Monday, March 3, 2008

USEC (USU), an interesting Uranium / nuclear energy play

With oil hitting new records, everyone is looking towards other energy sources. Natural gas is no help, that's expensive too. In fact, the reason we have so many natural gas power plants is because we thought it would stay cheap. For an example of how difficult it is to predict natural gas prices, look up the Amaranth Advisors disaster. Coal, solar, and nuclear plays are all being bit to new highs.

I think most of this is irrational. Energy prices are high due to a speculative bubble and market manipulation (by OPEC and others). Stocks in those sectors are also incredibly expensive. Take Exelon Corporation (EXC), a nuclear plant operator. It is in a great position because no nuclear plants are being constructed. However, I do not like owning any utility at a P/E of 20. That's just silly.

While doing some research on nuclear energy, I did find an interesting little company called USEC (USU). It is the owner of the United States Enrichment Corporation. USEC (USU) was privatized over a decade ago. It currently operates a gas diffusion enrichment plant which is barely breaking even. (Enrichment is a part of the process that creates fuel for nuclear power plants). It also performs some contracting services for the United States Government.

A company with only one operation that's barely breaking even -- that doesn't sound very good at any price. However, the story behind the stock is that it is building a new gas centrifuge enrichment plant. It is expected to use 95% less energy than the current plant (rising energy prices is why the current one is barely breaking even).

So, why is the stock in the dumps? Well, the project is 50% over budget and likely to be behind schedule. There are lots of other companies doing the same thing. In this credit environment, a small player like USEC (USU) may not be able to get funding to finish this plant.

So, why buy the stock? Well, recently President Bush passed a series of bills that includes loan guarantees for nuclear companies. USEC (USU) is likely to qualify. Its competitors face difficulty in placing their new plant due to NIMBY (not in my back yard). USEC (USU) has two properties on lease from the DOE for this purpose.

With the current price, there is a lot of upside for moderate downside. I've been picking it up since the 6.50 level and will continue to accumulate. I am also looking at selling some puts at the 5.00 strike.

Lots of risk, but if you believe in the nuclear renaissance, USEC (USU) is definitely a ticker for the watch list.

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