Kazatomprom: Upside Expected Despite Disruptions

Summary

• Kazatomprom, the world's largest uranium miner, has seen an 11% price rise for its GDRs listed on the London Stock Exchange after the release of its latest trading update.
• Both sales volumes and realised prices look expectedly good for the company in 2023 and particularly for Q4 2023, following the spurt in uranium prices.
• While there are risks to production and revenues due to sulphuric acid shortage, the exact impact remains to be seen. In the meantime, its market multiples continue to look good.

Since the last time I wrote about Kazatomprom, the biggest uranium miner in the world, has seen a 14% rise in the price of its GDRs listed on the London Stock Exchange.

The increase isn’t surprising at all, of course, considering the bullish investor sentiment towards uranium stocks, which has led to a 52% increase in Kazatomprom's own price in the past year. However, it's still interesting to note that it a big 11% of the gain this year has been seen since the end of January, following the release of the company’s full year 2023 and final quarter (Q4 2023) trading update.

Sales and realised prices rise

Expectedly, the update is a positive one. For the full year 2023, the company’s uranium sales volumes are up by 10% despite a small 1% drop in production, as planned. This was partly because customers made additional requests before their existing contracts ended and also because the company got into new long-term contracts.

Also, there was an improvement in the average realised price for both the group, by 27%, and that attributable to the company, by 22%. This implies that the company’s revenues will see a continued uptick in 2023.

While the full-year figures are encouraging enough, the Q4 2023 results are even more impressive. This is not only because of the rapid rise seen in uranium prices in the second half of 2023 but also because of the massive 94% year-on-year (YoY) jump in the group’s sales volumes (see table below for full details).

It does need to be noted though, that the realised prices in Q4 2023 are lower than the 65% rise seen for uranium spot price over the same time. This is on account of the company’s long-term contracts made before the price spurt, which were made on fixed prices.

Guidance for 2024

The company's production guidance for 2024 remains positive, with a 3.6% increase forecast. However, on the face of it, there's some disappointment on account of sales volumes, which are expected to decline by 12.3%. Whether this impacts revenues negatively, however, remains to be seen, since the company points out that the smaller volumes would be a result of of higher sales of enriched uranium products [EUP].

The risk of sulphuric acid shortage

The bigger risk can come from a shortage of sulphuric acid, which is required for ISR mining, as it can challenge the company’s current production estimates. The shortage stems partly from the growing fertiliser demand in Kazakhstan, where Kazatomprom operates.

With 60% of global sulphuric acid demand coming from the fertiliser industry, the focus on food security in the country has led to greater agricultural demand for fertilisers, fuelled by subsidies to the sector. Other factors like geopolitical challenges, supply chain disruptions and the potential lags in importing the highly corrosive acid due to safety protocols and proper logistics have impacted its supply as well.

Moreover, the shortage in the acid can also tell on the company’s profits as the company’s costs for it rose by 33.6% during 2023. Kazatomprom is in the process of seeking alternative sources now, which include constructing a new in-house plant for acid production. But it’s worth bearing in mind that this would also be an expense that can impact profits.

Competitive P/E

To this end, it would be particularly significant to wait for the company's guidance for 2023, when it releases its full-year 2023 results in March. For now, though, the stock looks attractive. Here's why.

With a price rise since I last checked, the stock’s price-to-earnings (P/E) ratio is up to 16.2x compared to the 15.1x it was in October. Even then, it is significantly lower than the comparable P/E for the Canadian Cameco Corporation (CCJ) at 76.8x.

Buy Kazatomprom through URNM

While trading in the stock is significantly constrained as it’s not listed on the US markets, as I pointed out the last time, exposure to it is still possible by buying into uranium and nuclear energy ETFs.

The Sprott Uranium Miners ETF (URNM) is the best pick from these for the said purpose since Kazatomprom has a substantial 13.7% weight in its holdings. It has sustained the position of the second biggest holding since I last checked and the weightage has actually increased since by 0.6 percentage points.

Besides the high relative shareholding percentage, URNM is also the best choice despite its AUM of USD 2.05 billion being less than that of Global X Uranium ETF’s (URA) at USD 3 billion, since URA accords only 4.45% weight to Kazatomprom. As a result, in absolute terms, the stock is a much smaller holding for URA.

What next?

The Kazatomprom story continues to look good. The latest trading update shows that not only has the company benefited from increased uranium prices, but also due to an increase in improved production volume. This indicates that the full year 2023 should continue to be a positive one for its financials.

While sales volumes can suffer in 2024, this doesn’t necessarily mean that its revenues will be impacted, especially as uranium prices are expected to be even more robust this year.

However, revenues could be impacted as there is a risk to its production from the shortage of sulphuric acid, however. The acid is crucial to its mining operations and its shortages can slow production, add to costs and alternative measures like constructing its own plant for the acid could impact profits as well.

Nevertheless, the issue at present doesn’t appear likely to affect Kazatomprom over the long term. As the biggest uranium producer in the world, its prospects look secure as nuclear energy gains ground. This alone can increase its stock price, which is further supported by its competitive market multiple compared to peers.

While it can’t be directly bought in the US markets, the Sprott Uranium Miners ETF is a good way to gain exposure to it, considering that it has the highest weightage and absolute holding of Kazatomprom.

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