Answering Saudi Arabia Request for Nuclear Proposals

The most recent post “Saudi Arabia Going Nuclear” started a series on nuclear power plant construction.  The Saudi government recently announced plans to prequalify construction companies for a bidding process that will begin before the end of 2018 and result in the signing of contracts sometime in 2019.  Never to undertake anything with moderation, Saudi Arabia plans to build 17.8 gigawatts of nuclear capacity by 2032, requiring about sixteen reactors.  It is an ambitious plan and one that could have a significant impact on the nuclear power construction industry.  There are otherwise about fifty nuclear power plants under construction scattered among at least a dozen countries.

Which nuclear construction companies are sending envoys to the House of Saud?  The last post highlighted the financial difficulties faced by the major nuclear construction company Toshiba’s (6502:  Tokyo) Westinghouse Electric Company.  Given that Westinghouse has been such a significant player in the world’s nuclear power industry, it seems more likely than not that there would be some conversation. 

The company has already been reported as trying to form a consortium to bid on at least the first two nuclear reactors in the Saudi plan.  The U.S. power producer Exelon (EXC:  NYSE) has been mentioned at least once as one potential partner for Westinghouse, as has privately-held construction giant Bechtel.  It would seem that on its own Westinghouse would be a difficult choice, but the right partners and progress toward ending its bankruptcy status could give more credibility to the much storied company.

Politicians in Washington DC are not so pessimistic.  Apparently as a carrot to win favor for a Westinghouse bid, the White House has signaled willingness to relax restrictions on the sale of nuclear technology in the Middle East.  Section 123 of the U.S. Atomic Energy Act sets up the conditions and process for cooperation between the U.S. and other countries on major nuclear projects.  The counter party must agreed to nine nonproliferation criteria.  That might seem daunting, but there 23 cooperative agreements already in place, involving four dozen countries.  Unfortunately, Saudi Arabia has previously balked at the nine criteria.

Saudi may not need to bend to stipulations of any kind.  There are other construction companies with a track record in building nuclear power plants.  Companies in France, Russia, Korea and China have reportedly responded to Saudi Arabia’s request for proposals.

Country	Company	Operations
USA	Westinghouse Electric Company	Nuclear power plant construction; consulting
France	Areva SA	Nuclear power generation, construction; uranium mining, nuclear fuel production
Russia	Rosatom Group	Electric power generation; nuclear power plant construction
China	China Nuclear Engineering & Construction Corp.	Nuclear power plant design, construction
Korea	KEPCO Hydro & Nuclear	Construction subsidiary of Korea Electric Power Corporation

Russia’s Rosatom Group claims to be one of the largest companies in the Russian Federation with a portfolio of power generation facilities in Russia and over thirty energy construction projects around the world.  Rosatom is also involved in uranium mining and enrichment and claims 18% share of the global nuclear fuel market.  Rosatom is working on nuclear power plant construction projects in India, Finland and Vietnam.  India in particular appears impressed with Rosatom capabilities, entering into an agreement in 2014 for a dozen power plants through 2035.

Riyadh might have already signaled its current sentiment with the signing of an agreement in October 2017, between Rosatom and King Abdullah City for Atomic and Renewable Energy, which is Saudi Arabia’s nuclear and renewable power development authority.  The agreement was described as a ‘roadmap’ for implementation of Saudi’s new Program for the Cooperation of Peaceful Use of Atomic Energy.  Perhaps even more importantly, in October 2017, King Salman became the first Saudi monarch in history to visit Russia.  Besides talks about nuclear technology, Saudi also declared interest in buying Russia’s S-400 air defense system, signing an arms deal reported wotuh US$3 billion.  Additionally, Russia pledged to invest in a planned Saudi Arabia megacity to be powered by wind and solar energy.  Difficult questions were perhaps kept in abeyance regarding Syria, where the two countries are supporting opposing sides of a bitter and deadly civil war.

The VVER-1200 reactor is Rosatom’s main nuclear reactor design featuring a thermal neutron reactor with pressurized water as a coolant and moderator.  Atommash, Rosatom’s mechanical engineering division, is the manufacturer.  A predecessor design had been installed in Iran, China and India as well as in Russia.  The newer design claims increased capacity, longer service life and efficiency in labor requirements.   The first plant with the VVER-1200 design was commissioned in Novovoronezh, Russia in August 2016.  Interestingly, ASE Group (ASX:  NYSE), the Taiwan based construction company, has been the general contractor for all the VVER-1200 installations.

Rosatom reported net earnings of US$700 million on US$5.4 billion in the first half of 2017.  Sales represented 17% year-over-year growth over the first half of the previous year.  Strength in power generation and strong sales of energy equipment were cited by management as drivers of growth and profitability.  Unfortunately, Rosatom is a Russia state-owned company, leaving no room for investors from any country.

ASE Group might be an alternative vehicle to play Saudi nuclear power plans, especially if Russia becomes the favorite to win the Saudi contracts.   No small-cap, ASE Group reported $9.6 billion in total sales in the twelve months ending September 2017, providing $826.9 million in net income or $0.46 per share.  The stock trades at 14.7 times estimated 2018 earnings.  If that is not attractive enough the forward dividend yield is 3.37% at the current price level.

Investors must keep traveling to take a direct stake in the nuclear power construction industry.  Our next post will look at nuclear power plant construction companies in France, Korea, and China.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.