Political Risk in the Uranium Industry

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"Obviously, news out of Kazakhstan is creating concern and influencing investor confidence."

Savvy investors are well aware of the impact political risk can have on the market perception of a company's share value. The mining industry is especially vulnerable to political risk and the affect it can have on investor interest.

If you follow the uranium market, then you're probably aware of the recent pressure placed on Uranium One's (TSX: UUU) share price after reports started circulating last week that its joint venture property in Kazakhstan may be a part of a government fraud investigation.

On Wednesday last week, Uranium One's stock dropped 30% in value. In total, 48 million shares traded by closing and the stock value had fallen 40% to $1.99.

Obviously, news out of Kazakhstan is creating concern and influencing investor confidence.

Last week, the Kazakhstan National Security Committee (KNB) arrested Mukhtar Dzhakishev, head of the state-run uranium company Kazatomprom. Dzhakishev and other arrested officials are accused of illegally selling state-owned uranium deposits to foreign companies.

"It has been proved that more than 60% of state uranium deposits worth tens of billions of dollars had been turned into Dzhakishev's property," said a government report.

Some analysts, like BMO Capital Markets' Edward Sterck, view these latest developments as "highly negative" for companies operating in Kazakhstan.

However, others are confident this is but a bump in the road for a nation that is destined to remain a heavy player in the uranium mining industry. "Uranium itself is one of the most important commodities generating revenue in a country that has been heavily hit with the fall in the resources market," said Neal Froneman, the former CEO who headed the mining company when Uranium One bought out UrAsia. "There could well be power plays taking place, but certainly the operations will continue to run and I think that Kazakhstan and the government know that it's important that the Western world is treated in an appropriate way."

Kazakhstan holds about a fifth of global uranium reserves and has made becoming the world's leading producer by 2010 a major goal. Despite its perceived political risk, the Central Asian nation will continue to attract foreign investor interest as the world's demand for energy and uranium products increases.

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