Kazatomprom: Fueling the World's Nuclear Energy Boom

Company Profile

Kazatomprom, also known as the National Atomic Company Kazatomprom, is a Kazakhstani state-owned nuclear energy company. It is one of the world's leading uranium producers, accounting for a significant 23% share of global uranium production. Headquartered in Astana, Kazakhstan, the National Atomic Company Kazatomprom is a publicly traded company on the London Stock Exchange under the ticker symbol KAP.

Summary

• Kazatomprom, Kazakhstan's uranium mining giant, claims the title of the world's largest uranium producer, contributing a substantial 23% to the global uranium production with plans to boost production by 46% in 2025
• Kazatomprom has exhibited robust revenue and profit growth, and its stock price has surged by an impressive 236% over the past five years.
• Compared with other uranium producers, such as Cameco (CCJ), (CCO:CA), Kazatomprom has also the competitive advantage that all its uranium production is mined using in-situ recovery (ISR) methods.

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Extraction methodology

In conventional mining, extracting uranium ore involves physically digging it out of the ground, breaking it down, and applying chemical processes to separate the uranium from the surrounding mineralized rock. In the case of In-Situ Recovery (ISR), the uranium ore remains in the ground, and a leaching solution is injected underground, effectively dissolving the uranium within the rock. The resulting solution, rich in uranium, is then brought to the surface for further processing. This process resembles the way oil is extracted from the ground.

ISR offers various advantages, including lower initial costs, quicker start-up times, and reduced environmental impact. Once a well is depleted, it can be simply sealed or capped, allowing the land to return to its previous use. While not all uranium deposits are suitable for ISR (only 18% of global uranium resources are found in sandstone deposits), ISR techniques currently account for over 60% of total uranium production due to these benefits. These advantages become even more significant as inflation and stricter environmental regulations raise challenges in permitting, developing, and operating conventional mines.

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Structural deficit

With the current uranium spot prices rising recently to $65 per pound, the uranium market is on the way to reach the marginal cost of production, which is set at $70. When the inventory of secondary supplies is exhausted the uranium price will have to rise in order to incentivize new production. In a scenario where the uranium price increases beyond $70, Kazatomprom would be a major beneficiary. The company could ramp up production faster than any other miner and at a lower capital cost.

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Ownership

First, let's delve deeper into this mining company, which boasts 75% ownership by Kazakhstan's sovereign wealth fund, with the remaining shares publicly traded. Kazakhstan plays a dominant role in global uranium production, contributing a substantial 43% as of 2022, according to the World Nuclear Association (WNA). In comparison, Canada, the second-largest producer, trails significantly with a 15% share, and Namibia ranks third with an 11% contribution.

Kazakhstan's commitment to stable governance has created a favorable environment for production. This is evident from the remarkable jump in the World Bank's Ease of Doing Business rating, climbing to 25 in 2020 from 63 a decade earlier. The nation's economy is on an upward trajectory, with projected GDP growth of 4.3% in 2023, a notable increase from 3.2% in 2022.

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In 2022, KAZ's uranium production stood at 11,373 metric tons, as indicated in the table above. This output is on par with the production of the second and third largest uranium mining companies, Canada's Cameco (CCJ) and France's Orano.

Increased Production and strong financials

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Kazatomprom is ahead of its peers despite not operating at full capacity currently. The company has made plans to boost production to 100% based on subsoil use agreements by 2025, citing a positive shift in the uranium market. Presently, production is 20% below these levels, with an expected 46% increase to approximately 31,000 tons in the near future.

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Improved financials are evident with a 45% revenue growth in 2022 and steady double-digit growth in earnings. Additionally, the company's margins and share price have also shown positive trends.

In 2022, the operating margin stood at a noteworthy 45.5%, maintaining a strong 41% in H1 2023. Notably, the net margin exceeded this figure in 2022, reaching an impressive 47.2%, primarily due to a surge in the company's other income. Furthermore, H1 2023 retained a healthy net margin of 35.4%. While the attributable net margin in 2022 was considerably lower than the total net margin, it remained a solid 35%.

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Rising Share Price and Attractive P/E Ratios

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Kazatomprom's share price, traded on the London Stock Exchange (LSE), has surged by 236% in the past five years, reflecting the improved uranium market conditions.

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Despite this growth, the company's market multiples remain favorable, with a trailing twelve months (TTM) price-to-earnings (P/E) ratio of 17.6x. In comparison, Cameco has a much higher P/E of 217x. Looking forward, Kazatomprom's forward P/E of 15.1x is also attractive, especially when compared to Cameco's forward P/E of 83.6x.

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Investment?

The KAZ story makes a very good buy case for it. For investors who don’t want to invest in KAZ through non-US exchanges, ETFs are a good way to buy into the stock. Sprott Uranium Miners ETF (URNM) has the biggest share of its net assets in KAZ at 13.1%, making it the second biggest holding in its portfolio. Global X Uranium ETF (URA) comes in next with a 6.4% for the stock followed by VanEck Uranium+Nuclear Energy ETF (NLR) where it holds a 4.7% share in assets.

While KAZ is a good reason to consider these ETFs, they look promising even otherwise, going by the prospects for nuclear energy.

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Summary

In summary, I view Kazatomprom as a standout option within the uranium mining industry. It offers an attractive valuation, a strong commitment to delivering value to its shareholders, sensitivity to uranium price trends, assets in the most cost-efficient quartile globally, and robust profit margins, all backed by a disciplined production strategy. However, it's important to note that recent developments following the Ukraine conflict have somewhat lowered the attractiveness compared to a year ago, leading to an elevated geopolitical risk factor and increased cost considerations.

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Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in CCJ, over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Harmonic Invest's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Harmonic Invest is not a licensed securities dealer, broker or UK investment adviser or investment bank. Harmonic Invest is managed by an individual writer who is not licensed or certified by any institute or regulatory body.