Uranium Processor Still Waiting Federal Loan (USU, ARVCY)

Ever since the Energy Act of 2005 was passed and signed by President Bush, USEC Inc. (NYSE: USU) has been working on a loan guarantee of $2 billion to build a new uranium enrichment plant at the site of its idled Piketon, Ohio, plant. Following the disaster this past Spring in Japan, Obama administration officials have no doubt hoped that this project would quietly fade away. No such luck.USEC, however, still has hopes for the loan to build the new centrifuge plant, even though a similar operation proposed by France’s Areva (OTC: ARVCY) and approved last month by the US  Nuclear Regulatory Commission has been put on hold as Areva reviews its business plans.USEC has been the sole US supplier of low-enriched uranium for decades and has been making a living for the past several years re-processing Soviet-era weapons-grade uranium into material that can be used in nuclear power plants. The contract for that work runs out in 2013. The company’s deal to supply fuel for a reactor owned by the Tennessee Valley Authority runs out next year. Renewal for both of these contracts is not guaranteed, and without one or both, USEC could have no revenue stream.

The company’s problems have not been overlooked by investors. The company posted a new 52-week low of $1.17 in early October and is hovering around $1.20-$1.25. The shares hit an all-time high of around $25 in mid-2007, but since mid-2008 shares have never gone above about $6.50. Shares traded at a high of $6.35 in early January of this year, but the delay in the federal loan guarantee and the soon-to-expire contracts combined with an EPS loss so far this year of -$0.37 weighs too heavily to bring shares back to anything approaching the January levels.

The answer to a simple question is likely to determine USEC’s future: does the US need its own state-of-the-art uranium enrichment facility, and if so should the government provide the loan guarantee to build it? The debacle with Solyndra and its $535 million loan would be almost small change if the $2 billion USEC loan is approved and then the company folded.

According to The New York Times, the Obama administration is considering a $300 million loan guarantee that would allow the company to prove that its centrifuges work as a pre-condition to the full loan amount to build the plant. But that’s one of those “in for a penny, in for a pound” deals. If the government guarantees even some fraction of the $2 billion, shares in USEC will rebound on the expectation that the rest will be forthcoming at some future date.

Once again, the Great Yogi gets the final word: it ain’t over till it’s over.

Paul Ausick