exposure

.Silex Systems opts for solar exposure Tim Boreham From: The Australian July 17, 2010 12:00AM Increase Text SizeDecrease Text SizePrintEmail Share
Add to DiggAdd to del.icio.usAdd to FacebookAdd to KwoffAdd to MyspaceAdd to NewsvineWhat are these?WITH the climate-change debate winding its way back on the political agenda, the Lucas Heights-based Silex Systems is hedging its bets.
It has dual exposure to cutting-edge uranium processing technology as well as the mass market.

The potential of Silex's patented laser uranium enrichment -- a cheaper and much more efficient atomic energy process -- drove Silex shares to $12 in mid-2007, valuing the company at $1.7 billion. But a subdued uranium price and a dearth of information on Silex's nuclear progress has weighed heavily on the stock, now valued at $650 million.

"Investors are asking: where's the next news flow," says one Silex watcher.

Under licence from Silex, a consortium of heavy-hitting atomic energy companies has been trialling the technology at a test facility in Wilmington, North Carolina.

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The consortium, Global Laser Enrichment (GLE), in April reported the so-called test loop was successful, paving the way for a full-scale plant.

Since then, the information curtain has descended as the Nuclear Regulatory Commission (NRC) undertakes a 30-month approval process. But only Silex investors who are keen readers of the Wilmington Star-News Online would have picked up last month's news that the plant had received environmental approval -- no mean feat for an atomic plant.

Silex chief executive Michael Goldsworthy says the company prefers to stay mute out of deference to the NRC. He defends the lack of disclosure on the grounds the environmental assent is only one part of the approval process (a safety review comes next).

"We can only say what we can say," he says. "Until that licensing process is finalised we can't pre-empt the NRC."

But he says the GLE project is "very much" tracking to plan as further testing continues. "The focus now is on data for engineering and construction," he says.

"There's no shortcuts. You just have to go through the test sequences and build up the reliability data."

At stake is a share of the $US8bn global market, currently dominated by two outdated methods (mechanical centrifuge and gas diffusion) that date back to the 1940s. GLE is owned by GE (51 per cent), with Hitachi and Cameco accounting for all but 1 per cent of the rest. GLE's deal with Silex is simple enough: a 7 per cent base royalty plus a 5 per cent variable component and milestone payments of $US55m ($62.8m).

Southern Cross Equities analyst Hamish Perks notes that the NRC licensing process is a consultative process with ongoing communication between the GLE and NRC: in other words, the regulator is working hand in hand with the applicant, which lessens the risk of the sort of nasty surprise a few local drug developers have received when fronting the US Food & Drug Administration.

Perks says: "It's unlikely you will get to the end of the (30-month time frame) and the NRC says sorry that's the end of it."

GLE envisages its initial plant would have the capacity of 3-6 million separate work units (SWUs, a measure of energy). Put in context, the current global supply of enriched uranium is about 50 million SWUs annually.

GLE expects its plant to cost about $US1bn. In comparison, rival USEC plans to spend about $US3.5bn building the American Centrifuge Plant, based on the centrifuge method used by half the world's reactors (one-third use gas diffusion).

Another advantage is that the laser technology is not able to be patented, but rather is classified, which means its royalty is protected effectively into perpetuity.

However, any investor who survived the tech boom and bust of the late 1990s would be wary of grandiose technology claims.

It is therefore mollifying that Silex's local solar operations are also on a growth path, albeit with only a fraction of the nuclear side's dazzling potential.

To fill the investor information void, management's recent commentary has focused on the solar side, which investors view as not so sexy but which offers short-term earnings potential.

Silex is the only local maker of solar panels, having acquired BP's Homebush-based facility last year for a bargain $6.5m. The plant, which is in the process of being ramped up to annual output of 10 megawatts equivalent to 35MW, is running at full capacity.

Silex followed up with this year's purchase of the failed Solar Systems for $20m (mainly in shares).

Investors including TruEnergy had sunk $150m into Solar Systems, which planned to build a 150MW facility near sun-kissed Mildura. Despite the promise of government assistance, management ran out of funds before it could commercialise the process.

"The opportunity came not once but twice to get into the market very cheaply," Goldsworthy says.

In the first half, Silex reported an $8.3m loss on revenue of $3.24m. Southern Cross expects the solar division to be break even in 2009-10. Once the plant's ramp-up to 35MW is complete, however, Perks expects the division may generate EBIT of about $15m on $100m of revenue.

Goldsworthy refuses to see the solar side as the poor cousin to the nuclear business. He's resolutely proud that Silex retained Australia as a leading solar innovator when the industry struck trouble during Kevin Rudd's prevarications on renewable energy policy.

"We are a technology company in uranium and solar," he says. "We have very high hopes and very aggressive plans to make a success of both of them".

These plans include greenfields expansion in the US or Asia.

RBS Morgans analyst Scott Power says solar accounts for less than 10 per cent of the firm's Silex valuation.

"But they are pretty excited about the solar business," he says. "They could generate good revenues, but we are interested to see what sort of profit they can chalk up (given cheap imports from India and China). Let's see how it unfolds, but so far so good."

Perks says Silex has suffered the general migration of risk-averse investors to safer income-producing stocks during the recent pull-back.

But he adds some investors perceive Silex as a case of management "trust me": given the security implications, analysts and the media are not exactly invited to Wilmington, even though Goldsworthy would love to show off the facility.

While light-on for local institutions, Silex's share register is tightly held, with the selling reflecting only modest daily turnover. For the faithful, there's the potential of sky-high returns should laser enrichment become the global industry's gold standard. But in the short term, it is a case of looking at the stars while trying to avoid tripping over the red ink