This is getting a bit old now, none the less, the economic...

This is getting a bit old now, none the less, the economic methodology and conclusions could still be relevant to today only pricing and figures need to be updated along with ownership and company structure.


SilexAnd Terrestrial Energy: 2 Nuclear Innovators

Summary

• Silex will cut the cost of nuclear fuel, a minor cost of nuclear power. Terrestrial Energy will cut the capital cost of nuclear plants- the major cost of nuclear power.
• Eighty percent of the cost of nuclear power is the capital cost of the power plant. The fuel is less than ten percent.
• Integral Molten Salt Reactor powered electricity give promise of being cheaper and safer cheaper than coal or conventional nuclear powered electricity.

by Levis Kochin April 8, 2014

INTRODUCTION

Silex - a public company - is an attractiveinvestment opportunity. Its technology for laser enrichment of uranium ismarkedly lower cost than the centrifuge enrichment technology of itscompetitors. Its licensee Global Laser Enrichment will over time take over theUranium enrichment market and Silex is likely to receive royalties which are amultiple of the cap value of Silex. But the disruptive effect of laserenrichment is narrow. The prospects of nuclear power are only marginallyaffected because uranium enrichment is a small portion of nuclear power costs.Terrestrial Energy is attacking the main costs of nuclear power- capital costs,safety and waste disposal. If Terrestrial Energy succeeds, a substantial numberof important public companies in nuclear reactor construction and coal willlose much of their capital value. The value of companies exploiting the oilsands will, on the other hand, be substantially enhanced.

SILEX

Natural uranium has to be enriched in thefissile isotope U235 in order to be used as a fuel in almost all the world'snuclear reactors. Enrichment represents about 30% of the cost of nuclear fuel.But nuclear fuel represents only 10% of the total cost of nuclear power. Thetotal value of nuclear electricity in the world at wholesale is about $200Billion per year. The total value of nuclear fuel is about $20 Billion peryear. (All valuations in this article are stated in U.S. dollars.)The worldenrichment market is worth about $7 billion per year. Two manufacturers ofcentrifuges, one Russian (Rosatom) and one West European (Enrichment TechnologyCompany) both manufacturing centrifuges designed by Gernot Zippe while aprisoner in the Soviet Union, have over 90% of the uranium enrichmentcentrifuge market.

In North Carolina, the first commercial lasercascade to enrich uranium is under construction by Global Laser Enrichment (GLE) under a license from Silex of Australia. In 2012 GLE obtained U.S. Government permission to build a six million SWU per year plant. GLE is building the first cascade of enrichment devices. If that works as projected, the plant will be completed and supply 10% of the world enrichment market. At current forward prices of about $120 per SWU, Silex's royalty will be between 5% and 12% depending on the cost of enrichment at the plant. At current forward prices for enrichment, Silex would collect about $75 million per year at a 10% royalty rate when the plant is completed (projected for 2020). Since GLE's costs per SWU will be about $60, GLE could (and probably would) obtain additional revenues by "underfeeding" their enrichment contracts, that is by using more SWU and less uranium to make the low-enriched uranium they deliver to their utility customers.

GLE is in exclusive talks with the U.S. EnergyDepartment to build an enrichment plant in Kentucky to "mine" 50million pounds of uranium by re-enriching the 110,000 tons of tails whichaccumulated in 60 years of operation of the obsolete and recently closedPaducah Kentucky enrichment plant. The 50 million pounds of natural uraniumequivalent in the form of uranium hexafluoride that Silex would produce overthe life of the enrichment plant are worth $3 Billion at current uraniumforward prices. This would over time yield additional royalties of $300 millionto Silex.

GLE's commercial opportunity for the sale ofSWU is limited to the growth in the market for enrichment as almost all thecost of uranium enrichment comes from capital costs and current enrichmentneeds are covered by current SWU capacity and centrifuge enrichment plantscurrently under construction in New Mexico and France. GLE would have to cutthe contract price from the current $120 per SWU to the operating costs ofcentrifuge enrichment which are almost certainly less than $30 per SWU in orderto force the closure of existing centrifuge plants. What GLE is more likely todo is to set a SWU price enough lower than existing prices to make ituneconomic for Urenco to construct new centrifuge enrichment capacity. Nuclearpower generation is expected to rise about 30% over the next decade as newplants under construction and planned in China, India, Russia, South Korea,France, Finland and the UAR have a larger generating capacity than the plantslikely to close in the US, Japan and Germany so the additional demand for laserenrichment over the next decade is not insignificant.

Enrichment firms sell the service of enrichinguranium. Enrichment firms swap low-enriched uranium for natural uranium andcash supplied by their customers. With lower costs for SWU, GLE can deliver agiven quantity of low-enriched uranium while using less than all of the uraniumsupplied by the customer and selling the extra uranium to another customer.When an enrichment firm "underfeeds" uranium it is adding not to thesupply of SWU but to the supply of uranium. With a much lower cost of SWU suchunderfeeding will be a far more important source of cash flow for GLE than forother uranium enrichment plants.

GE owns 51 percent of GLE. Even a prosperousfuture for GLE will have little impact on the returns to shareholders of GE. GEhas a market cap of $500 Billion so the $4 Billion investment in GLE nowplanned will not have a material effect on the GE investor. For minoritypartners Hitachi (HIT) and Cameco their investment in GLE will total about 10%of their total plant and equipment investment if GLE's plants in North Carolinaand Kentucky are completed. Even a GLE strategy that lowers SWU prices enough toforeclose all new commercial competition for uranium enrichment will have onlya small effect on the prospects of nuclear power as enrichment is about 3% ofthe cost of nuclear power. Thus even if uranium enrichment were free, thedemand for the products of nuclear plant suppliers and operators and most otherfirms in the nuclear power industry will be only slightly affected. Uraniumminers will be more affected by a fall in the price of enrichment as enrichmentis a substitute for natural uranium in producing low-enriched uranium. If thecost of enrichment falls, then more enrichment and less natural uranium will beused in producing uranium.

ENRICHMENT COMPETITORS

GLE's pricing strategy will have an importanteffect on the commercial prospects of the producers and operators of uraniumenrichment centrifuges. USU is the one currently public company other thanSilex whose principal business is uranium enrichment. USU has shut down itsobsolescent enrichment plants in Ohio and Kentucky and declared bankruptcy. USUhas spent over a billion dollars designing and making prototypes of a uraniumenrichment centrifuge which even if USU's estimates are accepted will cost muchmore per unit of separating capacity than Urenco or Rosatom centrifuges.Rosatom is owned by the Russian Government. Urenco is owned one third each bythe British and Dutch governments and one sixth each by the German utilitiesE.ON SE (EONGY on US pink sheets ) with a market cap of $35 Billion and RWE AG(RWEOY on US pink sheets ) with a market cap of $23 Billion. Urenco's currentowners have agreed to sell Urenco. They are anticipating receiving between $11Billion and $15 Billion for Urenco. Part of this value derives from theenrichment plants in Europe and New Mexico and part of it derives from Urenco'shalf interest in Enrichment Technology Company (ETC). E.ON SE and RWE shares ofUrenco would be worth about $2 Billion at that valuation. Bidders for Urencowould trim their bids if they are aware of the competitive threat of GLE whichis possibly the reason why the existing owners are selling . The other halfinterest in ETC is owned by Areva, a French company which has a sizablecentrifuge enrichment plant now operating in France. Areva is building GeorgeBesse II a 7.5 million SWU centrifuge enrichment plant which began commercialproduction of SWU in 2011 and is scheduled to be completed in 2016. Areva isnow the only substantial publicly traded company for which uranium enrichmentis an important current business. But Areva has other nuclear businesses indesigning and building nuclear power plants, in mining uranium, in reprocessingnuclear waste and in renewable energy . Areva's total market cap is about $11Billion, of that more than 90% is owned by the French government.

In 2020 and after, Silex would receive $100million in annual royalties or about $75 million after tax. The present valueof $75 million a year would be $1 Billion in 2020 at a 7.5 % discount rate and$647 million now which exceeds the $270 million enterprise value of Silex. Onthe upside, Silex has hopes for follow up plants which would yield additionalroyalties. I have not included these more speculative royalties in my valuationof Silex but I have also not made an allowance for the chance that the GLE plantwill not be constructed or will have much higher costs than Silex now projectslowering royalties. In my evaluation of Silex I have assumed that the royaltyproceeds will be either returned to Silex shareholders or invested in projectsyielding benefits to them. Silex executives will control the disposition of theroyalty payments from GLE. Silex is spending a net $9 million on ongoingprojects in solar energy.

Silex has a market cap of about $330 million.Silex has about $80million in current assets and about $15 million in totalliabilities. The market is valuing the commercial operations of Silex at $265million. Most Silex trades occur in Australia (under the symbol SLX.AX). Onaverage 1152 ADRs worth $11,000 trade per day on Nasdaq. Each Silex US ADR is adeposit receipt for 5 Australian shares. SILXY recently traded at $9.6 per ADRand traded as high as $20 per ADR in the past year. SLX.AX has recently tradedat about $2 Australian per share.

Silex's control of its technology does not endwhen its patents expire as Silex's technology has been put under a securityblanket by an agreement between the Australian and US governments. Imitatorswill not be able to copy Silex's key innovations by reading patent documents.Silex can therefore look to a stream of royalties potentially extending touranium enrichment plants not yet planned. The value of the Silex intellectualproperty depends on the long run demand for uranium enrichment and thus on theprospects of the commercialization of conceptual designs for nuclear powerplants which would increase the demand for enrichment by substantially loweringthe main (capital) cost of nuclear power plants.

I am an Associate Professor of Economics at the University of Washington, Seattle Campus. I earned my Ph.D. in economics from the University of Chicago in 1975. Lester Telser and Milton Friedman were my advisors. I have taught at the University of Washington since 1973. I have also worked for the Federal Reserve Bank of New York, the Federal Reserve Bank of St. Louis, the Bank of Israel, and the Hoover Institution of Stanford University.