Kayelekera Uranium Mine, Malawi: Narrative Report on the Economic Model

Kayelekera uranium mine is the biggest mining project in Malawi’s history and began production in 2009. In 2013, revenues from the mine contributed 2.6% to Gross Domestic Product. Yet production at Kayelekera was suspended as a result of the crash in uranium prices following the Fukushima nuclear accident. The economic model of project cash flows and the fiscal regime for Kayelekera Uranium Mine was built by the authors in collaboration with Open Oil on the Mining Development Agreement and Paladin Energy’s disclosures to the Australian and Canadian stock exchanges where they are listed. In building an economic model based on public sources, the authors consider several questions, including what uranium price would be required to restart production? What has total government take been to date? Which impact did the reduction in the general royalty rate have when the contract was negotiated? The report was produced in collaboration with Open Oil. Based on the economic model, the authors find that Kayelekera needs a breakeven price of $58/lb to reopen (October 2016 uranium spot price is $20-26/lb), that Paladin Africa reports an accounting loss of $387 million to date, the government revenue is $12 million to date, and the reduction of the general royalty rate for this project has cost $15 million so far. Further reducing the royalty would make only a marginal difference to the breakeven price for restarting production. Royalty rate reductions have a large impact on government revenue and are the most assured revenue stream from mining projects in Malawi. African governments are advised not to reduce the royalty rates for mining project given this is the most reliable way to raise revenue from non-renewable resources and not at risk of base erosion and profit shifting.