The U.S. Department of Energy can be such a tease sometimes -- just ask the uranium enrichment outfit USEC (NYSE: USU). The company has been in hurry-up-and-wait mode for more than two years now, eagerly anticipating a DOE decision on a $2 billion loan guarantee for its American Centrifuge project that has yet to materialize.
The company has been forced to negotiate extensions with its two main investors, Toshiba and Babcock and Wilcox (NYSE: BWC), for the second time in two months. The companies have agreed to stay tied to the project, and their respective $100 million investments, until Oct. 31.
Er, what is uranium enrichment?
A key process in the production of nuclear fuel for power plants, uranium enrichment increases the U235 isotope and decreases the U238 isotope in naturally occurring uranium. The U235 isotope is the only one that is fissionable, therefore the only one that can be used as nuclear fuel. USEC plans to use the American Centrifuge to separate the isotopes and sell the U235 to its customers.
Now that we've got the science out of the way...
USEC desperately needs a conditional commitment from the DOE by the end of the month. The company provides more than 50% of enriched uranium in the United States but has issues with liquidity. The new centrifuge project is expected to provide 20% of the U.S. electricity supply but cannot go forward without help from the DOE.
Continued support from Toshiba and Babcock and Wilcox is also contingent on DOE commitment. As it stands now, USEC has already directed certain suppliers to suspend work and has informed employees that layoffs may or may not be just around the bend.
Nuclear drama
Between Solyndra, hydraulic fracturing, and oil spills, I'm beginning to wonder if there is a form of energy out there that isn't highly contentious. Though nuclear disasters are rare, they are arguably the most fear-inducing. The graph below charts share price percentage gains and losses for a few companies in the uranium industry over the past year: Cameco (NYSE: CCJ), Denison Mines (AMEX: DNN), and Ur-Energy (AMEX: URG).
Source: Google Finance.
Not surprisingly, the tsunami in Japan and resulting issues at the Fukushima Daiichi power plant punished every uranium-related stock shown. What's interesting is that USEC actually felt greater pain during the market volatility much later that summer.
Some of the volatility depicted above can be attributed to public relations, and part of it can be attributed to the fact that with the exception of Cameco, these are all penny stocks -- an ornery, volatile breed of stock to begin with. Though these stocks eventually recovered to their pre-March levels, they have yet to work back up to December 2010 levels.
I never promised you a loan guarantee
I'm not guaranteeing the whole industry will turn around immediately if the DOE approves the USEC loan guarantee. It would mean the U.S. is at least willing to consider a nuclear future, though, and that is likely to have a dramatic effect on these volatile stocks.
