2024 may become known as the year America fell back in love with nuclear power. Will 2025 be the year we get serious about it?
You've all read the headlines by now. You know how Microsoft (MSFT -1.73%) is partnering with Constellation Energy (CEG -0.92%) to restart nuclear power at Three Mile Island.
You've probably also heard about Alphabet (GOOG -1.55%) (GOOGL -1.45%) partnering with Kairos Power to produce electricity for its artificial intelligence (AI) servers. And how Amazon.com (AMZN -1.45%) actually went out and bought itself a pet nuclear power company of its own?
Of course, assuming they eventually get built, all these new nuclear power plant projects are going to require nuclear fuel to run on. And that's where today's story begins.
Image source: Getty Images.
LEU, HALEU... and weapons-grade uranium
In broad outlines, the nuclear fuel supply chain works like this: First, someone (like Cameco (CCJ -0.13%) or Denison Mines (DNN -1.58%) or Energy Fuels ((UUUU -2.44%)) mines natural uranium, which contains about 0.7% of the isotope U-235 that is necessary for nuclear fuel. Then, someone else enriches that natural uranium to the desired level -- 3% to 5%. At this point, we call the result "low enriched uranium," or LEU.
Certain nuclear reactors require even more refinement, to about 20%, at which point the substance is called "high assay" LEU, or HALEU.
(And since you're certainly wondering, if you keep on enriching your uranium until it reaches 90% U-235 purity, the result is "weapons-grade" uranium -- what you use to build a nuclear weapon).
Russia accounts for about 44% of all LEU produced worldwide. For obvious reasons, the U.S. doesn't like to buy from Russia right now, but we still get about 35% of our LEU from Russia because... for the most part, that's where the LEU is.
In contrast, here in the U.S., very little uranium enrichment is done. But that's about to change.
Two uranium contracts for six nuclear companies
Earlier this month, the U.S. Department of Energy (DOE) named six U.S. nuclear companies that it hopes will begin or expand their enrichment operations, so that the U.S. can buy LEU from them going forward:
- American Centrifuge, a subsidiary of Centrus Energy (LEU -2.64%).
- General Matter.
- Global Laser Enrichment, owned roughly 50-50 by Australia's Silex Systems and Cameco.
- Louisiana Energy Services, a subsidiary of U.K.-based Urenco Limited.
- Laser Isotope Separation Technologies, which has Nano Nuclear Energy (NNE -5.44%) as an investor.
- Orano Federal Services, a subsidiary of France's Orano SA.
Each of these will receive at least $2 million in contracts. Collectively, DOE intends to spread around $3.4 billion in LEU purchases among these companies over the next 10 years.
These contracts come on top of $2.7 billion in earlier awards for the purchase of HALEU from four companies: General Matter, Orano, Urenco, and Centrus Energy -- each of which won LEU contracts as well (either directly or through a subsidiary). Once again, the contracts will be spread over 10 years. Once again, each winner is guaranteed at least a couple million dollars.
And because the U.S. Congress has now banned further imports of enriched uranium from Russia (not immediately, but phasing out between now and 2028), the chances of this money actually being disbursed seem very good indeed.
Which nuclear stock should you buy?
Add it all up, and we're talking $6.1 billion in U.S. government contracts here. While no one of these six companies is guaranteed to win it all, on average, it should work out to $1 billion in revenue each -- or $100 million per year, over 10 years.
Best of all, because Cameco, Centrus, and Nano Nuclear Energy each trade on U.S. exchanges, individual investors (either directly or indirectly) can pretty easily find ways to invest in about half of the likely winners.
That's the good news. The bad news is that as I've explained in recent columns, I'm already not terribly enthused by the valuations on two of these companies, Cameco and Nano Nuclear.
So who does that leave? Basically, Centrus. Not only does it have "LEU" right there in its ticker. From a valuation perspective, Centrus also seems to be the most attractive play on uranium enrichment in the U.S. today. Based in Bethesda, Md., Centrus boasts a more than 25-year history, and it's earned profits in most of these years (according to data from S&P Global Market Intelligence). At a price-to-earnings (P/E) ratio of only 15.5 times earnings currently, with plenty of cash on hand and no net debt, Centrus stock looks well positioned to capitalize on the new U.S. policy to become "independent" in nuclear enrichment.
Look it over and see if you agree.