Tuesday, March 25, 2014

Stakeholders Give USEC a Timeout

Two weeks ago enriched uranium producer USEC, Inc. (USU:  NYSE) filed for bankruptcy protection.  The move came after lengthy negotiations with shareholders and creditors who eventually gave the nod for restructuring USEC debt. 

The plan allows operations to continue without interruption.  That is a big plus for customers and suppliers.  Over the last year USEC reported $1.4 billion in revenue on which the company earned $138.0 million in EBITDA.  Unfortunately, interest and other expenses resulted in a net loss of $1.2 billion.  Worse yet, operations used up $142.2 million in cash.  USEC has been a cash producer in the past and the restricting should help restore CFO to the plus side.  Indeed, USEC claims that even for the full calendar year 2013, it will report positive cash flow from operations.

Apparently even the preferred shareholders Toshiba and Babcock & Wilcox have given their consent to the restructuring deal.  One reason for these companies to stay the course with USEC might be its American Centrifuge project.  Both these equipment and engineering companies have a stake in seeing the nuclear power industry expand and flourish.  That is not possible without adequate uranium enrichment capacity.  USEC is developing technology to boost by four times the output of uranium enrichment gas centrifuges originally develop by the U.S. Department of Energy.  The new, enhanced centrifuge will decrease power costs and allow USEC to remain competitive with new uranium enrichment technologies being brought to the market (See March 7th post on Silex Systems).

The American Centrifuge project was to have concluded in January 2014, but USEC received a three-month extension to craft a better plan forward.  USEC claims to have met critical milestones in the program and that at least ‘sounds’ good for a successful completion of the project.

Two important points for investors with an interest in the nuclear sector:  First, USU has taken a drubbing over the past few months, adding an element of volatility to a long-term downward trend that begin in earnest four years ago.  Anyone looking at the stock today trading near $3.80 might be surprised to by a 10-year stock price chart that reveals USU traded as high as $577 in early 2007.  Second, the news that Japan authorities plan to restart some nuclear power plants bodes well for uranium demand.  Likewise the growing interest in small-scale reactor designs could keep enriched uranium producers like USEC in business. 

Positive demand trends and a deeply depressed stock price usually create a great buying opportunity.  However, a review of historic trading patterns suggests there is more negative than positive sentiment in USU valuation.  Anyone taking a position in USU today might have a bit of a wait for higher prices.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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