China funds Russian mine

17 May 2018

Steve Kidd looks at the motivation behind China’s investment in a new Russian uranium mine in Siberia.

There was a lot of comment when China announced recently that it would make a significant investment in a Russian uranium mine.

The Russia-China Investment Fund for Regional Development (IFRD), ARMZ Uranium Holding and Priargunsky Industrial Mining and Chemical Union (PIMCU) are to jointly develop a significant uranium mining project in Priargunsky District, located in Siberia’s Zabaikalsky Region (although the status of the agreement is currently unclear). IFRD was launched last year with the partial aim of investing in Russia’s nuclear industry, while ARMZ and PIMCU are subsidiaries of Russian state nuclear company Rosatom.

The agreement concerns Mine No. 6, which has reported reserves of 38,000t of uranium, 35% of PIMCU’s total. It is planned to bring the mine into operation in 2023. The deal would reportedly see the IFRD, via its backer the Chinese National Nuclear Corporation (CNNC), take a 49% stake in a joint venture to own and develop the mine, at a cost of 2.5 billion roubles ($44 million). The fund would subsequently invest another 14 billion roubles ($245 million) in the project when construction picks up in 2020-23. It is believed that CNNC will have offtake rights from the mine of 600t of contained uranium per year.

When the agreement was signed, Russia said that the agreement represents a breakthrough for creating mechanisms for future joint investments in the global uranium market.

The first question is why anyone would invest in a uranium mine at a time when spot prices are as low as $20- 25 per pound and likely to stay there until the mid-2020s? The answer lies in the particular circumstances of the
mine in question and the rapidly rising requirement for uranium in China and Russia – in stark contrast to most other markets.

Russia’s uranium production has been stuck at around 3000t/year since the 1990s. Production was formerly all from the PIMCU mines, near the remote city of Krasnokamensk in Eastern Siberia (near the Chinese and Mongolian borders). The city has always been heavily economically dependent on the mines which are old (over 50 years), deep underground, relatively low grade, and suffer from very high costs in today’s market conditions.

Production has struggled in recent years as some mined deposits have neared exhaustion, and Russia has diversified its uranium production by developing lower cost in situ leaching (ISL) mines at Dalur and Khiagia. Neither has so far reached its expected output.

Increasing russian demand

Russia has a rising requirement for fresh uranium for a number of reasons.

Firstly, the domestic reactor programme is going quite well, despite some reductions from original plans. The first VVER-1200 reactors are now coming online and although some new units will be replacing retiring old RBMK and VVER-440 models, the domestic requirement for uranium is rising from around 5000t/year today.

Secondly, Russia has been very successful at winning reactor orders overseas and, although these are inevitably delayed, they will require more fuel. Russia has successfully maintained its contracts for fuelling reactors it has built overseas by offering good prices and service. Although there is now competition to fabricate the fuel for VVER reactors from Westinghouse (and potentially others), Tenex (the Russian fuel marketing operation) offers very competitive prices for the supply of enriched uranium.

The third reason is that Russia has depended very much on secondary supplies of uranium to fuel its reactors and, with significant quantities exported to customers around the world, these are gradually getting exhausted. There remain some surplus highly enriched uranium (HEU) still to be down-blended after the end of the deal with the US in 2014, but other inventories (for example stockpiles of high-grade depleted uranium) cannot be expected to play such a large role in the future.

Russia has been struggling to get access to more fresh uranium domestically, as PIMCU has faced falling production and new mines have not achieved all that had been hoped.

In terms of uranium resources, Russia is quite well-served, with current recoverable reserves estimated at 274,000t and with substantial quantities inferred beyond this. One big problem, however, is that most are relatively high cost, so in today’s market conditions they are uneconomic to develop. For example, the Elkon deposit is rated as the second largest in the world but the production costs (probably well above $60 per pound) suggest it will not be developed until the 2030s, at the earliest.

The answer for Russia has been to acquire uranium from overseas. Rosatom’s uranium business, ARMZ, has fully acquired and largely integrated Uranium One, a company with extensive joint venture interests in Kazakhstan and other projects in development around the world. This has provided Russia with secure access to much more low-cost Kazakh ISL production but other overseas projects, such as the Mkuju River project in Tanzania, and its US interests, have stalled owing once again to poor market conditions.

While relations between Russia and Kazakhstan remain close, a diverse supply is advisable.

Russia still wants to increase domestic uranium production. But without significant investment in PIMCU, production is likely to continue falling.

ARMZ has been eager to develop the underground Argunskoe and Zherlovoe deposits at Mine No. 6 for years. It has better uranium grades than other Priargunsky deposits, so it hopes they can be extracted at lower cost, but it will probably not be as low as ARMZ’s two other production sites at Khiagda and Dalur. ARMZ has unfortunately struggled to secure the cash needed to launch work on this project. Russian federal funds have been channelled to other local projects, although in Krasnokamensk the key industry continues to be uranium.

Russia’s uranium mines, fuel cycle facilities and even nuclear power plants have long been used as a policy lever to stimulate employment in this and other ‘nuclear cities’ built up under the Soviet Union, but there is clearly a need to diversify economically and, with an unfavourable world oil price, domestic money is tight. This is where the Chinese come in.

China’s uranium strategy

Although China has bought huge quantities of uranium on the world market since 2010, building up an inventory of well over 100,000t, its strategy is to build equity holdings in key mines overseas rather than merely buy uranium. It also tries to stimulate domestic production and this has been partly successful, with annual production now approaching 2000t. China faces the same problem as Russia, however: most of its uranium reserves are of poor quality and therefore relatively high cost.

As a result, CNNC and the China General Nuclear Corporation (CGN), who together operate all of China’s reactors, have been investing overseas.

CGN has developed the huge Husab mine in Namibia, which has just started producing and will eventually ramp up to 6000t/year. CNNC has been less successful. Its investment in the Azelik mine in Niger has proved a disaster. Staff were kidnapped and it has high costs. After producing just a few hundred tonnes it is now on a care and maintenance basis. More successful has been CNNC’s 25% investment in Paladin’s Langer Heinrich mine in Namibia. Despite the parent company’s financial difficulties, this has secured roughly 500t/year for CNNC at a relatively low cost. CNNC may now acquire the remaining 75% from other financially shaken shareholders.

Investing rather closer to home, for example in Siberia, must have some attractions for CNNC. Although production costs may be relatively high, Chinese financial and business practices may allow Mine No. 6 to produce at a reasonable cost, certainly compared with PIMCU’s previous record. The assumption is that CNNC would take 49% of the output (maybe 1250t/year), with ARMZ taking the rest. This has advantages to both sides: without the Chinese investment, the development probably would not take place. 

Increased Sino-Russian cooperation? 

The deal has attracted comment. It is a further sign of cooperation between CNNC and Rosatom, which have seen relations with ups and downs over the years. In a wider sense, Russia has been an important contributor to China’s nuclear expansion, through technology transfers in reactors and enrichment facilities. There have been signs, however, that now China has a mature nuclear sector, cooperation will be less likely as Russia recognises it has created a dynamic new competitor in world markets. For example, sharing research on fast reactors appears to have largely ended.

In the fuel area, Russia’s uranium industry has been historically closed to outside investors, although it has sold minority stakes in some of its enrichment facilities. Domestic yellow-cake production has always been funnelled to Russian conversion and enrichment facilities, and sold abroad only in the form of enriched uranium. China has been an enriched uranium buyer, but this deal will see uranium going directly to China. China now has plenty of domestic conversion and enrichment capacity and wants to add value to uranium.

Another interesting angle on the deal relates to Mongolia. Not so long ago, ARMZ and CNNC fought a battle to control Canadian junior uranium company Khan Resources, which was trying to develop the Dornod deposit in Mongolia. CNNC jumped in with an agreed bid well ahead of ARMZ’s offer, but Mongolia eventually invalidated Khan’s exploration and mining licences.

CNNC’s motive was probably to develop Dornod jointly with the nearby Gurvanbulag deposit, which it had previously acquired. Progress there has been slow, but there may be some synergy with PIMCU’s processing facilities just across the border. This is obviously some way off but may be in China’s longer-term thinking.

Experience has shown, however, that developing any mining ventures in Mongolia is a very fraught activity, while relations between China and its near neighbour have always been awkward.

We will simply have to wait and see what happens subsequent to the signing of the agreement. It coincided with the official ground-breaking of the new Siberian mine, so Russia clearly intends to develop it and arrest the decline of local production. China should be willing to help, and will provide a ready market for the product.  

Steve Kidd is an Independent nuclear consultant and economist with East Cliff Consulting 

Russia Russian uranium production (tU) by mine 2010-2017
Russia Construction of Mine No. 6 started in March 2018 and is expected to be commissioned in 2023

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