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 |
| ISO certification | BSI OHSAS 18001 ISO 14001 certified |
| Estimated reserves (our share) |
59.7 million pounds (proven and probable) average grade U3O8: 0.07% |
| Estimated resources (our share) |
28.8 million pounds (indicated) average grade U3O8: 0.08% 153.0 million pounds (inferred) average grade U3O8: 0.05% |
| Mining method | 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 2.9/3.0 million pounds per year – see Licensing) |
| Total production 2008 to 2011 | 6.5 million pounds (our share) |
| 2011 production | 2.5 million pounds (our share) |
| 2012 forecast production | 4.3 million pounds (100% basis) (our share of production 2.5 million pounds – see Licensing) |
| Estimated decommissioning cost | $11 million (US) |
2011 update
Production
Production this year was in line with the currently approved production level, but about 4% lower than production in 2010. Lower production was a result of in-process uranium inventory changes. Prior to final commissioning of the processing facilities in 2010, the in-process uranium inventory had built up. A significant reduction of this inventory added to production in 2010.
In addition, production in 2010, the first full year of operation, benefited from the higher grades associated with new wellfields. Average grades at in situ recovery operations typically stabilize at levels lower than initial years because uranium is recovered from a mix of wellfields of varying maturities and, as wellfields mature, the grades decrease. The processing plant has the capacity to produce at an annual rate of 5.2 million pounds per year (100% basis) depending on the grade of the production solution. Inkai is planning to expand the existing satellite plant capacity in order to support this production rate from lower grade solution. Regulatory approval is required to carry out production at the annual rate of 5.2 million pounds per year (100% basis).
Operations
Inkai experienced brief interruptions to its sulphuric acid supply during the year, which had a small impact on production. The supply of sulphuric acid is tight in Kazakhstan.
Project funding
We have a loan agreement with Inkai. As of December 31, 2011, there was:
- $192 million (US) of principal outstanding on the loan (in 2011 Inkai repaid $122 million (US) of principal)
- a nominal amount of accrued interest and financing fees on the loan. In 2011, Inkai paid $6 million (US) in accrued interest and financing fees.
Inkai uses 100% of the cash available for distribution every year to pay accrued interest and financing fees. After these are paid, Inkai uses 80% of the remaining cash available for distribution to repay principal outstanding on the loan until it is repaid in full. The final 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.
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
We signed an MOA this year with our partner, Kazatomprom, to increase production from blocks 1 and 2 to 5.2 million pounds (100% basis). Under the 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 need a binding agreement finalizing the terms of the MOA, government approval and an amendment to the resource use contract.
Block 3 exploration
Inkai continued delineation drilling, began infrastructure development and completed engineering for a test leach facility for the block 3 assessment program. Regulatory approval of the detailed delineation and test leach work programs is required.
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.
Uranium conversion project
Under the guidance of the memorandum of understanding (MOU) signed in 2007 (see Doubling production), we continued to work with our partner Kazatomprom to evaluate joint UF6 conversion opportunities. This work includes examining the feasibility of a number of options and locations based on strategic and economic considerations.
Planning for the future
Production
We expect our share of production to be 2.5 million pounds in 2012.
Block 3 exploration
In 2012 we expect to continue delineation drilling and development of a test leach facility.
Doubling production
As part of our strategy, we are working with our partner, Kazatomprom, to implement our 2007 non-binding MOU. The memorandum:
- targets future annual production capacity at 10.4 million pounds (100% basis). Our share of the additional capacity is expected to be 50%.
- contemplates studying the feasibility of constructing a uranium conversion facility as well as other potential collaborations in uranium conversion
To implement the increase, we need a binding agreement to finalize the terms of the MOU, and various approvals from our partner and the government. We expect our ability to double annual uranium production at Inkai will be closely tied to the success of the uranium conversion project.
Managing our risks
Regulatory approvals
Our 2012 and future annual production targets for Inkai assume, and we expect:
- 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
- we reach a binding agreement with Kazatomprom to finalize the terms of the MOA
- Inkai will ramp up production to an annual rate of 5.2 million pounds (100% basis)
There is no certainty Inkai will receive these permits or approvals or we will reach a binding agreement with Kazatomprom or that Inkai will be able to ramp up production. If Inkai does not, or if the permits and approvals are delayed, Inkai may be unable to achieve its 2012 and future annual production targets and we may have to recatagorize some of Inkai's mineral reserves as resources.
We also require regulatory approval of our detailed block 3 delineation and test leach work programs.
Supply of sulphuric acid
There were brief interruptions to sulphuric acid supply during the year. Given the importance of sulphuric acid to Inkai's mining operations, 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.
There has been recent civil unrest in the oil producing region of West Kazakhstan. The government has taken action to resolve the underlying concerns and restore stability. Inkai, which is in South Kazakhstan, has not been impacted by the civil unrest. We are monitoring the situation.
We also manage the risks listed here.