Inkai
Inkai is a very significant uranium deposit, located in Kazakhstan. There are two production areas (blocks 1 and 2) and an exploration area (block 3). The operator is joint venture Inkai limited liability partnership, which we jointly own (60%) with Kazatomprom (40%).
Inkai is one of our three material uranium properties.
| Location | South Kazakhstan |
| Ownership | 60% |
| End product | Uranium concentrates |
| Certifications | BSI OHSAS 18001 ISO 14001 certified |
| Estimated reserves (our share) | 53.9 million pounds (proven and probable), average grade U3O8: 0.07% |
| Estimated resources (our share) |
28.0 million pounds (indicated), average grade U3O8: 0.08% 146.6 million pounds (inferred), average grade U3O8: 0.05% |
| Mining methods | In situ recovery (ISR) |
| Licensed capacity (wellfields) |
approved: 3.9 million pounds per year, (our share 2.3 million pounds per year) application: 5.2 million pounds per year, (our share 3.0 million pounds per year – see Licensing) |
| Total production: 2008 to 2012 (our share) |
9.0 million pounds |
| 2012 production (our share) | 2.6 million pounds |
| 2013 forecast production (100% basis) |
5.2 million pounds (our share of production 3.0 million pounds – see Licensing) |
| Estimated decommissioning cost (100% basis) |
$14 million (US) |
2012 Update
Production
Production this year was 4% higher than our forecast for the year and 4% higher than production in 2011.
We continued to bring on additional wellfields to maintain some new, typically higher grade, wellfields in the production mix. The processing plant has the capacity to produce at an annual rate of 5.2 million pounds (100% basis) depending on the grade of the production solution. Production at Inkai steadily improved over the course of the year and the facility is now operating at design capacity. However, regulatory approval is required to carry out production at the annual rate of 5.2 million pounds (100% basis).
Licensing
An amendment to Inkai’s resource use contract was signed early in 2011, and Inkai received government approval to:
- increase annual production from blocks 1 and 2 to 3.9 million pounds (100% basis)
- carry out a five-year assessment program at block 3 that includes delineation drilling, uranium resource estimation, construction and operation of a test leach facility, and completion of a feasibility study
In 2011, we also signed an MOA (2011 MOA) with our partner, Kazatomprom, to increase production from blocks 1 and 2 to 5.2 million pounds (100% basis). Under the 2011 MOA, our share of Inkai’s annual production will be 2.9 million pounds with the processing plant at full capacity. We will also be entitled to receive profits on 3.0 million pounds.
To implement the increase, we continue to await government approval of an amendment to the resource use contract.
Project funding
We have a loan agreement with Inkai whereby we funded Inkai’s project development costs. As of December 31, 2012, there was $133 million (US) of principal outstanding on the loan. In 2012, Inkai paid $4.3 million (US) in interest on the loan and repaid $59 million (US) of principal.
Under the loan agreement, Inkai first uses cash available every year to pay accrued interest. Inkai then uses 80% of the remaining cash available for distribution to repay principal outstanding on the loan. The remaining 20% is distributed as dividends to the owners.
We have also agreed to advance funds for Inkai’s work on block 3 until the feasibility study is complete. As of December 31, 2012 the block 3 loan principal amounted to $85 million (US).
Uranium conversion project and doubling production
In 2012, we entered into a binding memorandum of agreement (2012 MOA) with our joint venture partner, Kazatomprom, setting out a framework to:
- increase Inkai’s annual production from blocks 1 and 2 to 10.4 million pounds (our share 5.2 million pounds) and sustain it at that level
- extend the term of Inkai’s resource use contract through 2045
Kazatomprom is pursuing a strategic objective to develop uranium processing capacity in Kazakhstan to complement its leading uranium mining operations. The 2012 MOA builds on the non-binding memorandum of understanding signed in 2007, which sought to align the annual production increase with the development of uranium conversion capacity. Kazatomprom’s primary focus is now on uranium refining rather than uranium conversion.
The 2012 MOA strengthens our partnership with Kazatomprom and includes a number of connected provisions relating to the increase of Inkai’s annual production and extension to the term of Inkai’s resource use contract. Under the terms of the 2012 MOA, we agree to:
- adjust our ownership interests in Inkai to 50% on an overall basis after achieving the production increase
- make two milestone payments of $34 million (US) each – the first after Inkai receives all necessary government approvals to increase uranium production to 10.4 million pounds (100%) annually through 2045, and the second after the increased production target is achieved
- pay to Kazatomprom a royalty of $5 (US) per pound of uranium concentrate on our share of production above 2.6 million pounds annually from Inkai once Inkai obtains all approvals required for the production increase to 10.4 million pounds (100% basis)
- participate in the construction and operation of a uranium refinery in Kazakhstan with capacity to produce 6,000 tonnes of uranium (tU) as UO3 annually, where we will own one-third of the refinery and the remaining two-thirds will be owned by Kazatomprom, with construction to begin by 2018
- provide Kazatomprom with a five-year option to license our proprietary uranium conversion technology for purposes of constructing and operating a UF6 conversion facility in Kazakhstan
- negotiate with Kazatomprom toward a conversion services agreement for up to 4,000 tU of conversion services annually and/or, for a three-year period, provide an opportunity for Kazatomprom to acquire a one-third interest in our conversion facility in Canada
Under the 2012 MOA, the first steps will be to complete a feasibility study for the production increase, and a prefeasibility study for the uranium refinery. We agree to work with Kazatomprom to pace investments for increasing uranium production to match progress on the transfer of our uranium refining technology and construction of the uranium refinery in Kazakhstan, subject to market conditions.
Implementation of the 2012 MOA is subject to:
- further agreements on a number of issues, including agreements governing the ownership, construction and operation of the uranium refinery in Kazakhstan
- the receipt of all necessary Canadian and Kazakhstan governmental approvals including all licences and permits required to allow the transfer and licensing of our uranium refining technology
Block 3 exploration
In April 2012, Inkai received regulatory approval for the detailed block 3 delineation and test leach work programs. Inkai continued delineation drilling, started technological drilling of test wellfields, continued with infrastructure development and started construction of a test leach facility for the block 3 assessment program.
Based on earlier agreements, profits from future block 3 production are to be shared on a 50:50 basis with our partner, instead of based on our ownership interests.
Planning For the Future
Production
We expect our share of production to be 3.0 million pounds in 2013 from blocks 1 and 2.
Block 3 exploration
In 2013, Inkai expects to:
- complete delineation drilling
- complete construction of the test leach facility and test wellfields
- extend power line to block 3 facilities
- start operation of the test wellfields
Managing Our Risks
Regulatory approvals
Our 2013 and future annual production targets for Inkai assume, and we expect, that Inkai will obtain the necessary government permits and approvals to produce at an annual rate of 5.2 million pounds (100% basis), including an amendment to the resource use contract.
There is no certainty Inkai will receive these permits or approvals. If Inkai does not, or if the permits and approvals are delayed, Inkai may be unable to achieve its 2013 and future annual production targets and we may have to re-categorize some of Inkai’s mineral reserves as resources.
Supply of sulphuric acid
There were no interruptions to sulphuric acid supply during 2012. Given the importance of sulphuric acid to Inkai’s mining operations and shortages in previous years, we continue to closely monitor its availability. Our production may be less than forecast if there is a shortage.
Political risk
Kazakhstan declared itself independent in 1991 after the dissolution of the Soviet Union. Our Inkai investment, and our plans to increase production, are subject to the risks associated with doing business in developing countries, which have significant potential for social, economic, political, legal, and fiscal instability. Kazakh laws and regulations are complex and still developing, and their application can be difficult to predict. To maintain and increase Inkai production, we need ongoing support, agreement and co-operation from our partner and the government.
The principal legislation governing subsoil exploration and mining activity in Kazakhstan is the Subsoil Use Law dated June 24, 2010. It replaces the Law on the Subsoil and Subsoil Use, dated January 27, 1996.
In general, Inkai’s licences are governed by the version of the subsoil law that was in effect when the licences were issued in April 1999, and new legislation applies to Inkai only if it does not worsen Inkai’s position. Changes to legislation related to national security, among other criteria, however, are exempt from the stabilization clause in the resource use contract. The Kazakh government interprets the national security exemption broadly.
With the new subsoil law, the government continues to weaken its stabilization guarantee. The government is broadly applying the national security exception to encompass security over strategic national resources.
The resource use contract contains significantly broader stabilization provisions than the new subsoil law, and these contract provisions currently apply to us.
To date, the new subsoil law has not had a significant impact on Inkai. We continue to assess the impact. See our annual information form for an overview of this change in law.
We also manage the risks listed here.