This update provides a summary of recent key developments in the uranium industry, provisional information related to the Company’s key second quarter and half-year operating and trading results, and reiterated 2020 guidance. The information contained in this Operations and Trading Update may be subject to change.

Market Overview

The COVID-19 pandemic, which took hold in earnest at the end of the first quarter of 2020, continued to spread throughout the second quarter with a significant impact on global economies. The slowdown in manufacturing and commercial activities has impacted the energy sector; along with oil and other fossil fuels, the electricity sector has seen a large fall in demand of approximately up to 20% in most countries. However, within the electricity sector, the impact on nuclear generation has been much less severe, reflecting the resiliency and base load nature of nuclear power plants on the grid.

In its 2020 Global Energy Review, the International Energy Agency estimated nuclear power generation could decline by up to 3% in 2020 (compared to 2019), with extended outages and potential schedule delays in new plant construction being the most likely impact of the COVID-19 lockdowns. These include the following announced reductions and delays:

• Swedish utility OKG announced a three-week extension of its planned third-quarter maintenance and refuelling outage for the Oskarshamn-3 nuclear power plant, aiming to reduce the spread of COVID-19 amongst plant workers.
• In the US, DTE Energy of Detroit saw a COVID-19 outbreak in its workforce, resulting in an extended maintenance shutdown for the Fermi-2 nuclear power plant. Referred to by the company as a “safety stand-down”, the ongoing shutdown started 21 March and is the longest shutdown the plant has seen since 1993.
• Romania’s Nuclearelectrica postponed a planned maintenance outage of Cernavoda-1 to ensure continuity of operation and production under measures in its Staff Protection Plan for COVID-19.
• Rosenergoatom of Russia is expecting a two-month delay in commissioning of the Leningrad II-2 nuclear reactor due to Russian government restrictions imposed to prevent the spread of COVID-19.
• In Ukraine, Energoatom temporarily suspended the operation of three of its 15 nuclear power units during parts of the second and third quarters, largely due to reduced electricity demand.

Additional construction delays are possible for projects in France, the United Kingdom and the United States, although most companies are continuing to assess the overall impact and duration of the crisis, prior to making any announcements.

In Japan and unrelated to the pandemic, Kyushu Electric Power Co. suspended the operation of a second reactor at its Sendai nuclear plant in order to meet strict new safety guidelines. The shut-down follows the suspension of generation at the complex’s other unit in March, with both reactors expected to return to service in 2021, once construction of the required antiterrorism facilities has been completed.

In the US, Entergy permanently shut down the Indian Point-2 reactor after nearly 46 years of generating safe, clean electricity. The decommissioning was part of a deal reached in 2017 between Entergy, the state of New York, and the environmental group, “Riverkeeper”.

French utility EDF permanently shut down Fessenheim-2 in eastern France. Fessenheim’s two 880 MWe pressurized water reactors have been in operation for more than 40 years, but have now both been shuttered to meet requirements under France’s energy transition law, adopted in August 2015.

Nuclear utilities purchase fuel long before it is needed and the abovementioned demand side developments have generally had a limited impact on the near-term uranium market. In contrast, events affecting the supply side have already begun to impact the near- and medium-term market far more significantly.

The impact of COVID-19 on global primary uranium supply has already been seen in most mining jurisdictions. Driven by the need to keep employees safe and follow local health regulations, the temporary suspensions and production reductions announced by major uranium producers in Kazakhstan, Canada, Namibia and other locales in March and April, started to take effect during the second quarter, with some reductions carrying into the third quarter. Based on the latest annual production volume guidance updates, at the end of July, compared to volumes announced before COVID-19 pandemic, analysts are forecasting a reduction of more than 15 mln pounds U₃O₈ (more than 10%) in 2020, pushing the supply-demand balance into a supply deficit and reducing inventories.

On the policy front, the US Administration announced in May that it would end sanction waivers for three Iranian projects — the redesign of the Arak heavy water reactor, the Russian supplies of uranium to fuel the Tehran Research Reactor, and Russian export of Iran’s scrap and spent fuel from the research reactor. Foreign companies involved in these projects were given 60 days to wind down activities. A 90-day extension was provided for the fourth waiver, covering ongoing international support to the Bushehr-1 nuclear power plant, in order to ensure safety of operations.

In other US developments, the US House of Representatives Committee on Appropriations (the “Committee”) directed the US Department of Energy (the “DoE”) to re-submit a plan for the proposed establishment of a uranium reserve, prior to the reserve being funded in the FY2021 Energy and Water Development and Related Agencies Appropriations Bill. The Committee determined that the DoE, acting on the recommendations of the US Nuclear Fuel Working Group (established following the Section 232 investigation completed in 2019), had not provided sufficient information about how it would implement the program. The Committee gave the DoE 180 days to resubmit a plan.

Spot Market

The volumes transacted in the spot market increased considerably in the second quarter, following announcements from several producers indicating the global pandemic would have an impact on primary supply in 2020. Over the quarter, the market saw a steep spot price increase from about $27.50 at the beginning of April, to $34.00 by the end of May. Utilities remained largely on the sidelines, their focus being on ensuring the safety and continuity of their operating environments amid COVID-19. Producers and intermediaries were therefore the primary buyers in the spot market throughout the quarter, replacing lost production volumes with tonnage from the spot market to backstop their delivery obligations.

According to third-party market data, spot volumes transacted over the second quarter of 2020 were nearly three times higher than the same period last year. A total of 27.3 mln pounds U₃O₈ (10,500 tU) was transacted at an average weekly spot price of $32.56/pound (compared to 10.5 mln pounds U₃O₈ — 4,050 tU — at an average weekly spot price of $24.88/pound in the second quarter of 2019).

Weekly SpoTPrice Dynamics

2019-2020
(Click to enlarge)

Long-term Market

In the term uranium market, third-party data indicated that contracted volumes amounted to nearly 3.5 mln pounds U₃O₈ (1,350 tU) through the second quarter of 2020, compared to about 17.7 mln pounds U₃O₈ (6,800 tU) in the second quarter of 2019. Although the term market saw a sharp drop in activity in the second quarter of 2020 compared to last year, the average long-term price increased by about $3.00/pound U₃O₈ to $35.50 (reported only on a monthly basis by third-party sources).

Company Developments

COVID-19 Update
To reduce the risk of a COVID-19 outbreak at Kazatomprom’s operations and to follow all government restrictions and recommendations, the number of employees on mine sites was reduced for a four-month period, from April through July 2020. With carefully developed plans to ensure compliance with distancing and hygiene requirements during shift changes and day-to-day operations, the Company believes it can now safely begin to gradually bring staff back to the mine sites.

During the first half of August, the operations are expected to begin mobilizing employees, with COVID-19 testing for all workers returning to site. The sites are expected to be back to normal staff levels within two to three weeks. The ramp-up will be carried out following strict health and safety protocols to minimize the risk of a potential outbreak. However, production levels for the second half of the year are expected to be severely impacted by the four month shutdown.

Thanks in part to the timely pandemic response measures taken by Kazatomprom’s management in April, there have been no outbreaks at Kazatomprom’s sites, despite increasing cases across Kazakhstan and a number of cases among the off-site staff. The Company will continue to monitor the situation at the operations, as well as all regional COVID-19 developments and governmental directives, ensuring that any further recommended actions to reduce the impact of the pandemic are implemented without delay.

Shareholder structure
In early June, Joint-Stock Company Sovereign Wealth Fund “Samruk-Kazyna”, Kazatomprom’s majority shareholder, placed an additional 6.28% of Kazatomprom’s shares for public sale on the Astana International Exchange and London Stock Exchange. Following the secondary placement, the Company’s public free-float is now 25%, as was planned under the Government Privatization Plan. ■