Old West Investment Management LLC, an employee-owned investment advisory firm that are focused on uncovering value opportunities, published its third-quarter 2020 Investor Letter – a copy of which can be downloaded here. The Firm manages long only and long/short investment strategies that targets to maintain a long term value and growth of assets. You can view the fund’s top 10 holdings to have a peek at their top bets for 2021.
Old West Investment Management, in their Q3 2020 Investor Letter talked about Centrus Energy Corp. (NYSE: LEU). Centrus Energy Corp. is an engineering services company that currently has a $299 million market cap. For the past 3 months, LEU delivered a 148.40% return and settled at $24.84 per share at the closing of January 15th.
Here is what Old West Investment Management has to say about Centrus Energy Corp. in their Investor Letter:
“The global enrichment market is highly concentrated with significant barriers to entry, and only a handful of companies control global capacity. The majority of these are state-owned or privately held, and as a result there are very few opportunities to invest in this crucial
portion of the fuel cycle.
One such company is Centrus, which traces its origins back to the beginning of the nuclear age when the US government originally developed the technology for nuclear enrichment. Those enrichment assets, representing billions of dollars of research and development, were privatized in the 1990s and subsequently listed on the New York Stock Exchange. In 2013, due to market conditions and advances in technology, the company shut down the last of the legacy enrichment assets but maintained their relationships with fuel buyers and suppliers, in effect serving as a broker of enriched fuel into the US market.
The US is the world’s largest consumer of nuclear fuel, powering 20% of its electricity supply, but has no domestic enrichment capacity. The only operating facility, in New Mexico, is owned by a consortium of foreign entities. The country is heavily dependent on imports from Russia, whose state-owned nuclear enterprise controls half of global supply. The US government has readily acknowledged that this is a serious problem, and a trade investigation in 2018 led to a cabinet-level Nuclear Fuel Working Group report that revealed strong bipartisan support for revitalizing the domestic industry.
The government set out to remedy the problem by awarding a contract to Centrus to build a new enrichment plant, and agreeing to fund most of the $115 million cost. When completed next year, it will be the only facility capable of producing the advanced fuel (known as “HALEU”) required by the next generation of nuclear reactors and satisfying the domestic origin requirements of the US government. With their first mover advantage and strong government support we believe Centrus will have a dominant position in HALEU fuel, a market that is expected to grow 100-fold this decade.
In addition to early demand from government, many advanced reactors are being developed to use the fuel. Last month TerraPower, a company founded and chaired by Bill Gates, announced a landmark agreement with Centrus to invest in commercializing the fuel. Gates himself is a strong supporter of nuclear power, committing $1 billion personally to advance the technology.
In an era where high-flying tech companies with no profits (and sometimes no product!) are valued in the 10s and 100s of billions of dollars, it is remarkable that what will be virtually the entire nuclear enrichment capacity of the United States has a market capitalization of only $100 million.
Meanwhile the company trades at 5x earnings with a billion dollar contract book extending out much of the next decade. They have over $100 million in cash and $1 billion in tax offsets that can be used against future profits. Enrichment prices have been steadily rising leading to margin expansion from the low costs they locked into their supply contracts at the bottom of the cycle.
They also have a very tight share structure and low float, with over 40% owned by insiders and the two largest outside shareholders. The management team has strong ties to both industry and government, with the CEO previously serving as Deputy Secretary of the Department of Energy.
We believe it is one of the most underfollowed and misunderstood companies in the entire sector, and we plan to be a major shareholder for years as the thesis plays out. As always, we encourage clients to reach out if they would like to learn more about the idea or about the fund we launched specifically to capitalize on opportunities like this.”
As of September 2020, Old West Investment Management had a 863K share position in LEU that amounted to $7 million. However, our calculations showed that Centrus Energy Corp. (NYSE: LEU) isn’t ranked among the 30 most popular stocks among hedge funds. Centrus Energy Corp. delivered a 276.36% return in the past 12 months.
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