Japan Nuclear: USEC, TENEX Ink $2.8-Billion deal

It's even more complicated than it looks. Chess anyone?

This is my coverage published in Fuel Cycle Week V10:N418; 03/31/11, published by International Nuclear Associates, Washington, DC. Posting it here was delayed by the press of business related to the reactor crisis in Fukushima, Japan.

As the 20-year, $8-billion Megatons-to-Megawatts program winds down in 2013, struggling U.S. uranium enricher USEC (NYSE:USU) will usher in a replacement contract that will confer upon it two immediate advantages.. First, it will provide material (21 million SWU) that USEC probably needs to fulfill contracts that it might not otherwise be able to satisfy, due to delays in getting its American Centrifuge Plant built and producing.

?By supplementing its domestic capacity with continued access to Russian LEU, USEC can assure customers that its supply mix will remain sufficiently robust to meet their needs throughout the transition to the American Centrifuge Plant,? USEC spokesman Jeff Donald told FCW.

Second, this reliable supply of low-enriched uranium from TENEX will reduce USEC?s need to run its electricity-gobbling gas-diffusion plant in Paducah, Kentucky at full capacity. USEC may even gain bargaining leverage regarding what it pays its electricity supplier, the Tennessee Valley Authority. In short, the TENEX deal, worth about $2.8 billion, according to the Russian press, seems like a smart move for USEC. It is probably also based upon the minimum contract take over the 10-year period.

Building ACP Bona Fides

It will also enhance USEC?s bona fides for the Department of Energy?s review of USEC?s application for a $2 billion loan guarantee for the construction of the ACP.

Jeff Donald was quick to assure FCW that the company remained ?fully committed to deploying our American Centrifuge technology in our new plant in Ohio and extending the operations of our Paducah Gaseous Diffusion Plant in Kentucky. This contract complements those ongoing activities as we maintain our market position during this important transition period.?

USEC also needs to show revenue streams sufficient to justify the financing of up to $1 billion it will seek over and above the $2 billion covered by the loan guarantee (FCW #410, Feb. 3).

Of that amount, $600 million is to come from potential investors in Japan along with a contingency for another $200 related to possible cost overruns. But the funding from the Japan Export Bank may be in jeopardy due to the need for funding the recovery from the devastating earthquake and tsunami of March 11.

But the most startling element of the deal was an announcement that the two companies will immediately begin a feasibility study to build a separate, new uranium enrichment plant in the U.S. that would use Russian enrichment technology.

?Building such a facility... is a long way away, which cannot be covered in one day, but today we started moving in that direction,? Rosatom?s Sergei Kiriyenko told RIA Novosti on March 24.

A spokesman for TENAM, the newly established U.S. branch of TENEX, declined to respond to several requests for comment.

TENEX Project Tenuous

But a TENEX enrichment facility would face significant challenges in gaining market share, considering the existing and planned uranium enrichment plants in the U.S. There may not be enough business to justify the expense and effort to build another one.

Jacques Besnainou, AREVA U.S. CEO, has estimated that the U.S. nuclear market in 2012 will require 13 million SWU. By then U.S. production should be approaching 12 million SWU. With Urenco?s plant in New Mexico and AREVA?s Eagle Rock plant in Idaho, plus USEC?s current production at Paducah, the need for a TENEX facility is not compelling.

Urenco and AREVA each plan to double their annual capacity from three million to six million SWU by 2018. If GE-Hitachi decides in 2012 to build a laser-enrichment plant in North Carolina, the numbers look even worse in the out years for a USEC/TENEX plan.

Would TENEX take an equity position in the ACP instead? No chance, USEC?s Donald said. ?While this contract strengthens USEC?s financial position and increases certainty of supply over the next decade as we deploy the American Centrifuge Plant, the contract does not involve the American Centrifuge Plant directly.?

The diplomatic issues might be even more daunting. A Washington, D.C.-based industry expert told FCW he did not see how it would happen. The expert, who declined to be identified due to the sensitivity of the matter, said the U.S. government would have no appetite for a Russian-owned and operated enrichment plant on U.S. soil.

USEC?s Donald emphasized to FCW that the Russian enrichment plant is not a done deal. ?We have agreed to conduct a feasibility study to explore options of building a Russian centrifuge plant in the U.S. well beyond the deployment of the American Centrifuge project.?

The feasibility study would only examine the marketplace, government agreements, licensing, financing and market demand aspects of a project, and help determine whether or not to proceed to next steps. Any decision to proceed would be subject to further agreement between the parties and their respective governments.?

Into the Global Market

USEC must export much of the TENEX material, under U.S. law limiting the amount of Russian LEU that can be sold to U.S. utilities, to prevent dumping of uranium on the domestic market. This means USEC might need to pick up some international customers for the material it buys from TENEX.

The Russian firm will probably not allow USEC to compete directly for supply contracts in China; that leaves Taiwan and Japan as potential customers in Asia.

But USEC would compete in the international market with AREVA, which will supply fuel to new core loads of two 1,600 MWe reactors in China and another two in India.

But Japan?s need for fuel is about to shrink by 10% with the closure of the six reactors at Fukushima, equivalent to 4.2 GWe of its total 43 GWe nuclear generating capacity. It could be a decade before new replacement reactors are ready for their first core loads.

On the other hand, in the latter part of this decade, Russia?s Atomstroyexport will need to supply new core loads to 5 GWe in Turkey and another 5-10 GWe in India. Within that same timeframe Russia will also install a string of reactors for Vietnam.

In addition, the United Arab Emirates will soon open competition for fuel supply contracts for the four new reactors Korea is building there. Plus the Koreans themselves are planning to expand their home fleet. The U.K. is building 19 GWe of new nuclear generating capacity at seven sites. Four of them are to be built by EDF, using AREVA EPR reactors.

The international market is a crowded field, but not so crowded that USEC could not make its numbers with TENEX product.

New LEU Not Downblended HEU

USEC said in a statement that the quantities of material supplied by TENEX will comes from Russia?s commercial enrichment activities rather than downblending of excess Russian weapons HEU. This is a significant change and may reflect sensitive policy decisions at the highest levels of the Russian government. There is no obvious technical reason why the Russians changed their source for the feed. It may have more to do with diplomatic relations with the U.S. in the area of arms control than the USEC deal with TENEX.

?The contract is for the SWU component of low-enriched uranium,? said the USEC spokesman. ?While USEC will provide natural uranium equal to the uranium feed component of the LEU delivered to USEC, that specific amount will depend on the assays ordered by us, which in turn will depend on what customers request.?

The March 24 report by RIA Novosti said TENEX would deliver 21 million SWU for $2.8 billion, which produces a price of about $131/SWU. Quotes for SWU in the uranium industry trade press for March 28, 2011, show a delivered price of $154/SWU. The difference indicates Russia?s cost of production.

USEC said in a statement on its website that contract deliveries are expected to continue through 2022. USEC will purchase the SWU contained in the LEU and deliver natural uranium to TENEX for the LEU?s uranium component.

Uranium Producers Cautious

In a new statement the Uranium Producers of America indicate cautious support for the TENEX-USEC deal.

UPA President Paul Goranson told FCW that the group did not oppose it as long as the deal does not exceed Suspension Agreement limits imposed on Russian sales in the U.S.

?Our objection to the agreement is based on the fact that there is no reciprocity for U.S. producers in Russia,?

Goranson said, adding that the group recognizes that the deal is good for USEC. He passed the following statement along to FCW shortly before press time:

?The Uranium Producers of America is supportive of the ability of U.S. Enrichment Corporation to commercially participate in the importation of Russian sourced LEU. As an association that represents the domestic uranium industry, we are continually concerned with the transparency and monitor of the Russian material entering under the amended Suspension Agreement.?

?Our hope is that this commercial arrangement will provide support for the development of additional domestic enrichment capacity. However, this does not clarify the need for USEC to re-enrich high assay tails from the Government?s Excess Uranium Inventory to remain viable as announced in prior press releases. The introduction of new sources of LEU into the commercial market will have the potential for adversely impacting the domestic uranium industry, including mining and conversion.?

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