REFILE-UPDATE 1-Areva stock falls as auditor questions its business model

Tue May 13, 2014 10:28am EDT

(Refiles to remove extraneous characters in headline)

* Auditor questions merit of Areva's one-stop-shop model

* Report says hard to make money selling reactors today

* Areva suffers as EDF diversifies fuel purchases

By Geert De Clercq

PARIS, May 13 (Reuters) - Shares of state-controlled nuclear group Areva fell nearly four percent after France's top public auditor criticised the company's business model and its and former management.

The "Cour des Comptes" gave a withering review of the management of Areva's former chief, Anne Lauvergeon, in a report focused on the 2006-2012 period.

The report, published by French daily Les Echos late on Monday, criticised Areva's 2007 acquisition of uranium mine UraMin, on which it had to write down 1.9 billion euros; a 3 billion euro loss due to delays and cost overruns on a reactor in Finland; and Lauvergeon's exit deal when she left Areva in June 2011, which it described as excessive.

The report also questioned Areva's one-stop-shop business model. Lauvergeon built Areva into an integrated nuclear group that offers a full range of nuclear activities from uranium mining, enrichment and nuclear fuel to building and servicing reactors and recycling spent fuel.

"The integrated model is built on the idea of synergy between fundamentally different but complementary activities. In reality, this notion is not as clear as it seems," it said.

Other nuclear groups, such as Mitsubishi Heavy, Toshiba Corp's Westinghouse, GE Hitachi , and Korea's Kepco, focus on building reactors and are not involved in mining, fuel or recycling.

Only Russia's state-owned Rosatom sells fuel and recycling services with its reactors and often operates them.

"It is hard to define the advantages and inconveniences of the integrated model. Its strongest argument, notably that it would offer a commercial advantage, is not convincing, as customer expectations and contract types can be very different," the report said.

The auditor said that in the current competitive context, it is difficult to make a profit on the sale of nuclear reactors, which is the firm's core business.

It said Areva is forced to chose between fully accounting for its development costs and risk margins, which could limit success winning future tenders, and an aggressive commercial approach that could durably impact its financial equilibrium.

"FIVE QUESTIONS A DAY"

The auditor said in a statement the report was provisional and confidential and that its investigation into Areva had not yet concluded. Areva declined to comment.

"The report paints a worrying picture of Areva's health, which revives old worries about the governance of the firm," said a Paris-based equity trader.

The audit said that, with the exception of its mining and renewable energy business, Areva's financial track record for big projects was not satisfactory.

"The numerous cost overruns indicate optimistic forecasts and insufficient anticipation of difficulties," it said.

It said that Areva's fuel business was suffering as its principal client, state-controlled utility EDF, tries to secure stocks and lower prices by turning to other suppliers. Lower sales to EDF have not been compensated by new contracts with foreign clients, the audit body said.

Lauvergeon was not available for comment, but according to the transcript of an April 14 hearing obtained by Reuters, she told the auditor she had built Areva into the world's number one nuclear group.

She said that decisions such as the UraMin purchase had been taken collectively and under the tight control of French state holding company APE. She also said that her successor Luc Oursel had been a member of Areva's executive committee since 2007.

"Concerning APE's supervision, nothing escaped them. They asked five questions per day on average and wanted that absolutely everything be forwarded to them," she said. (Additional reporting by Alexandre Boksenbaum-Granier and Benjamin Mallet, editing by Louise Heavens)