Yesterday USEC (NYSE:USU) reported 4th quarter earnings and updated stakeholders regarding the progress on the American Centrifuge Project ("ACP"). This morning before open it had a management call.
I had previously written an article regarding USEC on January 25th when the stock was trading at around $0.55 a share. My main thesis was that the chances for the company receiving a $2 billion loan from the Department of Energy was high and that the downside, a situation where the DOE does not approve a loan, still offered investors upside potential from the current share price.
I unfortunately overlooked the gross incompetence of the current management team.
Over the last few weeks I remained firm in my conviction throughout the collapse in the recent share price to 30 cents and more than doubled my position throughout. Today, after management's update on the ACP project, I decided to sell my entire equity stake in the company (though I do continue to hold January call options for the long shot).
My change of opinion on the company was not due to the fourth quarter earnings (which are fairly inconsequential as the business will be changing drastically next year) but due to management's update on the ACP.
Management mentioned that the RD&D is "on schedule and on budget" but that the ACP will cost ANOTHER $1 billion, which they hadn't mentioned before!
Up until this announcement, the company had previously mentioned that the completion of the project would require $2 billion DOE loan plus $1 billion additional funding with the potential for a little more required. Never had they mentioned the potential that the project would cost an additional $1 billion!
This significant change to the budget changes the analysis which I mentioned in my previous article as I don't see how current shareholders will retain any value after such a huge dilution. Any large equity investor would likely want a significant discount to the current value. As someone on the Yahoo! message boards pointed out, the management has started to talk more about stakeholders than stock holders which is definitely worrisome.
The convertible debt is currently trading at only around 35 cents (near what the stock is trading) and S&P believes that any recovery for bond holders in a liquidation scenario would be negligible. Frankly, if I were to pick between buying the stock at 35 cents or the bonds, I would take the bonds.
At this point you have to wonder why the DOE doesn't just dump the ACP project and accept GE's (NYSE:GE) proposal for a laser enrichment facility. The cost for the ACP project has ballooned out of proportion since the first proposal made by USEC showing just how incompetent the current management is.
SWU prices have also continued to swoon causing even further pressure on the company's finances.
The only positive development since my article has been Obama's nomination on March 4th of MIT professor Ernest Moniz to become the next Energy secretary in place of Steven Chu. The Energy secretary heads the Department of Energy which is the entity that USEC is waiting on receiving approval for a $2 billion loan.
Moniz has been a big proponent for nuclear energy and took a strong public stance in early 2011 in favor of nuclear energy in the wake of the disaster at Japan's Fukushima nuclear plant.
USA today outlines his direct connection to USEC:
"Moniz has had a connection to USEC since the company's infancy. Now a Maryland-based global energy company and supplier of enriched uranium, USEC used to be part of the Energy Department. Congress privatized USEC in the mid-1990s, a process that was completed in 1998.
As the DOE's undersecretary during that time, Moniz was involved with the privatization, according to the company's 1998 Securities and Exchange Commission filings. He left the DOE in 2001, and in 2002, USEC tapped him to serve on its Strategic Advisory Council."
Considering Moniz's background, his appointment would likely aid in USEC receiving an undeserved DOE loan.
Another positive that has occurred since the article is that fuel prices in Japan have been increasing significantly due to the shutdown of its nuclear industry over the last two years.
A recent WSJ article quotes Atsushi Suzuki, a Mitsubishi Research Institute consultant who monitors the energy industry saying that "Japan's electricity prices are likely to rise 10% to 20% this year, unless at least a few of the 48 currently idled reactors resume operations."
The article concludes with ""In the long term, we may give up nuclear power, but for now, there's no alternative but to restart safe reactors," said Yoshimitsu Kobayashi, president of Mitsubishi Chemical Holdings Corp., a major electricity user."
Any reopening of the nuclear power plants in Japan should be a boon for the nuclear industry in general as well as USEC.
Frankly I am disappointed in the management of USEC. There was a real demand for a new centrifuge enrichment plant in the U.S. but right now the chances of this management team successfully building one looks pretty hopeless.
In my earlier analysis I unfortunately underestimated the potential of management incompetence. They misrepresented or underestimated the cost of the ACP by another $1 billion which greatly affects any return analysis. I don't know how anyone can take them seriously anymore.
The company still has a deal with Tenex to buy and sell SWU from them within the U.S. but the management continues to be coy regarding what the gross margins for the deal are. Considering shareholders will likely be majorly diluted anyways it doesn't really matter anymore.
I continue to hold onto some call options for a long shot but I believe the chances that they payoff now are very slim.
As always, do your own research especially when investing in small cap stocks like USU.