Clock - Uranium Supply Crunch and Critical ... - Andrew Johns

Uranium Canada Research | Page 65 of 87Other Potential ConcernsKazakh Exposure. In 2011A, 97.5% of production attributable to Uranium One came outof Kazakhstan and though diversification is a focus, with that number dropping to 68%by 2016E (RJL), our valuation is firmly Kazakh-focused, representing 82% of our projectNAV. Beyond obvious geopolitical risks (ranked 81 st of 93 jurisdictions in the FraserInstitute’s Policy Potential Index), recent inflation rates of 7% have impacted domesticproduction costs (outpacing exchange rates – thus, a negative).Acid Logistics. Uranium One states that for the past three years, constraints in thesupply of sulphuric acid – a critical component in preparing and producing fromKazakhstan’s low-salinity wellfields – have been ‘an issue,’ while Cameco admits Inkaiproduction for 2011A was below expectations due to brief interruptions in supply. Goingforward, we view acid logistics, particularly transportation and storage, as a key risk onplanned ramp-up, albeit, this risk is being eased with construction of storage facilitiesand SKZ-U’s US$199 mln, 500 ktpa sulphuric acid plant near Kharasan (start-up in2H12E; Uranium One owns 19%).Acid Consumption. For reference, acid consumption rates vary mine-by-mine, rangingfrom 58 kg acid/lb U3O8 produced at Akdala (as at September 2011) to 451 kg/lb atKharasan, located in the more carbonate-rich Syrdarya province. In May 2012, NuclearIntelligence reported average delivered acid costs of US$157/t in Kazakhstan; atZarechnoye, for example, this implies US$8.30/lb, or ~40% of 2011A cash costs(US$21/lb).Acid costs and utilization rates can thus strongly impact earnings and, in our view, are akey risk to Uranium One, given (i) existing deposits in the country are ageing, moving theminers into less attractive areas (on a uranium grade vs. carbonate content basis) andrequiring more acid to maintain output levels, and (ii) most of the shallow, high-grade,low carbonate deposits in Chu-Sarysu province have already been exploited. IfKazakhstan continues to ramp production, country-wide acid demand could outpacesupply, putting upward pressure on prices.Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2