Silex gets nuked

It had all the trappings of a perfect punt. Silex held the rights to a groundbreaking technology that used lasers to displace individual atoms to enrich uranium for nuclear power stations.

Compared to existing enrichment technologies, the Silex method was cheaper to set up and vastly more efficient. It was said to be the only civilian technology held as a state secret by the US Department of Defense and the only proven laser enrichment method anywhere.

Best of all, Silex was merely a licence holder earning royalties. The execution of the enrichment process was to be done by a joint venture between GE, Hitachi and Cameco (known as GLE), three of the biggest names in the game. Silex would contribute zero capital but would capture a slice of revenue as new plants supplied uranium enriched by lasers.

In Silex: Fission for opportunity we estimated the royalty could be worth between $400m and $2bn so Silex equity offered a decent shot of making multiples of your money and was enough to earn a Speculative Buy. Unfortunately it now looks like this tale won't have a happy ending.

Wipe-out

GE and Hitachi have said they intend to exit the joint venture and end their involvement in the Silex experiment citing persistently poor market conditions. This is a devastating blow for commercialisation prospects.

The Fukishima nuclear accident has severely dented global confidence in nuclear power, with a number of countries including France, Germany and Japan dramatically scaling back generation capacity. Lower demand has been compounded by a collapse in oil, coal and gas prices making alternatives to nuclear power much cheaper. The departure of the big boys from the JV is a dour verdict on the future of nuclear power and, after doubling since Silex: Waiting for Paducah on 9 March, Silex's share price has halved again.

Silex says it remains committed to commercialising the technology and may take an equity position in the joint venture to deepen its involvement and prod the process along. With no obvious candidates to replace to roles of GE and Hitachi, though, the investment case has changed.

New case

We were interested in a royalty business that didn't have to spend any capital to generate enormous potential revenues. Those prospects have changed. Becoming an equity partner increases capital intensity and guarantees more debt or dilution. The passive investor with a big cash pile has been replaced by an equity holder with more to lose.

That's not to say that Silex is doomed to failure: the business still holds about 75% of its market cap in cash and a decision on Paducah could see it earn further cash payments. Perhaps this is just a bump along the road to success.

Yet the risk reward pay-off is not as attractive as it was. We invested for a specific outcome under specific circumstances. Those circumstances have now changed, so we're opting to accept a loss and Sell.

Are there any grand lessons from this defeat? Not this time: investing is a game of probabilities and the outcome earned today was always the most likely one. We had a small chance of an enormous gain and a high chance of a loss. We got the losing end this time but mismatched odds is what investing is all about. SELL.