The (not) unthinkable has happened (USEC)

July 28, 2009
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Remember what I said about the dangers of event-driven trading? USEC has been denied the loan guarantee for their centrifuge enrichment plant construction, for reasons of concerns about commercial viability (which is unusual because the technology is already in use  by other uranium enrichers) . As a result, the company seems to be making good on its vow to cancel the project, although they claim they are now investigating strategic partners or buyers. The Department of Energy has taken the unusual step of asking USEC to withdraw and resubmit the application in 12-18 months, although I’m not sure to what end.

Naturally, the stock has fallen by about a third as of this writing. I’m as surprised as anyone, but as I’ve stated, this rush for the exits is a common enough reaction to an event coming out the wrong way. I should also point out by way of shameless bragging that, since I purchased it at a low price when it was still a net-net situation, I’m actually about even on this one.

If we neglect the new construction project entirely, we are left with the existing plant, which will probably not be competitive in the marketplace once the Urenco’s centrifuge enrichment plant is finished in a projected 2013, or perhaps Areva’s Eagle Rock facility, which will be fully constructed in 2018 or 2022 but like the Urenco plant, can operate without being fully operational (one of the awesome things about centrifugal enrichment is that it’s modular), or any of the other centrifuge plants around the world. Of course, since centrifuge technology is already being used at some overseas enrichment plants, the demise of USEC’s competitiveness has already started. It is still operating at a profit, but as centrifuge technology becomes more and more common their operations will most likely be squeezed out. USEC also takes weapons-grade uranium from Russia and dilutes it to fuel grade, but that program also comes with an expiration date.

However, as I stated, without R & D on the plant, which the company may have to follow through on their promise and put on standby, the company has average earnings of $180 million a year. After this price collapse, their PE ratio is down to 3, so it might still be a hold. But I was definitely more optimistic yesterday.

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