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

Good day, ladies and gentlemen, and welcome to Kazatomprom's 2023 First Half Results Conference Call. My name is Yerlan Magzumov and I am the Director of Investor Relations at Kazatomprom. Thank you for taking the time of the day to join us. [Operator Instructions] Our call will begin with presentation by our CEO, Mr. Yerzhan Mukanov, followed by an opportunity for your questions. If you joined through the Kazatomprom website or through our company page on the 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 2023 First Half Conference Call Slides. Note that our press release, full version of the operating and financial review for the first half of 2023, along with our financial statements for the first 6 months ended 30 June, 2023 are now available on Kazatomprom's website. Participating in today's call, we have Mr. Yerzhan Mukanov, CEO; Mr. Dastan Kosherbayev, Chief Commercial Officer; and Mr. Ulan Khassanov, Managing Director, Economics and Planning. This call is open to all stakeholders with a question-and-answer portion intended to be opportunity for members of the investment community to engage with the management team and ask their questions. Please note that this conference call may include forward-looking statements. These statements include all matters that are not historical facts, but their nature, forward-looking statements involve risk and uncertainty and they are not guarantees of future performance. This company does not make any representation, warranty or prediction that the results anticipated by such forward-looking statements will be achieved. I will now turn it over to Mr. Yerzhan Mukanov.

Thank you, Yerlan. I am delighted to welcome and thanks everyone for joining our conference call today. The success of any company is in the hands of its people and from our modest beginning to becoming the world's largest producer and supplier of uranium that will fuel a global transition to carbon-free energy generation, marking 26 years of growth and strategic evolution is a significant achievement for everyone. Our employees are key to the success and with the management team and the Board of Directors, we'll continue in the path of excellence. Along with the discussion of Kazatomprom's 2023 first half results, which were released earlier today, this call also provides an opportunity to update the stakeholders with our view of market developments, both long-term and during first half of 2023. Respectively, I would like to continue with a brief outlook at the uranium market, contracting activity and the spot and term uranium pricing gaining strengths during first half of this year with market participants shifting their focus to security of supply in light of the recent geopolitical events. Monthly spot prices were between USD 50 and USD 56. Spot market is now better balanced than seen as in previous years. The decline in purchases by the financials continues to be a factor in lower overall spot volumes. While financial demand has declined, utility spot purchases picked up slightly over the first half of 2023. The overall fundamentals are shifting to where the U3O8 market is becoming much tighter over the next several years, which leads to much more limited supplies being made available in the spot market. For the first half of 2023, there have been a total of 27 million pounds U3O8 in the spot market. [ Largest ] developments today are obsolete in the long-term market as according to the third-party sources, the volume of long-term contracting in the first 6 months of 2023 amounted to more than 160 million pounds, exceeding the volumes of the entire previous years. This can be perceived as a clear sign that the industry has entered into a new long-term contracting cycle, driven by the recognition of the restocking needs. Moving on to the long-term supply-demand picture. The third-party forecast indicates that the exponentially growing supply gap not covered by the production volumes coming online in the foreseeable future. Projections already indicate that this gap will continue to expand in the coming decades. By 2030, cumulative supply deficit of 63 million pounds U3O8 is projected, rising sharply to 140 million pounds U3O8 by 2040. Kazatomprom has consistently stated that it would closely monitor the market situation to determine the need to increase the production volumes back to 100 level in accordance with subsoil use contracts. Given the sustainably improving supply-demand dynamics, Kazatomprom is looking forward to expand its production in accordance with market fundamentals and expansion of the contract book. Consistent with our strategy and accounting for the constantly evolving situation around the mine development and production constraint, we expect our 2024 production volumes to remain below our total subsoil use contract volumes at a level of minus 10% of approximately 25,000 tonnes of uranium. Our production plans for 2025 will be communicated later this quarter. As a leading uranium producer, we aim to expand our worldwide presence, broaden our customer base to meet the increasing global demand and help the world in achieving global sustainable development and decarbonization goals. Accordingly, we continue to negotiate the supply of our products to customers and partners in Europe, Americas and Asia. Our share of the natural uranium market within the frame of our deliveries under new and existing contractual obligations to customers around the world increasing during the reporting period. Kazatomprom is continuing to optimize its sales based on the current market conditions with a focus on end-user utility contracts with exposure to increase its spot and term prices to maximize the benefits from the strength in market. For short-term deliveries to consumers, there is a certain time lag between the date of pricing fixation according to the transfer pricing legislation of Kazakhstan and the spot market price at the time of actual delivery. The high market volatility during these time lags become more evident as prices fluctuate both during periods of growth and decline. Our stakeholders have expressed a keen interest in our transportation rules during the reporting period. As was done in the previous periods, we have been using the St. Petersburg route as our primary route and we do not anticipate any major issues to arise in the foreseeable future. As we have reiterated in nearly every discussion with our stakeholder groups, should our access to that primary corridor become limited for any reason, we have a number of mitigation plans that are ready to deploy. They include the Trans-Caspian International Transport Route, an alternative route we first used in 2018 that does not enter Russian territory. The ability to negotiate swaps with partners and customers for material already at western converters. And an existing [ converter ] of uranium at various western conversion facilities that can be booked, transferred to customers should the need arise. Our customers can rest assured that Kazatomprom will meet all contractual obligations to deliver uranium to a designated location at a designated time. Moving into our first half year results for 2023. The company's production volume was nearly at the same level compared to the same period of 2022. And due to improvements in the schedule for wells commission and development progress now is on schedule. As of June 30, our inventory of uranium decreased compared to the inventory level we held in previous year due to the increase in sales volumes. Also, some parts of Kazatomprom's uranium goes to the production of fuel assemblies at Ulba-FA LLP. In May 2023, another delivery of fuel assemblies was carried out for our Chinese partners. And by the end of the year, we expect several more deliveries of our high-value-added products made from the Kazakhstan uranium material. To manage risk and ensure we had material at the right place and time, we did make some purchases and swaps in the market during this period. Our first half C1 cash cost rose as expected, increasing by 22% from just under USD 10 per pound this time last year to now just above USD 12 per pound. This was mostly due to an increase in the MET tax expenses related to each changes introduced in the beginning of this year as well as due to higher payroll costs and inflationary pressure. All-in sustaining costs rose as well by 27% to just above USD 19 due to a 35% increase in capital costs, resulting from the shift of some CapEx spending from 2022 into 2023 as well as a rise in purchase prices for materials, supplies, equipment and cost of drilling. Moving on to our financial results for the first half of 2023, you can see that they were quite remarkable. Revenue increased compared to the first 6 months of previous year by 25% to nearly KZT 620 billion, driving a rise in operating profit by 46% and a 33% increase in net proceeds to slightly above KZT 222 billion. There were no one-off transactions during first half of the current and previous year. These impressive results reflect both the improvement in the uranium market and considerable success of our commercial team in building our sales portfolio. This year, in July, we have paid dividends to our shareholders of approximately KZT 201 billion or roughly USD 1.7 per GDR, equal to 1 common share for the results of our previous year. Our dividend and capital allocation policy stays consistent with the prior years and with a payout ratio between minimum 75% from our free cash flow. Kazatomprom remains confident in our 2023 production plan and it remains unchanged between 20% lower than the nominal subsoil use contract level. And at the moment, Kazatomprom maintains the current level of guidance for annual production in 2023. Other metrics were revised using the updated spot price and exchange rates estimates and sales portfolio expansion. The company expects increased sales volume compared to previous guidance indicators due to additional requests from our customers to flex up their annual delivery quantities within the frame of existing contracts, some new long-term contracts with delivery in a prompt window between 2023. Expansion of contract book affects sales volume and revenue guidance. In the same time, cost metrics were also revised mostly due to updated forecast metrics of spot price and exchange rate. The spot price directly affects the mineral extraction tax expense in accordance with the introduced changes effective the beginning of this year. Total capital expenditures of mining entities on a 100% basis were revised due to change of schedule of new investment projects. We maintain our market-centric strategy, optimizing production and sales volumes based on market conditions and our contract book to deliver our shareholders' long-term value. As always, we are committed to the highest standards of health, safety, environmental stewardship and corporate governance in all aspects of our business. Open and constant communication is crucial during this time of ongoing uncertainty and elevated regional geopolitical risks and we remain committed to business continuity. Over the company's history, Kazatomprom has established itself as a reliable supplier and partner in the industry. Along with our proven track record since IPO for the commitment to building the long-term value for stakeholders through continued production and sales discipline, we are eager to keep working with new and existing global customers to provide the fuel required to meet the anticipated demand growth and help the world achieve its net zero objectives. Thank you for your interest and attention. We'll now be happy to answer questions from today's call participants.

[Operator Instructions] Our first question comes from Alexander Pearce of BMO.

Great. So just this question is on cash cost. Obviously, you mentioned you achieved, I think, USD 12.20 pound cash cost for H1. But you recently flagged a slight lift to the cash cost guidance for this year. I just -- I think it's USD 13 to USD 14.50. I just wonder whether you can you just perhaps talk us through how much of that change is due to FX and how much of it is because of some of the kind of cost inflation headwinds you may be experiencing?

Ulan Khassanov, the Managing Director. Like I say that the -- in the guidance, the increase of the cash cost and all-in sustainable costs are completely related with ForEx changes and also related with the changes -- related with the spot price. As you know, we have informed you that the mineral extraction tax nowadays is calculated according related with the spot price. That's why due to the increase of the spot price from last year, we can see that it influences the cash cost per pound. That is why we decided to increase our guidance for this year by USD 1 per pound. And we can say that half of them is related with the -- USD 0.5 pound is related -- USD 0.5 dollar per pound is related with the ForEx changes and the USD 0.5 is related with the increase of the spot price from last -- from the beginning of this year.

That concludes the question-and-answer session from the English audio line. And I will now pass the call back to Mr. Magzumov to take questions from webcast participants. Please go ahead, sir.

Hello there, again. We have received several questions. I'll start from the first one. Currently, there are 14 deposits out of 56. Known ones are in use. The remaining 42 are on standby. Could you please elaborate on the 42 deposits that are on standby. Question by [ Nicholas Philippides ], retail investor.

Okay. It's CEO speaking. Regarding the part of known deposits that are not in operation yet, I would like to say that not all of them are suitable for ISR operations. Part of them are suitable for underground and part of them for open-pit operations. And as you know, the cost of underground operations it's much higher. So for the moment, we do not consider in near future to start to mine this deposit.

Okay. The next question comes from Ben Finegold from Ocean Wall. What is the current status of route via Shanghai to the west?

Yes, this is Dastan, Chief Commercial Officer. Yes, indeed, such an endeavor had been in place. But currently, the negotiations are in progress and should there be any result, we'll update you accordingly, like, everyone will know. But at the moment, we are not disclosing any commercial terms or ongoing negotiations between the parties.

The next question comes from Mr. Kareem Haji from [indiscernible]. Can you please offer more color on the transport costs not using the St. Petersburg route? In a recent episode on the podcast of MacroVoices, it was alluded that the alternative route via Trans-Caspian, the TITR, is 20x more expensive.

That's a good question. It's just that I have to specify -- I had this notion being true. Our financial statements would have reflected that. And I mean, yes, definitely, there are some differences between prices for both routes, but it should be noted that the one using Trans-Caspian will have to use chartered vessels instead of like banner line vessels that are used through St. Petersburg. Therefore, there are certain discrepancies associated with the logistics, but they are insignificant. In general, this route is functioning well and we're using it as -- upon need. There are no problems.

The next question comes from Renata Abdurakhmonov from [indiscernible]. The question is, congratulations on great results. What percent of sales go to Russia and China? What are possible implications on you in case of sanctions on Russian nuclear exports? Will Trans-Caspian route be able to carry 100% of route via St. Petersburg?

Should this happen, yes, we believe that the TMTM is -- that's the short abbreviation for this route. We'll be able to transport 100% of our cargo for it was established and is functioning under this One Belt, One Road initiative, which implies a huge amount of cargo transport from China from East to the West. As for our region sales, well, you can see such information -- such data is not to be disclosed as it's commercially sensitive information. But in terms of -- I can give you a breakdown in terms of regions. You can see it from our financial statements. We had sold -- like 46% was sold to China last year -- Asia.

The next question comes from Anna Antonova, JPMorgan. Can you please shed some light on the nature of cash outflows related to acquisitions, redemptions of short-term securities in first half? There were some big movements recorded.

Actually, we have disclosed that most of this amount are related with the short-term securities, related with the -- like for getting some extra revenues from our cash and we were preparing for the dividend payment. That is why we decided from this year to have some short-term debt securities issued by National Bank of Kazakhstan. Also, we have invested in some amounts in the TVELs. That is why we do have such kind of amounts in our announced statement.

The next question is coming again from Anna Antonova from JPMorgan. The question is we see that Netherlands emerged as a material buyer of uranium this year with 8% share of sales revenues. Any comments -- is this a temporary event?

No, I don't believe that this is a temporary event just like it happened this year that it's one of our companies just helped us to engineer and structure a deal in this fashion. This may happen next year. This may happen a year after or -- it's just a regular sale business.

Dear operator, we still have time for more questions in English. Are there any other people who want to ask a question?

We currently have no questions on the conference call, sir. We will do, however, repeat the instructions. [Operator Instructions] Sir, we have no questions on the conference call.

This concludes the question-and-answer session in English. I will now turn the conference back to Mr. Yerzhan Mukanov to close today's call.

Okay. CEO speaking. Dear participants, thank you for your interest to our company. Let's meet the next time. Have a nice day. Bye.