The state corporation wants to reconsider the Australian deal

The accident at the Fukushima-1 nuclear power plant could disrupt Rosatom's largest deal in the uranium market. Atomredmetzoloto wants to renegotiate the terms of the purchase of Australian Mantra Resources, for which it must pay $1.2 billion - almost twice the current market price. Events in Japan and fears of a slowdown in the “nuclear renaissance” led to a sharp drop in uranium prices and quotations of core companies. Keeping prices low will also call into question the profitability of Rosatom's Russian uranium projects.

The uranium holding Atomredmetzoloto (ARMZ, which consolidates uranium mining assets in Russia and abroad), part of Rosatom, announced yesterday that, due to the accident at the Japanese Fukushima-1 nuclear power plant, it intends to reconsider the deal to acquire the Australian uranium mining company Mantra Resources Ltd. In a letter to Mantra, ARMZ states that the “series of serious incidents” at the nuclear power plant “are likely to have a material adverse effect on Mantra’s business, results of operations, assets or liabilities, financial condition or prospects.” The Russian company referred to the suspensive condition of the absence of significant negative changes, which was spelled out in the agreement between the parties signed in December to acquire the Australian company.

ARMZ is ready to continue negotiations on “alternative ways to implement the deal.” But the holding refused to specify what alternatives might arise in this situation. Mantra Resources did not comment on the situation yesterday.

ARMZ announced its intention to acquire 100% of Mantra shares for $1.2 billion in December 2010. The company's main asset is the Mkuju River deposit in Tanzania with reserves of 39 thousand tons of uranium. Mantra is currently completing a bankable feasibility study for the project.

In February, in an interview with Kommersant, the head of ARMZ, Vadim Zhivov, explained that the cost of production at Mkuzhu could be comparable to the Kazakh assets of the Russian holding company Uranium One (about $18 per pound of natural uranium). ARMZ intended to commission the first stage of Mkuzhu River by the end of 2012 - beginning of 2013, investments in the project were expected to reach $300-400 million.

But after the Fukushima-1 accident, the situation in the uranium industry changed dramatically. Spot prices for natural uranium, according to UxC Consulting, as of March 14, fell to $60 per pound; the MF Global uranium price index yesterday was $50 per pound (a 25% drop from Friday). Before the Japanese accident in February, the price level, according to UxC Consulting, rose to $73 per pound. The spot sector of the market covers about 10% of raw materials, most of the uranium is sold under long-term contracts, prices are more stable. In addition, stock prices of uranium mining companies fell sharply. Thus, Mantra securities immediately fell in price by 27.5% after the ARMZ message appeared, while in general since Friday the decline was about 38%. Cameco shares fell 23% over the same period, Uranium One fell 39.5% and Paladin Resources fell 30.6%.

The emotional wave is understandable, because there is a colossal tragedy in Japan. But you can’t build a strategy on this

— Anatoly Chubais, Chairman of the Board of Rusnano on March 17 about the prospects for nuclear energy after the accident at Fukushima-1

Vadim Zhivov, explaining the holding’s decision to acquire Mantra, said that “over the last two months of 2010, the uranium market has grown significantly and all companies have added 20-30% to their value.” Initially, it was about 8 Australian dollars per Mantra share with a premium to market quotes of 25-30%, the top manager said, but in mid-December the difference between quotes and price dropped to 5.5%. Yesterday, the capitalization of Mantra Resources on the Australian ASX exchange was about 652 million Australian dollars, thereby the premium that ARMZ would have paid for the company would have reached 84%.

Until now, ARMZ, in its strategy, which involved the active purchase of uranium assets, proceeded from the fact that the “nuclear renaissance” that began in the 2000s will lead in the future to a shortage of uranium. Part of the nuclear energy needs for raw materials is met by warehouse stocks, as well as by processing highly enriched weapons-grade uranium into low-enriched uranium suitable for use at nuclear power plants. In 2009, ARMZ predicted a uranium shortage in 2023; other analysts assumed a shortage of raw materials by 2014.

A review of nuclear power plant safety measures should lead to the fact that the cost of building new plants will increase significantly, says Andrei Cherkasenko, head of the Atompromresursy group. Referring to preliminary expert estimates, he speaks of a possible increase in the price of nuclear power plants by 20-30%. The head of Gazprom Energoholding (the company manages Gazprom's thermal energy sector) Denis Fedorov said yesterday that increasing the safety requirements for plants will lead to an increase in the cost of nuclear energy projects by 40-50%. According to Mr. Cherkasenko, the increase in the cost of nuclear power plants may lead to the fact that their payback will become a more difficult task; a number of investors may abandon such projects. This, in turn, will lead to a drop in demand for uranium.

But one of ARMZ’s key competitors, Canadian Cameco, does not yet intend to revise its development strategy. The head of the company, Jerry Grandy, said on March 14 that events in Japan would not affect the company’s plans (Cameco was going to double uranium production by 2018). In his opinion, lessons will be learned from the events in Japan, but the “nuclear renaissance” and the ongoing construction of new nuclear power plants will continue. Paladin Energy Marketing Director Dustin Garrow believes that the drop in spot uranium prices in recent days is due to the fact that virtually all the stocks that trading companies had were brought to market. He believes that "this situation will end in the near future, the market fundamentals will strengthen again."

But if the fall in uranium prices becomes long-term, this could affect not only the international expansion of ARMZ, but also Russian projects. In particular, on the development of the largest Elkon deposit in South Yakutia, for which the uranium holding was preparing. In February, Vadim Zhivov told Kommersant that Elkon was “becoming an interesting project” with uranium prices around $80 per pound. However, the current situation on the uranium market does not make it possible to talk about exactly when raw material quotes will reach this level.

Vladimir Dzaguto, Alena Miklashevskaya, Elizaveta Kuznetsova

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