In late February, Uranium One Holding N.V., which manages ROSATOM's uranium assets, announced plans to start producing scandium concentrate. In addition to a partnership with Kazatomprom, Kazakhstan's National Atomic Company, the project will also see involvement from a Russian company, Intermix Met. In the wake of the recent decline in uranium prices, producing scandium will provide a considerable boost to the economic success of Uranium One Holding’s projects in Kazakhstan, said Vadim Jivov, Uranium One Holding’s President.

In an interview with the company's corporate media channel, Mr. Jivov gave some insights into the recently announced scandium production project, as well as detailing plans to implement alternative energy solutions at ROSATOM's uranium producing facilities. He also touched on the project management system implemented at U1H and shared his thoughts on prospects for developing the global natural uranium market.

- So, how did the scandium production project come about?

- The technology we are planning to introduce involves the extraction of scandium from pregnant solutions coming out of the ground during the process of in-situ leaching (ISL) of uranium. The idea of the associated production of scandium appeared as far back as 30 years ago, and the All-Russian Research Institute of Chemical Technology (ARRICT) was the first to start exploring its potential. However, a cost-efficient technology for extracting scandium from pregnant solutions was not identified for a long time.

The problem was finally solved by Russian scientists at Intermix Met, whose Chairman of the Board of Directors, Sergey Makhov, is well-known in scientific circles. ROSATOM's Dalur production site is the only Russian facility involved in ISL uranium mining, and that resulted in us being approached by management of Intermix Met in 2010. Admittedly, we were sceptical about their proposal at first but, as Mr. Makhov and his partners were willing to invest their own money in the project, we eventually agreed to back it. In February 2013, we launched pilot production and mined the first kilograms of scandium at Dalur's production site, and it became apparent that the idea had good prospects.

The results of the pilot project and the prospects of a wider-scale application were reported to ROSATOM, who assigned the project to Uranium One Holding.

Scandium is a high-strength material used in satellites, rockets, robots, and laser technology. Its alloys are also used in other areas, for instance, in the production of high-quality impact-resistant sports equipment like bicycle frames and golf clubs.

- JSC NAC Kazatomprom will be a partner in the future joint venture. What is their interest in the project?

- The future of the project is linked directly to the roll-out of the technology at our six mines in Kazakhstan; the volume of pregnant solutions they produce is economically viable and sufficient for the associated production of scandium on a commercial-scale. Our partners at Kazatomprom had also been exploring ways to extract scandium for a long time. We had an opportunity to share our success in finding the right innovative solution, which had been implemented at our Dalur production site in Russia.

The project for the associated production of scandium concentrate may, at some point in the future, become part of the Innovation and Development Program currently under discussion between Russia and Kazakhstan.

- Who will be selling the scandium, and to whom?

- All sales will be handled by the joint venture (JV) established for the project. It was agreed that the exclusive rights to use the associated scandium production technology will be transferred by Intermix Met to the JV. We expect the bulk of final products to sell under long-term contracts. Kazatomprom currently holds supply contracts with a number of Japanese companies. Aside from this, Kazakhstan is now actively developing alternative energy sources, and scandium is used in a range of alternative energy projects. Intermix Met supplies scandium and scandium-based products to a wide range of facilities owned by the Russian Federal Space Agency (Roscosmos) and the Russian Technologies State Corporation (Rostec).

- The JV's planned design capacity is 6 tonnes of scandium per year. Is this a high number in terms of amounts produced globally?

It is high enough to make our JV one of the major players in this segment, hopefully without oversaturating the market, of course. In any case, the global demand for scandium is quite high these days.

- What will you do to prevent a slump in prices?


- We plan to sell scandium under long-term contracts, and this will serve as a certain type of guarantee. Also, our technology enables us to quite easily adjust the output volume: it does not involve any traditional mines designed to produce millions of tons of ore daily.

- Do you believe your technology to be more efficient as compared to other existing technologies?

- The cost of production secured by this technology allows us to earn a profit even if the price of scandium continues to fall.

- What is the current price of scandium in the global market?


- The record highs of 2011 saw prices spike to approximately USD 5,000 per kilo of 99.5% scandium oxide. Currently, the price is around USD 3,600 per kilo and is projected to stabilize at USD 3,000 per kilo by 2019.

- Scandium will be produced in Kazakhstan and then processed at Intermix Met's processing facilities in Russia, yes?

- Yes indeed. The project involves quite a complex production chain including the application of various elements of know-how. If the output levels we reach at our production facilities are sufficient to merit creating our own scandium processing platform, we will go down this road. However, it's too early to broach at this point and I would expect any decision on this to be made over the next three years.

- The first scandium to be produced is slated for 2016. When will the facility reach its design capacity?

- As pregnant solutions at different sites vary widely in scandium content, the project will be rolled out gradually and production will be set up where it has proven effective. The technology ensures that the production output and the volume of pregnant solutions used for extracting the scandium concentrate can be adjusted flexibly.

The production process is already up and running at our Dalur production site, with several dozens of kilograms of scandium delivered by the pilot unit already. In Kazakhstan, we will most likely start with Karatau LLP as, according to preliminary estimates, their pregnant solutions are the richest in scandium.

The required project investment is estimated at USD 60m. How do you obtain the funding?

- The project will be funded by the joint venture participants, and it is understood that Intermix Met’s technology for associated scandium production will be the company’s major contribution to the project and will be provided exclusively to the JV for future use. We also plan to raise money from prospective consumers and/or through bank facilities. According to our preliminary estimate, the project's economics and the simplicity of its implementation will help us raise the required funds.

- So, none of the partners are to have a controlling interest, are they? Will this not complicate the operation of the JV somewhat?

- We have a long track-record of working with our partners in Kazakhstan using various partnership schemes, including projects with 70%/30% participation and also those with equal participation of the partners. This has never had any negative effect on our business relationship. The parties have an equal interest in each other, and that is the really important thing. While pregnant solutions remain our joint property with NAC Kazatomprom, the scandium production technology is jointly owned by Uranium One Holding and Intermix Met. I believe that this puts ROSATOM in a strong position.

- Are you looking at producing any other rare earth elements?

- Our Kazakh partners are interested in the joint production of rare earth elements in Russia and then processing them at Kazatomprom's facilities. As a preliminary step, we have set up a task force to explore the potential of these opportunities. That said, I think that, in broader terms, rare earths are a rather challenging market, and in terms of the current pricing, scandium projects are the most attractive.

Another advantage brought by the associated scandium production technology is the significant improvement of the economics of our uranium production facilities in Kazakhstan. The present-day uranium market is not in any sense an easy one: prices plummeted and the outlook has not been very positive so far. We are, therefore, now primarily focused on projects which are able to bring additional value to our production sites and help improve their performance.

Our uranium production facilities in Kazakhstan already ensure the lowest final product costs globally, and the associated production of scandium will help secure extra income.

- Can you give us any specific numbers?

- The cost of production in 2012 at Karatau, our leading production facility in terms of this indicator, was USD 11 per pound of uranium oxide concentrate, and the associated production of scandium will serve to drive further improvement.

- So, there will be some other projects?

- Well, we do have many interesting ideas. For example, with Kazatomprom, we are now exploring a project that will actually let us completely do away with fossil fuels to power our production sites. Many of our facilities (especially those related to exploration projects) are located far from the power grids and other constant power sources and are therefore powered by diesel generators. We want to change this. Starting from 2014, we will start using photovoltaic panels produced in Kazakhstan.

There are also other projects in this area. The use of wind power on the steppes of Kazakhstan is constrained as the wind is so strong that it breaks traditional windmills. Our Kazakh partners, therefore, have developed an innovative solution – wind turbines with a vertical rotor that can be used in these conditions; we will probably play a part in their production.

- What is the economic benefit here?

- Diesel generators are a rather expensive solution in terms of the cost for the electrical power they produce, while alternative power sources are almost twice as cheap. In addition to solar and wind power, we are also going to use energy storage systems, with diesel generators used as a back-up.

If the project develops successfully, we will bring these products to the Russian market and the markets of other countries, using, inter alia, the wide range of best practices and know-how developed at ROSATOM's companies, TVEL and Atomenergomash.

We are currently analyzing prospects for producing various types of serial power units using alternative power sources. For instance, I think production might be set up using the vacant areas at the repairs and engineering plant of our Priargunsky Mining and Chemical Facility, the sites of TVEL and other ROSATOM's entities where production of this kind will prove to be most efficient.

I am talking about 20–60 kW units that can be used to power the GLONASS facilities, physical security equipment for remote installations, including those located in the High North, mining and land reclamation sites. However, first we need to examine the market of smaller autonomous power supply sources in more detail, and start with exploring and building the market niche for these products rather than attempting to sell.

- Up until recently, Uranium One was focused on uranium only. Now you have added scandium and also have plans for renewable energy. Will these new projects require any structural changes in either Uranium One Inc. or U1H?

- I would like to point out that Uranium One was open about its interest in alternative energy while still a public company. This interest is understandable; the alternative energy market is growing rapidly, especially in North America where its development is state-supported.

I think that, within the current management structure, new projects will be managed by Uranium One Holding. Over the last year, we have made a number of changes to the holding's management system, and today it is entirely geared towards working on a project basis.

Exploring every new idea starts with setting up a project team; it helps to have this work done without adding pressure on operating expenses. We also have a staffing manager who assigns employees from various business units to an array of projects, and a system that tracks the participation of every employee in the company's initiatives.

We have a strong team of in-house analysts, specializing in a wide range of areas. Third party experts can also be brought in to work on a specific project on a temporary basis. All of these elements result in a very flexible structure that can pivot with ease depending on our tasks and targets. By building up the required combination of knowledge and expertise of in-house and outsourced professionals, we hold onto the ability to explore new ideas and implement projects without adding management structures.

- Well, this brings to mind an investment fund rather than a mining company...

- This is true. We established a holding company, where – as an alternative to the operating company Uranium One Inc. – we wanted to build a structure similar to those seen in investment banks, the target being to have up to 80% of staff engaged exclusively for project assignments. Today, we are closing in on this target.

The project approach also provides us with the necessary tools to assess our team members, as they are not hiding behind their managers. My time is also split among several projects. As we close a reporting period, I see a map of employee involvement, which helps me to get a clear view of the resources that we have at our disposal.

By migrating from one project to another, our employees have an opportunity to participate in a wide range of initiatives implemented in various regions around the world. Our top analysts in Moscow can be offered 12–18 months assignments to work in Canada. At the same time, we bring Canadian geology experts over to work in Kazakhstan.

- How does decision-making on new projects work?

- We have a set of clearly defined procedures which outline how ideas are submitted for consideration and who can raise them to the level of decision-making. There is a collective body – a steering committee made up of all project managers.

Once an idea gets preliminary approval, a team of 3–4 people is put together to explore it further, so we can get a clear understanding of the costs involved.

The transition to the project stage depends on a set of specific indicators, such as the internal rate of return (IRR). As an initial idea gets closer to an investment case, the project is joined by experts in the fields of law, tax, and so on.

- Why have you decided to build the framework this way? Uranium assets are managed widely around the world, and major goals seem to be related to the development of the established facilities...

- Yes, we do have assets and facilities and, fortunately for us, they have efficient management systems ensuring that they develop independently, without additional management superstructures. In building Uranium One Holding’s structure, we have carefully reviewed various approaches to asset management. First of all, we needed to pinpoint precisely what was going to be managed. We chose value-based asset management for the benefit of the state as the mission of Uranium One Holding, and this was the starting point for building the holding's structure.

For a long time, we could not resolve how asset management was to be structured, and considered proposals to perform asset management tasks via the boards of directors only alongside other options. Now, we manage production facilities both via the boards of directors and via engagement of employees of the facilities in holding-wide projects that have the potential to generate additional profits for all assets within our portfolio.

At a certain point, even I had doubts that it would all work out, but, despite these misgivings, the system is now in place and today's Uranium One Holding translates to six production facilities and billion-dollar revenues, all with a total headcount of only 60 people in the holding and under 30 people employed at Uranium One Inc.

- Assets located worldwide, Uranium One's public status, the need for a diverse portfolio of assets due to the soft uranium market... Are these the major drivers behind the holding's structure?

- These are the main drivers, but there is still one more aspect: in Russia, regrettably, we are currently facing an acute shortage of new ideas, while new ideas are everything in a situation when ROSATOM's investment financing is low and traditional nuclear markets are far from flourishing.

To produce these new ideas we need free-thinkers, acting in a structural environment which is flexible enough to give space for a fresh approach to any matter. This is exactly the way many US and Canadian investment funds work. They explore the asset, take control over it in one way or another – you do not always have to purchase the controlling interest to do so.

After that, the fund starts implementing new methods to boost capitalization of the asset. Usually such companies employ outstandingly creative people, capable of starting from scratch and creating billions of dollars of value in just a few years. This is nothing to do with stock exchange transactions, mind, it is essentially about developing production assets through new ideas.

In this respect, we see Kazakhstan as a very valuable partner. As an example, Kazatomprom has fully developed a solar batteries production industry in a few short years. Not long ago there were no silica, no panels, and no production sites. Now we have this plant, built from the ground up and remarkably powered by alternative energy.

- You have just mentioned that the best analysts are leaving for Canada. Why is this? Does anyone come back to Russia?

- We are involved in international projects and the western analytical school is top-notch in this area. Our employees do come back eventually, though; we consider the experience as an extended business trip. If we launch any alternative energy projects here in Russia, we will be inviting a number of experts to this country.

- Are there many Russian speaking employees working in the Holding?

- We are seeing more and more of them. Initially, there was just me and one other Russian-speaking person in the whole of Uranium One Inc. After 100% consolidation of shares we sought to build up Russian-speaking administrative support staff, so that all our assistants and secretaries could speak Russian. All the analysts working in our overseas divisions speak Russian as well.

- Why do you require this?

- We are currently in the middle of a very intense dialogue with Kazakhstan, which requires instant feedback. As such, we cannot afford to lose time on correspondence translation. So we tend to employ bilingual staffers, with international communication experience as a prerequisite. By way of an example, there is a person on our team who used to work for an international company in Moscow then was moved to their office in Lithuania. Following that, this person took a position with a bank in Canada, and now is working for us.

- What is your outlook for uranium market? When will the prices snap back?

- One can hardly put forward an accurate and reliable outlook at the moment. We keep receiving news of reduced supply, companies reporting their projects frozen. It seems like the market has already bottomed out, yet the prices keep declining. Today over 50% of the mines are operating at a loss.

- But they keep working...

- For a number of reasons. In case of conventional mining methods (underground mines and open pits) – it is cheaper to go on operating at a loss, because of huge environmental liabilities, as uranium mining inevitably leaves behind refuse tips and tailing dumps. So, they have to negotiate with local authorities and to perform the reclamation of the land. The only exception here is ISL, the method we are using at our operating sites.

- Uranium One has frozen some of these projects as well, hasn't it?


- We announced Australian Honeymoon mine as mothballed, and halted further development of the Willow Creek project in Wyoming, USA. This aside, we have ambitious forward-looking development plans in the USA, but we are not ready to comment on them for the time being.

- What factors can influence the price?

- There are more nuclear plants being built around the world and, while uranium supplies are decreasing due to soft prices, this has not affected the market so far. I believe, the trend will improve when portfolio investors’ interest in uranium picks up again. As at now, they have obviously withdrawn from the market.

In terms of macroeconomics, the mining sector starts growing when investors show demand for real assets, e.g. due to inflation. There is no evidence of inflation in the global market at present, although we may be heading that way, taking into account recent trends like the soaring gold prices in the USA.

- In Selous Game Reserve in Tanzania you are currently running an anti-poaching project to save elephants. How is that going?

- Quite successfully. We have been utilizing drones and training rangers and, by now, we have almost driven the poachers away from the area under our control, although, I suppose, they will continue further afield as the national park's territory is huge. To solve the issue for good and protect the park as a whole, we would like other mining companies who operate in the region to join our anti-poaching campaign. We feel we need to show what can be achieved by taking a responsible approach to mining. As such, we are going to hold a conference on anti-poaching activities in Africa this fall for the mining companies who share our commitment to responsible subsurface management.

- Why are you doing this? Wouldn't it be easier just to pay the local authorities so that they would attend to the issue?

- Please, note that we are operating a stone’s throw from a park which is on UNESCO World Heritage list, so our activities will invariably draw public attention. We are very particular about maintaining our environmental and social commitment to local communities.

Sadly, governmental authorities do not often make the most efficient owner or investor. We decided to do the job our way, which is cheaper, but means we carry greater responsibility for the result.

- Is it hard to do business in Africa?

- We have developed an ability to cooperate with all sorts of partners around the world. There is much to learn from our African colleagues. South African geologists are far ahead of Russians in the field of expertise we are dealing with. Hopefully, we all stand to benefit from working together and the situation will improve as we go.