Seeking Alpha
Portfolio strategy, research analyst, growth at reasonable price
Profile| Send Message| ()  

USEC Inc. (USU), a global energy company, is a leading supplier of enriched uranium fuel for commercial nuclear power plants. USEC's privatization was completed on July 28, 1998. The company had been created as a government corporation in order to restructure the government's uranium enrichment operation. USEC operates the only U.S.-owned uranium enrichment facility in the United States: a gaseous diffusion plant in Paducah, Kentucky. However, the company is in the process of shutting down this obsolete plant.

Furthermore, the Megatons to Megawatts (M2M) program is completing its 20-year life and will be phased out. The company signed in 2011 a replacement program called the Russian Supply Agreement (RSA). Unlike the M2M program, the quantities supplied under the RSA will come from Russia's commercial enrichment activities rather than from down blending of excess Russian weapons material. Under the terms of the agreement, the supply of LEU (Low-Enriched Uranium) will increase until it reaches one-half the level currently supplied to USEC in 2015.

As these have been the two main sources of the company's sales, USEC is preparing to be a significantly smaller company with lower revenues. The company is also seeking to position the American Centrifuge project technically through a cooperative cost-sharing research, development and demonstration ("RD&D") program with the Department of Energy (DOE).

Indeed, since 2002 USEC has been developing an efficient uranium enrichment gas centrifuge technology called the American Centrifuge. USEC is working to deploy this technology in its American Centrifuge Plant (ACP). Since 2007, the company has invested over $2.3 billion building the ACP in Ohio. USEC is deploying the ACP to replace its gaseous diffusion uranium enrichment plant, and to be well positioned to meet future demand for low enriched uranium. At least another $4 billion will be necessary, which is a prediction cost that has increased over time. In addition, the DOE loan guarantee program has become increasingly demanding in relation to the company's potential to complete the deal. Nevertheless, the exact additional amount is still uncertain because there is no updated study.

DOE has requested the company to perform additional research until the end of this year in order to improve the prospect of deployment of the American Centrifuge technology. At this point, nobody is sure that USEC can get the funds to go on with the ACP. The DOE loan guarantee program provides that the company may receive $665 million if the ACP facility is not built eventually. However, it is difficult to know how long it would take.

In terms of the energy sector, this company has relevance and it's unfortunate that it is going through tremendous difficulties. Technically, the process could continue as long as the financial problems were resolved, which doesn't seem to be easy. Meanwhile, USEC has announced that its stockholders have approved an amendment to its Certificate of Incorporation to implement a 1-for-25 reverse stock split. USEC's stock began trading on the NYSE on a split-adjusted basis on Tuesday, July 2, 2013.

Chart courtesy of StockCharts.com

(click to enlarge)

I don't know the reason for the size of this operation, but I can say that it was a terrible decision. As the company had been trading below $1 for a while, to meet NYSE listing requirements, a smaller reverse stock split would be enough. By not doing so, the company showed that it was afraid of a potential downside risk of large proportions. Having a much lower number of shares outstanding than before doesn't offer any advantage to a company with the huge problems that USEC shows. Shareholders have understood that the situation also points to the probability of a capital increase. What actually happened to share prices was expected given the problematic situation of the company. In three trading days USEC lost 53%, and nobody can say if Friday was a capitulation day or not. These large reverse split operations tend to weaken strongly fragile companies.

Conclusion

With a strong volume traded on the last session, the company's stock price seemed like a "falling knife" with the underlying danger for shareholders. USEC's chart is scary and reflects all the company's problems. It is still possible to build the ACP plant, but the probability is not high. At this point, the company lost the enthusiasm of investors who are very pessimistic, and USEC is a significant risk, even to mere speculation. In my opinion, it is better to stay on the sidelines for the time being.

Source: In addition to other research, the data collected by the author was obtained through the site of the Company.

Source: USEC: What To Do With This Supplier Of Uranium?

Additional disclosure: The author of this article gives only his personal view and opinion, never making any investment advice to buy or sell specific securities. The information presented is from sources believed to be reliable, but its accuracy cannot be guaranteed. Before investing in financial assets, investors should do their own research and consult a professional investment adviser.