Last Friday evening, Kazatomprom (KAP LI, NR) announced that it will revise down 2024 production guidance on shortage of sulfuric acid supply, and its 2025 output is also subject to adjustment depending on progress in new deposits. While CGNM is not immune from the reduced production and offtake volume at its JV/associate mines in Kazakhstan, we expect the surge in uranium prices would be more than enough to offset it and eventually benefit its bottom line. We lift SOTP- based TP to HK$2.30 as we adjust up our 2024/25 earnings forecasts by 15%/7% respectively. Reiterate BUY rating on CGNM.
Key Factors for Rating
KAP's production update. The company announced on last Friday that it expects 2024 production target to be adjusted down due to supply challenges of sulfuric acid - a key material for its in-situ recovery (ISR) uranium mining method. Its 2025 production target may also be affected depending on the development progress of new deposits. KAP will give detailed production guidance at its 4Q23 results announcement on or before 1 Feb.
Our take: The shortage of sulfuric acid has been one of the operational challenges haunting KAP in the past two years and it is not really a surprise for the company to cut production guidance, in our view. To address the problem, KAP is building a 800,000 tonne sulfuric acid plant in the southern Kazakhstan city of Turkestan, but it will only be completed before 2026. Sulfuric acid accounts for 12-16% of KAP's production costs during 2018-22 period.
Impact on uranium price. Spot uranium price responded strongly to KAP's announcement overnight, with mid-price jumping to US$103.5/lb according to Numerco. Uranium ETFs also surged 5.8-10.1% in US trading sessions. The tight uranium market is highly sensitive to any marginal supply changes, not to mention KAP's - the largest producer in the world with a 43% market share in primary supply in 2022 (100% basis). Global utilities companies may take further actions to secure their long-term fuel supply, and the uranium rally may still have legs in the coming months, in our view. We lift our 2024/25 average spot uranium price from US$82.5/92.5 to US$100/110 per pound of U3O8.
Impact on CGNM. We believe CGNM will see a net positive impact from the move. On one hand, CGNM's JV/associate mines with KAP will also suffer from reduced output, but the increase in uranium price will more than offset the volume loss on our estimates. We cut our 2024-25 output assumptions by 9%/15% respectively (100%), but raise EPS forecasts by 15%/7%.
Key Risks for Rating
Higher-than-expected uranium supply; unexpected nuclear accident.
Valuation
Maintain BUY rating. Our new SOTP-based TP of HK$2.30 represents 12x 2024x P/E.