Uranium stocks have had a very tough time of it since the March 2011 Fukushima accident and subsequent shutdown of the Japanese nuclear industry. This suddenly reduced the demand for uranium and drove spot prices downwards. Contributing to this fall has been the development of cheap natural gas within the US.
Rio Tinto's (ASX: RIO) 67%-owned Energy Resources of Australia (ASX: ERA), is Australia's largest producer and the world's fourth largest. Since Fukushima its share price has plummeted from $9.40 to $1.31. Likewise Paladin Energy (ASX: PDN) was trading at $4.79 on 11 March 2011 and is currently trading at 41 cents. Meanwhile, BHP Billiton's (ASX: BHP) Olympic Dam mine expansion project remains on hold until prices improve.
A preferable way to play this sector is via Silex Systems (ASX: SLX), which focuses on development and commercialization across three platforms including nuclear energy, solar energy and advanced materials and instrumentation. The SILEX uranium enrichment division is the major contributor to revenue and earnings. The division is responsible for marketing and developing the company's "ground-breaking" SILEX uranium enrichment technology.
The company has licensed the technology for uranium enrichment to a consortium (named GLE) comprising General Electric (NYSE: GE), Hitachi and Cameco. The license is in perpetuity and the agreed royalty is 7% to 12%, depending on capital cost efficiencies. Given that the market for enriched uranium market is currently worth US$6 billion and projected to expand to US$12-US$15 billion by 2030, the potential upside is substantial.
Why invest now?
In an ASX announcement today, GLE was selected by the US Department of Energy to focus on detailed planning for the establishment of the Paducah Laser Enrichment Facility in Kentucky. This would upgrade depleted uranium tails left over from previous enrichment activities using first-generation diffusion plants. Depending on the production rate, this plant could be equivalent to one of the world's largest uranium mines operating for up to 40 years.
The above prospect for Silex is in addition to its original approval from the US Nuclear Registry in September 2012 for a license to construct and operate a test facility in Wilmington, North Carolina. Following the approval, the Phase 1 validation of the system was successfully undertaken, resulting in a $15 million milestone payment to Silex. GLE plans to continue with Phase 2 of the commercialization program focusing on engineering scale-up and economic validation of the technology.
Foolish takeaway
Silex is approaching an inflection point, whereby key goals are being achieved. During a recent Asian road show for investors, one short term potential milestone and value driver was this opportunity at Paducah. However, it should be noted that the announcement is subject to successful negotiations and finalization of agreement documentation.
While individual producers have merit when the spot price for uranium rises again, my preferred exposure to the sector is via the supply of technology and receipt of generous ongoing royalties.
