Sector Watch: Nuclear power stocks
The nuclear power industry may reap a multi-billion dollar windfall if new legislation passes that imposes regulatory limits on carbon dioxide emissions from power plants. Emissions-free nuclear power facilities would benefit, as would nuclear fuel suppliers Uranium Resources, Inc. (Nasdaq:URRE) and USEC, Inc. (NYSE:USU).
USEC Inc. supplies uranium fuel to commercial nuclear power plants worldwide. This company operates the only uranium enrichment facility in the United States and supplies fuel to more than half the U.S. market and one-quarter of the world market. USEC also performs contract work for the U.S. Department of Energy; it maintains two uranium processing plants, transports nuclear materials and provides nuclear fuel cycle consulting.
Demand for enriched uranium will likely rise if Congress votes to limit carbon dioxide emissions under a so-called “cap and trade” system. The intent of the program is to cut greenhouse gas emissions 65% below 1990 levels by 2050. As part of this program, the Environmental Protection Agency will create 125 billion purchasable emission allowances, enough for all 38 years of the program, which is scheduled to commence in 2012.
Nuclear facility operators will benefit in two ways. First, since nuclear plants do not emit carbon dioxide, these plants will not be required to purchase emission allowances, giving them a major cost advantage over coal-powered plants. Second, to recover emission-allowances costs, coal-fired utilities would be forced to jack up electricity rates. As a result, nuclear plants would enjoy higher prices for their electricity without higher costs. Finally, carbon emissions penalties would make the economics of developing a new nuclear plant more attractive.
At present, there are some 439 nuclear reactors operating worldwide. Another 33 are under construction and 94 new plants are scheduled to come online over the next five to 10 years. These plants currently consume some 79,000 tons of uranium each year, but each new gigawatt of capacity will require 195 tons of additional uranium production.
The majority of reactors served by USEC are refueled on an 18- to 24-month cycle, and most of the company’s customers refueled in 2007. As a result, USEC anticipates lower 2008 sales and volume more heavily weighted toward the end of the year. The company expects 2009 sales volume to meet or exceed record 2007 levels. Revenues rose 4% to $1.9 billion in 2007 from $1.6 billion in the prior year and net income was $96.6 million, or $1.04 per share, in 2007, versus $106.2 million, or $1.22 per share, in 2006.
First-quarter 2008 revenues of $343.3 million were 26% lower than prior-year levels of $465 million. First-quarter 2008 net income fell to $4.4 million, or $0.04 per share, from $39.3 million, or $0.45 per share, one year earlier. For full-year 2008, USEC anticipates revenues approaching $1.3 billion and net income in a $25 million to $45 million range. Analysts forecast 2008 per-share earnings at $0.32 and 2009 per-share earnings at $0.93. Long-term growth is forecast at 20% annually. These shares appear modestly priced at an 11 times P/E multiple and a 7 times forward P/E multiple. My $9 price target for USEC suggests a 44% premium over Tuesday’s closing price of $6.23. Shares have ranged between $3.15 and $22.57 over the last 52 weeks.
Uranium Resources mines uranium properties and has produced over 7 million pounds of uranium since 1997. While currently producing only from its Texas properties, Uranium Resources believes its future lies with its development-stage New Mexico properties, which are estimated to contain more than 100 million pounds of uranium. Uranium Resources is also acquiring new assets through joint ventures and partnerships.
In 2007, the company produced 416,700 pounds of uranium, up from 259,100 pounds in 2006. Sales prices averaged $71.61 per pound last year and $32.63 per pound in the prior year. Reflecting these production gains, the company’s revenues tripled in 2007 to $31.1 million from $8.6 million in 2006. Although 2007 net income fell to $1.1 million, or $0.02 per share, from $21.5 million, or $0.42 per share, in the prior year, this was due to non-cash gains on derivatives totaling $31.5 million in 2006.
Uranium Resources benefits from a long-term outlook for rising uranium prices. Uranium supply is expected to fall short of demand by as much as 500 million pounds by 2016 and experts are forecasting $95 per pound uranium prices within a few years.
During the first quarter of 2008, Uranium Resources sold 81,000 pounds of uranium, up from 79,700 pounds in the first quarter one year ago. Average sales prices rose to $70.66 per pound from $57.41 last year. As a result, the company’s revenues grew 25% year over year in the 2008 first quarter to $5.7 million, from $4.6 million. Production was lower, however, at 83,400 pounds this year versus 109,000 pounds last year due to delays in bringing new fields online. Start-up costs for new fields resulted in higher net losses at $1.8 million, or $0.04 per share, this year, as compared with $1.4 million, or $0.03 per share, one year ago.
The good news is that with two new fields coming online and production restarted at an existing site, second-quarter production will likely exceed 95,000 pounds and full-year 2008 production will be between 400,000 and 450,000 pounds. The company anticipates producing at this level through 2009 and completing an acquisition that will extend this production level through 2011.
Uranium Resources expects to begin producing from its New Mexico properties within three years, and predicts the mines will support long-term production and profit growth. Analysts expect Uranium Resources to produce 20% average annual growth over the next five years. My $6 price target is 84% above Tuesday’s closing price of $3.26. Over the last 52 weeks, shares have ranged between $2.90 and $14.99.
About the Author
Contributing author Lisa Springer is an equity research analyst with nearly 20 years of investment research experience.
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