operate within its interests. Can you tell us a little bit about how that went?

A: How the fund will be operated will be decided by the manager of the fund. They will decide which way they will go — like Yellow Cake or like Sprott. It's up to them to decide what's within the benefit of the whole industry, not just Kazatomprom. It will have some mechanisms that will prevent material going back to the market. Kazatomprom, as one of the biggest producers and players on the market, we don't want to create a vehicle that would be selling back material to the market as soon as any short-term fear happens. So these mechanisms are in the framework agreement that we have signed on Nov. 23. The project is ongoing and we expect to do the first sale within no later than May 2022.

Q: That's the initial $50 million, right? And then there will be a later potential, second-stage fundraiser of $500 million?

A: Yes. Up to $500 million, but again, that's a decision of the fund manager, whether they'll go to IPO or buy-in placement or whichever they decide. But we're seeing a lot of interest from investors.

Q: One of the mechanisms is that Kazatomprom would have a priority option to repurchase any material?

A: Kazatomprom would be the priority seller and have a priority buyback option in case the fund decides to sell. Those instruments at our disposal — should we need to exercise them — further substantiate our long-term vision.

Q: Do you have any updates on the Ulba fuel fabrication plant? I know the first start-up was late last year. Can we expect the plant to fully ramp up this year?

A: The plant is operational. Commercial production is expected to be under way in 2022. The first commercial fuel assemblies will be assembled this year and delivered to [China General Nuclear].

Q: Can you also provide an update on the nuclear cooperation agreement that Kazakhstan signed with Saudi Arabia in 2016? Saudi Arabian Energy Minister Prince Abdulaziz bin Salman said last week the Mideast country has “a huge amount of uranium resources, which we would like to exploit." We recall a Kazakh energy minister in 2016 floating the possibility of sharing fuel assembly technology.

A: We are looking forward to Saudi Arabia's plans to develop nuclear energy. We have one very successful example in the Middle East, which is the United Arab Emirates. So if Saudi Arabia will be joining that family of nuclear industry participants, we would be very happy to welcome them and support them in any of these endeavors. We would be very happy to be one of the companies that will deliver them fuel whether they would like to take natural uranium or as fuel assemblies. These agreements allow us to have all the legal and procedural instruments in place so when we're ready to move forward with some active phases, we're already halfway there.

Q: Are you talking about an agreement to supply or provide operational technology?

A: If it will be on the side of construction of nuclear power plants or fuel deliveries or whatever, Kazatomprom and the Saudis would be sharing the experience, creating some work groups. They were mentioning that they have some kind of reserves of uranium within Saudi Arabia. If they decided to investigate or explore that, we would definitely try to assist or consult them to see if that's a possible way of business.

Q: Are there any other plans to grow the fuel cycle in Kazakhstan?

A: We have our strategy, which says that we are concentrating on our core business. The fuel fabrication plan was part of a big and very long-term agreement with China. At the moment we don't see other parts of the front end of the nuclear fuel cycle to be as beneficial. But if it helps to increase our sales of natural uranium, we will definitely pursue the possibilities. We have access to almost all parts of the front end of the nuclear fuel cycle, including conversion and enrichment within our Russian JV. We have powder and pellet production at Ulba already. So if it will help us increase our sales with our customers, we might consider a different type of delivery in terms of nuclear material.

Q: Thank you. And do you have an update on the status of a potential trading hub in Alashankou with CNUC?

A: There is not much to report now. We're still in close communication with them. As far as we know they have completed the first stage, they built initial storage for 3,000 tons. They have to build additional storage for another 20,000 tons by 2026. Once China is declaring something, they usually deliver. With the Chinese New Year, things will inevitably slow down, but we can expect to hear something from them perhaps at one of the spring conferences.

Q: Do you see a possibility for the ANU fund to use the trading hub to store its physical holdings?

A: I would not be surprised, but I think everything will need more time. If all the specific conditions for storage of nuclear material are met, why not? Of course, Kazatomprom is only one of the participants in the ANU Fund, so strategic questions on the moves and the policies should all be addressed to the fund's management.

Q: What market fundamentals will you be watching most this year?

A: Starting from maybe September last year, we're seeing much more contracting from utilities for a longer term. It's not just three- or five-year contracts as it was before, now we're seeing their requests going up to 2030, and some of the tenders or RFPs are actually exceeding 2030 and going to 2030, 2033, which was not the case for the past couple of years. We're seeing increased volumes of contracting as well. That's a good sign for the transformation of the market.

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