By Melissa Pistilli-Exclusive to Uranium Investing News
Savvy investors are well aware of the impact political risk can have on the market perception of a company’s share value. The mining industry is especially vulnerable to political risk and the affect it can have on investor interest.
If you follow the uranium market, then you’re probably aware of the recent pressure placed on Uranium One’s (TSX: UUU) share price after reports started circulating last week that its joint venture property in Kazakhstan may be a part of a government fraud investigation.
On Wednesday last week, Uranium One’s stock dropped 30 percent in value as over 10 million shares traded on the TSX within fifteen minutes before trading was halted for three hours. In total, 48 million shares traded by closing (more than double the next most active stock on the TSX) and the stock value had fallen 40 percent to $1.99.
On Tuesday this week, Uranium One shares were trading at around $1.81 by 2:25 PM EST. Obviously, news out of Kazakhstan is creating concern and influencing investor confidence.
The Central Asian country of Kazakhstan is home to all three of Uranium One’s producing properties. Last week, the Kazakhstan National Security Committee (KNB) arrested Mukhtar Dzhakishev, head of the state-run uranium company Kazatomprom. Dzhakishev and other arrested officials are accused of illegally selling state-owned uranium deposits to foreign companies.
“It has been proved that more than 60 percent of state uranium deposits worth tens of billions of dollars had been turned into Dzhakishev’s property,” said a government report.
One of the properties in question is the nation’s largest uranium mine, Khorasan. Uranium One owns a 30 percent stake in the mine. Another 40 percent is controlled by a group of Japanese companies and the other 30 percent is owned by Kazatomprom.
The government claims that Dzhakishev may have illegally sold a 30 percent stake in the property to an undisclosed buyer sometime in the past. But, Uranium One has said that its share in the venture was acquired in accordance with Kazakh law and through the approval of Kazakh authorities. The interest was first acquired in 2005 by UrAsia Energy, which was purchased in 2007 by Uranium One.
“UrAsia paid full value for these assets, including $75 million for its 30 percent interest in (Khorasan),” the company said in a statement.
“We think the link made to us was a complete misunderstanding. The financial police [of Kazakhstan] are not investigating a transaction where we are the subject of it,” said President and CEO Jean Nortier.
Neal Froneman, the former CEO who headed the mining company when Uranium One bought out UrAsia, said in a recent interview that he believes the huge drop in share price is “a total over-reaction.”
Over-reaction or not, the case highlights the influential impact of political risk and the perceptions it creates for investors.
For the mining industry, particularly the uranium sector, Kazakhstan is a nation full of promise but not without the potential pitfalls one might expect in a former Soviet Union republic.
Authoritarian President Nursultan Nazarbayev, sixty-eight, has been in power for 20 years and has no clear successor, a problematic revelation in a country whose ruling class is deeply divided.
Nazarbayev “has allowed the KNB to arrest many people in government-owned industry,” said The Financial Post’s Peter Koven. “Finger-pointing and corruption accusations have run rampant in Kazakhstan since the financial crisis crushed its banking system.”
Prior to his fall from grace, Dzhakishev was known as one of the country’s most powerful industry heads whose close ties with Nazarbayev’s political circle put him in good standing. Dzhakishev’s arrest, notes a recent Reuters report, “highlights the vulnerability of this political balance and emphasises uncertainty over who might be gaining weight as a possible successor” to Nazarbayev.
The opposition party, Azat, and some top business leaders, have made public statements in support of Dzhakishev and issued open letters appealing for justice this week.
Some analysts, like BMO Capital Markets’ Edward Sterck, view these latest developments as “highly negative” for companies operating in Kazakhstan.
However, others are confident this is but a bump in the road for a nation that is destined to remain a heavy player in the uranium mining industry. “Uranium itself is one of the most important commodities generating revenue in a country that has been heavily hit with the fall in the resources market,” said Froneman. “There could well be power plays taking place, but certainly the operations will continue to run and I think that Kazakhstan and the government know that it’s important that the Western world is treated in an appropriate way.”
Kazakhstan holds about a fifth of global uranium reserves and has made becoming the world’s leading producer by 2010 a major goal. Despite its perceived political risk, the Central Asian nation will continue to attract foreign investor interest as the world’s demand for energy and uranium products increases.
