Uranium Enrichment With Centrus

Dan Poneman, CEO of Centrus Energy, joins Marc Bianchi, Industrial Gas and Equipment and Energy Oilfield Services and Equipment Analyst on the Energy Transition Podcast. They discuss uranium enrichment, U.S. dependency on Russian supplies, and how Centrus is positioned to grow U.S. enrichment capabilities, including producing HALEU for advanced reactors.

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Transcript

Speaker 1:

Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

Marc Bianchi:

Hey, everyone. Marc Bianchi here from the TD Cowen energy research team with another installment of our Energy Transition Podcast. In today’s episode, my guest is Dan Poneman, CEO of Centrus Energy, formerly known as the United States Enrichment Corporation. Prior to Centrus, Dan spent several years in the US government in roles such as deputy and acting Secretary of Energy. He’s been a White House fellow, and special assistant to the president, and held director positions at the National Security Council, which involved development and implementation of policy in areas such as peaceful nuclear cooperation. Uranium enrichment has gained a lot of attention on the back of Russia’s invasion of Ukraine, and concerns about supply, where Russia is nearly half of the global enrichment capacity. Add to that concern, the US has essentially gotten out of the enrichment business, so there’s not only an energy security risk, but a national security risk.

Centrus is in a unique position to capitalize on reshoring US enrichment capabilities, but it’s a complex situation, the competitors are state-owned, and any effort in the US is going to need a healthy dose of government support. So let’s get some enrichment on this important part of the nuclear ecosystem with our guest, Dan Poneman. Maybe just to get going here, can you give us a two-minute introduction on the business? What are the two divisions, and how are you thinking about their progression over the next several years?

Dan Poneman:

Sure, Marc, happy to, and first of all, thank you very much for having me. A lot of people have looked at me quizzically when I say I lead Centrus, and I say, “Well, you might not have heard of us, but our first name was the Manhattan Project.” And it’s true. Oak Ridge Tennessee, 1944, the effort to develop a technology to enrich uranium for the purpose of the Manhattan Project was in fact the genesis of our company. We became, so to speak, the Atomic Energy Commission. The whole uranium enrichment enterprise of the US government that was used to support our nuclear weapons arsenal that was used to create all of the high-enriched uranium for the naval reactors, and our submarines and carriers, were performed in the Atomic Energy Commission that eventually became the Department of Energy, which eventually privatized this enterprise. The only country in the world to privatize uranium enrichment was the United States.

That happened in 1998. The two divisions in the company reflect the two activities. Number one is trading in enriched uranium, that’s our LEU segment. And the other segment is what we call CTS, Centrus Technical Solutions, and that’s where we’re developing the technology to enrich uranium anew. And to keep it under two minutes, I’ll just say, now we can go into it later, that the way to think about it is really two complimentary businesses, a trading arm that buys and sells material, depending on market conditions of the day, and a production segment, which has been, unfortunately, out of production for a number of years, but now, excitingly, is back into production. As of October 11th, we just launched our first new production of enriched uranium and a new facility to begin production in the United States since 1954.

Marc Bianchi:

Super impressive stuff. I want to ask one question that’s come up since we put this recording on the calendar, and it’s that Centrus has announced a CEO transition where Amir Vexler’s going to become CEO on January 1st of 2024. So maybe you can talk about what went into that decision and what you’re going to be doing?

Dan Poneman:

I believe any strong corporation has to have a very thorough and thoughtful succession planning approach. Frankly, I joined this company in 2015 not thinking it would take quite this long to get the job done. I intended to stay about five years initially, but we basically were able to clean up the balance sheet. We were able to improve our market cap substantially, like twenty-fold, in the last eight years. We were able to restore our book of business we hadn’t signed contracts for a long time. We were able to put our pension liabilities into a much sounder framework, from being a multiple of our market cap to a mere 5% of our market cap. And really excitingly, we were able to secure contract with the US Department of Energy, a cost share basis, to build a new advanced cascade of centrifuges to make this new exciting kind of fuel.

We’ll talk more about High-Assay Low-Enriched Uranium, and candidly, I wanted to see it through to its initial production, and we have. So it’s almost nine years for me. I think it’s healthy for an organization… and frankly, we said publicly many, many times that it’s 42 months to build the next cascade, and I think it’s the right thing, it’s the right time for the company. And we have in Amir Vexler, a young guy who’s got engineering background, he’s got business background, he’s got C-suite experience both at Orano and GE. And so it’s a very, I think, good thing for the company, a good thing for our shareholders.

Marc Bianchi:

Yeah. One of the questions that came up from investors, on the back of that announcement is you’ve got a long history of dealings inside the Beltway, and the thought is you’ve been instrumental in the company’s dealings with the government, and now, that may be going away. Can you talk about the continuity there?

Dan Poneman:

I think there’s always going to be continuity. Frankly, one of the things that’s most encouraging, Marc, about what’s happened over the last several years is, early in my tenure, frankly, we were a little bit of lonely voices crying in the wilderness, but now, you’re in the business. And so anytime you pick up an NGO report, an analysis report, everyone’s talking about the imperative for enrichment. And the first legislation passed under the new speaker of the House of Representatives was the appropriations for energy and water, which included $2.4 billion for enrichment. The last time the President of the United States sent a supplemental funding request up to the Congress, included $2.2 billion for enrichment.

The last time the Senate voted on the Nuclear Fuel Security Act, it was 96 to 3. So I think it has been a very much of an effort to get people to understand the importance of this, but I think that Rubicon frankly has been crossed, and I think really now, just like the rest of the industry, Marc, we probably talk about this on the reaction side as well, what the story is going to turn into is a story about execution and about really excellence in project management. And to go from where we’ve been to a full up large facility, able to produce SWU for both advanced reactors and conventional reactors, I think it needs exactly the kind of skill set that Amir Vexler is going to bring to the table here.

Marc Bianchi:

Okay, that’s great. Maybe you could talk a little bit more about the history. You introduced it a little bit, but some investors may remember USEC and there was a bankruptcy there. I know that was before your time, but maybe you could talk about what happened there, what led to the bankruptcy, and how is the business and the balance sheet different today?

Dan Poneman:

It wasn’t before me because I was actually working for President Bush 41, of the National Security Council when they turned, then the operating arm of the Department of Energy, into a government corporation. And I was not there for the end of it, but I was there for the discussions in the Clinton administration, which led to the IPO. Basically, here’s what happened, there’s a musical called Pal Joey, which has a song called, if you asked me, I Could Write a Book, and I certainly could, so I won’t take that much time now, but I’ll say basically the following, it may or may not have been a good idea to privatize. Once privatized, there were basically two things, major things going on in the company. There were, originally, three large old technology, Cold War era, gaseous diffusion plants. And by the time the company was privatized, there were only two of them operating at Portsmouth, Ohio, and Paducah, Kentucky. The one in Portsmouth closed rather early in the company’s life in about 2001 or so.

Basically. For example, when I took office in 2009 as deputy secretary, about half of the production of the company came out of that last Paducah enrichment plant. Where was the other half coming from? Well, again, back when I was with President Bush 41, the Soviet Union broke up, people were terrified that the Soviet Union would turn into four nuclear weapon states, Kazakhstan, Belarus, as well as Ukraine, and Russia. And they were terrified that scientists would flee all over the world, that materials and technology would end up in North Korea and Iran. And one of my chunks of responsibility at the National Security Council was to figure out what to do with all that high-enriched uranium that came out of the Soviet stockpile. And we decided a rather ingenious thing, which is to buy 500 metric tons, which was the equivalent of 20,000 bombs worth, and blend it down to be a low-enriched uranium commercial reactor fuel.

So the other half of USEX company was this 20 year deal, it was basically the most successful arms control deal in history, to blend down that material. So long story short, that contract seemed… when I was the in guy negotiating it to be forever, but 20 years ended in 2013, and so that ended and that took away half of the company’s production. And then Fukushima crushed the enrichment market, since Japan closed 54 reactors, Germany closed eight reactors, and everybody else put their plans on ice. So the market effectively collapsed, and the highest cost production was this old Paducah plan. So that shut down too. So in six months, the United States went from 25% to 0% market share effectively. And not surprisingly, the company at that time could not make its debt payments, went through chapter 11, and after it came out of chapter 11, that’s when I came on board.

And how’s business and balance sheet different today? Well, when I took over, utilities are very cautious, you know this very well, and they were not really enthusiastic about buying long-term commitments from a company that just came out of chapter 11, nor were they eager to make long-term contracts with a country that had a cliff maturity in 2019 when the delivery schedule called for deliveries in 2024, et cetera, et cetera. So we were able to regain the confidence of the US fleet operators, and we got into those order books. We were able to do a lot to refinance that long-term debt. We had to put out some preferred to save our net operating losses, and we were able ultimately to bring all that preferred back in. And so our balance sheet is much stronger. We got $200 million of cash on the balance sheet.

And really, even though now the LEU segment, our trading business still accounts for about 75% of our revenues in almost all of our margin. The really exciting thing is we’re now really at the front edge of a new wave of expansion of this very small but very exciting demonstration cascade to satisfy both the advanced reactor markets that need this special kind of so-called High-Assay Low-Enriched Uranium, or HALEU, as well as those utilities were very eager to get off of dependence on Russian imports of low-enriched uranium fuel. So it’s really an incredibly exciting moment for the company.

Marc Bianchi:

Before we get into part of that, maybe you could give us an overview of the enrichment industry today. And I guess, somewhat what we’re going to find out, I suspect when you go through this, is that the US isn’t doing any enrichment, and there was an opportunity for us to stand up all this enrichment capability, but we didn’t do it. And I’m curious as to why we didn’t do it, or what your perspective is on what failed in that progression?

Dan Poneman:

Yeah. I really might want to write a book about this because it’s an interesting story. It’s curious, Marc, the global enrichment industry now is basically dominated completely by four state-owned enterprises. There’s one in Russia, there’s one in China, there’s one in France, and there’s a European entity known as Urenco, one-third British, one-third Dutch, one-third German. The United States has fallen out completely. The United States, in 1985, had about 27 million, what we call separate work units, which the unit of account for enrichment, we now have almost zero, we have just a tiny bit on this new plant that we’ve just started, and Russia, guess what? Has 27 million SWU. So the space that we used to dominate and occupy basically has been completely displaced by Russia. Russia actually has… even after a couple of years of people trying to reduce dependence, they still have basically 44% of the installed base to enrich uranium.

They are still the leading supplier of enriched uranium globally. United States still relies for a little bit more than 20% of its enrichment requirements from Russia. Europe relies for about 30%. Why isn’t the United States doing this? Well, that’s a long story too, but the bottom line is, at the very moment… so first, when the company privatized in 1998, they tried for a couple of years to work on a form of laser isotope enrichment, which ended up not working out for the company, I wasn’t there, I can’t tell you any details, but then they did try to pivot to the basic current flavor of the month when it comes to enrichment, these so-called gas centrifuges. And it so happens that at the very time that they were putting together a very large plan and actually selling a perspective output of a big plant that they were going to build right there in Piketon, Ohio, was at the exact same time that Fukushima happened and the market collapsed.

I was actually the deputy secretary of energy at that time, I chaired the credit review board, and candidly speaking, because, A, the market had collapsed, and B, along with the market collapsing, the company at that point was in distress, that the underwriting criteria of the loan program office were not met by that loan application. And basically, the loan application failed. So the bottom line was, the United States fell into complete dependence. Having gone in the world’s biggest exporter of enrichment, became the world’s biggest importer of enrichment and an abject position, in which we basically had no domestic production. It’s analogous, Marc, in some ways to what happened with Germany on natural gas, they just were lulled into complacency, and that’s what happened. And we just fell out of the market.

And then for a number of years, some of us were saying, “This isn’t good. We really need to think about supply chain resilience. We really need to think about multiple sources of supply.” And it wasn’t until COVID that people really started waking up to the challenges created by having not resilient supply chains, and semiconductors reiterated that point. And now comes the Ukraine war. People realize, well, “Gee, whiz, it’s the same thing for uranium enrichment, you just can’t be safe and secure, and energy secure as a country without having a domestic source of enrichment.”

Marc Bianchi:

All the enrichers are state-owned, as you mentioned, and Centrus would like to become a participant in that market. Does it make sense for a public company to be in the enrichment business if all the competitors are state-owned?

Dan Poneman:

Well, look, we have to take life as it presents to us. And I would say the following, it absolutely makes sense for the United States not to be 100% dependent on foreign state-owned enterprises. I don’t care where they’re from, it’s just not resilient. It’s not good market architecture. You will not find a single US utility CEO who says, “I really would like a single point of failure in my field chain.” You don’t hear that sentence. That having been said, every single enrichment plan in the history of the world has been 100% bond paid for by governments. So is anybody advocating that the United States should renationalize this sector? No. However, I think it’s now become, I believe, conventional wisdom that we need a public-private partnership, and that if the United States is going to get back on the field, that we need to have government defray some of those upfront capital costs that every other government has provided for every other enricher.

And I have every confidence that once we are put back on a level playing field, that when it comes to OPEC and competing in the market on a going-forward basis, I think once we’re back in the field of play, back of one of those public-private partnerships, I am very confident that we can secure very significant market share. And I think it’s good for the market too, to have multiple sources of supply that assures resilience of supply, that gives you fallbacks in case God knows what happens to any particular supplier, and it gives you a price competition. So I think a healthy market really is crying out for another supplier, and frankly, another American supplier.

Marc Bianchi:

Okay. Great. I want to jump into the LEU segment here a little bit, and correct me if my understanding is wrong, but really, you’re not doing any enrichment, this business is a broker, for maybe lack of a better term, between enrichers and utilities. I guess, if that understanding’s correct, why wouldn’t enrichment companies just be selling directly to the customers? Why you needed here?

Dan Poneman:

Well, first, I have to make just a slight distinction here, which is, it’s only 20 kilograms so far, but we’re about to make 900 kilograms, but we are actually producing HALEU. And by the way, we are the only producer of HALEU outside of Russia. So it’s small, but that’s us. So we are producing, point one. Point two, on LEU, currently, you are correct. And why does that make sense? Well, in the years when 96 straight quarters, from Fukushima, basically ’till about August 2018, the market fell consistently from $160 per SWU, down to about $35 per SWU. It was a very tough time in the market. And Centrus was in a favorable position because there was so much capacity floating around and the demand was slack, that we were able to scarf up large quantities because we were willing to buy long-term and in bulk. And so that allowed us to take long-term positions, which then allowed us actually to and compete and win, in a number of cases, in competition with the suppliers.

It’s just the nature of a small market of that character. That is why that made sense. And I think opportunistically, you see any number of companies, including in our sector, that have an option to exercise their trading arms or exercise their production arms, there’s an arbitrage that people smarter than I am in finance can decide at what point you tip from production to trading. But I think there’s strength in having the capacity to do either. How this will shake out in the years ahead? Now, the market’s very tight, so the model that we were applying very, very successfully in 2017, 2018 probably wouldn’t work so hot now that prices have spiked the way they have. But you’ve seen this market, Marc, long enough to know that it’s cyclical. So I think it’s a strength for the company to have, going forward, produce or procure option to satisfy our customer’s needs.

Marc Bianchi:

Let’s say enrichment becomes a big business for you guys, is it the idea that the LEU segment and the long-term supply contracts you have shrink and you don’t re-up them for the reasons you just stated, and then the technical solutions and enrichment really become the core of the business, or would you expect to just keep layering in longer-term supply contracts to keep this side of the business going?

Dan Poneman:

Yeah. Well, I don’t think there’s a doctrinal or religious answer to this question. Clearly, we’re very excited about building out new capacity, and clearly, as a producer, it gives you control over your cost structure and your production schedule. And there are clearly advantages to being a producer, but in terms of calibrating how much production versus how much trading, I think that’s, candidly speaking, more of a tactical decision that is going to be informed very much by market conditions as they evolve. The way I think about it, Marc, is once we’re up running in the field of play, we will have the tactical flexibility to make judgments based on the market-prevailing conditions of the day, our cost structure of the day, the input prices for enrichment themselves may vary from time to time as electricity rates vary, for example, as uranium prices vary, for example.

So I think it’s going to be a continuous analytical process that people at the corporate level of the company will have to decide. But I think that the predicate to being able to do that is getting a significant production capacity up and running, then you have the tactical flexibility, if that makes sense, to call balls and strikes in terms of what you’re going to do in Q1 versus Q2, in terms of production schedules, and sales contracts, and so forth.

Marc Bianchi:

Okay. Well, maybe we can talk a little bit more about the contracts and maybe what drives profitability. So you’ve got some long-term contracts through the end of the decade, more or less. I think those were set at low prices, and I think one of them was reset at a lower price, the TENEX contract. In reading the language around how those work, it seems like there’s some adjustment for market prices, so they would, as you mentioned, the SWU price has gone up quite a bit here. Would those costs then go up, and what really drives the margin here? And I know from quarter to quarter, there can be some volatility, but as we look at it over a twelve-month period, what drives the margin in this business?

Dan Poneman:

I remember when I was in practicing law, I was asked why a certain person was the best managing partner in town, and the answer was because he understood that profit equaled revenue minus cost. So our contracts are a mixture of fixed and variable components. A lot of that frankly is not publicly disclosed, so I have to refer folks to our Qs and Ks, and so forth. But there are, in both our sales contracts and our supply contracts, variables of both. But I would say that the cost variables are trailing, and therefore, overall, having hit the market frankly at just the right point in terms of our cost structure in 2018-ish, plus or minus, that’s, to be very frank, one of the things that propelled us into profitability in the subsequent years. And so I think that overall architecture is still in place. We are able to benefit from… and we’re sorry for the war, reasons why the market has spiked, but obviously, prices are up, we’re selling into that rising market, and the costs do rise but not necessarily as rapidly as the prices.

Marc Bianchi:

Okay. And I think of those contracts, you have one with Orano, and the other one’s with TENEX or Rosatom, so the Russian enricher, and I think that’s a larger one. I’ve heard some utilities aren’t accepting Russian-enriched in uranium, maybe you have more supply than demand. So how is that affecting margins? And then how should investors think about the risk if there is some limitation by the US government on these Russian-enriched supplies?

Dan Poneman:

Yeah, this is obviously a huge question for our industry, and candidly speaking, Marc, it shows you, I don’t know how else to put it, how short-sighted people were in past years to become so complacent. And I could cite, but I won’t chapter and verse, on very glib statements in past years about why this was really not a problem. Obviously, now that Ukraine has happened, we see that it is a problem. But you can’t argue with the crude facts, and the crude facts are Russia has 44% of the world’s enrichment capacity. There’s not nearly enough non-Russian enrichment to fuel the world’s reactors. I’m going to view a broad, but at least indicative measure of that, global demand for enrichment without Russia is 48 million SWU per year, separate work units, global supply without Russia is 33 million SWU per year. That gap of 15 million SWU per year is equal to 100% of US demand per year.

And then you have to add onto that, Europe also gets about 10 or 11 million SWU per year from Russia. And so as I mentioned earlier, they get 30% of their enrichment from Russia, United States gets a little over 20%. So the bottom line is, if that product were to immediately come off the market, it would create a lot of distress in a lot of places. And I think a lot of utilities have, I’m sure, done a lot… everyone’s done a lot to see how they can mitigate the risk, but there’s no getting around the fact that you can’t surge enrichment production in a matter of weeks or even months, it’s going to take years. And that’s why you would not be surprised to read the formal position of the Nuclear Energy Institute, is that we should wean off of dependence on those Russian imports, at the same rate that we replace it with domestic capacity.

There’s a difference between the uranium enrichment market and the oil market, where the United States, for example, is the world’s largest producer, there’s lots of other suppliers, it’s just much more concentrated in Russia when it comes to enriched uranium. So I think candidly speaking, Marc, why you’ve seen this growing consensus, both sides of the aisle, both sides of the hill, both Senate and House realizing this, both ends of Pennsylvania Avenue, it’s because of the frank recognition that we really have to get off the dime, and the only real permanent sustainable solution to overdependence on any one foreign enricher, including Russia, is for us to get back into the field and build domestic capacity.

Marc Bianchi:

That’s where we’re going next with the conversation, so that’s a good segue. You touched on this briefly in the introduction, but talk about the enrichment capabilities that you have and the efforts you’ve got? And what is American Centrifuge? Is that dead now or is that essentially the basis of the technology for HALEU? Just help us understand those different parts of the portfolio.

Dan Poneman:

The technology, Marc, goes back to technology developed 1980s at the US Department of Energy, the technology that was advanced to build what was going to be called the American Centrifuge Plan, in the years prior to Fukushima, frankly, we have continued to improve that technology. That’s why the machine we now deploy is called the AC-100M, the M stands for modified. We feel great about it, it’s producing HALEU today. It is a continuous process of technical improvement, but we’re now very happy with the design that we’ve got. The capabilities that we have, I think it’s very important to note, in addition to this fantastic technology, we’ve got fantastic workforce, and not only is their subject matter knowledge and engineering skills, but these folks are great at project management. You’ve spent a lot of time in our industry, I know, and I can tell you that our team has produced 15 in a row successful projects, in other words, on time and on budget, and that is the brass ring in nuclear capital construction.

And they haven’t all been capital construction projects to be clear, but we have an outstanding project management team. That’s where we are today. I was very happy to host a lot of folks from different walks of life, from utilities, from manufacturers, from trade unions, from lots of folks. In October at the site in Piketon, I think the two things that people came away impressed by were, number one, it’s really fantastic technology that we deploy. But number two, if you see the physical plant, there’s like $6 billion of taxpayer and private capital in a phenomenal facility, which has got the square footage of the Pentagon, and we have room for thousands of machines to go in there. So if we had the right kind of demand signal and financial support, we do need some help from the government, boy, we’re off to the races.

Marc Bianchi:

What’s the difference in making HALEU versus LEU? Is it just a matter of doing more cycles in the centrifuge or-

Dan Poneman:

That’s the tricky thing… or the not tricky thing about uranium enrichment technology is, just think of octane on your car. You take this uranium ore out of the ground, only 0.7% is Uranium 235, and then you turn it into gas and you spin it, and you use centrifugal force to separate the lighter from the heavier isotopes. And it’s the same spinning process that will take you to 4 or 5%, which is low-enriched uranium, that will take you to 19.75%, which is high assay LEU, or HALEU, which will take you to 90%, which is for a naval reactor or actually for a weapon, possibly. So that’s why this is a very sensitive and heavily controlled technology, so that the physical principles are identical. And that’s why people care a lot when Iran is going to three or 4%. They’re worried because there’s no glass ceiling, so to speak. There are differences in terms of balance of plant and plumbing, and so on, and so on, but the physical process of enrichment is the same.

Marc Bianchi:

And maybe just while we’re talking about the process, you have an agreement, I guess, with Oklo, it’s the right way to describe it, where you could be buying power from them. And I think people think of enrichment and they go, “Well, that at one point consumes 7% or 10% of the US energy production,” but that was gaseous diffusion, which is quite a bit different than centrifuge. Could you just unpack that a little bit for us and help us understand what the energy needs would be, going forward?

Dan Poneman:

Yeah. Well, I think you answered the question the way you framed it, so you clearly have done your homework. Basically, the death knell to the gaseous diffusion technology, vis-a-vis the gas centrifuge, was exactly that, its Achilles’ heel was, it was a humongous consumer of electricity and lots of… I’m not sure exactly which is the right data, but people said up to maybe 10% of US electricity during World War II was dedicated… It’s not a coincidence, by the way, that the three big gaseous diffusion plants were all built along the TVA hydroelectric power system. And I can’t get into much detail, but I would just tell you that by definition, the economics and mechanical processes of gaseous centrifuge is far favorable and a much more efficient use of energy, and that’s why Paducah failed in 2013, and that’s why the new machines we think are very promising.

Marc Bianchi:

Maybe we could talk a little bit about the DOE-HALEU contract that you have, but as an introduction to that, maybe you just want to give us an introduction. What is HALEU? Why do we need it? There’s an urgency to produce in the US because Russia makes all of it, but is there any other hope? Could it be coming from elsewhere? Are we going to see Orano or Urenco doing HALEU in Europe, and maybe that’s just fine for us?

Dan Poneman:

Well, Marc, having both in and out of government, one of my cardinal rules in an interview is not to speak for somebody who I’m not, so I’ll let Orano and Urenco speak for themselves. In terms of HALEU, here’s the simple way to think about it, and I said it just a moment ago, it’s the same physical process, and when you have enriched uranium at 4 or 5%, it’s really quite remote from any weapons applications. And as I said, 90% is basically weapons-grade or naval reactor-grade HEU. The dividing line between low and high is 20%. I don’t want to get into the physics of it, but most of the separate work to get to the 90% actually is performed at the lower assays. And so it’s actually a reasonable number. But what happens, and this isn’t crazy either, is at 20% and higher, you get a whole new set of nonproliferation concerns, you get a whole new set of security concerns, criticality concerns, and therefore, people don’t want to exceed it.

Why do they want to get close to it? Well, if you are looking for a higher-performance reactor with some of the very attractive benefits of these so-called Generation IV reactors that are not cooled by light water, but rather cooled by liquid metal, like TerraPowers, Natrium reactor, which is cooled by liquid sodium or Oklo as well, or the high-temperature gas-cooled reactors like X-energy, or the molten salt reactors, these enhanced performance characteristics are achieved at higher assays. So if you want a more power-dense concentrated fuel to provide enhanced performance, and including certain things like producing high-temperature steam, which can not only support power generation, but also support industrial processes that take that high heat requirement, then you’re going to want to have these advanced reactors.

And if I want to get advanced reactor fuel without tripping into all kinds of criticality and security concerns, I just go just a hair under 20% and go to 19.75%. That’s why there’s so much interest nowadays in this so-called HALEU, and you would know that of the 10 reactor designs that the US Department of Energy selected to support in the advanced reactor development program, nine of those do in fact require HALEU, and as we just discussed a moment ago, Oklo as well also requires HALEU.

Marc Bianchi:

And you’re, I think, entering phase two of this DOE contract, or maybe you’re already in phase two, can you talk about when we would hear more about phase three?

Dan Poneman:

Yeah. Well, for your listeners. So phase one was significant in two dimensions. Number one, it was a 50/50 cost share, and number two, it was actually kind of proof of concept. So it was just 20 kilograms, we produced it, we were very proud to deliver it. All this has been ahead of schedule, which is pretty much unheard of in our sector. And so we then move directly into phase two. Phase two covers a full year of production, that would be 900 kilograms, just less than a metric ton, and that will cover a full year of production. And that’s no longer 50/50 cost share, and now, we’re into a cost plus incentive fee, which is a good thing. And then phase three is optional and at the Department of Energy’s sole discretion, they will need to decide whether and when to exercise that option. In phase three, they have up to three three-year options. So if they exercise all the options and to repeat, it’s up to them, it’s their discretion. But if you add that to phase two, then basically, it adds up to overall a ten-year contract.

Marc Bianchi:

And let’s say, we’re a year from now, and you’re going to complete phase two, would they need to make some announcement and agreement, or that option expires? How does that work?

Dan Poneman:

Presumably, if the DOE were to exercise that option, they would, I presume, make that known to folks. It’s going to be watched, Marc, because this fuel is in fact urgently needed. The department has set their requirements, looked to be on the order of 25 metric tons per year, and this would produce just one metric ton a year. So this is incredibly valuable stuff. And I think your listeners know, but just to remind, the title to that material is in the Department of Energy. The other golden rule is, who has the gold makes the rule. And so they would be basically the offtaker, and they will be allocating that material. So I think, when they make a decision, if they make a decision, to go into phase three, I’m quite sure you’ll know about it.

Marc Bianchi:

Okay. There’s also an RFP that the DOE has for HALEU, can you describe that process? What are the next steps? What’s the potential size of the award? And then how does phase three have anything to do with that, if at all?

Dan Poneman:

Great question. Well, again, as I would not speak about a competitor, I’m not going to speak on behalf of the US Department of Energy, but basically, under the Inflation Reduction Act, the Congress appropriated, the president signed into law $700 million for HALEU. Of the $700 million, $500 million is for the potential purchase of HALEU. And the Department of Energy put out a draft RFP, they solicited and received a lot of comment. They have been reviewing that comment, and presumably consulting internally about it, and we and everybody else are waiting. I should note, there’s actually two RFPs floating around out there. One which would deal with deconversion, and one which we’ll handle enrichment.

We’ve been talking about enrichment so far, but it’s important, Marc, again, for your listeners to know, that you can’t put uranium hexafluoride gas at 19.75% into a reactor, you got to turn that gas back into a solid form, be it an oxide or a metal, and then fabricate fuel with it, that needs to be done for HALEU. And so there’s an expected RFP that’s going to come out on that. I think folks are expecting that RFP to come out first, and I think, quite soon, and after that would be the RFP for the enrichment.

Marc Bianchi:

Okay. And would you be capable of participating in both of those?

Dan Poneman:

Well, this is our space, this is where we intend to play. And again, it isn’t out yet and it’d be premature for me to say what the company will or will not do, but we are certainly very active in this space, and have been active participants in the RFP review and comment process so far.

Marc Bianchi:

Okay. Great. And you’ve talked about, I think, a scale up roadmap for this, if all goes well, how quickly you could add capacity. And I think, if I worked it out, it seems like you could be making 50 tons a year of HALEU within five years, maybe correct me on that math if it’s wrong, but I’m just curious, what sort of investment would that involve if you were to do that, if you were to prosecute that plan? How many dollars are we talking about?

Dan Poneman:

Right. Well, of course, the dollars depend on, A, how big of a plan you’re going to build, and B, how fast you’re going to build it, and see things, like if the investment comes in the form of a CapEx support directly, that’s a lot better than a long-term off-take commitment, because CapEx will spare you the need to basically get private finance, which could, for a capital-intensive facility, be very, very costly. So there’s a lot of variables in there, but let me just say what we’ve said publicly many times, which is, within 42 months of a decision to proceed, like a final investment decision, that we could build an additional cascade of 120 machines. Each cascade of 120 machines, Marc, produces six metric tons of HALEU per year. And by the way, that is based on the feedstock of those machines being low-enriched uranium of 4 to 5%.

It would take a lot more machines if you were starting with natural uranium. So if you take that as the starting point, the second cascade would take us an additional six months, and after that, because by that time our supply chain is up and humming along, it’s two months per cascade. So I can’t do math in my head, but I know that may be where you got your numbers, but that’s how we think about it. So effectively, within 42 months, we got six tons, within 48 months, we got 12 tons, add that to the ton we already got, so that’s 13 metric tons within 48 months of HALEU. So how much would that cost? Well, again, I hate to be contingent, but it depends. Let me just put it to you this way, it takes a few hundred machines to produce HALEU at the quantities that DOE has indicated interest in. To make LEU sufficient to make a meaningful dent in the imports now coming from Russia, would take a few thousand machines.

And I would just say, without getting into data I could not share, that the numbers that you are witnessing in the Congress, and bouncing around between the administration and the Congress, are not crazy numbers to think about, not the overall cost of a project, but the scale of government contribution that would be required. Because to be clear, the numbers that are being talked about now when you’re into the two plus billion range is not only intended to address the HALEU need, but also to address the LEU requirement.

Marc Bianchi:

What we’ve seen most recently is everything’s like a 50/50 cost share. Is it as simple as that, that there’s 50% coming from the private sector and 50% from the public, or is it multiples of the public spend?

Dan Poneman:

Yeah. Well, nothing’s ever as simple as that when it comes to these kinds of things, but I think a lot of people, Marc, think in terms of 50/50 cost share as a well-known percentage, and it’s going to depend on what the requirement is. Again, not to be contrarian, but if, for example, there were a national security imperative that were being addressed, I don’t think those do typically have 50/50 cost shares involved. And it’s not a random comment to talk about national security, because it’s not what we’ve been talking in this conversation about so far, but it’s probably useful for your listeners to know also that the United States government has a long-term inexorable requirement for enriched uranium for multiple purposes, but the largest, most salient ones are, number one, our actual weapons require tritium, which is an isotope with a half-life of 12.5 years, so it atrits and has to be replenished.

And for many years, that’s been replenished out of high-enriched uranium that’s been blended down to low-enriched uranium, and those low-enriched uranium forms are put into targets that are irradiated in Watts Bar reactor and produce tritium. And then the other long-term requirement is for high-enriched uranium needed for naval reactors. Now, there’s been a lot of stockpiled material over many years, but that is a wasting asset, and in due course, that will need to be replaced. And it’s worth noting that by law and treaty, and so forth, it has to be replaced by what’s called unobligated enriched uranium, and that means it does not bear peaceful use obligations, and all of the foreign sources of enrichment do have those peaceful use restrictions. So the other salient advantage of Centrus enrichment is not only do we have the only NRC license to make HALEU, but we also have the only technology that’s purely US in origin and able to support national security requirements.

Marc Bianchi:

That brings up another question that I wanted to ask about… and this is, I guess, related to both LEU and the national security, is it the right decision for the government to be putting so much effort towards HALEU when we need to satisfy these national security concerns? We have an LEU deficiency and we need LEU to make HALEU anyway, so why aren’t we attacking those problems with more funding and more legislation?

Dan Poneman:

Well, I come out of government and I think one phrase that we used in both the Obama and the Trump administrations was all of the above. And so I view this as one of those, Marc, I view this as an all of the above problem. You’re quite right, and people often don’t pay that much attention that the feedstock for HALEU is LEU, so you’re going to have increased LEU demand just to support HALEU. And then that’s quite apart from, and in addition to, the need to replace Russia. So I would say, we have to tackle both problems. I think that just as US policy, and I think the Nuclear Energy Institute policies supports both protecting the existing fleet and promoting advanced reactors, that logic obtains equally well for the fuel to support both of them. So that’s why I’m gratified that the numbers in Congress and the numbers from the administration now are of a dimension that I think you can address both the HALEU and the LEU requirements with that substantial level of government investment.

Marc Bianchi:

What’s the role of the Loan Program Office in all of this?

Dan Poneman:

It’s very interesting. It’s a very powerful tool. When I look back on my five and a half years as deputy secretary of energy, among the things of which I’m most proud is that under the sort of Damocles of having the money expire on September 30th, 2011, we got $30 billion of loan guarantee out the door in 2011, which basically spawned the entire solar PV industry, which did not exist at utility scale up until that time, and supported Tesla and all kinds of exciting stuff, a tremendous driver to clean energy transition. So the loan program has a lot of what they call dry powder, and I won’t give the numbers on their behalf, some of that dry powder is actually dedicated specifically to nuclear, and at least when I was there, was dedicated to front end nuclear.

In fact, we approved a loan guarantee for… it was then called the Areva, now it’s called Orano, they had an enrichment project in Eagle Rock that was in fact approved. So the loan guarantee program can play a very important role. There is a nuance here, which is, there are certain statutory provisions called federal support restrictions, and the easiest way to describe it is, if you get money from one part of DOE, like the Office of Nuclear Energy, you can’t get it simultaneously from the loan program. I think the way to think about it, or has been explained to me, Marc, is, and I do remember this from sitting in those credit review boards, their underwriting process is very familiar from any banker’s perspective, you look at debt service coverage ratios, you got to make sure that the statutory standard, as I recall, there has to be a reasonable prospect of repayment, and if the debt cannot be serviced, but for an action that has not yet been taken by the federal government, that will not pass muster.

And so therefore, there’s a bunch of people looking at this in a bunch of different ways. Some people are saying there’s so much of a national security imperative in getting up off our backs on enrichment that maybe… I think there’s been legislation advanced to perhaps modify or even eliminate for some purposes this federal support restriction. But I think the way to think about it in a nutshell is the loan program is a very important potential tool to advance the cause here, but it’s got to be feathered into the process in a way that it’s not canceling out, so to speak, other department programs, if that makes sense.

Marc Bianchi:

That’s interesting. I want to shift a little bit and talk about maybe the barriers to entry, or the moat that’s around your enrichment business. So you’ve got an NRC license for HALEU production, I’m curious, how much of an advantage you think that provides you, maybe a number of years of lead time, or what the challenges would be for others to do that? And then the other one is around enrichment technology. There’s these laser technologies that are moving forward, and some of those, I guess, don’t use LEU as their feedstock, they use the tails, which would seem to solve this problem of LEU supply concern. So maybe you could address both of those.

Dan Poneman:

Yeah. So NRC licensing is a very thorough, rigorous process, it’s been a lot of comment around this. We were very satisfied in our interactions with NRC. They were very rigorous, they were very analytical, they were very disciplined, but they were also, to be candid, efficient, and I don’t recall NRC ever missing any of their deadlines in the interactions we had with them. That said, the process to secure an NRC license, and this is appropriate given the nature of the technology and criticality risks and so forth, is lengthy, and I would say, it’s measured in years, not months. Again, I’m not going to speak for who’s how far down that timeline, but we feel we have a significant time advantage in terms of the NRC licensing. On the other topic you raised, Marc, of laser isotope separation, again, I’m certainly aware of other efforts that are going on in GLE, and so forth, I am not privy to what they’re doing, and so I can’t really comment.

I view, overall, this is a technology-rich environment, and I think you’re always going to have people trying, and they should try, to find disruptive ways to radically cut costs and so forth. And I think time will tell. We in this company tried this for a while in the so-called ABLA process that was looked at by USEC 20 plus years ago, did not go down that route, but I can’t say for sure what will happen in the future for other efforts to go down that road.

Marc Bianchi:

So maybe as we wrap it up here… this by the way has been great, so thank you so much for joining us, as a major stakeholder in nuclear power, Centrus is hopefully supplying a lot of HALEU to all these advanced reactors, what do you think is the biggest bottleneck to new nuclear capacity in the US? One of the major challenges is overcoming first of a kind costs and timelines, nobody wants to sign up for the first one, and it seems government backstopping can only go so far. So how do you think this plays out?

Dan Poneman:

You framed the question well, and your question contains the seeds of the response. And I commend all of your listeners to a really terrific interview with Joe Dominguez, the CEO of Constellation, and my colleague, Steven Clemons, our friend over at Semafor. And Joe says, “On these things, we can do it, the question is, will we do it?” And having gone through all we went through on Vogtle, we showed we can do it. And there is no question, Joe said this in his interview, that those first of a kind costs, they’re always high. That’s just the nature of advancing technology. So yes, a major bottleneck is overcoming the first of a kind costs and getting to the nth of a kind cost. The good news is that, it’s not rocket science to get to nth of a kind cost, it turns out to have a lot to do with things we call practice.

So I was actually running around visiting Haiyang and Sanmen, and you see these swarms of workers going from one site to another site, and guess what? You get better. Look at Barakah, the four plants built basically with Korean technology and UAE, each one got built better and faster. And it’s a pretty steep and favorable learning curve. So that’s thing one. Thing two, and it’s related, is execute. We need to execute. I’m so proud of our team at Centrus. We’re a small company, but boy, they killed it, notwithstanding all the challenges, and they were real challenges, Marc. During COVID, we delivered that project on budget, on schedule, and that is everything. And Bret Kugelmass has talked a lot about this in some of his podcasts. There’s been a lot of talk about the waste issue and various things that have been adduced as possible impediments to the widespread deployment.

But I really think, A, getting our costs down, and B, executing well against a schedule and a budget, given the imperative, and it is an imperative, in terms of climate change, in terms of energy security, in terms of the incredible asset you have in nuclear power. But Bill Gates sums it up really well, he puts a one sentence case in his book on averting a climate disaster for nuclear, “It’s the only technology that’s been shown to work day or night, summer or winter, almost anywhere on earth, at large scale, and has been deployed successfully for decades.” It’s just an incredibly prodigious producer of carbon-free electrons. And the last thing I’ll say is that, I commend your readers, listeners also, to a great book called Taming the Sun, by Varun Sivaram, in which he will tell you that you will not be able to max out on wind and solar and intermittent sources of power without having firm fixed dispatchable power behind it.

And what better way to do that than with nuclear? And in fact, the Natrium reactor being developed by TerraPower does just that, in backstopping solar deployment. And so I think that those two things, A, government support in overcoming inexorable, first-of-the-kind costs, and B, industry contribution, both in terms of matching some of that government investment, but then in terms of fulfilling their role in terms of project management, excellence and execution, getting the workforce, and so forth, that they need, and the supply chain to support. These are the things that make history. And I think, frankly, to be able to save our planet, we have no choice but to succeed.

Marc Bianchi:

Well, that’s a great place to leave it. Dan Poneman, CEO of Centrus Energy, going to be handing over the reins on January 1st of 2024. So thanks so much for joining us. We look forward to your next act.

Speaker 1:

Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.

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