Your April issue of Southbank Growth Advantage

The most important acronym of the 21st century: HALEU

Recently we’ve been re-focused on the importance of nuclear energy. The reason being the rise in compute-hungry technology like next-generation datacentres and AI models means a huge swell of power is needed to keep these things running.

That energy needs to be reliable, constant and efficient. While current energy grids can contribute towards these current and future needs, they can’t be relied upon.

Furthermore, with geopolitical issues continuing to rage around the world, the concept of energy security at a domestic level has never been as important.

The way we see it, that energy security comes with the development and commercialisation of nuclear energy.

And that’s a future we expect will come to fruition. Namely through innovative, advanced reactors like those in development from Oklo and Rolls-Royce.

However, as we outlined in our report “The Uranium Bull Market Playbook”, nuclear energy is great unless you don’t have the right fuel for it.

Of course, that fuel for fission reactors comes in the form of uranium. And we’ve pinpointed ways to play the physical uranium market.

But there’s another slight problem with this. That comes in the way in which the nuclear fuel goes from being dug up in the dirt into an actual fission reactor in a nuclear reactor.

Driving Putin out of energy markets

Most new, advanced nuclear reactor designs require new kinds of nuclear fuel. Well, we say new, but the reality is it’s still uranium but a particular kind of enriched uranium in order to create their fission reactions… and hence energy.

There’s one kind in particular that’s known as high-assay, low-enriched uranium (HALEU).

As we explained in our nuclear stocks watchlist report, HALEU is an important kind of nuclear fuel.

Uranium is not ready to be used as a fuel as soon as it is mined. At that point, it contains very low amounts of the fissile material – uranium-235 – which is needed for combustion in a nuclear chain reaction.

The rest – more than 99% – is non-fissile uranium-238. As a result, the uranium needs to be enriched to be more effective, and current nuclear plants run on uranium fuel that is enriched up to 5%.

HALEU is enriched to a greater extent – between 5% and 20% – to allow new reactor designs to generate more power per unit of volume. HALEU will also allow developers to optimise their systems for longer life cores and increased efficiencies (such as with fuel use).

The Nuclear Energy Institute (NEI) surveyed US advanced-reactor developers in 2020 to produce an estimate of potential HALEU demand through 2035. And even if only a fraction of the demand in the NEI survey materialises, HALEU requirements would be very large.

At 25% of the NEI estimate, for example, the HALEU market could be worth $400 million per year by 2030 and $1.4 billion per year by 2035.

More recently the UK government even launched a £300 million investment into a HALEU programme, becoming the, “first country in Europe to launch a high-tech HALEU nuclear fuel programme, strengthening supply for new nuclear projects and driving Putin further out of global energy markets.”

See that last sentence? The bit about Putin. This is the attitude that countries like the UK and the US are taking (and rightly so) to ensure they’re not reliant on foreign supply of energy that is high-risk.

The US is taking a similar approach. It’s enacted the Energy Act in 2020 that also directly established the HALEU Availability Program to ensure research, development and commercialisation of HALEU production in the US.

Which leads us to your latest recommendation that has become the first new, US-owned, US technology uranium enrichment plant to begin HALEU production in the US in 70 years.

Introducing your latest Southbank Growth Advantage recommendation…

If you read our nuclear watchlist special report, this name will be familiar to you. We’ve been watching it for a while and feel that with developments and the potential of Oklo in the short term, the continuous rise of nuclear energy demand, and a key milestone this company only achieved in late 2023, now is the perfect time to bring Centrus Energy into our buy list.

Centrus Energy (NYSE American: LEU) is a supplier of nuclear fuel (in particular HALEU) and related engineering services to the nuclear energy industry.

It currently trades on the NYSE American market with a market cap of $657 million and a stock price currently around $40.40.

Centrus is an important developer of this HALEU fuel, and thus is central to American plans (and likely British plans) for the future of the nuclear industry.

Centrus Energy is a supplier of nuclear fuel and services to the American nuclear power industry. It buys raw uranium, enriches it, and sells it as a ready-to-use fuel. It has world-leading expertise in uranium handling and nuclear fuel design.

It is a key American supplier for a strategic industry with a history of financial performance and a very bright future ahead. It is going to be a key player in the development of the next generation of nuclear power plants.

To summarise, Centrus:

• Is the only company that has a Nuclear Regulatory Commission licence for HALEU production
• Has a favourable cost position, with a long-term order book of ~$1 billion through the end of the decade
• Has world-class and proprietary technical, engineering and manufacturing capabilities
• Is an integrated domestic HALEU fuel supplier for national security and commercial needs
• Is now the first US-owned and US technology uranium enrichment plant to begin production in 70 years.

Centrus’ business model is relatively simple. It purchases raw, unenriched uranium from a variety of suppliers across the world. It then enriches the uranium to the specific needs of its clients, mostly global power utilities operating nuclear plants.

It is like an oil refiner, sitting between the miners and the end consumer. It has a diverse range of suppliers on a variety of contract terms, and it also purchases in the spot market to diversify its risk. It has $1 billion worth of orders waiting to be delivered and long-term supply agreements through 2030, which help ensure continued strong financial performance (see below).

In terms of its business, it is also quite innovative. It has a 440,000-square-foot, state-of-the-art Technology & Manufacturing Center in Tennessee, where a team of scientists and engineers develop new ideas with the aim of turning them into proven designs, high-quality products and components.

And so, it has managed to position itself as the key future supplier of the HALEU fuel we looked at earlier. For example, Centrus has signed an agreement with Clean Core Thorium Energy to develop next-gen nuclear fuels together, based on Centrus’ advanced HALEU and Clean Core’s thorium pellets which it calls ANEEL (Advanced Nuclear Energy for Enriched Life).

The new HALEU-Thorium ANEEL combined fuel will be suitable for the existing pressurised water reactors (PHWRs) used in Canada, and the new PHWRs too. Crucially, it will be able to reduce the amount of waste produced in such reactors by 80% – and it will also minimise waste management costs and safety concerns.

There are 48 such reactors worldwide, of which 19 are in Canada, offering Centrus an untapped market to move into. Clean Core plans to test and certify its ANEEL fuel at the Idaho National Laboratory in 2023 and expects to commercialise the fuel by late 2024.

Centrus has also signed a memorandum of understanding (MoU – which is non-binding) with Oklo to cooperate in the deployment of a HALEU production facility. Together, the two companies are aiming to commercialise advanced fission and the HALEU supply needed to fuel them.

As their announcement outlined:

The parties intend to enter into one or more definitive agreements relating to the following collaborative activities addressed in the MOU:

• Oklo would purchase HALEU from the production facility Centrus is planning to build in Piketon, Ohio, the only such facility licensed by the U.S. Nuclear Regulatory Commission to produce HALEU.
• Centrus would purchase electricity from the Aurora powerhouses that Oklo is planning to build in Piketon. These two power plants are designed to power thousands of homes and businesses in addition to the HALEU production facility; similarly, the HALEU production plant is designed to be scaled up to support hundreds of reactors.
• Centrus would manufacture components for Oklo’s Aurora powerhouse at Centrus’ advanced manufacturing facility in Oak Ridge, Tennessee, as well as manufacturing capacity at the American Centrifuge Plant in Piketon, Ohio, where HALEU production will take place.
• Centrus and Oklo would work together to establish and license the capabilities necessary to deconvert HALEU from uranium hexafluoride to uranium metal and fabricate fuel assemblies for Oklo’s Aurora powerhouses.

Centrus, meanwhile, has constructed the country’s first NRC-licensed HALEU production facility in Ohio, which began producing HALEU in October 2023. The company even recently rang the closing bell at NYSE on 5 March this year to commemorate this historic milestone.

Its HALEU will be a key fuel for many of the next-generation nuclear power plants. Its partnerships with Oklo and Clean Core give the firm clear commercial opportunities. Besides the nuclear power industry, Centrus’ other main customer is the American military.

Crucially, Centrus has designed, manufactured and successfully operated the world’s most advanced gas centrifuge (the machine for enriching uranium into useful fuel). It’s called the American Centrifuge, which has undergone rigorous testing by the US Department of Energy (DoE) and is available for national security deployment.

And for numerous reasons, only American companies are permitted to supply the critical fuels required for national security. Centrus is therefore a key partner of the US government.

In its own words, “Restoring America’s capability to enrich uranium with domestic technology is critical to meeting long-term national security requirements, such as supplying fuel for the U.S. Navy.”

Furthermore Centrus made the first delivery of HALEU to the DoE in November 2023, completing the first phase of its contract with the agency.

Phase two requires a full year of production at a rate of 900kg per year. It’s doing this at the American Centrifuge.

In 2015, the DoE described Centrus’ AC100 centrifuge design as the “most advanced” and “lowest risk” option to meet US national security requirements. The American Centrifuge was originally developed by the DoE in the 1980s and significantly upgraded by Centrus over a 15-year period.

These are the most advanced centrifuges in the world. Centrus spent the time since improving efficiency, reducing costs, and enhancing its reliability, thus advancing US expertise in centrifuge design and operation.

Its work is supported by the DoE’s Oak Ridge National Laboratory so that it can ultimately be deployed to support US national security requirements. So, on the military front, as well as commercially, Centrus is in a very strong position.

The company is also strengthening its balance sheet after generating strong profits, bringing liabilities down and growing assets.

Its 2023 annual report (published in February this year and the latest financials of note) shows:

• Revenues from the LEU segment of $269 million
• Revenues from services of $51.2 million
• Gross profit of $112 million
• Net profit of $84.4 million.

Considering the company’s market cap of just $657 million that means the company is trading at what we consider to be a low 7.7-times earnings. For a point of comparison, the nuclear fuel and uranium giant Cameco trades at an earnings multiple of 81-times earnings.

They are slightly different companies of course, but with no other listed HALEU producers that have a DoE licence to produce HALEU, we think the company’s long-term value is grossly underestimated.

Adding to our mix of nuclear plays is important. Now we have exposure through every major step of the process, from mining uranium to the enrichment of the fuel to the potential of small modular reactor technology.

Adding Centrus to complete that pathway is crucial and we believe a huge long-term opportunity for investment.

Buying instructions

Centrus Energy (NYSE American: LEU) is a supplier of nuclear fuel and related engineering services to the nuclear energy industry.

It currently trades on the NYSE American market with a market cap of $657 million and a stock price currently around $40.40.

Volume is a healthy 189,000 per day on average, so it should be relatively easy to get in and out of this stock as needed.

Action to take: buy Centrus Energy (NYSE American: LEU). Buy up to $44. Set a stop loss for downside protection at $21.

Source: Koyfin

Big breakthroughs

Inside the lives of James and Sam

Sam:

April there’s really only one thing happening outside of work and family…

It’s MASTERS MONTH.

Would this be the year of Rory McIlroy finally getting his hands on a green jacket? Or would the seemingly impossible-to-defeat Scottie Scheffler snatch another one?

Or… maybe, just maybe… Tiger would rise from the depths of near disability to get just one more under his belt.

Even my wife knows that it’s Masters week when the golf is on this time of the year. And thankfully a few of the dads at my son’s school were keen on hitting the local marina to have a few “daddy drinks” as my son puts it, and see just who would reign supreme.

This was the one and only photo from that night. I used it to remind my brother that he should have been on a plane to spend some time with his nephews (but really to hang out play golf and watch it with me that week).

Can’t get too much a better spot for a spot of Masters coverage than here. Albeit the best location to watch would be at Augusta.

Which is exactly what I plan to try and do next year. I’ve registered myself on the Masters website and will be applying for tickets. And if I can’t get any, I’ll keep trying every year until I get them… or die.

It’s bucket list stuff but is also a clear reminder that golf is big business. Even where I’m located down in the Algarve, one of the main reasons people come down here is for golf. And with a lot of the courses here charging in excess of €120 per round, you can see why.

Clubs, bags, apparel, travel, beers at the pub… golf is mega business. And then you see that in 2024 alone, Scottie Scheffler has made around $16 million in prize money and you wonder why aren’t I a golf prodigy?

There are some big companies involved in it too from Topgolf Callaway Brands ($3 billion market cap), Acushnet Holdings ($4 billion), Mizuno Corp ($1.2 billion) and of course the Saudi Public Investment Fund ($unlimited capital)…

Fair to say that if you can get a chunk of the golf pie in your investments, that also might not be a bad approach to take for a robust overall portfolio. And like my grandfather used to explain to me, own the companies who make the things you buy.

James:

Long-term readers will know that, together with my partner, twin brother and his wife, I own a two-bed apartment in the French ski resort of Avoriaz, nestled in the Alps in the commune of Morzine.

We bought the property with two purposes in mind, the main one being for our respective families to enjoy it for ourselves for a few weeks a year. However, we also hoped we’d be able to make a little money via letting it out the rest of the time.

On the first count, the purchase is proving an undoubted success.

We’ve now had several holidays with family and friends at the apartment. We keep our ski equipment and clothing in a designated locker in the building, which has removed a lot of the hassle out of any ski holiday. The apartment now feels very much like a home away from home, and we’ve started to make some friends in the resort.

It’s also been fantastic to see the kids improve their abilities on the slopes at rates that no adult can remotely match.

But on the second count, it’s fair to say the jury is still out.

Prior to the purchase we ran the numbers and thought it would be possible to generate a yield of around 5-6% via letting it out, though, in truth, we would all have been content if the property was at least able to wash its own face, thereby providing us with some “free” holidays.

It hasn’t worked out that way, though there are some obvious reasons for this, not least the fact that the purchase finally completed in February 2020, just one month before Avoriaz, like the rest of the French Alps, closed for nigh on two years amid sweeping Covid-19 lockdown measures.

Those two years of paying the mortgage with no rental income coming in meant that we ran the property at a loss.

What’s more, since the resort reopened, we’ve used the apartment ourselves frequently, including in some of the peak weeks of winter when short-term rental rates are at their maximum. We’ve been eager to make up for lost time and very much accepted that this would impact on the apartment’s top line.

As I said, the main reason for the purchase was to enjoy it for ourselves – which is something we couldn’t do during Covid and a wrong we’ve been determined to put right subsequently.

One factor that we’ve been unable to control is the weather. Over the last two winters, the snow has been a little patchy, which has reduced demand in the winter over some key weeks, pulling down rental rates with it.

Generally, however, the apartment has been pretty much fully booked over the winter when it’s been available to rent, while summer bookings have been more or less in line with expectations laid out in the estate agent’s brochures (at around 50% occupancy).

But with all this mind, we’ve decided to make some changes.

Now that we’ve all had plenty of trips to the apartment in the post-Covid years, we’ve decided that we will collectively reduce the amount of time we spend there during the winter.

We will now also bookend any ski trips we make to either right at the beginning of the season in December and/or right at the end in April, keeping the peak weeks only for rentals. This had been the original plan before Covid changed our motivations.

Finally, we’ve also decided we will now market the property ourselves and no longer use the services of a local rental agency that creams off 25% of our booking revenue.

It was vital to use such an agency while we were still finding our feet with the apartment and resort, but we now think we’re in a position where we can do a lot of the donkey work ourselves, especially as there are four of us to divvy up the tasks.

We’ve already contracted a local concierge service on the ground to help with the linen and laundry, as well as handling the keys and other emergency functions that come with running a short-term rental property. But we’ll do all the marketing of the property ourselves.

We’re now deciding whether we need to use a property management system such as Guesty or Hospitable that both automates and centralises some of the marketing functions for a small fee. These services also us to build our own website to drive direct bookings. (If any of you have any experience with these systems then please do drop me a line and let me know if one is better than the other!)

Either way, the property will be going live on Airbnb and perhaps one or two other portals in the next week or two.

In short, as a seasoned investor, I’ve been happy to accept some of the challenges involved with running a vacation property. Things haven’t’ always been plain sailing but the apartment is now successfully serving its main original purpose and now, with the tweaks we’ve made, it’ll soon start to pay its own way too.

Crypto Corner

Sam:

The hardest thing during a crypto cycle is to do nothing.

And sometimes, you should be doing nothing.

Well, slight caveat to that. My view is that you should, where you can be, “stacking sats”. That means adding to your bitcoin pile.

That is a long-term hard and fast view that for the last 14 years has been 100% the right thing to do.

But outside of bitcoin, the wider market, there are times when nothing is the best thing.

It can be easy to get tempted into just doing something, but often you’re better off deleting the CoinGecko app from your phone and just leaving it all alone for a while.

That’s because you want to have already deployed your capital into crypto that you’ve got conviction will do well in another bull market cycle.

If you’ve not taken your stake and built your crypto portfolio by now… it’s not too late, but it’s not far away from being too late.

Most people will buy up various crypto into a rising market. But you’re simply lowering your chances of mega success by waiting too long.

The other thing that’s tempting is to get involved into things you don’t know much about because you anecdotally see and hear of people making money hand over fist in the market on the most stupid of things.

I’m all for owning some memecoins, and over the years I’ve done quite nicely from memecoins. I do think if you really want to commit to crypto investing, playing about with a tiny bit of risk capital and memecoins is actually a bit of fun. But here’s the thing: of the huge number of memecoins out there, only a handful will ever make it.

Your chances of hitting the big time, 1000x gains (and more) are so slim that you either a) shouldn’t bother, or b) have the expectation that if you make 1,000% you’ve already shot the lights out more than most will.

Also, the time to buy up memecoins for “max gainz” was this time last year. Now with the market going a bit bonkers for them, I dare say you are too late for mega money in memecoins, but there’s still some profit to be had.

Point being, build a portfolio of the staples of bitcoin and Ethereum, solid layer 1 crypto. That is, crypto that align with thematic areas like decentralised physical infrastructure (DePIN), artificial intelligence (AI), bitcoin layer 2 developments, and a meme coin or two.

Now when it comes to the big guns, as in bitcoin, we should talk about the halving and how that’s impacted not just the market but importantly the miners that secure the market.

How to cut your revenue in half and increase it at the same time

Bitcoin’s halving completed over the weekend. And the block reward was slashed in half, as it is every 210,000 blocks.

This is often a tipping point that leads into another big crypto bull market. And I don’t see this time being any different.

But just like all the other halvings, there’s been a fair share of negativity about this halving, particularly aimed at the bitcoin miners. That’s important to know because the market took the view that a reduction in the block reward means a reduction in miner revenues…

Well yes… and no.

In fact, what we’ve begun to see is miners making more after the halving and it boils down to JPEGs.

This story goes back to 2017 when the idea of non-fungible tokens (NFTs) first became a part of crypto.

These were predominately based on the Ethereum blockchain and became quite the craze. Their launch became so popular that in some cases it completely clogged and slowed down the Ethereum network.

The NFT mania, however, really took hold in 2021’s crypto bull market when millions were being made on the minting and trading of NFTs on all kinds of different networks from Ethereum to Tezos to Solana.

The NFT craze caught mainstream headlines as renowned digital artists were seeing their NFT art selling through legendary auction houses like Sotheby’s and Christie’s all of a sudden.

The most famous and valuable of all was the sale of Beeple’s “Everydays: The First 5000 Days” which sold for $69.3 million in March 2021.

NFT mania has caught its fair share of critics over the years. The 2021 bubble clearly burst not long after. Albeit some popular NFT mints like CryptoPunks and Bored Ape Yacht Club still have “floor prices” upwards of $100,000 and $35,000 respectively.

Historically these NFTs have never been a “thing” on the bitcoin network. Mainly due to the fact that they were technically possible. The programming capability of other networks like Ethereum and Solana made NFT creation and popularity easy.

However, thanks to network upgrades like Taproot in 2021, all of a sudden bitcoin allowed for greater programming capabilities. In 2023 we began to see new developments on bitcoin around NFTs which were called inscriptions. This led to a surge in Ordinals which were NFT inscriptions on the bitcoin network.

This is all important because in 2023 and into 2024 the popularity in Ordinals started to have an impact on the fee generation of bitcoin’s network.

That’s important for miners, because while they get the block reward when they mine a block, they also get the fees generated per block.

So for example, if a miner mined a bitcoin block pre-halving, they were getting 6.25 BTC plus the fees. What you’ll see in the chart below is the average fee per transaction on bitcoin. What this means is that a higher fee means often higher fee rewards per block.

Source: Blockchain.com

You can see in late 2023 that the average fee per transaction went from around $1.75 in early November to as high as $37 per transaction in mid-December.

That’s due to Ordinals.

So miners, began collecting more and more BTC per block in fees leading into the halving. In some cases the fees were getting close to the block reward.

Yet since the halving took place last week we’ve seen the release of what
are called “runes” on bitcoin’s network. This is the ability to mint fungible
tokens on bitcoin’s network. Fungible tokens are those that can be replicated and are not individually unique like a non-fungible token is.

This has only been possible since the halving and the release of the runes protocol. The stock market didn’t understand this at all but the build-up in excitement for runes has been working its way through crypto circles for months.

And that massive spike in fee per transaction right after the halving is the result of runes.

The day after the halving, with the surge in activity in minting runes on bitcoin, the average fee per transaction rose to over $127. It became so wild that miners were now making more per block in fees than they were getting from the newly slashed block reward of 3.125 BTC.

In fact, the total reward per block was now exceeding the total reward per block before the halving.

Take a look at block 840,000, the first block of the new halving epoch.

James Allen and Sam Volkering
Editors, Small Cap Investigator