investors

Whether it is in the frigid Athabasca Basin in north Canada, the arid Outback of Australia or the dunes of Namibia in southwest Africa, mainland firms have been eagerly acquiring access to uranium deposits around the world to supplement domestic supply of the raw material for nuclear power.

China was the world's 10th-largest uranium producer last year and had the 14th-largest reserves of the ore in the world, according to the World Nuclear Association. But with a plan to raise nuclear generating capacity by more than sevenfold in the next 11 years, domestic supply will be far from enough.

Publicly, officials in charge of the nation's energy policies play down supply concerns. However, in private, the tone is different and an official at China National Nuclear Corp, one of the two state-owned nuclear power project developers and uranium miners, said the low quality of domestic uranium meant overseas resources would have to be tapped in big amounts if China's nuclear power programme was to run economically.

"If we operate our nuclear plants purely on a political and strategic basis at the current consumption rate, existing domestic reserves will be sufficient until 2020," said the official, who is responsible for overseas uranium sourcing and investment and did not want to be named. "The low quality of our resource means lifting the uranium will be expensive and loss-making at international prices."

Given that it can take a decade or more to take a project from early exploration to production, the state nuclear power companies are well aware of the looming challenge and have done a huge amount of work on overseas uranium procurement.

In the past few years, Beijing-based CNNC and Shenzhen-based China Guangdong Nuclear Power Corp have amassed stakes or are in advanced talks to take stakes in exploration and production projects in Namibia, Niger, Mongolia, Jordan, Kazakhstan, Uzbekistan, Australia and Canada.

Besides ranking among the top producers and holders of proven reserves, Canada and Australia's mature economies and stable political environments mean they are often preferred investment destinations compared with developing nations.

Such advantages had in cases been offset by aboriginals' land right claims, which had been stumbling blocks for quick deals and exploration, said the CNNC official.

Politics also played a part in slowing progress in Canada, the official said, and neither CNNC nor Guangdong Nuclear had invested in the country though it holds the world's best-quality uranium resources in terms of ore concentration. Contributing to this inaction was the lack of a nuclear-safeguard agreement between China and Canada, which are still engaged in talks on the subject.

Such an agreement has been in place between China and Australia since early 2007 and requires China to ensure uranium exported from Australia to China will be used solely for peaceful, non-military purposes.

But even were China and Canada not to have ironed out a nuclear-safeguard agreement by the time the uranium projects started production in Canada, the project owners could choose to sell the output to countries other than China, such as Japan, South Korea, France and India, the official said.

Another factor in the Canada equation seems to be the lower risk appetite of China's state firms.

"The biggest barrier for CNNC in Canada is the fact that exploration in western Athabasca Basin has so far not yielded results that give us a relatively high level of confidence about the resources," the CNNC official said. "We are not willing to enter due to the high risk."

In the eastern section of the basin, proven resources have already been dominated by France's Areva and Canada's Cameco.

The official said CNNC was in talks with domestic, Hong Kong and overseas private equity and venture capital funds on co-investing in projects to share the risks of early-stage exploration projects.

"By combining our access to state funding and funds from private financing, we hope to achieve a win-win situation," he said.

CNNC's hesitation to enter into exploration contrasts with some of the more adventurous mainland private enterprises.

At home, uranium mining is allowed only by state companies, but private firms are not restricted from mining abroad and are seen to have some advantage over state companies in investing abroad as they are considered more flexible and faster in making decisions.

They also tend to keep a low profile and invest in small, early-stage projects, which mean they often escape the media limelight.

This is particularly important at a time when the mainland's high profile and frequent investments in Australia's resource sector have already stirred much controversy and opposition from politicians who regard the trend as a threat to the resource-rich nation's economic independence.

In Canada, although the activity by mainland state firms has been much lower, memories of the political opposition that played a big part in state-backed China Minmetals Corp's withdrawal in 2004 from a proposed takeover of Canadian mining firm Noranda still linger.

Extra sensitivities exist in the uranium sector as the mainland's civil and military nuclear industries are closely linked, causing worries that increasing uranium sales to the mainland power industry may feed expansion of its nuclear arsenal or that of other nations.

But mainland private investors are seen to have a useful role in funding early-stage exploration projects overseas. After resources are found, project stakes or output can be sold on to the state nuclear power firms.

"Security of supply is priceless and price is no object for Beijing," said Emil Fung, vice-president of corporate development at Canadian junior uranium explorer CanAlaska Uranium. "Beijing realises it needs to move fast to secure uranium and it can underwrite private enterprises' risks by providing them loans."

One low-profile private firm active in Canada is Allway Minerals and Science Technology. The controlling shareholders of the obscure Shaanxi-based nickel, copper, gold, lead and zinc miner have set up a Canada unit called East Resources.

In June, East Resources signed a memorandum of understanding with Vancouver-based CanAlaska to co-invest in the Poplar uranium exploration project in the Athabasca Basin. Under the preliminary agreement, East Resources will be entitled to an interest of 40 to 95 per cent in the project, depending on its commitment on exploration, feasibility study and mine construction.

Fung said partnering a mainland investor like Allway, which has taken geologists and equipment to Canada, was a bonus, as mainland equipment cost just one-sixth of those in Canada, and mainland engineers' salaries were also much lower.

"But they can't directly import the way they operate in China to Athabasca," he said. "In addition to having to learn how to deal with bears, their Russian-style comprehensive exploration method does not work well in all situations."

Due to the remoteness of the Athabasca Basin - as big as Switzerland - and the extreme winter weather, with temperatures dropping as low as minus 50 degrees Celsius, exploration work is expensive and challenging.

The fact that the resources are trapped below big lakes means such work can only take place during the 60-day summer and a 45-day winter period when the lake's ice is thick enough to operate safely. Chartering helicopters to move two tonnes of equipment could cost US$3,800 an hour, Fung said.

Although Canada restricts ownership by foreigners in the nation's uranium mining projects to a maximum of 49 per cent, Allway's shareholders have circumvented this by virtue of their being Canadian citizens. They may, however, have to prove to regulators that the bulk of the company's resources do not come from offshore sources.

East Resources has yet to formalise an investment agreement with CanAlaska as it is still finalising a corporate structure for its Canadian investment holdings. But it had already sent C$300,000 (HK$2.2 million) to CanAlaska to fund its exploration programme and subcontracted six geologists from the mainland's Northwest Non-ferrous Metals Mining and Geology Group to work in Athabasca, Fung said.

This kind of speed and flexibility is hard for state firms to match.

Allway's officials declined to comment on its controlling shareholders' Canadian uranium venture.

Other mainland entrepreneurs have also ploughed money into overseas uranium ventures.

He Liehui from Shanghai, who made his fortune by importing Zhejiang-made textiles to South Africa and building factories there, last year won the right to explore for uranium in an area of more than 2,000 square kilometres in the African nation.

He was quoted by China Business News as saying that any uranium found and produced would be exported to the mainland.

Huang Yaoquan from Jiangsu province, also a textile tycoon who ventured into Africa for years, set up a mining outfit in Namibia in 2005.

The chairman of Nantong Huazheng Textile acquired 17 metals and energy resource mining rights for just over US$10 million. A China News Agency report said he was offered US$30 million for the rights by a Western investor but he declined and handed a 58 per cent stake in the rights to Beijing. Nantong last year formed a joint venture with CNNC on a uranium project in Namibia.

Eric Ng
Nov 09, 2009