UMMC looks to the RF to float its $3bn energy project

23 Jul '10
Oleg Kouzbit, Online News Managing Editor

Ural Metals and Mining (UMMC) is seeking investors for its $3bn power construction project in the Sverdlovsk and Kemerovo regions. By 2018 two coal power stations could begin generating 1.5GW of new electricity. But the entire project seems to hinge on whether or not the planners manage to persuade the RF to include UMMC on its priority list of Russian energy-generating companies to assure government support. Private investors may also have concern since expert say the region is already becoming energy self-sufficient.

Ural Metals and Mining (UMMC) has aired long-term plans to build $2.8-3.2bn worth of construction projects in the trans-Urals and is reportedly looking to the RF for government support.

According to CEO Andrei Kozitsyn, by 2018 the company wants to launch the $1.8-2bn Demidovskaya TPS thermal power station in its home Sverdlovsk region and the $1-1.2bn Slavinskaya TPS station in the neighboring Kemerovo (Kuzbass) region.

Demidovskaya, with a projected coal power capacity of 500MW for each of its two power units, is expected to be put into operation in 2016-2018. Slavinskaya, with a smaller capacity of 500MW, is scheduled for completion by 2016.

Kemerovo-based Kuzbassrazrezugol, a coal company whose shareholders also have stakes in UMMC, will supply 4.3 million tons of coal a year for the new stations, according to management.

Set up in 1999, Sverdlovsk regional UMMC is now Russia’s second largest copper producer with a reported 40% national market share for cathode copper, 37% for zinc, 32% for lead and its alloys, about 25% for rolled nonferrous metals, and with an estimated 50% of Europe’s powdered copper market.

The privately owned metallurgical company (with Iskander Makhmudov reported to be the largest shareholder) incorporates 36 assets across 13 regions of Russia. The holding hasn’t disclosed its consolidated 2009 results yet; it reports however that its parent company, Uralelektromed, had sales of $611m (down 10% from 2008) and a $52.5m net profit (up 29% on 2008).

Powering itself and feeding new markets

UMMC first announced its broad generation strategy in 2007. At that time, the firm had partnership plans with South Koreans; today it is said to be eyeing both Koreans and Germans as potential equity investors.

Mr. Kozitsyn purportedly inked a preliminary agreement with Russo-German RUDEA earlier this month; although no investment details have been made public.

The holding currently has modest generating capabilities; its two coal power stations in the Sverdlovsk and Orenburg regions with a combined capacity of 22MW cover just 5% of its assets’ needs for energy. So UMMC needs the new stations to power more of its companies.

But the primary goal will be to generate revenue from new energy markets. Demidovskaya will reportedly sell half of its electricity to outside consumers, while Slavinskaya will sell off 70%.

A key to investors’ hearts?

The project will require at least $3bn in investment. To jump-start the process and lure private investors, UMMC is putting a lot of energy into securing a special agreement with the RF government called a ‘power supply contract’.

Such contracts guarantee that the government pays more for power supplied than it would under an ordinary deal, thus enabling private investors to have a more rapid and assured ROI.

Power supply contracts are routine between the government and energy-generating firms that used to be part of Russia’s energy leviathan, RAO UES—but not firms like UMMC.

When RAO UES was re-formed in the early 2000s its assets were bought by private investors. Today, these are the only companies that have been eligible for such preferential power supply contracts.

Looking for help in high places

Although UMMC is “holding talks” with the RF Ministry of Energy over the matter, the company’s CEO openly admitted in a mid-July interview with Interfax that persuading the RF to include the firm was not a done deal.

IFK Metropol’s Sergei Beiden goes even further and doubts UMMC will ever win approval.

The Energy Development Foundation’s Sergei Pikin agrees, pointing out that the preferential contracts for ex-RAO companies are designed to help meet demand for capacity that the government believes is required for the Russian economy—not to create power that can be marketed to other regions.

Mr. Pikin also feels that the Ministry of Energy will view UMMC’s investment proposal as unfair competition. He notes that over the past years private investors have already installed gigawatts of new capacity without any privileged power supply contracts from the RF. The way out he says is for the RF to announce an open tender for investors when and if it feels more electrical capacity is needed.

But until then UMMC may not only have a tough time tapping government funds, but private investment too. Analysts point out that unlike many areas of Russia, Sverdlovsk and the surrounding areas are already becoming energy self-sufficient with existing energy programs; hardly a compelling case for $3bn.
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