KAZAKHSTAN'S URANIUM MARKET: KEY PLAYERS, PLANS, AND

UNCLAS SECTION 01 OF 04 ASTANA 000209

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, T, ISN
STATE PLEASE PASS TO USTDA DAN STEIN

E.O. 12958: N/A
TAGS: PGOV PREL EMIN ENRG EINV ELAB KNNP KZ
SUBJECT: KAZAKHSTAN'S URANIUM MARKET: KEY PLAYERS, PLANS, AND
PROSPECTS

REF: (A) 08 ASTANA 2232 (B) 08 ASTANA 2535

ASTANA 00000209 001.2 OF 004



1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY: On January 15-16, Energy Officer met with top
managers of Kazakhstan's state nuclear company Kazatomprom (KAP) and
its foreign partners in Almaty, Kazakhstan's commercial hub. They
discussed the role of international investors in Kazakhstan's
uranium mining sector; plans to build a new nuclear power plant in
Aktau; changes to the subsoil use law and tax code; and production
constraints caused by the rising cost of capital, a dearth of
qualified local personnel, and a lack of sulfuric acid for in-situ
mining methods. KAP Vice President Sergei Yashin confirmed that KAP
will fund the safe transportation and storage of spent fuel from the
decommissioned BN-350 nuclear reactor in Aktau. END SUMMARY.

MONOPOLIST KAZATOMPROM MANAGES THE MARKETPLACE


3. (SBU) Kazatomprom, a state-owned holding company, is
Kazakhstan's national uranium producer and operator of uranium
exports. The company operates in six main areas: geological
surveys, uranium production, metal making, power generation,
scientific research, and technical training. Reftel A describes in
detail the various operations of Kazatomprom and its joint ventures
with nuclear power companies from Canada, France, and Japan that
Energy Officer met in Almaty. On February 3, KAP President Mukhtar
Dzhakishev announced that revenue in 2008 would be 162 billion tenge
(approximately $1.33 billion),a 37 percent increase over 2007.
Dzhakishev also said that Kazatomprom produced 8,521 tons of uranium
in 2008, and plans to produce 11,900 tons in 2009, which he said
"will certainly make us number one in the world in uranium
production."


4. (SBU) In contrast to Kazakhstan's oil and gas companies, which
compete intensely against each other for exploration and production
contracts, the rivalry among major foreign players in Kazakhstan's
uranium market is muted, because their contracts are carefully
calibrated and awarded by the state-owned monopolist, Kazatomprom.
Furthermore, there is a shared sense that Kazakhstan's uranium
production potential has only begun to manifest itself. As Sergei
Yashin, Vice President of Kazatomprom, put it, "There is enough work
here for everyone. And each project is tailored to supply uranium
to a specific export market." For example, the APPAK joint venture
of Kazatomprom (65% ownership) and Japan's Sumitomo Corporation
(25%) and Kansai Electric Power Co. (10%) enjoys long-term supply
contracts with six Japanese companies and plans to sign two more in
the near future. Similarly, Katko, a joint venture between KAP
(49%) and France's Areva (51%),exports 100% of its uranium U308 to
customers in France.

KAZATOMPROM CONSIDERED "A RELIABLE PARTNER"


5. (SBU) Without exception -- or prompting -- Kazatomprom's
international partners spoke highly of the monopolist's management
style and leadership. The comments of Paul Lewis Clarke, Senior
Vice President of Canadian-based Uranium One, were typical. He
praised KAP's President Mukhtar Dzhakishev and Vice President Askar
Kassabekov for assembling an impressive team of well-educated,
talented, young managers. He said Dzhakishev and Kassabekov are
"very smart guys with a laser focus on business strategy and
execution." Clarke added that KAP plays an active role in assisting
the joint venture resolve tax, environmental, sulfur supply, and
other critical issues with the government of Kazakhstan and he
complimented KAP's technical staff for their expertiQn operating
mines and conducting geological studies.

BUT NEW INTERMEDIARY HAS A SOVIET MENTALITY


6. (SBU) Although established in 2003, State Mining Company, a KAP
subsidiary, only recently became the primary point of contact for
KAP's international partners. All existing and future joint venture

ASTANA 00000209 002.2 OF 004


partners must now first agree with State Mining Company on business
plans, personnel decisions, and investment strategies, before
presenting recommendations to KAP. The joint venture partners who
spoke to Energy Officer were universally critical of the new
intermediary.


7. (SBU) Uranium One's Clarke said he was unable to make a simple
but necessary technical adjustment because three key people from
State Mining Company happened to be out of the office that day.
Rinat Abduvaliyev, Director General of APPAK, said the additional
level of bureaucracy means "we have at least one more document to be
reviewed and approved before we can move." Pascal Lassus, Chief
Financial Officer of Katko, was even more critical, calling the new
entity, "just too much." Lassus said that Areva expressed its
concerns about State Mining Company to KAP's Board of Directors and
received a "positive response," but he lamented that nothing has
changed. Lassus said State Mining Company follows Soviet management
principles, stemming from the days when Soviet enterprises focused
exclusively on meeting production targets set by the state plan and
had no profit motive.

KAZATOMPROM VALUES ITS INTERNATIONAL PARTNERS ...


8. (SBU) When asked why Kazatomprom still needs foreign partners,
KAP's Yashin said, "First of all, we require long-term financing on
good terms. Second, we need to secure guaranteed sales, and all of
our joint venture partners buy our products. And third, we receive
value-added processing technology from our foreign partners.
Kazatomprom does not want to be simply a mineral resource exporter
anymore." When pressed, Yashin was surprisingly candid, even
sentimental. He said that KAP particularly values its partnership
with "American companies like Westinghouse and General Electric."
(NOTE: Japan's Toshiba Group is the majority owner of the
Westinghouse Electric Company, headquartered in Monroeville,
Pennsylvania. Kazatomprom owns 10% of the company, but has no
voting or veto rights or even a presence on the board of directors.
END NOTE).

... AND INDEPENDENCE FROM RUSSIA


9. (SBU) Yashin bitterly recalled the tough times Kazakhstan
experienced after the fall of the Soviet Union and said he felt
betrayed and abandoned by Russia. "We kept waiting and waiting for
our friends in Russia to resume relations and work with us as equal
partners, but they treated us like illiterate nomads who ride horses
and live in yurts. Now that we are back on our feet, Russian
companies come to us to buy uranium and we just tell them to get
lost." Yashin said Kazatomprom is "honored" to have worked with --
and learned from -- experts at Westinghouse and General Electric,
"who were there when we needed them."

SAFE TRANSPORTATION AND STORAGE OF BN-350 SPENT FUEL


10. (SBU) KAP's Yashin assured Energy Officer that KAP will fund
the safe transportation and storage of spent fuel from the
decommissioned BN-350 nuclear reactor in Aktau. Yashin thanked
Energy Officer for the assistance of the U.S. Department of Energy
in decommissioning the reactor, and said, "This is Kazakhstan's
business and we will take care of it," including building the
necessary roads and storage facilities.

NUCLEAR INDUSTRY SHELTERED, BUT NOT IMMUNE, FROM CRISIS


11. (SBU) Kazatomprom and its joint venture partners acknowledge
the adverse affect of the global financial crisis on business
operations. Katco's Lassus said that Areva's June 2008 agreement to
manufacture fuel assemblies at the Ulba Metallurgical Plant and sell
them to France exist "only on paper." And Aliya Kayupova, Corporate
Development Director for Inkai, a joint venture of Canada's Cameco
and KAP, said that the Ulba conversion and sulfuric acid plant
projects were put on hold for financial reasons. Nevertheless, the

ASTANA 00000209 003.2 OF 004


consensus was that Kazakhstan's civilian nuclear energy industry
will be sheltered from the worst of the global financial crisis,
mainly because KAP and its joint ventures have signed major
long-term supply contracts ranging from five to 10 years. KAP's
Yashin added that by 2030, the world's consumption of electrical
power will double, and although nuclear power cannot meet this
demand entirely, it will supply some of it.

SULFURIC ACID SUPPLY A COMMON CONSTRAINT


12. (SBU) The major constraint on uranium mining in Kazakhstan is
the supply of sulfuric acid. Currently, companies buy sulfuric acid
from Russia, Uzbekistan, and two companies in Kazakhstan --
Kazakhmys and KazZinc -- for which sulfuric acid is a byproduct.
Both APPAK and Inkai are dissatisfied with the irregular supply and
transportation costs of sulfuric acid and are planning to invest in
new sulfuric acid processing facilities. Uranium One and Inkai
praised KAP's success in securing a long-term supply of sulfur from
Tengizchevroil (TCO),which produces more than two million tons of
sulfur annually as a byproduct of oil production. Inkai's Kayupova
indignantly described how she spent several months negotiating with
TCO, which originally insisted on charging $400 a ton, while she
said Cameco was able to purchase sulfur for $150 a ton. Kayupova
said she visited Tengiz in 2008 with Kazatomprom Vice President
Askar Kassabekov, who was "pissed off" by TCO's marketing officials.
According to Kayupova, TCO did not seem to care about their
potential client, telling Kassabekov that they had eager buyers for
their sulfur in more than 20 countries around the world. Kayupova
said that Kassabekov subsequently had the government exert "a lot of
pressure" on TCO to convince the company to sign a contract to
supply the sulfur.

TAX AND LEGAL CHANGES


13. (SBU) Lassus of Katko is concerned by the proposed new Subsoil
Law, which lacks a clause on international arbitration and has
caused France's Areva to re-evaluate future investment in
Kazakhstan. In general, however, the foreign investors Energy
Officer consulted were not worried about changes to the Tax Code or
the Subsoil Law. Uranium One's Clarke said his company recently
extended its subsoil use agreement for the Kyzylkum mine until 2053,
and the terms of the contract are already consistent with the new
laws, unlike contracts signed years ago by companies such as Inkai.
"They got a sweet deal in the 1990s," according to Clarke, "so they
will have to make more of an adjustment." Abduvaliyev of APPAK says
that the new mineral extraction tax will lower the company's annual
rate of return, but he predicted the affect on commercial operations
would be offset by the lower corporate income tax rate.

ENVIRONMENTAL IMPACT OF URANIUM MINING


14. (SBU) Although KAP's joint ventures rely on a more
environmentally friendly in-situ leaching method to extract uranium,
mining operations nevertheless produce waste lakes, soil waste, and
transportation emissions. As with all subsoil users, uranium mining
companies are subject to quarterly inspections by regional and
national environmental authorities. Katko's Lassus reported that
his company had been fined previously for environmental violations,
but he would not disclose the amount or reason.

WORK PERMITS NOT A MAJOR PROBLEM


15. (SBU) Some, but not all, of the international joint ventures
working with KAP reported difficulty obtaining work permits for
foreign employees. The problem appears less acute than in the oil
and gas sector, although Katko's Lassus said it has affected the
company's strategic planning. Inkai's KayupoQid that South
Kazakhstan oblast, where Kazakhstan's uranium mines are located,
historically has a low quota for expatriate workers, since there is
little foreign investment in the region. Inkai has never raised the
issue with regional authorities and reports that 95% of their

ASTANA 00000209 004.2 OF 004


employees are hired locally from neighboring villages. Kayupova
said that in general, the local population in South Kazakhstan has a
very positive attitude toward foreign uranium mining companies since
they provide well-paying jobs with good benefits.

BUILDING LOCAL CAPACITY


16. (SBU) Nearly all companies consulted stressed the importance of
building the technical capacity of local staff. Abduvaliyev of
APPAK estimates that it takes up to 10 years to train a specialist.
According to the terms of its contract with KAP, APPAK must spend at
least one percent of total revenues on training and
capacity-building activities. APPAK provides classroom training at
Kazakhstan's Nuclear University (a Kazatomprom subsidiary) and the
National Technical University, and offers a variety of mentoring and
on-the-job training opportunities. Lassus said Areva trains its
employees in Kazakhstan and in France and proudly cited the example
of a Kazakhstani engineer who is currently working for Areva in
Paris. Industry sources said that the most qualified technicians
come from the Ulba Metallurgical Plant in Ust-Kamenogorsk and the
Institute of Nuclear Physics in Almaty. Dr. Adil Tuleushev,
Director of the Institute, complained that after several years of
training at his institute, many employees leave for better paying
jobs at Kazatomprom and its joint ventures.

NUCLEAR POWER PLANT TO BE BUILT IN AKTAU


17. (SBU) KAP's Yashin confirmed that the company plans to work
with Russian partners to build a new nuclear power plant in Aktau,
although he noted that the country currently derives 80% of its
power from coal, and investments in nuclear power are unlikely to
alter that ratio significantly. Yashin said the feasibility study
for the Aktau nuclear power plant has been completed will be
submitted to the government for review in April. Russia will supply
two 300-megawatt reactors, analogous to those used in Russian
nuclear submarines. The first block will be ready by 2016 and the
second by 2018.


18. (SBU) The Institute of Nuclear Physics hopes to take part in
this $5 billion project by providing ecological monitoring and other
services, which Tuleushev said might reach 10 percent of the total
project cost. Tuleushev was nevertheless opposed to using a
Russian-made, 300-megawatt reactor in Kazakhstan's nuclear power
plants. He said the electricity grid of western Kazakhstan is
isolated from the national power grid, which is much bigger and
requires larger reactors. As a result, technical and operational
lessons learned would not be applicable to the rest of the country.
Tuleushev is also concerned that the Russian-made 300-megawatt
reactor has no competitors and Kazakhstan would be dependent on a
monopoly supplier. According to Tuleushev, a 600-megawatt reactor
built by Westinghouse and other companies could be used in central,
northern, and eastern Kazakhstan and would be a better option. "We
need a replicable, widely-applicable project," he said.


19. (SBU) COMMENT: It was interesting to note the difference in
attitude between international oil companies and uranium mining
companies doing business in Kazakhstan. The oil companies are very
concerned by work permit restrictions, the new Tax Code, and
proposed changes to the Subsoil Law, and are skeptical of the
capacity of national oil company KazMunaiGas to advocate on behalf
of the industry and manage complex projects independently.
International uranium mining companies, however, expressed great
faith and confidence in the leadership and management abilities of
Kazatomprom and praised KAP's willingness to lobby the government,
often with impressive results. END COMMENT.

HOAGLAND