There are a lot of wild nuclear bets in the market. One enrichment company holds a strong hand.
Uranium enrichment—a key step in making nuclear fuel—is a unique corner of the energy market. Only two companies, both in Europe, hold enrichment capacity outside Russia and China. American company Centrus Energy LEU 1.30%increase; green up pointing triangle is hoping to disrupt that world order.
Centrus shares rode an AI wave over the last few years, peaking late last year. Since then, its shares have lost steam alongside other nuclear stocks. It is down 67% from its peak. But it looks less speculative than some nuclear plays.
The decline is partly because there is more nuclear equity available on the public market, according to Vikram Bagri, equity analyst at Citi. More nuclear stocks have made public debuts recently, and existing companies such as NuScale, Oklo and Centrus have raised additional equity. Plus, rising interest rates lower the present value of nuclear projects, which are capital intensive and have long timelines, he added.
Centrus shares still aren’t cheap and trade at roughly 52 times forward earnings. It is all relative, though. Its market cap is less than half that of X-Energy and Oklo, both of which are small modular reactor, or SMR, companies that aren’t anywhere close to generating profit. Near-term earnings might not be a meaningful metric for a company whose enrichment capacity isn’t expected to start for a couple of years.
Once part of the U.S. government, Centrus stopped enriching uranium in 2013 and went bankrupt in 2014 after demand tanked following the Fukushima nuclear accident. Since then, Centrus has been making money primarily as a broker-dealer for enriched uranium. Now it is building out manufacturing capacity to re-enter the enrichment market by 2029.
Russia is the main reason. The U.S. used to source up to a quarter of its enriched uranium from Russia but has banned those imports. Temporary waivers on that ban will end on Jan. 1, 2028.
Outside Russia and China, there are currently only two other providers with scale: Urenco, a consortium between the U.K., Netherlands and Germany, and French company Orano.
The price of enrichment has soared from $65 per separative work unit in February 2022—before Russia’s invasion of Ukraine—to $181 an SWU today, according to data from research firm UxC. Part of that reflects tight supply as buyers look for non-Russian sources. It also reflects rising demand as utilities look to restart old nuclear reactors or extend the lives of existing ones, according to Jonathan Hinze, president of UxC.
Industry watchers say demand won’t be a problem for Centrus, even though incumbents Urenco and Orano are expanding or adding enrichment capacity in the U.S. Utilities want diversification, Hinze said. “Russian [supply] is going away, China is not supplying the West. Utilities in the U.S., Europe, Japan and Korea want more options,” he said. South Korean utility Korea Hydro & Nuclear Power, for example, has signed a long-term supply agreement with Centrus.
Centrus expects the bulk of its future enrichment revenues will come from low-enriched uranium, the type that conventional nuclear reactors use. It is, however, well positioned to benefit if SMR technology takes off. It is the only company with a Nuclear Regulatory Commission license to produce the highly enriched uranium required by some of these new technologies.
The other potential market is the U.S. government. So far, Centrus is the only enrichment company that relies solely on domestically made components, making it the only player that can meet U.S. national security needs such as naval reactors. Since Centrus’s enrichment operations stopped in 2013, the U.S. government has been drawing down Cold War-era stockpiles. The National Nuclear Security Administration has said that it intends to solely source certain enrichment from Centrus, according to the company.
The bigger risk for Centrus is execution. It has proven that its technology works but hasn’t demonstrated that it can produce at commercial scale. Its successful demonstration project with the Energy Department involved 16 centrifuges. Commercial enrichment facilities use thousands of centrifuges, Hinze said.
Funding is the other risk, given that Centrus’s factories will be capital intensive. It is setting up an enrichment facility in Piketon, Ohio, and a centrifuge manufacturing facility in Oak Ridge, Tenn. Earlier this year, Centrus received a $900 million task order from the Energy Department. It has also raised money through equity and debt offerings. Between this and its cash reserve, it should be able to meet near-term requirements.
But the company will need to raise more going forward. One source of additional funding could be prepayment from potential customers. So far, it has signed three such agreements, including with X-Energy. Utilities tend to be conservative, but more of them might be willing to prepay for Centrus’s future capacity as it makes progress on manufacturing, said Lawson Winder, equity analyst at BofA Global Research.
Enrichment promises to be profitable. Urenco’s margins on an earnings before interest, taxes, depreciation and amortization basis have averaged 61% between 2010 and 2023, according to a report from Citi. Enrichment companies have considerable market power, given the limited competition.
That isn’t to say there won’t be competition in the future. Other American companies are also eyeing the market, including General Matter, which is backed by Peter Thiel’s Founders Fund. Another is Global Laser Enrichment, which is co-owned by Canadian uranium miner Cameco. But Centrus has an early-mover advantage: It is one of only two companies—alongside Urenco—that has an NRC license to produce low-enriched uranium and the only NRC-licensed entity for the highly enriched kind.
While Centrus has been lumped together with some more-speculative nuclear stocks, its technology is proven, and future revenues don’t depend on new technologies taking off. The U.S. government and potential customers should be highly motivated to see a domestic enrichment provider succeed. Given the company’s unique position, it deserves an energy security premium.
Source: Wall Street Journal