CNNC Intl's state-owned parent invests in Chinese nuclear power plants like this one in Qinshan, which will soon be buying uranium from CNNC.
CNNC INTERNATIONAL Ltd (HK: 2302), one of only two organisations allowed to import uranium into China, had a tough first half.
For the six months ending June 30, the Hong Kong-listed firm - a unit of state-owned China National Nuclear Corp - saw its revenue nearly halved to 54.8 mln hkd from a year earlier, while its net loss more than quadrupled to 20.1 mln hkd.
“In the first half, inventory clear-up has been the order of the day in a die casting market that succumbed to the global economic downturn, as demand fell sharply after new projects had been either shelved or cancelled altogether.
"Nevertheless, the difficult situation was slightly alleviated by tax incentive plans launched by governments around the world, which had the effect of boosting production,” CNNC Intl explained in its earnings statement.
In a recent interview with NextInsight and Aries Consulting, CNNC Intl Financial Controller Philip Li said China currently had “just enough” uranium resources to meet domestic demand.
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“China’s energy grid relies on coal and gas for over 80% of electricity generated, which is not good for the environment. This is what prompted the country to begin developing nuclear power,” Mr. Li said.
He added that currently, a mere 1.9% of the country’s 1.3 bln people get their energy from nuclear power, while France is 80% reliant and Japan around 50%.
“We expect China to be 6-8% nuclear-energy driven by 2025 or so.”
Uranium: Next big trend?
Allowing China to be around 7% nuclear in 15 years may not seem like an aggressive target. But for the world’s fastest growing major economy and its third largest overall – it is certainly not a timid target either.
“China is not uranium rich and domestic reserves are only just meeting demand. Besides, there are the environmental issues. China is now the top global emitter of greenhouse gases, but nuclear energy is clean energy. Finally, we must remember that there is still a chronic energy shortfall in China,” Mr. Li said.
“Over the next few years, nuclear plants will increase substantially in China, from 9 Gigawatts nuclear-based electricity generating capacity now to 90 GW by 2020.”
Therefore, expectations of rising uranium prices were a big incentive to stock up now, rather than later.
He said the current market price for uranium was around 45 usd per pound, while CNNC Intl’s anticipated production costs per pound at a newly acquired mine in neighboring Mongolia were 29 usd per pound, suggested a healthy profit margin.
And margins would only fatter over time if Mr. Li’s price forecasts were correct.
“We expect the uranium market price to increase over the next two years. In 2-3 years time, 60-70 usd per pound is not out of the question. Therefore it is very good for us to acquire uranium mines now.”
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However, global competitors were beginning to come to terms with this likely reality as well, and their negotiating strategies belied this.
“Everyone expects the uranium price to increase so it is very hard to get fixed long-term contracts. Therefore, securing uranium supply could be the next big stock trend.”
He added that by around the year 2020, China would need between 10-16,000 tons of uranium per year, up significantly from current levels.
This, he said, was the main impetus driving CNNC Intl more toward uranium mining and resource acquisitions as a future growth driver and earnings generator for shareholders.
“China will have a lot more nuclear power plants over the next 5-10 years, so we have a guaranteed future demand for uranium. Also, our group is one of two organizations authorized to import uranium into China. Therefore, one of the major roles and goals of CNNC Intl now is to secure uranium, especially through winning extraction rights overseas.”
Pursuant to this aim, CNNC Intl paid 200 mln hkd this summer to fully acquire Canadian firm Western Prospector’s uranium mine in Mongolia.
“At around 8-10,000 tons total estimated uranium reserves over 10 years, it’s relatively small scale but it’s an acquisition model we want to follow. However, the Mongolia mine is in its exploration stage and there is still another 2-3 years before extraction begins,” Mr. Li said.
And although the global slowdown took a big bit out of external demand for CNNC Intl’s die-casted product demand, it did have an upside on potential uranium mine acquisitions.
“Actually, the financial crisis helped us on the uranium side, as we could buy off assets cheaply. For example, the Canadian firm we bought was selling at 3 usd/share two years ago, and at just 50 cents around acquisition.”
CNNC Intl would continue scouring the world for overseas uranium mines ripe for takeover, but as a publicly-listed unit of a Chinese state-owned enterprise (SOE), the Hong Kong-listed firm also realized that transparency was key to keeping its existing shareholders happy as well as attracting potential new ones.
“We are a listed firm so we have to be transparent and independent. We always strive to pay market prices for both uranium and acquisitions and we of course don’t want to be seen as just passing on benefits to our parent firm. There are many complex considerations we vet when buying uranium mines including the duration, quality and extraction costs of the site,” Mr. Li said.
As a listed firm, CNNC Intl also had to abide by the rules of the Hong Kong bourse.
“We still hold onto our die casting business. According to HKSE regulations, we have to wait two years before combining or selling off too many assets.”
“And of course, we need approval from majority shareholders for major acquisitions and moves.”
He said there were enough uranium reserves in the world today to last another century.
“There are mines popping up all over the world, but whether to move in depends on concentration, quality, quantity and grade. At current market prices and demand forecasts, concentrations of between 300-500 ppm (parts per million) were worthwhile for extraction, and it is always cheaper to process onsite as heavy cargos are expensive to transport long distances.”
However, he said not all countries were willing to let a foreign-listed unit of a very large Chinese SOE walk away with domestic uranium resources, regardless of how much money CNNC was willing to part with, he said.
“Canada and Australia are two countries with rich uranium resources, but they only allow foreign firms a maximum 20% stake in any domestic mines. Therefore, our main uranium mine acquisition target region at this point is African countries as well as Kazakstan, with whom China has better political relationships.
“We need political influence because in a way, we represent China.”
China’s road to reactors
CNNC International Ltd is 62.1% held by China National Nuclear Corporation, the country’s largest nuclear power plant builder and operator.
State-owned China National Nuclear began as a supplier to China’s military, according to globalsecurity.org, but since the 1980’s it has expanded in earnest to the nuclear power station construction sector.
China National Nuclear became the controlling shareholder of CNNC Intl (formerly known as United Metals Holdings Ltd) on Nov. 5, 2008. CNNC Intl had enlarged its share capital in July this year by 50 mln shares, raising gross proceeds of around 439 mln hkd.
On the back of China National Nuclear’s leadership and solid experience in the uranium leveraging business, CNNC Intl is actively expanding its overseas uranium leveraging business and indentifying related opportunities.
Meanwhile CNNC Intl is also engaged in the die-casting business with manufacturing plants in the southern Chinese city of Dongguan, producing finished parts for the global automotive, communications, household appliances and power tools.
China began considering nuclear energy in the late 1970's as an alternative to burning higlly-polluting coal. Nuclear power represents a relatively minor, but growing, share of China's power generation options, with two plants currently in operation: Qinshan in Zhejiang province (288 MW) and a plant at Daya Bay in Guangdong province (1,812 MW).
China has plans for eight reactors in four plants to be built by 2020.