National Atomic Company Kazatomprom JSC (KZAP) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Kazatomprom 2021 First Half Results and Conference Call. [Operator Instructions] I will now hand over to Director of Investor Relations, Cory Kos, to open the presentation. Please go ahead.

Good afternoon, and welcome to Kazatomprom's conference call to discuss the company's 2021 half year operating and financial results. My name is Cory Kos, Director of Investor Relations, and we thank you for taking the time to join us today. Our conversation will begin with a presentation by our CEO, followed by an opportunity for investors to ask questions. If you joined through the Kazatomprom website or through our company page on our London Stock Exchange website, note that there will be slides displayed during the remarks. These webcast slides are also available for download in English and in Russian as PDFs called 2021 Half Year Conference Call slides. Note that our press release, full version of the half year operating and financial review, along with our reviewed unaudited 2021 half year financial statements are now available on Kazatomprom's website. Participating in today's call, we have Galymzhan Pirmatov, Chairman and Chief Executive Officer; Kamila Syzdykova, Chief Financial Officer; and Askar Batyrbayev, Chief Commercial Officer. This call is open to all stakeholders with a question-and-answer portion being intended as an opportunity for members of the investment community to ask their questions. Please note that the Q&A session will be conducted in English. The simultaneous translated Russian conference line is in listen-only mode and will include the translation of the Q&A. This conference call may include forward-looking statements. These statements include all the matters that are not historical facts. By their nature, forward-looking statements involve risk and uncertainty, and they are not guarantees of future performance. The company does not undertake any representation, warranty or prediction that the results anticipated by such forward-looking statements will be achieved. So with that, I will hand it over to Galymzhan.

Thank you, Cory, and hello, everyone. Thank you for joining us today to discuss the uranium and mid-tier market environment to date in 2021, along with Kazatomprom's 2021 half year operating and financial results, which were released earlier today. As always, before touching on some key half year highlights, we will be providing our corporate view of the global uranium market. Prior to jumping into the details, I think every stakeholder would agree that the extraordinary situation that we find ourselves in today as a global community warrants a bit of discussion. As many countries emerge from isolation with reduced restrictions, we are starting to see how the COVID-19 pandemic has changed virtually every aspect of our life. From work to leisure to travel, we are all adjusting to the new reality that could be in place for the foreseeable future. As we recognize the changes and the need to adapt in our daily life, we're also seeing that while we were locked down at home, the pre-pandemic challenges and problems the world was facing prior to COVID-19 did not go away. In fact, the social and environmental issues that have generated so much concern and debate in past have only become more pronounced in part due to the significant economic effects of the pandemic. Governments and individuals have had to evaluate the problem to try and find near- and long-term solution with a reprioritization of target and increased spending in areas that are expected to have the most significant impact. One of the areas that is perhaps needing the most attention right now is in relation to climate change. With the deepening impact of detrimental events like droughts, forest fires, floods and hurricanes, it is obvious that the time for idle discussion and counterproductive debate has passed, and governments must take action. For decades, experts in the scientific community have warned us that the problems are going to get worse, and it is imperative that we find meaningful ways to reduce the world's reliance on fossil fuel. Nongovernment environmental organization, which has, on one hand, been calling for such a reduction, have, at the same time, been among those putting up significant barriers to the most impactful solution, including more widespread acceptance of baseload carbon free nuclear power. The lack of recognition and support for nuclear as one of the only ways to effectively meet our 24-hour energy needs and displace carbon emitting fossil has delayed action. But thankfully, we're starting to hear more thoughtful conversations emerging with knowledgeable experts being given a voice in the attempt to increase both formal and informal public discussions about nuclear's role in addressing the climate challenges. With the focus on climate, several international agencies including the International Energy Agency have reinforced the message that the pathway to net zero emissions and an improved outlook for the planet must include both a significant increase in renewables as well as a significant expansion in global nuclear capacity. In that regard, noteworthy firsthand demand side development came from 2 of the world's biggest economy. In China, a new 5-year plan continued to show strong support for nuclear energy, calling for a near 40% expansion compared to 2020, pushing capacity to about 100 gigawatts by 2030. The United States, which today produces around 15% of global greenhouse gas emissions, officially rejoined the Paris Agreement, which aims to maintain the central global temperature rise well below 2-degree Celsius above pre-industrial levels and to pursue actions that will further limit temperature increase. Alongside the emphasis on climate, stakeholder interest has also become much more focused on ESG. Every industry is working to improve the environmental footprint, social impact and governance framework of their businesses. And we in uranium and nuclear industry find ourselves in a unique situation. ESG has always been at the center of how we have done business and with evolving global trends, we are reinforcing operational standards to ensure their ESG efficiency. The environmental benefits of nuclear are obvious and at the front end the entity recovery mining method is the most environmentally friendly way to extract uranium. All of our Kazatomprom mines employ the ISR mining method with our uranium operations providing the world with a significant amount of energy despite a very small operational footprint. Socially, uranium mining provides benefits to both nearby communities enter the countries in which they operate. In our case, with all operations located in Kazakhstan, the country benefits from having a significant resource base that underpins our place as the largest producer with the lowest cost mining operations in the world. In terms of governance, international regulations have always been at the forefront in the nuclear sector, requiring governments and businesses to operate under restricted oversight in order to ensure long-term viability. As a result of these factors and in the context of the difficult situations we see around the world today, we have become more and more optimistic in our view that the world is increasingly in need of a carbon-free solution like nuclear power. And with that need comes an increase in the demand for uranium, the commodity at the center of Kazatomprom's value strategy. The market showed some improvement in the first half of 2021. But the transition toward healthier conditions continued to move slowly. The impact of COVID continued to be felt across the industry, with lower primary production resulting from suspended operations and lower overall output, further grinding down available near-term supply. But thus far in 2021, sentiment has remained cautionary, particularly in light of the presence of new financial players. Those activities have the potential to introduce more transparent price dynamics and additional secondary demand. As many fuel buyers continue to evaluate their needs and are not under pressure, having little in the way of uncontracted requirements in near term, spot price remained around $30 during the first half of the year with lower overall volume contract. Term price also remained stagnant at $33.75 with lower contracted volumes so far in 2021. However, in the case of the term market, which calls for deliveries 2 or more years out in time, uncontracted requirements continue to grow, and there is mounting pressure for utilities to pay producers an adequate price that supports the decision to deploy capital and undertake the mining risk to ensure that future production is available when needed. Today's term price does not support such a decision and there is an increasing risk at an adequate level of uranium production will simply not be available at the end of the decade and beyond, regardless of the price. This must surely be a concern for the entire market. Moving into our first half results for 2021. Safety performance remained strong, though there was a slight increase in the frequency of injuries compared to 2020 when staff levels and site activities were reduced during the second quarter. In terms of protecting people amid the pandemic, 81% of our employees have now received a first vaccine dose, with 69% of staff now being fully vaccinated with 2 doses, which is well ahead of the country as a whole. Among our employees that work on shift and travel from across the country to our production site, more than 87% have received the first dose and more than 74% are fully vaccinated. We continue to focus on improving and implementing systems that will protect our people. In general, our operational and financial results for the first half of the year were strong. Although our operations continued to perform well and delivered production volumes on both 100% an attributable basis that were similar to 2020, development progress was slightly behind schedule compared to our plan. So we're working to ensure they are on track for the second half. As noted earlier in the year, we are having some difficulties getting the necessary types in some reagents due to pandemic-related supply chain challenges. But we have continued to employ mitigation plans that have reduced the risk to acceptable level, and our guidance remains unchanged at this time. The picture will become clearer as we finish the third quarter, after which we can review our expectations on 2021 production volume with more confidence. Early in the year, Yellow Cake purchased uranium from Kazatomprom at market prices, exercising their $400 million option and taking an additional $64.5 million. In our annual guidance, we do not assume Yellow Cake will exercise that option. So when they do, it's either the pressure on other negotiations we have underway, allowing us to be more selective, knowing that we have committed more of our annual production. In terms of our first half financial results, Yellow Cake sale was a small boost to our overall higher uranium sales with a higher average realized price also acting as a primary driver designed a 54% increase in revenue compared to the same time last year. The improvement resulted in a near 30% increase in operating profit. Net profit was down slightly compared to last year due to the one-off gains received in 2020 from the sale of the investment in the joint venture Uranium Enrichment Center. Though with that impact removed, adjusted net profit was higher by over 30%. Adjusted EBITDA for the first half was also higher than in 2020. At June 30, our inventory of finished uranium was similar to the inventory level we held at the end of 2020, remaining at the bottom of our comfort zone of about 6 months of attributable production, which did require some small opportunistic purchases in the market during the first half. We will continue to monitor market conditions. And to keep our inventory level in the target range, we expect to purchase additional material from the spot market during the second half. In terms of first half costs, C1 cash costs remained below $9 per pound, while all-in sustaining costs rose slightly to $12.58 per pound due to increased capital spending at the mining operations. Recall that the pandemic-related suspension of various site activities through the second quarter of 2020 resulted in a lower level of spending. After the end of the quarter, we also disclosed a few very important developments. First, we completed the payment of dividend in July, calculated based on our updated dividend policy. A 52% increase in the dividend payment compared to last year speaks to the company's commitment to maximizing shareholder returns even in a more challenging economic environment. In July, we also closed the transaction to sell 49% share of our 100% owned Ortalyk operation to CGNPC for $435 million. The completion of the sale was part of a much broader agreement between Kazatomprom and our Chinese partner dating back to 2014, which also included the construction of the fuel fabrication plant at our Ulba metallurgical facility. Certification of the production line at that plant are underway for this year, with the first deliveries of finished fuel bundles to China expected to take place in 2022. Finally, an important development not only for Kazatomprom but for the entire industry. We announced that we are extending the 20% reduction of our production against subsoil use agreements for an additional year to 2023. This means that for yet another year, global primary production is expected to be lower by over 5,000 tonnes than was previously expected. Although we remain confident and have started to see market improvement, we don't want to bring that production back until we have it committed under contract to ensure it doesn't end up in the spot market further delaying the recovery. For the remainder of 2021, we have kept our annual guidance unchanged, except for the adjustments made to attributable production and all-in sustaining cash costs related to the recent sale of a 49% share in Ortalyk. We remain confident that we can deliver on expectations, although that confidence assumes that our supply chain and well field development challenges can be effectively managed, which is by no means a guarantee. Our ongoing contract negotiations are expected to deliver sales at a similar level to 2020, exceeding attributable production by over 1,000 tonnes. Notably, we're only halfway through the year, but already, we no longer have any near-term material to manage, and we will not be selling uranium into the spot market in 2021. With the Kazakh Tenge to USD exchange rate remaining stable to date in 2021, revenue expectations are trending towards the bottom of the guidance range, but the range remains unchanged. As always, to the extent the exchange rate changes or is actually uranium prices are higher or lower than the third-party estimates we use for budgeting purposes last year, revenue would also be higher or lower. We remain on track for cost and CapEx guidance, pending our ability to operate and complete projects at normal activity levels throughout the year. Importantly, for the second half, and indeed, in general, our strategy has not changed. On the corporate governance side, we constantly work on improving our already high standard and in May shareholders approved the new composition of the company's Board of Directors. We welcomed 3 new representatives appointed by our majority shareholders in Samruk Kazyna. And importantly, we increased the number of independent representatives on the Board. We're proud of the fact that our Board now includes 2 females. Kazatomprom supports Board level diversity, which we believe is a big step towards our ESG and sustainable development goal. Kazatomprom's management team and Board of Directors remain committed to prioritizing long-term value in its decision-making as the marketing and sales team continuing to exercise discipline in our market activity. We are guided by our commitment to the highest standards of health, safety, environmental stewardship and corporate governance. We have maintained our lower-than-planned production level and will now continue to do so through 2023. Our marketing function has signed contracts with several new customers. We are confident that as the market transitions to more supportive pricing and the renewal of long-term contracting interest, Kazatomprom as a low-cost producer with substantial long-term reserves will be well positioned to benefit and deliver value to our stakeholders. Thanks for your interest and attention. We will now take questions from stakeholders on the call.

Thank you, Galymzhan. Just a quick note for everyone listening on the english line and on the webcast, audio will now be swallowed for a moment just well our slightly longer Russian translation of the presentation catches up. So in a minute or so, we will have the operator rejoin the call to begin the Q&A. So we just ask for your patience on the conference line for just a moment. [Operator Instructions]

[Operator Instructions] We have our first question, and that's coming from the line of Chintan Kumar from Crédit Suisse.

Two questions from me, please. Firstly, on pricing. You mentioned that we see a modest rise in the spot price and kind of a stagnant long-term price. In your interactions with utilities, do you feel fuel buyers are becoming increasingly concerned about longer-term security of supply? And I guess, particularly in the face of your rolling of supply curtailments, have you noticed any changes in your interactions more recently? And then on the second question, there's been some commentary by your peers suggesting that some producers are bidding aggressively to term RFPs that are appearing in the market. Could you shed some light on what type of producers you think are chasing this business? And does it concern you?

Thank you, Chintan, for great questions. Yes. We -- on both, we do see it's not a concern, but a lot more attention to longer-term supply. And in terms of our recent interactions, maybe Askar, you can give it a little bit more detail, and I'll follow up with the second question.

Yes. On the Utility change, we can say that yes, we see that utilities have changed their attention. They are approaching us more frequently for longer-term deals and mid-term deals. So we see some change in their attitude, but it's not at that level as we wanted to see. Maybe that was the reason for our decision about 2023 to grow minus 20% from our contractual subsoil use contracts. So definitely, utilities have changed. They are coming and seeking for the material. We're having open and off-market conversations with them, but their attention and their requests are not that big, but it will still shift the market to more long-term talks.

And in terms of second question, we don't -- we can't really say what -- which producers are doing that. But we noticed in seeing that more and more that some of them are bidding more aggressively. And we have feedback, obviously, from utilities that somebody else got it because of sizable difference in pricing. So that's what we're seeing. Thank you.

The next question is coming from Anton Fedotov.

I have a question with regards to your asset structure. You just sold 49% in Ortalyk asset to a Chinese company. Do you have any plans in other asset sales or maybe adding to your current stake in your current assets going forward?

Thank you, Anton. No, we don't have any plans for any further asset sales or adding or doing more consolidation in our existing assets. If you remember, this sale is the part of the agreement that Kazatomprom signed back in 2014. It's related to our fuel fabrication project, so it goes hand in hand with that project, and we finally completed the sale. End of last year, the fuel fabrication plant was commissioned. And this year, it's basically assembling first fuel bundles as part of the certification process, and we expect the first delivery of fuel bundles next year. So that is part of that project, that agreement. We don't have any current plans to sell any more assets or to buy more shares in existing projects.

The next question is coming from Anna Antonova from JPMorgan.

One question from our side. In light of your guidance of flattish uranium production next year and in 2023, is it fair to assume that your mining CapEx on 100% basis next year and then 2023 should roughly be the same as it is for this year? Could you please shed some light on this?

Yes. Thank you, Anna. Few comments. First, about 2023 CapEx plan. It will depend on what we decided for 2024. If we decide to change the production plan for 2024, that may drive CapEx for 2023 higher, and we will have to prepare for potentially a different number of tonnes we want to produce. In terms of '22, more or less the same, except we are seeing some of the pressure coming from COVID-related supply chain bottlenecks and some maybe increase in cost base different from our recent experience. We are following it. It's not significant in any meaningful way. But on the CapEx side and on some of the OpEx side, we are already seeing that the experience will be different from our recent few years.

Understood. And maybe a quick follow-up question. Do you expect any changes to taxation regime in the near term for uranium industry in Kazakhstan, given the wider press comments on government officials about hiking royalty rate for other mining sectors in the country?

Yes. Thank you. No, we don't expect as of today any changes in terms of taxation.

[Operator Instructions] Okay. There are no further questions on this line. And we may pass on the question-and-answer session to my colleague, Roxelana. Please go ahead, Roxelana.

Thank you, operator. There are no questions on the conference line. I will now hand over to the management team for the bridging question.

Thank you, operator. We have just a couple of questions in so far from webcast participants. So I will act as moderator for the final part of today's call. So we have an investor asking a question, what percentage in revenue income do you foresee your new fuel fabrication plants in the upcoming years? So perhaps if I could ask Galymzhan to take that question?

Thank you, Cory. Maybe we'll get back to -- with the answer to that question. In general, as you know, revenue may be sizable, but in terms of margin, that business is different from our mining business. So it has quite a bit of expensive input items. And so with enriched uranium, so Kamila will get back with the detailed answer to that question.

Perfect. Thanks. So I will -- I guess, I can hand back to you to close. We have no more questions right now on the line. But as always, with our investor audience or anybody that who wishes to ask any questions, please do reach out. Our contact information is on our website, and we're happy to have a conversation. So I'll hand back to you for a brief summary to close the call, Galymzhan.

Yes. Thank you, everyone, for your interest and time. Since we have less and less questions. I hope that means that you have more and more understanding of our business and in our approach. So please be safe and look forward to speaking to you soon.

Thank you. Thank you, everyone. That concludes your call for today. You may now disconnect. Thank you for your participation, and enjoy the rest of the day.