NUKEM'S URANIUM QUOTA UNMET BY UZBEKS

C O N F I D E N T I A L SECTION 01 OF 02 TASHKENT 001682

SIPDIS

SIPDIS

DEPT FOR SCA/CEN

E.O. 12958: DECL: 09/25/2017
TAGS: EMIN KNNP ENRG ETRD ECON IN UZ
SUBJECT: NUKEM'S URANIUM QUOTA UNMET BY UZBEKS

REF: A. A) 06 TASHKENT 650

B. B) TASHKENT 1514

C. C) STATE 128731

Classified By: CLASSIFIED BY ECON OFF B. OLSEN FOR REASONS 1.4 (B, D).


1. (C) Summary: As per ref C guidance, econoff informed Nukem
Inc.'s Tashkent Head of Office, Yevgeny Onokhin, of the
Indian Embassy's inquiry into Nukem's business in Uzbekistan.
Onokhin said he is cautious yet open to meeting with the
Indians. DCM informed the Indian Ambassador he should direct
his inquiries to Nukem. He said the government-owned Navoi
Mining and Metallurgy Combine (NGMK) is three months behind
in supplying Nukem with uranium, even though its stockpiles
are over twice the legally permitted amount. Onokhin said
the Government of Uzbekistan (GOU) is stalling its
contractually-obliged uranium shipment to Nukem while it
demands the renegotiation of numerous contracts with
international buyers. Meanwhile, the GOU is seeking out new
foreign companies willing to purchase uranium at a price
higher than it receives from Nukem. The Japanese company
Itochu recently signed a limited five-year contract with
NGMK. End summary.

Nukem's Supply Problems
--------------


2. (C) On September 20, Nukem's Office Head told econoff the
GOU is seeking out alternative buyers and stalling its
supplies to Nukem to maximize its revenue from uranium.
Nukem has an exclusive contract with the NGMK to export all
but 300,000 tons of uranium extracted from the Navoi mine.
This is currently Uzbekistan's only active uranium mine. To
date, NGMK is over three months behind in supplying uranium
to Nukem, and the previous shipments in 2007 were only
partial. The Nukem official said NGMK is stockpiling over
750 tons of uranium, although its capacity is 300 tons.
(Note: The International Atomic Energy Association licensed
NGMK mine to stockpile up to 300 tons.) Onokhin expressed
concern over potential environmental degradation from the
excess uranium.


3. (C) Nukem's downstream deliveries are due in one month to
users in Europe, Asia and the U.S. This year NGMK, in
concert with the Ministries of Finance and Foreign Economic
Relations, renegotiated four contracts with foreign buyers,
something Onokhin said is abnormal practice in the uranium
industry. Recently NGMK told Nukem it wants to renegotiate
for the second time. Onokhin said the GOU did not like the
renegotiated price and has stopped shipment until new prices
can be agreed upon. The GOU's economic pricing formula is
tied to the spot-market price, which is currently high.
However, long-term contracts are seldom tied to this price.
Nonetheless, the Uzbeks are trying to maximize their profit,
regardless of whether doing so violates contractual
obligations. Some of the downstream buyers have refused to
renegotiate, stating that NGMK must honor its contracts.


4. (C) Onokhin said if Nukem is sued by its buyers, it will
sue NGMK. He added it was too early to worry about such a
situation, as his company is still optimistic that the
problems will be resolved. Nukem experienced similar, yet
milder, problems in 2006 (ref B). Onokhin told econoff that
Rustam Azimov, the Minister of Finance, is quietly seeking
control over NGMK and its assets. (Note: NGMK also is
handling the gold tailings operations of the former
Zarafshan-Newmont joint venture. End note.) From the
beginning of 2007, NGMK's ability to make contracts was
removed and now Azimov must approve all contracts. A similar
phenomenon occurred in 2004 with the government-owned Almalyk
copper mine: the price of copper soared and government
officials quietly vied for control.

Looking for New Buyers
--------------


5. (C) According to Onokhin, this year the Uzbeks approached
the Russians to buy uranium. The Russians told them they
were uninterested and would call if and when they were.
Nukem's representative said the Indians approached the Uzbeks
a few years ago to purchase 30-50 tons of uranium. Nukem

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convinced the GOU to decline the offer, as India is not a
member of IAEA and Uzbekistan would be solely responsible for
transport and any ensuing problems. Responding to econoff's
comment that the Indian Embassy inquired about Nukem with
Post (ref C),Onokhin opined the Uzbeks might have approached
the Indians first. Onokhin is aware of the current
prohibition on engaging in nuclear trade with India, and is
cautiously receptive to the Indian Embassy's interest.
Separately, DCM informed the Indian Ambassador on September
17 that he should direct his inquiries to Nukem. The Indian
Ambassador was disappointed we had to substantive response
for him.


6. (C) Itochu, a Japanese company, recently signed a five
year contract with NGMK to purchase 300 tons of uranium/year.
Onokhin said the Japanese company has agreed to buy uranium
in 2007 at the short-term market price with no commission; it
reserves the right not to buy uranium during the final four
years of the contract. By contrast, Nukem has a long-term
contract with NGMK and receives a commission. In the
short-term with high market prices for uranium, Uzbekistan
receives more per ton by selling to Itochu than Nukem. If
the price of uranium falls, the reverse could be true.
Nukem's contract with NGMK states that NGMK may sell up to
300,000 tons of uranium directly to buyers once it has
fulfilled its minimum supply obligation of 180,000 tons to
Nukem.


7. (C) Uranium exported from Uzbekistan transits Kazakhstan.
Onokhin said Kazakhstan's border regulations are increasingly
more bureaucratic. NGMK must have a new transit license from
Kazakhstan to ship uranium to Itochu. A requirement to
receive the license is a letter from Nukem stating it does
not object to the sale. Onokhin told econoff his company
would only write a letter stating that Nukem does not object
to the sale if NGMK first meets its supply obligations to
Nukem.


8. (C) Comment: Uzbekistan is benefiting from a scarcity of
uranium; if the market price were lower and supply larger, it
would not be able to play such games with its buyers: buyers
would seek out other markets. Even though the GOU repeatedly
tells the Embassy it is interested in working to attract U.S.
(and foreign) investment, its actions continue to tarnish
Uzbekistan's reputation in the global market.
NORLAND