Silex: Waiting for Paducah

Silex sits apart from every other recommendation on our buy list. It has no operating business, earns little revenue and won't generate a profit for years (at best) and yet it is at the forefront of a monumental breakthrough: enriching uranium via lasers rather than traditional methods.

We explained the Silex technology along with the risks and opportunities it presents back in Silex: Fission for opportunity. In short, laser enrichment of uranium allows up to 20 times the enrichment efficiency of traditional methods; it requires only a fraction of the upfront capital to initiate and a fraction of the running costs to sustain; and Silex's is the only laser enrichment process approved by the US Department of Defense. It is also the only private technology currently held as a state secret.

The best part about Silex isn't the groundbreaking technology, it is the structure of the business. The technology is licensed by a joint venture between GE, Hitachi and Cameco – three industry heavyweights – and they will pay all capital expenditure and running costs for uranium enrichment.

Silex holds a royalty licence and will earn 7–12% of every dollar in revenue generated by the Silex technology. It does not need to expend any capital or take any operating risk, merely take a clip of the revenue line.

The success of the investment will depend on expansion of the US$10bn market for enriched uranium which, in turn, depends on the build-out of nuclear power plants. Silex is, effectively, an option on nuclear power.

A nuclear option

We don't know whether nuclear has a role to play or not, nor are we engaging in that debate. The case for Silex is one based on probabilities.

If nuclear builds commence as forecast, the market for enriched uranium will expand and new uranium supply will likely be enriched with lasers.  We estimate that the royalties to Silex could be worth up to US$2.6bn in total, in today's money.

If nuclear doesn't work, Silex will fail. Yet the price of the option is enticing. The company carries $51m in cash and no debt, has a market capitalisation of just $60m and spends about $2m a year to stay in business. Silex has the resources to wait patiently for a nuclear renewal.            

The first test comes in Paducah, Kentucky, where the US Department of Energy is about to decide on an enrichment contract to reprocess uranium tailings over 40 years, a task that will produce enriched uranium in volumes to match the largest uranium mines in the world. Silex's joint venture partners have all approvals in place to start reprocessing and are short listed for the job but it hasn't been granted yet.

If they are successful at Paducah, it will be the first time that uranium is enriched at a commercial scale using lasers. It will mean an upfront royalty payment of US$20m and confirmation that the Silex process works. A decision is expected during the course of the year.

To repeat, this is the most speculative idea on our buy list and is not suitable for conservative investors. It is also an idea that is under researched, under the radar and a well-priced option on a specific outcome. Time to roll the dice. SPECULATIVE BUY.