A New Era for Nuclear
04/01/2005 12:00 am EST
"The nuclear energy story has undergone a complete transformation since the early failures of Three Mile Island and Chernobyl," says Tobin Smith, a noted expert on uncovering developing trends. Here, he looks at the future of nuclear energy, and his favorite stock in the area.
"Twenty-first century nuclear power plant technology has evolved to a whole new generation of safety. More than 60 new nuclear power plants are now on tap for construction during the next 10 years. One aspect of OPEC’s loss of control over oil pricing is the indisputable fact that we are at the beginning of a rapid expansion in nuclear power plants throughout the world. With 2010 oil and gas futures pricing consistently above $45 and $6 respectively, the economics and environmental attractiveness of nuclear energy is undeniable.
"At the same time the key ingredient used in nuclear power plants - uranium - is not being mined nor found at the same level of demand growth. Energy-grade uranium spot prices have doubled in the last year to $19.75 per pound. As these contracts roll over, we could easily see uranium prices go to $30 or $40 a pound. But new supply is distant, given the many years required to site, permit and develop a uranium mine before bringing it into production.
"And because most companies exited the business in the 1996-2001 uranium price crash, it's going to be more expensive for newcomers. In short, there just isn’t a lot of spare capacity out there to bring online soon enough. By 2020, China plans a six-fold increase in its nuclear electricity capacity and India a ten-fold increase. Even the US is coming back to nuclear power. To date, three US nuclear operators have applied for combined licenses (Dominion Resources, Entergy, and Exelon)
"Why do I like USEC (USU NYSE) as our best play in this area? It is a leader in selling low-grade uranium and will profit the most from what I expect to be a significant price increase in the nuclear energy source. USEC is involved in the American Centrifuge Project. This project has just met a government milestone for producing low-grade uranium that I think is worth another $20 per share in value for USEC as it comes on line later this decade. So we get an option on this project that the US government has spent billions on for zero cost. When it moves out of the demo stage and on to construction by the end of this decade, it is expected to offer the world's most efficient uranium enrichment technology, making fuel for nuke plants more cheaply and quickly than prior models.
"And we get one other new project with USEC -- the Isaiah Project. USEC is imploring utilities to build one or more new nuclear power plants for which the US and Russia would provide excess weapons-grade uranium. USEC, which would blend down the material, says that the construction of a single new plant would lead to the elimination of 100 nukes just from the initial fueling. Over the plant's lifetime, its fuel needs would lead to the elimination of 2,000 warheads. Every socially responsible mutual fund and money manager in the world will want to own USEC for this aspect alone.
"Meanwhile, the company has solid earnings. USEC reported net income of $23.5 million, or 28 cents per share, for 2004 compared to net income of $9.8 million, or 12 cents per share, in 2003. For the fourth quarter, USEC reported net income of $28.2 million, or 33 cents per share, compared to a net loss of $0.7 million, or 1 cent per share, in the year-ago period. In our opinion, the bottom line is that the pricing power for low-grade uranium is ramping up, and USEC will be the world's low-cost producer. In addition, the stock provides investors with a yield of 4.4%."