Kazatomprom corruption probe engulfs head, Canada's Uranium One

By bne IntelliNews May 29, 2009

Clare Nuttall in Almaty -

The president of Kazatomprom and several top managers face criminal charges, and Canadian miner Uranium One saw its share price plunge nearly 40% on May 27 when Kazakhstan's state nuclear firm became embroiled in a financial scandal. Other foreign investors could now fall under suspicion as the investigation into the sale of Kazakhstan's nuclear assets widens.

Mukhtar Dzhakishev was sacked from his long-held post as head of Kazatomprom on May 21 on the recommendation of Kazakhstan's General Prosecutor's Office, and subsequently arrested. A statement from the National Security Committee (KNB) - Kazakhstan's successor to the KGB - issued on May 27 said that a preliminary investigation has produced enough evidence to suspect seven other high-ranking Kazatomprom officials. "The preliminary probe suggests that Mukhtar Dzhakishev and other top managers of the national company abused their authority and caused damage to the state through misuse of state property in form of shares in the major uranium fields," a statement from the KNB said. "They allegedly disposed of the uranium companies' shares for the benefit of a number of offshore companies."

The KNB said its preliminary investigation has uncovered evidence of several illegal transfers of mineral production licences for uranium fields. The only specific transaction named so far is the sale of a 30% stake in Kyzylkum LLP in the Kyzylorda oblast. This was sold to an offshore company for just KZT15.6m ($104,000), the KNB alleges. This revelation has caused a furore among international investors since it appears to implicate Canada's Uranium One, which owns 30% in the Kyzylkum operating company (the other shareholders are Kazatomprom and a Japanese consortium).

Uranium One's stock plunged nearly 40% on the Toronto Stock Exchange from $3.29 to $1.99 on May 27 when the news emerged, though its price rebounded slightly to $2.40 the next day. In a statement, Uranium One said it's "cooperating with the Kazakh authorities in their investigation." CEO Jean Nortier and other senior officials have offered to fly to Kazakhstan in the first week of June to meet with the new Kazatomprom management - the former energy minister Vladimir Scholnik has been brought in to head the company after Djakishev's dismissal. Canada's ambassador to Kazakhstan, Margaret Skok, has also sent a request for clarification to the Kazakh Ministry of Foreign Affairs, according to reports in the Canadian press.

Uranium One acquired its assets in Kazakhstan when it bought UrAsia Energy in April 2007. UrAsia had bought the assets from a group of Kazakh investors in November 2005. "UrAsia paid full value for these assets, including $75m for its 30% interest in Kyzylkum, which operates the Kharasan uranium project, and $350m for its 70% interest in the Betpak Dala joint venture, which operates the Akdala and South Inkai mines," the company said in a statement.

UrAsia Energy is understood to have bought its rights to the Kyzylkum field from a company called Jeffcott Group rather than the Kazakh state itself. "UrAsia's acquisition of these assets, as well as Uranium One's subsequent acquisition of UrAsia, were completed in accordance with the requirements of Kazakh law, and both transactions were approved by the Kazakh authorities," Uranium One's statement said.

Casting the net wider

As the KNB investigates the sale of rights to other uranium fields in Kazakhstan, the scandal could widen. A number of major international companies are involved in the sector, thanks to Kazatomprom's policy of working with foreign companies to bring in expertise at every stage of the nuclear fuel production process - its aim had been to become the Kazakh equivalent of France's Areva. "We are creating the missing links of the nuclear-fuel cycle," Dzhakishev told bne in an interview last year.

For their part, foreign companies had been keen to participate since Kazakhstan holds around 15% of the world's uranium reserves and demand for the fuel is growing. As well as Kyzylkum, Uranium One also owns a 75% stake in the Betpak Dala venture operating the Akdala and South Inkai deposits; Areva has a 51% in the Katko venture at the Moinkum deposit; and Canadian miner Cameco holds 60% of the Inkai venture, which is active in the same field as Betpak Dala.

Uranium deposits

Local business people are concerned that Dzhakishev's arrest and the investigations into Kazatomprom's deals could scare off foreign investors especially if the spectre of expropriation rears its ugly head. A group of Kazakh businessmen have sent an open letter to President Nursultan Nazarbayev asking for the trial to be carried out in an open and transparent manner to avoid damaging Kazakhstan's reputation among international investors. "We ask you to assist the openness of the investigation of the criminal case against Dzhakishev, because a 'secret' investigation will in this case spoil the investment climate in the country and the position of Kazatomprom," a statement from the group said. "The situation surrounding Kazatomprom will inevitably impact the international image of the country, because nuclear companies of the United States, Russia, China and Japan actively cooperate with the company which was led by Dzhakishev for a long time."

In particular, the group hope to avoid the appearance of a political motivation for the former Kazatomprom head's fall from grace. Rumours that Dzhakishev had fallen out of favour in Astana started to circulate soon after the former head of the BTA Bank, Mukhtar Ablyazov, fled Kazakhstan after the government stepped in to prevent the bank's collapse.

In April, a former member of parliament, Tatyana Kvyatkovskaya, claimed in a press conference that Dzhakishev and Ablyazov had connived to strip Kazakhstan of some of its largest uranium mining assets. Kvyatkovskaya alleged that the Akdala, South Inkai and Kharasan uranium fields had been sold for just KZT64,000 ($426) to Betpak Dala, which she claimed was controlled by Ablyazov.

Back in 2007, when similar claims were made, Djakishev was cleared after a seven-month investigation by agencies including the General Prosecutors Office, the KNB, the Ministry of Finance and the financial police. But two years on, the situation had changed. After Kvyatkovskaya's press conference, the General Prosecutor's Office announced it was investigating her claims, which led to Dzhakishev's arrest.

Weeding out corruption

Events at Kazatomprom are the latest in a string of clearouts at major state-owned concerns and government offices. The Kazakh government's emphasis on weeding out corruption has intensified as the crisis becomes more severe and life becomes less comfortable for ordinary Kazakhs. In late April, Nazarbayev signed a decree on extra measures to fight crime and corruption, and improve law-enforcement. A new chairman of Kazakhstan's anti-corruption agency, former financial police chief Kairat Kozhamzharov, was appointed.

Jaksybek Kulekeyev, president of Kazakhstan's national rail operator Kazakhstan Temir Joly, was one of the first heads to roll back in May 2008. More recently, Nurlan Iskakov was replaced as environment minister after two deputy ministers were arrested on suspicion of abusing their powers and stealing public money. Several high-level officials within the Agriculture Ministry's water resources department are charged with embezzlement. In addition, senior officials at several regional authorities have also been dismissed.

At Kazatomprom, the removal of Dzhakishev marks the end of an era. He has been at the centre of the uranium industry for almost two decades, and was appointed head of Kazatomprom after Katep, the Kazakh atomic energy corporation, was restructured into Kazatomprom in 1997. Dzhakishev is widely credited with building up the company into a major international concern, having pushed ahead with ambitious expansion plans as early as 2001, when uranium prices were at an all-time low.

More recently, with governments in numerous countries turning back to nuclear energy, Dzhakishev had been planning to turn Kazakhstan into the world's largest producer of uranium. Although production forecasts for this year had to be revised downwards due to the crisis, two months before his arrest Dzhakishev announced that Kazakhstan could overtake Australia and Canada to become the largest uranium producer as early as this year, if it extracts at least 11,900 tonnes in 2009.

After his appointment, Kazatomprom's new president, Vladimir Shkolnik, announced that strict economy measures would be introduced. "All costs should be subject to strict economy," Shkolnik said at his first meeting with directors of Kazatomprom subsidiaries. However, "investment projects, commitments, operations for equipment maintenance and capital investments (into ongoing production) should be fulfilled to our production capacities - not be decreased."

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