Hi Bernhard,Some points that may assist us all and add to the...

Hi Bernhard,

Some points that may assist us all and add to the discussion. I'll use your numbering:

1) GE is only going to build (from memory) a 6 million SWU plant initially. 6 million SWU plant isn't likely to be 5% of the global share initially. It will then take (and I'm guessing) but another 3 years to take that to double or triple or more output depending on how much larger a facility they want to build (I'm assuming 12 months to ensure process is perfect and then a 2 year additional construction phase).

2) I don't think it is possible to mine the ore, process it into UF6, enrich it and sell it into constructed reactors at a rate greater than I suggest. I actually think it will be less than this. Remember that growth comes firstly from countries changing their mind about U plants and then having to construct all of the facilities that lead into the end product. It's 2008 now, so 4 years is a very very short timeframe considering the immensity of the systems required. Yes, China is starting in a big way, but even so it is unlikely to get any enriched material from GE unless GE were to build an enrichment plant in Asia. To do so (and they may eventually be interested) then they would have a heck of a lot of top level red tape to get through to make it happen. Silex is so top secret because in theory a plant that can produce weapons grade enriched material could be built on the space the size of the back of a truck. So getting it out of the USA / AUS alliance would be hell. The advantage that China may have is that it will sop up world supply (initially) and so URENCO and others might supply freeing up more local customers for the GEH alliance. Hard to see how all this will pan out in the long term, but I would think that there will be no Silex tech out of the US before at least 2015. At least. If ever.

3) Desire to use more enriched U might be there, but it's not going to be easy to service the need. Yes, this gives the GEH an advantage in that they will be the only group deploying 3rd generation, efficient technology, but again I doubt they will get too much of the market prior to decisions to expand which I doubt will come until 2013, coming on line in (maybe) 2015. DCF and NPV calcs when you start to get out that far become so diluted that they don't add an excessive amount to current valuations.

Also on the China issue - You can bet they will find a way to enrich material themselves. They will be looking to purchase raw materials (ie yellowcake) only. And that assumes they don't find some in their own dirt. China has a history of autocracity as you say and they have proven time and time again that they are not interested in procuring value adding services when they can provide them themselves (look at what they have done in the Iron ore industry for example). Even if it costs more and is modelled on 2nd generation enrichment technology (ie centrifuge) you can bet they will build their own enrichment plants in time. Maybe not initially as they develop their own system (or steal it by allowing one centrifuge plant to be built there) but eventually. My guess is by around that 2015 mark they will be doing it themselves.

Fianlly, on your market share assumptions. From the details provided above it is impossible for GE to have anything anywhere near $10 billion in enrichment revenue by 2012. $1 billion a possibility but unlikely imo. Using the same formula (but revenue of $1 billion (US)) then you get a valuation of $2.25 billion AUD at 2012. Discount by an IRR of 12% and that becomes $1.43 billion AUD now, or $10.44 per share.

Now is where the market irrationality come in. This estimate is somewhat close to mine except again I doubt GE can have revenues in 2012 of $1 billion. But even so the price is too low. We all agree on this, but the market continues to drive it lower. If the market was acting rationally then the price would be $10.44 (or so) minus a factor for risk.

If U was all that SLX had going for it, then right now the market is saying that there is only a 50% (actually a bit less) probability of the above scenario panning out, so we will discount the current share price by 50%.

If it can be that irrational, why can't it be irrational down to $2? The problem is, it can. I'm sure that $2 is too low, but who knows.

There are a whole lot of other variables here that we haven't even discussed yet such as governmental policy, who the likes of USEC have on the payroll, whether or not another tech (such as SLX's solar) comes along which ends up cheaper per kWh etc. etc.. And again there lies the difficulty for analysts and long-termers. "How do we value a company that has such a long time to go before it earns significant revenue, if at all". "How do we factor all of the variables into the scenario and how do we assume they will affect the price". The extreme pessimist will say that there are going to be government delays, then construction delays, commissioning hiccups, oversupply and other disruptions putting first commercial sale back to 2015 and with GE only reaping $US200 million in the first 2 years. That gives a shareprice now about $1. The optomist goes the other way and comes up with $15 right now. The truth of course will lie somehwere in between.

I'm very attached to this stock, even though I don't hold. As previously posted here or at SS I don't mind if I miss getting in at a lower price late in 2008. I made plenty on SLX (though not what I could have of course if I sold at the intra-day high of $13.65). When the market settles and I have some cash after this financial year is over I'll reassess the price, the prospects and the market conditions (ie volatility) and if it's attractive I'll be back in. Until then I'll maintain an intimacy with what the company does and what it says.

J.