Centrus is a compelling risk-reward play on the future of US uranium enrichment. It is the sole US-owned uranium enrichment manufacturer, representing billions of dollars of IP and centrifugal technology. Combined with their recent price reset on their long-term contracts making them considerably more profitable, there are multiple ways to win with Centrus.
Centrus Energy (LEU) represents the efforts of the American government’s uranium enrichment program that was spun off in 1999 for roughly 3B dollars. It was heavily reliant on government backing to support its facilities and after the Fukushima nuclear disaster, they saw this support dry up. As a result it shuttered its enrichment facilities. This is also the reason why there are no other American owned uranium enrichment facilities. Centrus now acts in a supplier capacity to supply LEUs (low enriched uranium) to American and foreign owned utilities from its Russian counterpart ((TENEX)).
An important part to Centrus’ valuation is that it does not have too much downside. It’s current business model in which it buys LEUs from TENEX was a money losing operation until recently as there was a price reset provision that took place in late 2018-early 2019. This substantially lowered the cost Centrus was paying from LEUs from $140/lb to about $40/lb. One can see this from the graphs below. It took about a year for this price reset to bake into their Cost of Sales as they valued their inventory on an average cost method. Based off their recent quarterly reports, they are selling LEUs for about $55/lb with prices likely to remain at these levels if not go higher with COVID disrupting uranium production.
Nuclear power is both carbon free and one of the most reliable sources of power today. It has provided the United States with about 20% of its power for the last twenty years. It is able to provide one thing that solar and wind cannot, a steady baseline of power that is not subject to variation. Nuclear power has been subject to unlucky events such as nuclear disasters like the tsunami at Fukushima causing nuclear waste to spread. These events have given nuclear power a tarnished reputation. As Vaclav Smil calls it, nuclear power is a “successful failure”. Looking at the chart below shows that nuclear power generation is back at pre-Fukushima levels with China and Russia aggressively expanding with new nuclear reactors coming online. The US has produced the same amount of nuclear power for the last decade.
Nuclear power importantly also has bipartisan support in the US with the latest nuclear innovation bill passing through Congress 361 votes to 10. This is important as it supports the deployment of advanced reactors that will be able to produce nuclear power at much lower costs. Future president Biden also specifically calls out the development of advanced nuclear reactors in his clean energy plan. Staunch supporters of nuclear power such as Bill Gates who advocate it’s widespread use also help with its “social” acceptance. Although Centrus would be moderately successful with its current business, the advancement of nuclear reactors is where the upside of Centrus lies.
Although its enrichment operations in Ohio and Kentucky were no longer economically feasible to provide LEUs post Fukushima, Centrus has kept it’s IP and has put hundreds of millions of dollars in centrifugal technology R&D in its Oak Ridge facility. Centrus Energy recently partnered with the DOE for a 150mm dollar startup to manufacture HALEU (High assay low enrichment uranium). This essentially is fuel that has 4x the amount of uranium that traditional uranium reactors use. The benefit of this fuel is higher efficiency and lower costs enabling companies to build smaller reactors, making construction much cheaper which is the main bottleneck to building these facilities. Centrus has also partnered with Terrapower and several other companies to provide them with this fuel for their advanced nuclear reactors.
The DOE partnered with Centrus as it is the only unobligated US owned enrichment company. This is a key stipulation in any nuclear material the government obtains, the material nor the technology can come from foreign sources. For commercial purposes, utilities can buy from foreign sources, the only LEU enrichment facility in the US is in New Mexico owned by a consortium of European countries. This facility enriches uranium to 5% and has not yet obtained a license to enrich up to 20%. This stems from heavy regulation and also shows why several companies have chosen to partner with Centrus.
HALEU is a pressing need for new nuclear reactors given its advantage and has been listed as the main concern at the Advanced Nuclear Developers summit in April 2020. The following letter the NEI sent to the DOE shows projected HALEU needs in 2035, going from about three metric tons to be used in 2021 to five hundred tons in 2035, representing a CAGR greater than 40%!
Currently no facility enriches uranium up to 20% although highly enriched uranium (used in nukes and naval reactors) can be down-blended to create HALEU. A European report was put together showing the development of HALEU and that to be profitable, prices would have to be around twenty thousand euros per kilogram. With the projected forecasts above, it is possible that the HALEU market is in the billions of dollars. If this occurs, Centrus would be the sole US owned facility to produce this with at least a five year head start on competition (roughly the length it takes to create and license a facility to produce HALEU).
The main risk is that advancement of HALEU gets shuttered or delayed as the current nuclear energy production using LEU is suitable enough for energy needs. Centrus would probably trade around its current range given this.
Regulations clear the way for HALEU production to ramp up post 2022 or competition between countries such as China and Russia heats up to be the leader in nuclear power.
Uranium prices continue to increase as mines are shuttered due to COVID and uneconomical mining. This would lead to significantly higher margins for Centrus as they were able to lock in very attractive prices at the lows in late 2018 early 2019 from TENEX.
Given its contract price reset in January 2019 that enabled Centrus to purchase LEUs at roughly one-third its previous price, Centrus energy should be earning roughly 25-30mm dollars in cash flow for the foreseeable future. This alone should put Centrus at a significantly higher valuation than where it is currently trading at.
Using the royalties Centrus would get from the DOE as a starting point if they terminate their contract and hand over their centrifugal IP to the DOE would value Centrus at roughly 700mm dollars. This would put Centrus at a 4x multiple. Compared to if HALEU production starts to ramp up and Centrus is at the forefront, that valuation would be on the low end. Given it’s cash flows and solvency along with a potential monopoly (at least five years) on HALEU production, Centrus could have enormous upside. It also has about 1B in NOL’s to boot that expire in 2037. The combination of these elements presents a very undervalued company.There does not seem to be too much downside with Centrus other than it being illiquid and perhaps dead money for a while. Uranium and LEU prices are trending up due to supply constraints and Centrus benefits from this as it locked in much cheaper prices in early 2019. Thus it is buying cheap LEUs and selling them for substantially higher prices. There are multiple ways to win from improved FCF from Centrus to the realization of the value of their IP.
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