Research Notes

The international community's close attention to the development of the nuclear power industry is the major driver for orders in the nuclear fuel sector where industrial facilities and technologies are held only by developed countries, including Russia. Russia's sole nuclear fuel manufacturer is state-run corporation TVEL which produces nuclear fuel at its two subsidiaries: Novosibirsk Chemical Concentrate Plant (NCCP) and Electrostal Engineering Plant (EEP). Thanks to smooth cooperation ties on promising Asian markets Russia stands a very good chance of winning international tenders to operate in this region.

The opportunities available to TVEL's nuclear fuel subsidiaries on the domestic market, where the corporation is an unrivalled leader, are no less alluring. Today's top priority is to replace domestic operating reactors whose service life is coming to a close. According to long-term strategic plans for expansion of the Russian nuclear energy industry, as early as 2020 Russia plans to commission 26 power units whose aggregate capacity will be twice as high as that of nuclear power generation facilities currently in operation. Thus, in the long term Russian nuclear fuel producers are expected to see a sharp rise in orders not only from foreign projects, but also domestically. However, it should be borne in mind that profitability of nuclear power output at Russian reactors will be much lower compared to foreign manufacturers, since domestic prices remain under state control.

Robust expansion of the global nuclear industry has led to a shortage of primary uranium, which is the main component for nuclear fuel output. Countries with ample uranium reserves have already begun to develop new fields, which implies slower growth in uranium concentrate prices by 2010. However, Priargunsky Mining Company (PMC, Krasnokamensk, Chita region), Russia's biggest uranium producer and also part of TVEL, should see only changes for the better in the future. The need for large-scale financial investments to replace reactors and also cash injections in the development of uranium fields has determined the formation of the domestic nuclear industry. The spin-off of uranium producing concerns from TVEL, which is planned in the course of nuclear industry reform, should help settle all current controversies with regard to uranium concentrate purchase prices, which TVEL has kept artificially low until now. This will encourage redistribution of profits from the production segment into uranium extraction.

In addition, achieving one of the reform's key objectives that aim to enhance transparency of nuclear fuel manufacturers presupposes that TVEL-controlled entities will abandon transfer pricing, which, in turn, will lead to improved corporate governance.

Given all the above trends and new prospects, we revised our target prices for the shares of Novosibirsk Chemical Component Plant, Electrostal Engineering Plant and Priargunsky Mining Company. Based on our estimates, we upgraded our fair prices for all the above concerns.

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Anastasia Sarapultseva

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