Kazatomprom’s Transformation to Increase Company’s Efficiency, Chair of Board Says

Last year, Kazatomprom confirmed its status of a major mining company and earned more than 35 billion tenge (US$103.9 million) in net profit. Although considering that Kazatomprom has been the mining leader for many years, in principle the news was expected for the market. An arrangement with Chinese partners on the joint construction of a fuel assemblies production factory was an unexpected development. Experts have already called this step historic; for the first time in its 19 years of existanceKazatomprom will not only sell raw materials, but will launch the production of ready-made fuel for nuclear plants. Chairman of the Board of Directors of the national nuclear company Askar Zhumagaliev provided the details in this interview.


What stage has been reached in construction of the factory?

Last December, we signed an agreement with our Chinese partners and thus began to implement a task of the President on the diversification of production. The joint venture Ulba-TBC has already been established. Currently, the design and estimate documentation is being developed. We plan to complete this work by the end of the year and start construction next year. We plan to receive the first products in 2019. The expected plant capacity is at the level of 200 tonnes per year.

Is there an understanding who will be buying the products from this plant? Could it be possible that it will be constructed and produce fuel, but no one will buy it?

When choosing a partner, we primarily pay attention to issues of sale and during the signing of the commercial agreement all these matters were taken into account. In fact at the present moment, before the start of the factory’s construction, all its products were contracted for and will be sold to China. It is also envisaged that the production will be expanded for third-country markets. Many European countries which use this type of fuel for reactors can also become potential buyers.

Nevertheless, production of fuel for nuclear plants is a science-based production. Being the world mining leader, why has Kazatomprom decided to try its hand in this new sphere?

We will not simply try. Now it is our strategic goal: in prospect we must not only keep the leading position in uranium mining, but be a producer of fuel for nuclear power plants. We will diversify production using the experience of international companies. Kazatomprom has enough resources for this end, including human resources. We will attract new knowledge and technologies to the country and create jobs. And of course, we will increase our profit via added value, being present at different stages of the nuclear-fuel cycle.

You said that one of the strategic goals is to remain the mining leader. Does it mean that you intend to increase production of uranium concentrate?

The current market situation tells us that there is no need to significantly boost production in the near future. As of today, the share of Kazakh uranium is more than 40 percent of global production.

While many uranium mining companies have frozen their production until better days because of low profitability, you continue to receive profit. What is the reason for such low costs of your products?

We use unique, effective methods of uranium mining with low costs. We can extract 80 percent of our uranium reserves using the most environmentally-friendly and efficient in-situ leaching method. This is our principal advantage. We are not digging pits, constructing mines; we extract uranium by the closed method without radioactive dust. That is why our mines have the same level of radiation as other populated areas without uranium production.
Returning to the issue of production costs, I may say that this is an ongoing process and we are continuously working to decrease them. In particular, at the end of 2015, we have cut them by 16 billion tenge (US$47.5 million). We are constantly working to improve mining technologies, raise productivity, introduce conservation systems, optimise expenditures and increase the qualifications of our specialists. For example, in the last year we gave up stainless steel and moved to polyethylene – it is more corrosion-proof, more plastic, easily mounted and cheaper. We have applied the technology of heat recovery; in other words, we receive heat during the process of mining and then use it to heat the premises and we are moving on peroxide sedimentation. Finally, all these influence production cost.

What is the cost of uranium production at Kazatomprom?

The system includes 14 enterprises; each has its own mining costs, some higher, some lower. It depends on the depth of uranium deposits, as well as other factors. But, in general, the current production cost allows us to extract, sell and gain good profits. In the last year we earned more than KZT 35 billion (US$103.9 million) in net profit.

During the recent meeting on transformation of Samruk Kazyna, you spoke about plans to create a trading company. Why would you need it, because Kazatomprom sells its own mining products?

It is one of the instruments which will be implemented during the transformation in order to increase marketing efficiency. You know that Kazatomprom not only produces uranium; we have beryllium, tantalum… We want to create a company which will successfully and comprehensively represent Kazatomprom on the international market and will be closer to the consumer. Yes, today we sell all uranium; for instance, in the last year we have concluded agreements on supplying uranium to France and India, the other part is on the spot (retail) market.
We can sell spot market uranium at a higher price. This will be the major objective for the trading company, but not the only one. The trading company will be an active player in the market, using various mechanisms targeted to increase Kazatomprom’s sales efficiency. Being a full-fledged trader, the company will seek opportunities to attract profits not only from Kazakh uranium sales, but also through the consideration of different offers on the world market. At the same time, we are closing three of our representations in China, Russia and the USA. The trading company itself will be in Switzerland.

You also apparently plan to attract a foreign specialist as a marketing adviser. Do we not have our own strong marketing experts?

If we would be selling sugar or cookies, I would agree with you; although, the uranium products market is very specific and narrow. Much depends upon personalities and relations are based on trust. We have been working with many of our partners for many years; they know that Kazatomprom is, first of all, reliable and stable, because over the life of the company we have never violated contract terms and failed supplies. We want to explore new markets. Thus we need help from those who worked on these markets and gained confidence and respect. New knowledge is a plus. You must learn always, otherwise you will lose your competitiveness.

Despite the big profit, the economic value added (EVA) indicator is very low – minus KZT 27 billion (US$80.3 million).

The company had such an indicator in late 2014, having started the transformation of the programme, we managed to improve this indicator to 16.9 billion tenge (US$50.3 million) in one year, and now it is minus 10.4 billion tenge (US$31 million). To that end, we have taken a set of measures to cut expenses, production costs, to transfer non-core assets… According to the 2025 Strategy, we must raise EVA to plus 32 billion tenge (US$95.2 million). To that end, we still need to do a lot, and it is, obviously the aim of the transformation. Further transfer of non-core assets, restructuring, lower administrative costs, reengineering of business-processes, automation, higher efficiency of production – all these measures, in the end, will help raise the profits of the company and increase EVA.

Do you think that a company of your scale needs transformation; could it be overestimated and can everything you just said be implemented without excessive flash, without making it a different programme?

The idea is that the programme provides an integrated approach; it helps to look at yourself from the outside, to identify weaknesses, to change the perception of the current situation. The world is rapidly changing, and competitors are also moving forward. When I explain to my colleagues the idea of transformation, I always take Nokia phones as an example. If you remember, 10 years ago it was the most popular brand, almost everyone had such a phone. It was a world bestseller; managers of the company might have thought that it would last forever. But then, new players came who focused on the development of technologies and substituted Nokia. The idea is that you need to develop continuously.

You said that the transformation plans to restructure and transfer non-core assets. What does it mean?

It means that we will sell, reorganise, and merge companies and enterprises, which are not related to our major activities. In the beginning of the last year, we had 82 daughter and granddaughter companies. Besides them, the company had social facilities, which were built at the expense of the company for its employees and population, living in uranium mining regions.

The first thing we did was to transfer all social facilities to the Akimats (regional governors’ offices). They have more experience in management, we can mine uranium. In short, everyone must do what he/she can do. In 2015, we also transferred 11 enterprises producing household chemistry and other chemistry products to the competitive environment. Now, we plan to sell our eight daughter companies, some “daughters” will be liquidated, and a number of other enterprises will be reorganised by merger. As a result, by the end of this year, we plan to transfer 18 enterprises of the holding.

President Nazarbayev instructed you to ensure implementation of all obligations taken by the partners of Kazatomprom during the launch of JVs or to consider returning the assets. Could you tell us about it in more detail?

At that time, when we created joint ventures with our partners, they took certain obligations, including on the development of hi-tech industries. At present, not all obligations are fully complied with or their implementation is protracted. Now, we started to analyse relations with all our partners, consequently, we will propose concrete solutions.

Last year, having started the implementation of the transformation programme, you moved all your daughter enterprises from Almaty to Shymkent and Kyzylorda. What is the idea of this relocation?

Instructed by the President, we relocated the offices of daughter companies, i.e. administrative and managerial personnel. Initially, we had all production employees in these regions. Yes, I cannot say that it was an easy process. But we consider this decision as a right one. The head of a mining enterprise must be in the production area, not in the comfortable office hundreds miles away. When I was engaged in the modernisation of the public service centres [as a head of government agency for telecommunications and information in 2010-12], we removed the offices of operation hall managers, for them to monitor the service delivery process, to communicate with clients, to promptly solve emerging issues. This experience was taken from Japanese – heads of workshops and factories were not granted offices. They must be present in the territory of the workshop and continuously monitor the industrial process. Besides, the relocation helped us to save almost KZT 300 million (US$892,647) of administrative costs.

Presumably, process automation is a key aspect of the transformation. Taking into account your broad experience in this area, how will the activities of the Kazatomprom will be changed?

We have already launched a pilot project – Situation Centre, which will be connected to all our enterprises by the end of the year. It is an information system, which collects all financial and production indicators of our “daughters.” It can analyse them and make forecasts. After the implementation of the Situation Centre we won’t need to compare dozens of Excel documents, it will show us online, in graphic form, the situation on all our indicators that will lead to prompt managerial decision-making.

By the end of the year, we also plan to introduce a solution called “Digital Mine” at one of our enterprises. It is also a system, which will show us the situation at our production facilities, production rates, agents use and deviation from regulations and plans. We also plan to start the development of a corporative system of procurement analysis, which will help us effectively use existing materials and plan new procurement. By the way, having implemented these projects, we will save 4.7 billion tenge (US$ 14 million) over five years. In fact, all these measures are the initial elements of the fourth industrial revolution.

I’d certainly like to ask about the Low-Enriched Uranium Bank, which will be located at the Ulba Metallurgical Plant. It’s a sensitive public issue. Many people still think that nuclear waste will be placed there.

No, uranium-235 hexafluoride enriched to 4.95 percent, which is used for peaceful purposes will be placed there. The idea of this bank is that any country in need of such material could get it from the bank without enriching it on their own. In other words, it is a product ready to be used for the production of nuclear power plant fuel; it is the same material we make fuel pellets from. Therefore, it is an absolutely wrong assumption that the bank will store nuclear waste. The UMP has been working with such material for 40 years and there were times when more than 1,000 tonnes of uranium hexafluoride were kept in stock, whereas now we are talking about more than 100 tonnes.

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