Understanding Kazakhstan's Importance To The Uranium Market
'Uranium's OPEC' holds the key to the bull thesis
In January 2022, violent riots broke out in Kazakhstan in response to rising fuel prices and poverty. After Kazakh security forces were overrun, the Collective Security Treaty Organization (CSTO), a military alliance of Russia, Armenia, Belarus, Kyrgyzstan, Tajikistan and Kazakhstan, agreed to deploy troops in Kazakhstan. Vladimir Putin described the intervention as a concerted effort to protect regional allies from unrest "instigated by foreign interference in internal affairs".
To understand why Russia didn’t hesitate to deploy troops to Kazakhstan, one has to understand the deep historical ties between the two countries. Not only is Kazakhstan a former Soviet republic, it also shares the largest contiguous land border on the planet with Russia. Roughly a quarter of the population of Kazakhstan are ethnic Russians. Russia still uses the Baikonus Cosmodrome in Kazakhstan as its primary space-launch facility and conducts anti-ballistic missile testing at a test site within Kazakhstan. Kazakhstan is considered the closest ally to Russia after Belarus.
More pertinently for uranium investors, Russia obtains most of its uranium supplies for its enrichment facilities from Kazakhstan. In fact, Kazakhstan sits on 12% of the world’s global uranium reserves and currently produces roughly 22,000 tU / 57.2mm lbs of uranium, representing ~40% of global primary annual uranium supply, and making the country the largest uranium supplier in the world. It wouldn’t be an exaggeration to call Kazakhstan the OPEC of uranium. Kazakhstan also produces around 1.8mm b/d of oil, and has become the EU’s third largest source of oil imports since the start of the Russia-Ukraine war.
To make things even more interesting, Kazakhstan shares a border with another major geopolitical power, one that happens to be going all-in on nuclear energy: China. In September 2022, when Xi Jinping announced his first post-COVID foreign-trip, Kazakhstan was his first stop. He proclaimed that China and Kazakhstan were “good neighbors, true friends and reliable partners.” Critically, Xi also stated support for “state sovereignty, security and territorial integrity”. This was taken by many to be a veiled message to Russia, to respect Kazakhstan’s independence and to affirm China’s strategic interests within the country.
In recent months Kazakhstan’s national uranium mining company, Kazatomprom (KAP), has come under increasingly heavy influence from both Russia and China. In May this year, KAP sold a 49% stake in a massive new uranium mine (Budenovskoye) to Russia’s nuclear power company, Rosatom. People familiar with the transaction claim that the deal was pushed by Kazakhstan’s sovereign wealth fund, which owns 75% of KAP, and was against the wishes of KAP’s management team. The transaction led to a senior management exodus at KAP, including the Company’s two CEOs, CFO and COO.
Last week, KAP announced that it had signed a LT uranium supply contract with China National Uranium Company (CNUC), subsidiary of China National Nuclear Corporation (CNNC). While the details of the contract (term, amount) have not been disclosed, KAP has had to obtain a shareholder vote earlier this year to approve of its contracts with China as they are >50% of KAP’s equity book value. The shareholder vote allows the company to enter into a contract of up to 200% of the book value, which would mean a contract size of US$2.6bn - 10.4bn (book value is 2.3bn Tenge which is ~US$5.2bn). At a uranium price of $70 / lb, this implies a contract volume of 37mm - 149mm lbs, vs. KAP’s 2023 attributable production guidance of 28.5mm lbs.
In its recent Q3 operations update, KAP disclosed that production was down 5% YoY and that “issues associated with limited access to certain key materials, such as sulphuric acid, remain persistent and might potentially have a negative impact on 2024 production” (note: KAP uses in-situ recovery which requires sulphuric acid as a critical ingredient to extract uranium). This report comes only a month after KAP announced aggressive 2025 production targets. KAP has missed production estimates every year since 2020, with large misses in 2021 and 2022. In 2022, KAP stated that in 2024 they would increase production by ~12.5% which would require a 25% increase in capex. So far in 2023, capex has dropped on a YoY basis. It is quite unlikely that KAP will be able to meet 2025 guidance.
Why is all of this important? The largest uranium producer is struggling to meet its production targets and is increasingly under influence from Russia and China. If you are a Western utility that has uranium purchase contracts with KAP, this confluence of developments should concern you.
Let’s take a look at KAP’s customer commitments at the moment:
KAP is committed to delivering 22mm lbs of uranium to China’s Alashankou Warehouse (located at the Kazakhstan-China border).
KAP has an offtake agreement with Yellowcake (physical uranium fund) for 1.7mm lbs
Commitment to US utilities - 6.8mm lbs / yr
Commitments to Asian utilities - 15mm lbs / yr
Commitment to European utilities - 8mm lbs / yr
Total commitments: 53.5mm lbs
These total commitments are in contrast to KAP’s attributable nameplate production capacity of 31mm lbs (the rest goes to their 12 JV partners), and uranium inventory of 17mm lbs.
In fairness, there is no specific time frame mentioned for the 22mm bls to be delivered to Alashankou. However consider that China needs roughly 1bn lbs of uranium inventory by 2035 (vs. its current stock of 400 - 500mm). Why does China need so much inventory? China currently has 55 operating nuclear reactors and 21 more reactors under construction. The country intends on bringing 6-8 new reactors online every year for the next 10+ years, adding 150 GW of nuclear capacity by 2035.
Every time a new reactor is brought online, it requires an initial fuel loading of 3 times its annual fuel requirement for the reactor cores. Each GW of nuclear capacity requires roughly 500K lbs of uranium annually to operate, so for 150 GW you would need 225mm lbs of uranium just for the initial core load. On top of the initial core load, you need to have operational inventory. Nuclear plants typically keep 3-5 years of operating inventory. For 200GW of nuclear capacity by 2035, Chinese nuclear facilities will need to maintain anywhere between 300mm to 500mm lbs of inventory.
Based on these calculations, it’s reasonable to assume that the 22mm lbs committed to Alashankou Warehouse may all need delivery within the next year. Which begs the question: where will KAP get the uranium to fulfill all of its commitments? Will it use up all of its 17mm in inventory? How will the market react if the OPEC of uranium has no spare inventory? If KAP is unable to meet its commitments to all its customers, which customers will it prioritize? Western utilities or Russia and China? These are questions Western uranium buyers should be pondering.
Leaving aside geopolitics, there is another reason why KAP would prefer to sell to China over the West: transportation risks and economics. KAP currently has 3 main ways of transporting its uranium to end customers:
Through Russia / St. Petersburg. This route takes around 30 days for the uranium to arrive in the West to Cameco (Inkai JV) and Converdyn (green route) and 20 days to Orano in France (yellow route). The transport cost is roughly $0.30 / lb.
After Russia’s invasion of Ukraine, this route has come under threat of sanctions. Insurance on the route has switched from a fixed rate to case-by-case basis, leading to unpredictability in costs.
The alternative to the above, the Trans-Caspian route, requires uranium to be transported across the Caspian Sea through Azerbaijan, Georgia and to Turkey. Once in Turkey, the pounds can be shipped through the Bosphorus to US / Canada. The problem with this route is that Azerbaijan and Georgia have very little experience in handling radioactive cargo, and KAP must charter its own vessels as it’s not a commercial shipping zone. Not only does this route require approvals from all 3 countries, it also takes longer and costs more due to the logistics. It takes 40+ days for the uranium to arrive in the West and 25 days to arrive at Orano. The cost is $10 / lb (!).
This route is further complicated by the fact that Armenia and Azerbaijan have been engaged in a border conflict since 2021.
Lastly, KAP can transport uranium to the Alashankou Warehouse on the Kazakhstan-China border through rail in 7 days, with almost no cost and no transport risk.
If you’re in KAP’s shoes, it makes a lot more sense to partner with China. Not only does China’s nuclear buildout offer demand certainty for decades, transporting uranium to China comes with far fewer logistical headaches. KAP receives compensation from its customers only after the pounds are delivered, which means that transportation risk is a major consideration. It shouldn’t come as a surprise then that KAP has been eager to sign mega-deals with China and that KAP’s shareholders have voted overwhelmingly in support.
Unfortunately, it doesn’t seem like Western utilities and governments have been paying enough attention to these developments and taking steps to counter Russia and China’s influence in Kazakhstan and / or diversify their reliance on KAP. The French president Emmanuel Macron has made two recent trips to Kazakhstan, but I think it’s too little too late. The reason why France is showing more urgency now is that it generates 80% of its electricity from nuclear, and its primary source of uranium from Africa / Niger is currently under threat. Governments should be planning for such energy supply chain risks decades in advance, not on the eve of an emerging crisis.
Conclusion
Kazakhstan’s geopolitical importance has increased significantly in light of the nuclear renaissance. Russia and China have already made big steps to ensure that they have a strong influence over the country’s uranium assets.
Western countries have significant uranium supply commitments with Kazatomprom, but KAP will struggle to meet these commitments given the growing thirst for uranium from China.
If KAP had to make a choice, it would choose Russia and China as long-term partners over Western customers given the current geopolitical setup and the transport economics.
This leaves Western utilities in a precarious spot. The likely outcome will be a rush to develop Western uranium assets that have been ignored and underinvested for more than a decade.
Investors can benefit by buying the stocks of Western uranium producers and developers as these companies are likely to experience significant investment inflows as the uranium bull market matures.
Thanks. Love the detail.