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KazAtomProm - Initiation of coverage

Altynay IbraimovaDecember 25, 2018

Due to low costs the world’s leader in uranium production, Kazatomprom, demonstrates stable financial performance even against the background of unfavorable price movements for uranium. The expected increase in global demand and prices for the company's products puts Kazatomprom in a favorable position compared to other players in this industry. According to our analysis, the fair value of the company's shares obtained by discounting cash flows is $16.5/GDR and T6135/share.

World leader in mining and uranium reserves. Since 2010, Kazakhstan holds the first place in the extraction of uranium in the world. Kazatomprom accounts for about half of the uranium mining in Kazakhstan, produced through joint ventures with the world's largest companies such as Cameco, CGNPC, Orano and others. In addition to the main product, uranium concentrate (U3O8), Kazatomprom produces rare metals, and is also the national operator for the import and export of nuclear fuel for nuclear power plants, special equipment, technologies and dual-use materials.

Low production costs guarantee profitability despite low prices. The use of underground leaching technology, which does not require mineral extraction, provides the company with a high level of profitability, despite the low level of world prices for uranium. In 2007 the cost of uranium concentrate has reached $ 140 per pound, falling to $ 20-30 in recent years. At the level of full operating expenses, including Capex at $ 16 / lb, Kazatomprom has a stable margin of safety and is able to maintain marginal indicators at a high level even in case of negative dynamics of uranium prices.

Long-term prospects for nuclear power. The reduction in uranium production by major producers, Kazatomprom and Cameco, reduces the supply surplus in the market in anticipation of increased demand from the nuclear power industry. The growing number of newly launched reactors and the confirmation of the growing plans for the construction of new ones make it possible to expect a stable growth in uranium demand in the long term.

12M TP $16.5/GDR, Buy recommendation. Due to the high-tech nature of the business, stable financial performance and stable financial position, our expectations for Kazatomprom shares imply high growth potential. Low prices for crude oil and other commodities do not have a significant impact on the company due to the difference between the uranium price cycle and other commodity cycles. The DCF method of valuation gives a fair value of $16.5/GDR and we recommend to Buy Kazatomprom shares, which is one of the leading companies in the uranium sector. Noting the high concentration of the uranium market, we assess the benefit from the uranium price growth for Kazatomprom as overriding.