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Investment Thesis
Centrus Energy Corp. (NYSE:LEU) has a strategy to become the leading supplier of High-Assay, Low-Enriched Uranium (HALEU) in the U.S., recognizing the huge potential demand of this high-performance nuclear fuel component required for advanced reactor designs. In this article, I analyze the conditions necessary for Centrus to execute this strategy successfully and the potential profits the company could reap as a result. Read on to find out why I believe Centrus will be successful and how the investment now could really pay off.
Introduction
Centrus Energy was originally a U.S. government-owned enterprise for enriching uranium until it was spun out as a publicly traded company in the 1990s. It continued to enrich uranium with gaseous diffusion processes at its facilities in Piketon, Ohio and near Paducah Kentucky until 2013, when its operations were shut down for economic reasons. Now, the company essentially operates as a distributor, providing value by leveraging its diverse supplier base to provide a steady supply of nuclear fuel ingredients to utilities that operate nuclear power plants across the globe. Specifically Centrus Energy supplies Low-Enriched Uranium (LEU) and its components Separative Work Units (SWU) and natural uranium in various combinations, sourcing enriched uranium from its inventory, contracts, and spot-purchases. Centrus Energy has relationships with over 35 nuclear operators in the U.S., Europe, and Asia. The current market for nuclear fuels is already strong, with nuclear energy accounting for almost 19% of electricity production in the U.S. as of 2021 and 10.4% globally.
The HALEU Strategy
Centrus Energy’s strategy is to go beyond LEU and to become the sole licensed supplier of HALEU in the U.S. Demand will be driven by the need for clean, carbon-free electricity, where nuclear energy will play a key part.
HALEU (5-20% uranium-235) is a high performance nuclear fuel component enriched to just below weapons-grade uranium that will be required by advanced reactor designs over current LEU (<5% uranium-235). It provides better efficiency and performance, leads to fewer refueling outages and simpler reactor designs, reduces waste, and has greater nonproliferation resistance (due to less refueling). Centrus is the only company in the U.S. with a license from the Nuclear Regulatory Commission (NRC) to enrich HALEU. Centrus Energy seeks to take advantage of this situation and build significant HALEU capacity in the U.S. to meet the possible demand. Below, I analyze what conditions must be true for Centrus Energy to execute this strategy successfully.
What Needs to be True
The U.S., at a minimum, needs to adopt reactor technologies that require HALEU.
So far, it looks very promising that the U.S. is shifting to advanced reactor designs that require HALEU. On the government side, the Department of Energy’s (DOE) Advanced Reactor Demonstration Program recently selected ten designs, nine of which require HALEU. Additionally, the first non-light water reactor to undergo NRC review also requires HALEU. On the commercial side, an NEI survey collected forecasts from 11 advanced reactor developers and fuel designers and found that the demand for HALEU could be quite high by 2035. After adjusting enrichment levels to 19.75%, this works out to be close to 400 MTU/year. Even if only a portion of this demand materializes, it will be quite significant.
Centrus Energy Investor Relations Presentation
In another presentation, Centrus Energy detailed the demand situation, highlighting the greater certainty of demand coming from the U.S. Government.
Centrus Energy Presentation
It is this potential need that prompted the DOE to issue a sources sought notice for HALEU, supporting the scale-up over the 10-year program by purchasing up to 25 MTU/year.
Centrus Energy needs to demonstrate the ability to produce HALEU.
HALEU is not domestically produced at a commercial-scale, but Centrus Energy just met an important milestone this month with the completion of its 16 pilot cascade centrifuges. On November 10th of last year, the DOE announced an approximately $150 million cost-shared award with American Centrifuge Operating, LLC, a subsidiary of Centrus Energy. This includes $30 million for the setup of the first 16 centrifuges with the goal of producing 20 kg of HALEU by the end of 2023. The expectation is that the facility would go on to produce 900 kg of HALEU in 2024. Centrus still has to finish the support systems and regulatory checks, but this was an important step in demonstrating the viability of this new enrichment capability. More pictures can be found on Centrus Energy's website.
Centrus Energy
Centrus Energy needs to build enough manufacturing capacity to support HALEU production ramp-up
The first demonstration centrifuges would only be able to supply 1-2 small reactors, approximately 1 MTU/year. Phase 2 of production ramp up would involve three optional, 3-year extensions to produce HALEU. Because of the modular nature of the production, the facility capacity could easily be expanded. In a recent announcement, it was explained:
Assuming the DOE supports the scale-up to 25 MTU/year, this could be achieved with four full-scale cascades of 6 MTU/year plus the 1 MTU/year from the demonstration unit and could be online as quickly as 2029 if funding is secured starting in 2024.
Centrus needs to have a secure, cost-competitive supply of LEU to further enrich
The feedstock for producing HALEU is LEU, and this makes up the bulk of the costs.
Centrus Energy
The supply of LEU is the greatest risk for the HALEU scale-up given that Centrus’ largest supplier of SWU is TENEX in Russia. The supply quotas currently covered by the 1992 Russian Suspension Agreement (RSA) are enough to cover Centrus Energy’s needs for the foreseeable future. However, the company recognizes the risk of the possibility of sanctions over the Russia-Ukraine war. So far, U.S. sanctions have excluded enriched uranium, but it is still a possibility. The good news is that this could change from being a risk to an opportunity for Centrus. As the CEO Dan Poneman discussed in the last earnings call:
The Biden administration began pushing for $4.3 billion in funding to support domestic uranium enrichment in June of last year, and the $150 million investment in HALEU is a step in the right direction as the production can also include LEU.
Estimating Profits
To get a rough size of the HALEU opportunity assuming the 10-year DOE program is successful, I looked at how quickly production could be scaled up, conservative estimates for demand, and possible profit margins. As described above, Centrus could scale-up to the possible 25 MTU/year as quickly as 2029, though I assumed a ramp up of demand from each source, discounted for uncertainty: certain USG demand (100%), likely or possible USG demand (50%), and uncertain commercial demand (1%). With the additional commercial demand, the 25 MTU/year could conceivably be met by 2029. Then, I assumed capacity would continue to only be scaled once demand justified it and at a maximum rate of 6 or 12 MTU/year. Prices for HALEU could certainly vary considerably, but I used the $13,700/kg from Centrus Energy’s investor presentation. I assumed a 20% profit margin; the profit margin for the company’s LEU segment can vary widely. For instance, it was negative in 2014 and 2018 and 51% in 2020. However, 20% is a pretty average number since 2013 and, as mentioned above, the HALEU enrichment costs are actually pretty minor relative to the LEU feed material. The resulting estimates of gross profit can be seen in the table below.
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2035 |
Centrus Energy Centrifuge Capacity (MTU/year) | 0.02 | 1 | 1 | 1 | 1 | 13 | 25 | 25 | 25 | 25 | 31 | 37 | 49 |
Research Reactor Conversion (HEU to HALEU) (3-7 MTU/year through 2033, 7-9 MTU/year beyond, 100% certainty) |
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| 3 | 3.8 | 4.6 | 5.4 | 6.2 | 7 | 8 | 9 |
Demonstration Reactors (5-10 MTU/year adjusted 50% for uncertainty) |
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| 3.75 | 3.75 | 3.75 | 3.75 | 3.75 | 3.75 | 3.75 | 3.75 |
DOD Microreactors (1-3 MTU/year adjusted 50% for uncertainty) |
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| 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 |
NEI Survey - Commercial Demand (8-375 MTU/year adjusted to 1% for uncertainty) | 1 | 1 | 3 | 5 | 3 | 4 | 6 | 12 | 14 | 18 | 21 | 28 | 37 |
Total Demand (MTU/year) | 1 | 1 | 3 | 5 | 3 | 12 | 15 | 21 | 24 | 29 | 33 | 41 | 51 |
Quantity supplied by Centrus (MTU/year) | 0 | 1 | 1 | 1 | 1 | 12 | 15 | 21 | 24 | 25 | 31 | 37 | 49 |
Revenue, assuming $13700/kg ($1000s) | $ 274.00 | $ 12,331.73 | $ 13,700.00 | $ 13,700.00 | $ 13,700.00 | $ 164,885.57 | $ 202,493.28 | $ 292,429.10 | $ 325,413.50 | $ 342,500.00 | $ 424,700.00 | $ 506,900.00 | $ 671,300.00 |
Gross Profit ($1000s) | $ 54.80 | $ 2,466.35 | $ 2,740.00 | $ 2,740.00 | $ 2,740.00 | $ 32,977.11 | $ 40,498.66 | $ 58,485.82 | $ 65,082.70 | $ 68,500.00 | $ 84,940.00 | $ 101,380.00 | $ 134,260.00 |
Unfortunately, the company does not have a consistent track record of positive net income, so I did not feel comfortable trying to convert this to an EPS value. However, to give a sense of scale, current trailing 12-month gross profits for the company are $105 million, so an increase to $134 billion represents a more than 1200 times increase in gross profits by 2035 from the HALEU segment alone.
Current Financials and Additional Risks
If any of the above conditions required for the HALEU strategy turn out not to be true, the market could have a very negative short-term reaction. It is therefore also important to consider the current business. Centrus Energy Corp. makes most of its money with its LEU segment, which is largely dependent on volatile SWU prices. To mitigate this, the company tries to lock in the most favorable prices for both supply contracts as well as orders. In 2019, it was able to lock in a relatively low price for SWU with Tenex, for instance. However, this also means that the company could get stuck with potentially high prices when the contracts need to be reset, an additional risk, and in general results in a “lumpy” business.
With total liabilities greater than total assets, the company had a shareholder deficit of -$100.3 million. This is certainly not ideal and should be taken into consideration. However, given the outlook and the government support of the company, I do not consider this a deal-breaker. Indeed, leadership believes in the future, maintaining high insider holdings of 22.85%.
Conclusion
Centrus Energy is at the very beginning of an incredible opportunity with HALEU. The support from the DOE and the completion of the first 16 pilot centrifuges, the indications of high commercial demand for HALEU for advanced reactor designs, and the potential opportunity to restore U.S. LEU enrichment capability gives me confidence that Centrus will be able to execute its strategy. If successful, HALEU production could result in enormous value to shareholders with a greater than 1200 times growth in gross profits on top of the current business.
I will follow this story closely, watching for a successful demonstration event on the pilot centrifuges this year, continued support from the DOE in years to come, and the possibility of nuclear sanctions. For now, though, Centrus Energy seems to be set up well for success.
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