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DE RUEHTA #0209/01 0351022
ZNR UUUUU ZZH
O 041022Z FEB 09 ZDK
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4516
INFO RUCNCIS/CIS COLLECTIVE 1132
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0529
RUEHKO/AMEMBASSY TOKYO 1235
RUEHIT/AMCONSUL ISTANBUL 0133
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RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0706
RUEKJCS/SECDEF WASHDC 0622
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1165

UNCLAS SECTION 01 OF 04 ASTANA 000209 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, T, ISN 
STATE PLEASE PASS TO USTDA DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV PREL EMIN ENRG EINV ELAB KNNP KZ
SUBJECT:  KAZAKHSTAN'S URANIUM MARKET:  KEY PLAYERS, PLANS, AND 
PROSPECTS 
 
REF:  (A) 08 ASTANA 2232 (B) 08 ASTANA 2535 
 
ASTANA 00000209  001.2 OF 004 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  On January 15-16, Energy Officer met with top 
managers of Kazakhstan's state nuclear company Kazatomprom (KAP) and 
its foreign partners in Almaty, Kazakhstan's commercial hub.  They 
discussed the role of international investors in Kazakhstan's 
uranium mining sector; plans to build a new nuclear power plant in 
Aktau; changes to the subsoil use law and tax code; and production 
constraints caused by the rising cost of capital, a dearth of 
qualified local personnel, and a lack of sulfuric acid for in-situ 
mining methods.  KAP Vice President Sergei Yashin confirmed that KAP 
will fund the safe transportation and storage of spent fuel from the 
decommissioned BN-350 nuclear reactor in Aktau.  END SUMMARY. 
 
MONOPOLIST KAZATOMPROM MANAGES THE MARKETPLACE 
 
¶3.  (SBU) Kazatomprom, a state-owned holding company, is 
Kazakhstan's national uranium producer and operator of uranium 
exports.  The company operates in six main areas:  geological 
surveys, uranium production, metal making, power generation, 
scientific research, and technical training.  Reftel A describes in 
detail the various operations of Kazatomprom and its joint ventures 
with nuclear power companies from Canada, France, and Japan that 
Energy Officer met in Almaty.  On February 3, KAP President Mukhtar 
Dzhakishev announced that revenue in 2008 would be 162 billion tenge 
(approximately $1.33 billion), a 37 percent increase over 2007. 
Dzhakishev also said that Kazatomprom produced 8,521 tons of uranium 
in 2008, and plans to produce 11,900 tons in 2009, which he said 
"will certainly make us number one in the world in uranium 
production." 
 
¶4.  (SBU) In contrast to Kazakhstan's oil and gas companies, which 
compete intensely against each other for exploration and production 
contracts, the rivalry among major foreign players in Kazakhstan's 
uranium market is muted, because their contracts are carefully 
calibrated and awarded by the state-owned monopolist, Kazatomprom. 
Furthermore, there is a shared sense that Kazakhstan's uranium 
production potential has only begun to manifest itself.  As Sergei 
Yashin, Vice President of Kazatomprom, put it, "There is enough work 
here for everyone.  And each project is tailored to supply uranium 
to a specific export market."  For example, the APPAK joint venture 
of Kazatomprom (65% ownership) and Japan's Sumitomo Corporation 
(25%) and Kansai Electric Power Co. (10%) enjoys long-term supply 
contracts with six Japanese companies and plans to sign two more in 
the near future.  Similarly, Katko, a joint venture between KAP 
(49%) and France's Areva (51%), exports 100% of its uranium U308 to 
customers in France. 
 
KAZATOMPROM CONSIDERED "A RELIABLE PARTNER" 
 
¶5.  (SBU) Without exception -- or prompting -- Kazatomprom's 
international partners spoke highly of the monopolist's management 
style and leadership.  The comments of Paul Lewis Clarke, Senior 
Vice President of Canadian-based Uranium One, were typical.  He 
praised KAP's President Mukhtar Dzhakishev and Vice President Askar 
Kassabekov for assembling an impressive team of well-educated, 
talented, young managers.  He said Dzhakishev and Kassabekov are 
"very smart guys with a laser focus on business strategy and 
execution."  Clarke added that KAP plays an active role in assisting 
the joint venture resolve tax, environmental, sulfur supply, and 
other critical issues with the government of Kazakhstan and he 
complimented KAP's technical staff for their expertiQn operating 
mines and conducting geological studies. 
 
BUT NEW INTERMEDIARY HAS A SOVIET MENTALITY 
 
¶6.  (SBU) Although established in 2003, State Mining Company, a KAP 
subsidiary, only recently became the primary point of contact for 
KAP's international partners.  All existing and future joint venture 
 
ASTANA 00000209  002.2 OF 004 
 
 
partners must now first agree with State Mining Company on business 
plans, personnel decisions, and investment strategies, before 
presenting recommendations to KAP.  The joint venture partners who 
spoke to Energy Officer were universally critical of the new 
intermediary. 
 
¶7.  (SBU) Uranium One's Clarke said he was unable to make a simple 
but necessary technical adjustment because three key people from 
State Mining Company happened to be out of the office that day. 
Rinat Abduvaliyev, Director General of APPAK, said the additional 
level of bureaucracy means "we have at least one more document to be 
reviewed and approved before we can move."  Pascal Lassus, Chief 
Financial Officer of Katko, was even more critical, calling the new 
entity, "just too much."  Lassus said that Areva expressed its 
concerns about State Mining Company to KAP's Board of Directors and 
received a "positive response," but he lamented that nothing has 
changed.  Lassus said State Mining Company follows Soviet management 
principles, stemming from the days when Soviet enterprises focused 
exclusively on meeting production targets set by the state plan and 
had no profit motive. 
 
KAZATOMPROM VALUES ITS INTERNATIONAL PARTNERS ... 
 
¶8.  (SBU) When asked why Kazatomprom still needs foreign partners, 
KAP's Yashin said, "First of all, we require long-term financing on 
good terms.  Second, we need to secure guaranteed sales, and all of 
our joint venture partners buy our products.  And third, we receive 
value-added processing technology from our foreign partners. 
Kazatomprom does not want to be simply a mineral resource exporter 
anymore."  When pressed, Yashin was surprisingly candid, even 
sentimental.  He said that KAP particularly values its partnership 
with "American companies like Westinghouse and General Electric." 
(NOTE:  Japan's Toshiba Group is the majority owner of the 
Westinghouse Electric Company, headquartered in Monroeville, 
Pennsylvania.  Kazatomprom owns 10% of the company, but has no 
voting or veto rights or even a presence on the board of directors. 
END NOTE). 
 
... AND INDEPENDENCE FROM RUSSIA 
 
¶9.  (SBU) Yashin bitterly recalled the tough times Kazakhstan 
experienced after the fall of the Soviet Union and said he felt 
betrayed and abandoned by Russia.  "We kept waiting and waiting for 
our friends in Russia to resume relations and work with us as equal 
partners, but they treated us like illiterate nomads who ride horses 
and live in yurts.  Now that we are back on our feet, Russian 
companies come to us to buy uranium and we just tell them to get 
lost."  Yashin said Kazatomprom is "honored" to have worked with -- 
and learned from -- experts at Westinghouse and General Electric, 
"who were there when we needed them." 
 
SAFE TRANSPORTATION AND STORAGE OF BN-350 SPENT FUEL 
 
¶10.  (SBU) KAP's Yashin assured Energy Officer that KAP will fund 
the safe transportation and storage of spent fuel from the 
decommissioned BN-350 nuclear reactor in Aktau.  Yashin thanked 
Energy Officer for the assistance of the U.S. Department of Energy 
in decommissioning the reactor, and said, "This is Kazakhstan's 
business and we will take care of it," including building the 
necessary roads and storage facilities. 
 
NUCLEAR INDUSTRY SHELTERED, BUT NOT IMMUNE, FROM CRISIS 
 
¶11.  (SBU) Kazatomprom and its joint venture partners acknowledge 
the adverse affect of the global financial crisis on business 
operations.  Katco's Lassus said that Areva's June 2008 agreement to 
manufacture fuel assemblies at the Ulba Metallurgical Plant and sell 
them to France exist "only on paper."  And Aliya Kayupova, Corporate 
Development Director for Inkai, a joint venture of Canada's Cameco 
and KAP, said that the Ulba conversion and sulfuric acid plant 
projects were put on hold for financial reasons.  Nevertheless, the 
 
ASTANA 00000209  003.2 OF 004 
 
 
consensus was that Kazakhstan's civilian nuclear energy industry 
will be sheltered from the worst of the global financial crisis, 
mainly because KAP and its joint ventures have signed major 
long-term supply contracts ranging from five to 10 years.  KAP's 
Yashin added that by 2030, the world's consumption of electrical 
power will double, and although nuclear power cannot meet this 
demand entirely, it will supply some of it. 
 
SULFURIC ACID SUPPLY A COMMON CONSTRAINT 
 
¶12.  (SBU) The major constraint on uranium mining in Kazakhstan is 
the supply of sulfuric acid.  Currently, companies buy sulfuric acid 
from Russia, Uzbekistan, and two companies in Kazakhstan -- 
Kazakhmys and KazZinc -- for which sulfuric acid is a byproduct. 
Both APPAK and Inkai are dissatisfied with the irregular supply and 
transportation costs of sulfuric acid and are planning to invest in 
new sulfuric acid processing facilities.  Uranium One and Inkai 
praised KAP's success in securing a long-term supply of sulfur from 
Tengizchevroil (TCO), which produces more than two million tons of 
sulfur annually as a byproduct of oil production.  Inkai's Kayupova 
indignantly described how she spent several months negotiating with 
TCO, which originally insisted on charging $400 a ton, while she 
said Cameco was able to purchase sulfur for $150 a ton.  Kayupova 
said she visited Tengiz in 2008 with Kazatomprom Vice President 
Askar Kassabekov, who was "pissed off" by TCO's marketing officials. 
 According to Kayupova, TCO did not seem to care about their 
potential client, telling Kassabekov that they had eager buyers for 
their sulfur in more than 20 countries around the world.  Kayupova 
said that Kassabekov subsequently had the government exert "a lot of 
pressure" on TCO to convince the company to sign a contract to 
supply the sulfur. 
 
TAX AND LEGAL CHANGES 
 
¶13.  (SBU) Lassus of Katko is concerned by the proposed new Subsoil 
Law, which lacks a clause on international arbitration and has 
caused France's Areva to re-evaluate future investment in 
Kazakhstan.  In general, however, the foreign investors Energy 
Officer consulted were not worried about changes to the Tax Code or 
the Subsoil Law.  Uranium One's Clarke said his company recently 
extended its subsoil use agreement for the Kyzylkum mine until 2053, 
and the terms of the contract are already consistent with the new 
laws, unlike contracts signed years ago by companies such as Inkai. 
"They got a sweet deal in the 1990s," according to Clarke, "so they 
will have to make more of an adjustment."  Abduvaliyev of APPAK says 
that the new mineral extraction tax will lower the company's annual 
rate of return, but he predicted the affect on commercial operations 
would be offset by the lower corporate income tax rate. 
 
ENVIRONMENTAL IMPACT OF URANIUM MINING 
 
¶14.  (SBU) Although KAP's joint ventures rely on a more 
environmentally friendly in-situ leaching method to extract uranium, 
mining operations nevertheless produce waste lakes, soil waste, and 
transportation emissions.  As with all subsoil users, uranium mining 
companies are subject to quarterly inspections by regional and 
national environmental authorities.  Katko's Lassus reported that 
his company had been fined previously for environmental violations, 
but he would not disclose the amount or reason. 
 
WORK PERMITS NOT A MAJOR PROBLEM 
 
¶15.  (SBU) Some, but not all, of the international joint ventures 
working with KAP reported difficulty obtaining work permits for 
foreign employees.  The problem appears less acute than in the oil 
and gas sector, although Katko's Lassus said it has affected the 
company's strategic planning.  Inkai's KayupoQid that South 
Kazakhstan oblast, where Kazakhstan's uranium mines are located, 
historically has a low quota for expatriate workers, since there is 
little foreign investment in the region.  Inkai has never raised the 
issue with regional authorities and reports that 95% of their 
 
ASTANA 00000209  004.2 OF 004 
 
 
employees are hired locally from neighboring villages.  Kayupova 
said that in general, the local population in South Kazakhstan has a 
very positive attitude toward foreign uranium mining companies since 
they provide well-paying jobs with good benefits. 
 
BUILDING LOCAL CAPACITY 
 
¶16.  (SBU) Nearly all companies consulted stressed the importance of 
building the technical capacity of local staff.  Abduvaliyev of 
APPAK estimates that it takes up to 10 years to train a specialist. 
According to the terms of its contract with KAP, APPAK must spend at 
least one percent of total revenues on training and 
capacity-building activities.  APPAK provides classroom training at 
Kazakhstan's Nuclear University (a Kazatomprom subsidiary) and the 
National Technical University, and offers a variety of mentoring and 
on-the-job training opportunities.  Lassus said Areva trains its 
employees in Kazakhstan and in France and proudly cited the example 
of a Kazakhstani engineer who is currently working for Areva in 
Paris.  Industry sources said that the most qualified technicians 
come from the Ulba Metallurgical Plant in Ust-Kamenogorsk and the 
Institute of Nuclear Physics in Almaty.  Dr. Adil Tuleushev, 
Director of the Institute, complained that after several years of 
training at his institute, many employees leave for better paying 
jobs at Kazatomprom and its joint ventures. 
 
NUCLEAR POWER PLANT TO BE BUILT IN AKTAU 
 
¶17.  (SBU) KAP's Yashin confirmed that the company plans to work 
with Russian partners to build a new nuclear power plant in Aktau, 
although he noted that the country currently derives 80% of its 
power from coal, and investments in nuclear power are unlikely to 
alter that ratio significantly.  Yashin said the feasibility study 
for the Aktau nuclear power plant has been completed will be 
submitted to the government for review in April.  Russia will supply 
two 300-megawatt reactors, analogous to those used in Russian 
nuclear submarines.  The first block will be ready by 2016 and the 
second by 2018. 
 
¶18.  (SBU) The Institute of Nuclear Physics hopes to take part in 
this $5 billion project by providing ecological monitoring and other 
services, which Tuleushev said might reach 10 percent of the total 
project cost.  Tuleushev was nevertheless opposed to using a 
Russian-made, 300-megawatt reactor in Kazakhstan's nuclear power 
plants.  He said the electricity grid of western Kazakhstan is 
isolated from the national power grid, which is much bigger and 
requires larger reactors.  As a result, technical and operational 
lessons learned would not be applicable to the rest of the country. 
Tuleushev is also concerned that the Russian-made 300-megawatt 
reactor has no competitors and Kazakhstan would be dependent on a 
monopoly supplier.  According to Tuleushev, a 600-megawatt reactor 
built by Westinghouse and other companies could be used in central, 
northern, and eastern Kazakhstan and would be a better option.  "We 
need a replicable, widely-applicable project," he said. 
 
¶19.  (SBU) COMMENT:  It was interesting to note the difference in 
attitude between international oil companies and uranium mining 
companies doing business in Kazakhstan.  The oil companies are very 
concerned by work permit restrictions, the new Tax Code, and 
proposed changes to the Subsoil Law, and are skeptical of the 
capacity of national oil company KazMunaiGas to advocate on behalf 
of the industry and manage complex projects independently. 
International uranium mining companies, however, expressed great 
faith and confidence in the leadership and management abilities of 
Kazatomprom and praised KAP's willingness to lobby the government, 
often with impressive results.  END COMMENT. 
 
HOAGLAND