Uranium prices have halved since the nuclear disaster in Fukushima yet nuclear power, promising colossal quantities of clean energy, remains attractive to power hungry economies.
One of the obstacles to industry growth is the cost and waste generated by the enrichment process.
But a small Sydney-based company many have found a solution to it. With a share price down 65 per cent in the past year, this is one of the best intelligent speculations on the ASX.
After it is mined, native uranium cannot simply be plugged into a power plant to generate energy. The concentration of a key isotope needs to increase. Most of the world’s uranium is enriched using centrifuge technology, which separates isotopes by spinning gas in tubes. It’s a costly, capital intensive and complex process.
Silex Systems’ enrichment technology uses lasers, a process which is far cheaper to build and run. Best of all, the company itself owns a royalty on the technology and doesn’t have to spend a cent on building expensive facilities.
The technology is a tightly held state secret, said to be the only privately held technology to be classified as such, which makes researching its efficacy difficult. The laser technology is however claimed to be up to 16 times more efficient than existing centrifuge technology (an industry dominated by just four firms).
We have no way of knowing how cheap laser enrichment will ultimately be, which means its success is uncertain. But it’s also why the potential payoff could be huge.
Licensing deal
Silex has licensed its technology to Global Laser Enrichment (GLE), a joint venture between GE, Hitachi and Cameco. GLE has the task of commercialising the technology. At the moment, GLE pays development costs and milestone payments to Silex.
Last year, the company received $US15 million after a successful test and could receive another $US20 million if a commercial plant is approved. Silex, which doesn’t contribute any cash to the venture, collects a perpetual royalty of 7 to 12 per cent of GLE’s revenue.
GLE has secured regulatory approval from the US Nuclear Regulatory Commission to produce enriched uranium and has non-binding agreements with two of the largest American nuclear generators. The regulatory licence is equivalent to about 10 per cent of global production.
The enrichment market is expected to be worth $US10 billion by 2019. If GLE captures 10 per cent of the market it could generate revenues of about $US1 billion, implying a Silex royalty of between $US70-120 million annually.
Using a 10 per cent discount rate that would be worth between $US395 million and $US680 million in today’s money, which compares very favourably with a current market capitalisation of $A153 million. The company also has $US70 million in net cash.
By 2030 the enrichment market could be worth $US20 billion as new reactors in China, India and the Middle East devour fuel. Some industry insiders think Silex may capture 50 per cent of that market, which implies a Silex royalty of between $US700m and $US1.2bn annually. That’s what could make Silex a tenbagger.
So what needs to happen for Silex to move from esoteric idea to tech success? We envisage three potential catalysts.
Firstly, today’s depressed enrichment price must improve. With 48 of Japan’s reactors offline, there’s an oversupply of enrichment capacity that has lowered prices and profits. Restarting the Japanese fleet will raise enrichment prices, improving the economics of laser enrichment.
Second, the joint venture must build a commercial scale plant and Silex needs to get its house in order. Certainty that GLE will construct a laser enrichment facility will increase the likelihood of Silex earning royalties but the company must also dispose of its three remaining divisions to reduce cash outflow and allow the company to concentrate on its laser enrichment technology.
Finally, resumed growth in the nuclear industry is vital. Despite its technological advantages, Silex may find it hard to compete with incumbents whose production decisions depend on marginal cost when its own decisions relate to total cost. Displacing existing capacity will prove tough, but additional capacity will more likely come from laser enrichment than incumbent technology.
This is intelligent speculation at its best. Silex Systems is a SPECULATIVE BUY for 1 per cent of a risk-tolerant portfolio.
This article contains general investment advice only (under AFSL 282288).
Nathan Bell is research director at Intelligent Investor Share Advisor. You can unlock all of Share Advisor's stock research and buy recommendations by taking out a 15-day free membership.
