Kazatomprom (KAP) Lowers 2025 Guidance By 17%

Writing is on the wall for utilities.

Background

Last year, in November, I wrote a piece titled ‘understanding Kazakhstan’s importance to the uranium market’. In this post, I talked about China and Russia’s increasing influence over the country and the world’s largest uranium miner, Kazatomprom (KAP). I also talked about KAP’s poor track record of meeting production targets, the fact that KAP may have overcommitted futures sales, and how transportation logistics favor KAP leaning heavily towards China as its primary customer.

Just a couple of months later, in early January, KAP issued a press release warning that its 2024 production guidance would be lowered due to shortages of sulfuric acid, raw materials and construction delays. At that time, I wrote a another piece titled ‘uranium’s next phase - strap in’. The main argument in that piece was that KAP’s inability to grow production to subsoil use agreement levels could lead to a violent move higher in uranium prices. Being the largest and lowest cost producer, the nuclear industry has been relying on KAP to bring some semblance of balance to the uranium market, which is currently estimated to be running a 30-40mm lbs structural deficit. The rest of the uranium mining industry is still reeling from a decade of capital starvation, with major greenfield projects still 4-5+ years away from production.

In that post I also surmised that KAP’s frequent mention of sulfuric acid shortages was hiding something more sinister; third party reports indicate that KAP’s usage of sulfuric acid per pound of production has been steadily increasing, a sign of asset depletion. This means that KAP’s production growth limitations are structural, and won’t be resolved in the time frame required for the upcoming U3O8 replacement rate contracting cycle. It also means that KAP will increasingly prioritize its Russian and Chinese customers when it comes to allocating scarce pounds through future sales agreement.

In early February, KAP released its Q4 operations and trading update, reducing 2024 guidance by 13% to 21 - 22.5K tU (54.6mm - 58.5mm lbs). This led to a sharp move higher across the uranium sector equities. At the time I wrote that reaching the 2025 production guidance of 100% subsoil use agreement level was now also out of the question. I wrote:

With production in 2024 expected to barely grow, the hopes of achieving the subsoil use agreement level of production in 2025 is also close to zero; the logistics and the quantum of sulfuric acid needed to reach such levels will require many years of investment.

Recently, in its Q2 2024 operational update, the Company increased 2024 guidance by ~6% to 22.5 - 23.5K tU (58.5mm - 61.1mm lbs). This time the market reacted violently to the downside, with the uranium miners ETF, URNM, dropping ~15% over the next three trading days. I believe this was a significant overreaction for two reasons: 1/ a ~2-3mm lbs increase in production won’t make a dent to the deficit 2/ KAP’s sales guidance remained unchanged, implying the increase in production will go towards rebuilding depleted inventories. The sell off was exacerbated by the macro events (yen carry trade and short vol unwind) around that same time.

2025 Guidance Update

Given the above background, this Thursday’s KAP announcement regarding 2025 production guidance shouldn’t have come as a big surprise to readers of this blog. The Company reduced its 2025 production target by 17%, from 30.5-31.5K tU (100% subsoil basis) to 25-26.5K tU (a decrease of roughly 15mm lbs at the mid point). While the renewed guidance represents 12% growth vs. 2024, it’s far too low relative to the current market needs.

Assuming all existing mines and ramp-ups remain on schedule, with KAP’s current midpoint guidance, I estimate uranium primary supply of ~175mm lbs and primary demand of ~195mm lb in 2025. This doesn’t include any demand from over feeding, financial demand, or re-stocking demand (which is quite likely given utilities have been contracting below replacement rate for many years now).

More importantly, KAP has now acknowledged the structural nature of the challenges facing production growth. Not only has the Company pulled 2026 guidance all together, it’s also applying to renegotiate its subsoil use agreements as it’s likely to breach the -20% threshold stipulated under those agreements. These developments confirm that production growth will remain challenged for several years, most likely until the development of the Company’s new sulfuric acid plant in 2027. The H1 2024 results state the following [emphasis mine]:

Taking into consideration the high level of uncertainties related to the sulphuric acid supply and construction delay challenges, no decision has been taken regarding mine development activity and production volumes for 2026 and beyond. In order to improve the forecast quality, the Company expects its 2026 productions plans to be announced not earlier than a year from now as part of the 2025 half-year financial results disclosure.

The Company has highlighted several times that certain uranium mining entities are facing challenges related to delays in completing construction works at the newly developed deposits. The Company has also warned that these entities face the potential challenge of descending beneath the threshold of minus 20% (in relation to the stipulations of the Subsoil Use Agreements). As was noted, such risk is primarily attributed to delays in the construction of surface facilities and infrastructure. These delays, in turn, are a consequence of the extended timelines required for the development and subsequent approval of project design documentation. Both factors resulted in a significant shift in the production schedules at the newly established deposits. As a result, corresponding Subsoil Use levels for production volumes at the newly established deposits are expected to be decreased in order to comply with production volume obligations under the Subsoil Use Agreements.

For Budenovskoye, the ‘crown jewel’ growth asset, the production plans under the current subsoil agreement are being revised down drastically, and nameplate capacity of 6000tU is not expected to be achievable until 2027 (vs. 2026 previously):

2024 - from 2500tU to 500tU

2025 - from 4000tU to 1300tU

2026 - from 6000tU to 3750tU

Goehring & Rozencwajg, a prominent commodity research firm, had the following to say recently about the challenges associated with this asset:

Two potential geological factors might also hinder Budenovskoye's development. Firstly, the uranium-rich zones are nearly twice as deep as those in Kazatomprom's other in-situ leach projects, complicating development. Secondly, the deposit may contain significantly more carbonate than Kazatomprom's other sites, which means greater acid consumption - a problem given the current acid shortage in Kazakhstan.

With next year’s guidance reduced so drastically, investors and utilities should ponder whether KAP could have difficulty delivering on its forward sales commitments. Did KAP enter into future sales contracts under the assumption it would be producing near subsoil use agreement levels next year? Did KAP over commit? The H1 2024 press release makes an interesting comment on this topic [emphasis mine]:

Amid our continued success in long-term contracting activity, Kazatomprom had initially intended to ramp up its 2025 production to a 100% of Subsoil Use Agreement levels. However, the uncertainty around the sulphuric acid supplies for 2025 needs and delays in the construction works at the newly developed deposits resulted in a need to re-evaluate our 2025 plans. Despite 2025 production plan adjustments, Kazatomprom remains steadfast in fulfilling its existing 2025 sales commitments, having maintained an unblemished record of delivery over its 27-year history.

It’s clear from this statement that the initial 2025 production guidance was based on significant utility contracting interest. While management refused to disclose the exact 2025 sales commitment number, it’s notable that KAP has had to draw down on its inventory significantly to meet sales commitments over the last 12 months, with current inventory levels down 31% YoY. Rebuilding inventory back to 2023 levels would take up the entirety of the recently guided 2024 production increase.

One final takeaway from these results is that executive turnover at the Company continues, and is likely to hinder operational performance. KAP’s earnings press release states that the CFO, Sultan Temirbayev, is resigning from his post. As a reminder, after KAP decided to lean heavily towards Russian influence, a number of key management members left the Company. Askar Batyrbayev, the ex-COO, who was well regarded by the West, has been detained for alleged ‘abuse of power’. With all this executive turnover, and history of production guidance misses, one can’t help but question whether KAP will successfully meet its renewed 2024 and 2025 production targets, which, while lower than initial guidance, represent the highest YoY production growth rate over the past decade (leaving aside the COVID period).

Conclusion

KAP has repeatedly emphasized its ‘unblemished’ track record to assuage any delivery concerns with regards to future commitments. However, any Western utility that takes a step back to review KAP’s track record and processes everything that’s played out over the last couple of years on the geopolitical front, will see ample cause for concern. They will see the world’s largest, most profitable uranium miner consistently slashing production targets, drawing down inventories, not committing to 2026 production guidance, and a revolving door of senior executives. They will also see the Company increasingly leaning towards geopolitical opponents, and future growth coming from assets owned by the Russians. I maintain my view that these dynamics will lead to a higher-for-longer price regime for uranium, and that this will disproportionately benefit Western uranium producers who will be able to charge a premium for their product due to the lower jurisdictional risks.