Continuing the discussion we introduced yesterday, we’re
highlighting another microcap uranium play with a multi-layered investment thesis.
Centrus Energy (NYSE: LEU) is among the smallest companies reflected in the
Global X Uranium ETF (NYSE: URA) and one of the only non-mining companies.
Centrus Energy supplies enriched uranium fuel to commercial nuclear power plants in the US and globally. The company is expected to announce Q4 and full year 2016 results after the close today, and we think the investment merits are rooted in four key points:
1. Superior Technology
This may be the most important aspect of the company. We view Centrus Energy as a technology company and not simply a cog in the uranium supply chain.
Centrus is working with the U.S. Department of Energy and Oak Ridge National Laboratory to develop and demonstrate a highly-efficient uranium enrichment gas centrifuge technology – called the American Centrifuge – that could restore America’s domestic uranium enrichment capability for both national security and commercial purposes. Originally developed by the U.S. Department of Energy in the 1980s and significantly upgraded in recent years by Centrus, these are the most advanced centrifuges in the world.
In an October 2015 report to Congress on the management of tritium and uranium inventories through 2060, the Department of Energy presented the results of its evaluation of uranium enrichment technologies. It called Centrus’ AC100 centrifuge “the most technically advanced and lowest risk option for future production” of enriched uranium.
2. Management led by CEO Daniel Poneman cleaning up the balance sheet as promised
Mr. Poneman took the reins in March 2015, after Centrus Energy has emerged from its reorganization under Chapter 11, and he’s proven to be a great choice by the board. He was the longest serving Deputy Secretary at the Department of Energy and previously served as a White House Fellow and director of defense policy and arms control for the National Security Council (NSC). He was special assistant to President Clinton and senior director for nonproliferation and export controls at the NSC.
Last month, the company completed an exchange offer, cutting its long-term debt by more than half and extending the maturity of the new debt out to 2027. The debt exchange fulfilled a promise that management had made to shareholders.
Centrus CEO Daniel Poneman speaks at the Atlantic Council’s Global Energy Forum in Abu Dhabi on January 12, 2017.
3. Long-Term Contracts
Two weeks ago, the company announced day that it has signed several new sales contracts in the last nine months to supply its utility customers with enriched uranium fuel. In aggregate, the contracts have a value of approximately $165 million with deliveries through 2022.
4. The Trump Trade, Increased Defense Spending and Focus on National Security
While the stock has enjoyed the run with other uranium-related stocks we highlighted yesterday, we think Centrus Energy can continue to be a key beneficiary of the ongoing Trump Trade in nuclear power. Additionally, the company stands to from the planned budgetary increases in defense spending.
The US shut down the last of our outdated and increasingly uneconomical Cold War-era enrichment plants in 2013, leaving the nation without a domestic, industrial-scale uranium enrichment capability for the first time since the Manhattan Project. The company believes that the country needs an industrial enrichment capability to strengthen energy security, support our nonproliferation policy, provide fuel for the long-term needs of the Navy and to maintain the effectiveness of our nuclear deterrent. Centrus’ American Centrifuge technology is the only technology now available to restore this critical capability.
In our eyes, Centrus Energy is a technology company with a steady recurring revenue base whose future prospects could well be burnished by President Trumps’s positive stance on nuclear power and increased defense spending.
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