Why is Niger still losing out to Areva?
In 2014, Niger announced it had successfully renegotiated uranium extraction contracts with French state-owned company Areva to secure a greater share of the wealth deriving from their uranium resources. Three years later, an analysis carried out by Oxfam based on data released by Areva calls into question the benefits for Niger in the contract renegotiation. This analysis was carried out as part of the data extractor program developed by Publish What You Pay.
Understanding the context: why is Nigerien uranium so important for Areva?Uranium is a strategic commodity for France. More than 75% of electricity produced in France comes from nuclear power. Most of the uranium used for nuclear combustion in France is supplied by Areva. Up to 1 in 5 lightbulbs in France would be lit up thanks to Nigerien uranium.
For years, civil society organizations have called out Arevafor the uneven partnership with Niger. Despite vast resources in uranium, Niger has yet to convert this valuable resource into tangible wealth: the country still ranks second to last in the Human Development Index. The renegotiation: a game-changer for Niger? In 2013, Oxfam and ROTAB, a Nigerien NGO – both members of Publish What You Pay – launched a campaigndenouncing the unbalanced partnership between Areva and Niger and calling for the renegotiation of the contracts. Oxfam and ROTAB specifically pointed that Areva’s contracts included a sweetheart clauseenabling Areva to pay a lower rate of royalty than the applicable regime in Niger. Royalties make up the majority of uranium mining revenues to the Nigerien government.
In 2014, after months of pressure from civil society organizations around the world, Areva and Niger agreed to a new contract without the sweetheart clause. In June 2014, a Strategic Partnership Agreement signed between Areva and Niger stressed that Areva would be subject to the legal royalty regime, raising hopes of a fairer share of the revenues for Niger. This agreement was published on the Journal Officiel- the official gazette of the Republic of Niger where major legal official information are published.
In August 2016, Areva released for the first time the payments the company makes to governments where it mines uranium, as part of new EU regulations. In Niger, it was the first time the public had access to Areva’s payments since the renegotiation took place in Niger. And the results are surprising:
Among the payment listed we find one for Somaïr – the company owning one of the largest uranium mines in the world in terms of production. Areva owns 64% of Somaïr. The remaining share is owned by Sopamin a Nigerien public company. Areva’s report shows the French company paid more than 7bn FCFA (around 10.8 million euros) in royalty fees to extract uranium from the Somaïr mines in 2015. The company’s annual report outlines that Somaïr extracted 2,509 tons of uranium that year.
Niger is a member of the Extractive Industry Transparency Initiative (EITI). By the time Areva released its first payments to governments report in 2016, the most recent payments data available in Niger were from 2013 –right before the contract renegotiation. Niger’s 2013 EITI reportshows that Areva paid almost 10bn FCFA (about 15.3 million euros) in royalty fees to extract uranium in Somaïr mines. The amount of uranium extracted from the mine is slightly superior – 2730 tons – but not enough to justify a massive decrease in royalty payments.
In two years, Areva’s royalty payments decreased by 4.5 million euros. What went wrong?
How can the royalty decrease? To answer this question, we first need to take a step back and look at howth e royalty regime works in Niger.
Royalties are what companies pay in exchange for the right to mine a particular mineral. They usually represent a fraction of the value generated by the mine – or the gross revenues of the mine – which means they depend on the amount of mineral produced (i.e. the production volume of the mine) and the valorization of the mineral (i.e. the price at which the company value the mineral).
Since 2006, Niger imposed a sliding-scale royalty regime, which means that the royalty rate increases with the profitability of the company
Profitability corresponds to the net margin of the operator
Following the agreement over the new contracts Areva was subject to this regime for the first time. As numerous reports previously documented how uneven the partnership was, one would have expected the French company to pay a higher amount of royalty fees. Our comparison with the 2013 royalty payment outlines a small decrease in the production volume, but not enough to explain why Areva paid 4.5 million less in royalty fees. What about the price?
Areva: the price is wrong? Until 2013, Areva directly negotiated a price of extraction with the government of Niger. This price corresponds to the market value of uranium extracted from the mines operated by Areva in Niger. In 2013, the extraction price was 73,000 FCFA per kilogram of uranium (kgU) (about 111€/kgU). Thanks to data released by Areva, we are able to determine the 2015 extraction price of uranium:
- Find the applicable royalty rate
- Calculate the gross revenues
- Calculate the price
1. Find the applicable royalty rate: 5.5% In Areva’s 2015 annual report, the company discloses Somaïr’s income and revenue that we use to calculate the mine’s profit margin. This is the indicator that we need to determine the applicable royalty rate.
Somaïr Net Margin= (Somaïr Income/ Somaïr Revenue)*100 Somaïr Net Margin = (5/197)*100 Somaïr Net Margin = 2.5%
Somaïr Net Margin being 2.5%, the applicable royalty rate is 5.5% according to the sliding-scale royalty regime described above.
2. Calculate the gross revenues: 196 658 415€ If the applicable royalty rate is 5.5%, the amount of money disclosed by Areva as a royalty fee corresponds to 5.5% of the gross revenues of the mine Royalty Fee = 5.5% * Gross Revenues Gross Revenues = Royalty Fee / 0.055 Gross Revenues (FCFA) = 7 094 970 527 / 0.055 Gross Revenues (FCFA) = 128 999 464 127 We calculate the price in euros Gross Revenues (€) = 128 999 464 127 / 655.957 Gross Revenues (€) = 196 658 415 3. Calculate the price: 78.38€/kgU Using Somaïr’s production volume disclosed by Areva, we can calculate the price: Gross Revenues = Volume * Price Price = Gross Revenues / Volume Price (€/Ton) = 196 658 415 / 2509 Price (€/Ton) = 78 381 Price (€/kgU) = 78.38
According to Areva’s payments to governments report, the extraction price for the uranium extracted from Nigerien mines operated by Areva decreased by almost 33€ per kilogram of uranium. The effect of a price decrease is twofold:
- With a lower valuation of the uranium, the gross revenues generated by the mines are smaller which means the royalty fee – a fraction of the gross revenues – are also smaller
- With a lower valuation of the uranium, the profits of the mines are less important which means the profitability of the mine is lower and the applicable royalty rate is the lowest possible – 5.5%.
Why is the extraction price down? Before the new contracts were signed in 2014, the price of uranium was fixed through direct negotiation between Areva and Niger every couple of years. The latest known extraction price was agreed in 2013 and reached 73 000 FCFA per kgU (about 111€/kgU). Our analysis suggests that it was not applicable anymore in 2015.
Backing our analysis is the Strategic Partnership Agreement signed between Areva and Niger. When it was released, civil society organizations paid attention to the provision stating that Areva would be subject to the 2006 mining law.
However, another provision in the document states that the extraction price of uranium for the two mines operated by Areva will be calculated as follows:
This rather complicated formula essentially means that the extraction price is to be indexed on both short-term market prices (also called spot market prices) and long-term market prices.
Indexing the extraction price on market prices has lowered the value of uranium in Niger. In particular, the indexation on spot market – spot contracts are traded at a lower price – has had an important impact on lowering the price. The problem is Areva is not operating on spot contracts. Uranium extracted in Niger is systematically sold to another subsidiary of the Areva group to be refined into nuclear fuel. This nuclear fuel is provided to Areva’s commercial partners – mostly on long-term contracts. For example, Électricité de France has signed a contract with Areva to secure a supply of 30,000 tons of uranium until 2035.
Using the formula disclosed in the Strategic Partnership Agreement together with spot and long-term prices disclosed by Cameco – one of Areva’s competitors – we can double check that the price is indeed 78.38€/kgU.
The stark decrease in price had an important impact on revenues to the Nigerien government. With the new sliding scale royalty regime, we calculated that Niger would have received an extra 15 million€ in royalty fees had extraction price have been left unchanged at 111€/kgU.
Does a decrease in price benefit Areva? Intuitively, a decrease in a mineral’s price would not appear to benefit a mining company: the lower the price, the lower the profits. However in this case, it does benefit Areva because of the way the company structures its activities in Niger:
To formally get ownership over the uranium extracted in the Somaïr mines, Areva and Sopamin (Areva’s minority partner in the Somaïr’s mines) have to buy the uranium at extraction price – 78.38€/kgU. Areva buys this uranium through its Nigerien branch before selling it to another subsidiary that will take care of refining uranium. Areva is therefore not only a seller but also a buyer. It has an incentive to export uranium at a cheaper price: the cheaper the uranium is, the better for the company that can refine and sell nuclear fuel at a lower price than competition.