Tashkent, Uzbekistan (UzDaily.com) —  Standard and Poor’s (S&P) have assigned our ‘BB-’ long-term foreign and local currency issuer credit ratings to Navoiuranium.

The outlook is stable, mirroring that on the sovereign rating, since we do not expect to rate the company above Uzbekistan. Also, we forecast production and margins to remain steady in the near term as the company benefits from high uranium spot prices and low operating costs.

S&P ratings reflect Navoiuranium’s small scale and concentrated asset base, which is solely in Uzbekistan . The company operates 25 mines within the Navoiy region of Uzbekistan, with the majority of production (75% in 2023) attributable to the Zafarabad plant administration.

The agency’s assessment of Navoiuranium’s business risk profile is largely constrained by the company’s exposure to Uzbekistan, which we consider a high-risk country with evolving regulations and governance standards. As a single-commodity producer, risks inherent to the uranium market pose a threat to sustaining high margins, underpinned by contracts delivered at the spot price, with no indexation or flooring.

S&P viewes this as negative because it leaves the company vulnerable to a decrease in uranium prices, which have historically undergone large swings after nuclear disasters and changes in regulation. However, the agency acknowledges the company’s operational success over the past two years and its ability to ramp up production quickly as a result of in-situ leaching rather than open-pit mining operations. The company has total reserves of close to 119 million pounds (lbs), providing a reserve life of just over 11 years.

Due to the small scale, S&P views this as behind other uranium peers, with Kazatomprom’s reserve life exceeding 40 years, and Cameco’s and Orano’s at 27 and 31 years, respectively.

EBITDA generation should continue to support high margins with current uranium price levels. In 2023, Navoiuranium generated S&P Global Ratings-adjusted EBITDA of about Uzbek sum (UZS) 4.1 trillion (about US$370 million) with a margin of 65.3%. With the addition of a new contract with Western Mining Corp. (WMC) and higher uranium prices of about US$85 per lb, up from US$53 per lb in 2023, we forecast a meaningful uplift of EBITDA to about UZS9.0 trillion (about US$660 million) in 2024. Looking forward, we forecast EBITDA margins will stay at about 80%, due to low material and labor costs, which we anticipate will reduce further given the depreciation of the Uzbek sum against the U.S. dollar. The spot price of uranium is also expected to soften over our forecast horizon as global supply and demand factors become more balanced, but the additional production and contractual revenue will somewhat offset this.

Navoiuranium’s joint ventures will be of strategic value to the company and government, enhancing the production base in the long term. Currently, Navoiuranium has five planned joint ventures with foreign partners, consisting of production fields and projects within Asia. All five joint ventures are in the preliminary stages, and Navoiuranium is yet to make an investment, with additions to production expected toward the end of 2026. Investment by the company is expected to be US$50 million-US$150 million annually, starting in 2025. We view the joint ventures as a strategic measure to attract more foreign investment.

S&P expects Navoiuranium to maintain conservative credit metrics, with funds from operations (FFO) to debt higher than 60% and S&P Global Ratings-adjusted leverage lower than 1.5x through the cycle. We expect Navoiuranium’s credit metrics to remain strong over the next two years, complemented by low raw material and labor costs. The only debt instrument on the balance sheet is a Chinese renminbi (RMB) 435 million (about US$60 million) facility from the National Bank of Uzbekistan, in which RMB82 million is currently drawn. Due to the company’s low debt and EBITDA of over UZS4.0 trillion (about US$370 million) in 2023, we forecast credit metrics to maintain generous headroom for the ratings. That said, potentially volatile cash flows, given concentrated operations and fluctuating uranium prices, are an important contributor to our overall assessment of Navoiuranium’s financial risk profile. The only revenue visibility is from current contracts, which are primarily with private energy companies in Asia. The company is currently operating at full capacity, and we understand no new contracts will be signed for the next few years. That said, we forecast the total order book to increase from 3,772 tons in 2023 to around 5,000 tons in 2025, primarily driven by contractual increases.

The rating on Navoiuranium is capped at the ‘BB-’ sovereign rating on Uzbekistan because of the sovereign’s 100% ownership and full control of the company. Navoiuranium is one of the larger corporations in Uzbekistan, having recently been formed from the split of the uranium assets of NMMC (Navoi Mining and Metallurgical Co.). The government owns 100% of the company through the ministry of mining and geology, and has strong government representation on its board. We therefore consider that there are no sufficient mechanisms that would prevent negative government intervention if the state wanted extra cash from the company (for instance, due to sovereign financial stress). We have seen the government use its influence with major corporations over the past few years. For example, it has mandated a large investment program on national gas producer Uzbekneftegaz while also extracting sizable dividends from it, which resulted in a material increase in leverage (see "Uzbekneftegaz Downgraded To ‘B+’ From ‘BB-’ On Weaker Credit Metrics And Tight Liquidity; Outlook Stable," published Oct. 30, 2023, on RatingsDirect). Similarly, 100% state-owned copper producer Almalyk MMC is in the middle of a large expansion project but is also paying large dividends, causing leverage to increase faster than expected. On the other hand, we consider the potential mechanisms of support, such as the subsoil use tax (8% in 2023) and the dividend policy of 50% of net income to be flexible. These mechanisms are untested and subject to government intervention. But we view the latter as unlikely unless a specific risk to the uranium market were to occur.

Lack of a track record of operations constrains our rating. Since the company was formed only two years ago, we do not have an adequate time frame to assess profitability, production, and governance over the long term. A track record of meeting production targets, launching new projects on time and within budget (including joint ventures), management of price risk, and maintenance of conservative leverage could support an improvement in the company’s SACP over time.

The stable outlook on Navoiuranium mirrors that on Uzbekistan and our forecast that the company can maintain its production and margins in the near term, benefiting from high uranium spot prices and low costs of operations.