Perma-Fix (PESI): Transitioning To “Gold Mine” Phase

THE BOTTOM LINE

With business returning to pre-COVID levels and major projects being awarded, there now exists a clear path for PESI to move from Wait Time phase into Gold Mine phase imminently. Of these, there are two high-confidence deals that can more than double PESI’s top line from $70 million to $140+ million and ramp EPS to $1.70 as these projects get rolling.

Odd as it may sound, such a revenue ramp would not be truly extraordinary. Pre-COVID, PESI grew its business from $50 million in 2018 to a $120 million revenue run rate in 2020 (a 45% annual growth rate), before COVID derailed its momentum. So, getting to $140 million several years later feels more like a step toward where they should be, as opposed to something revolutionary.

Assuming a P/E of 12, I see PESI moving toward $20 in the coming year, roughly 3x current levels. Management is expected to verify and elaborate on this on its earnings call, coming up in a couple of weeks.

THE OPPORTUNITY

Perma-Fix Solutions (PESI / $7.33 / $97M market cap) is a company that provides environmental and nuclear waste management services. The company’s primary focus is on developing and providing innovative solutions for the treatment, storage, and disposal of hazardous waste. They specialize in a range of services, including nuclear waste management, industrial waste management, and consulting services for environmental and waste management issues.

Perma-Fix Solutions operates treatment and disposal facilities in the United States and provides services to commercial and government customers. Their services include waste transportation, packaging, and disposal, as well as facility management, environmental consulting, and engineering services. The company’s goal is to provide safe and sustainable waste management solutions while minimizing the impact on the environment.

In the nuclear waste cleanup industry, Perma-Fix has played a role in a number of high-profile cleanup projects, such as the cleanup of the Department of Energy’s (DOE) Fernald site in Ohio and the cleanup of the Oak Ridge National Laboratory in Tennessee. The company has also been involved in the treatment and disposal of waste from commercial nuclear power plants.

Perma-Fix has developed a number of proprietary technologies for the treatment and disposal of nuclear waste, including its patented Perma-Fix Process, which is designed to stabilize and solidify waste for safe disposal. The company has also developed technologies for the treatment of contaminated groundwater and soils.

Overall, Perma-Fix is a significant player in the nuclear waste cleanup industry, with a strong track record of providing innovative and effective solutions for the management and treatment of hazardous and radioactive waste.

The company has several major opportunities.. and two of them are imminent, placing the company on the cusp of transitioning into Gold Mine phase.

I look at their opportunities in four buckets:

1. THE CORE BUSINESS

The core business, as it appears today, which has been seeing an uptick in activity, now that COVID is behind us. This activity includes an apparent win to clean uranium mines on Navajo land. This is a complex and ongoing process that involves multiple stakeholders, including the Navajo Nation, the federal government, and private companies. Uranium mining in the Navajo Nation has left a legacy of contamination and environmental damage, and there are hundreds of abandoned uranium mines that need to be addressed.

The Environmental Protection Agency (EPA) is the primary agency responsible for overseeing the cleanup of the uranium mines on Navajo land. The EPA has developed a comprehensive strategy for addressing the contamination, which includes assessing the extent of the contamination, identifying the highest priority sites for cleanup, and developing and implementing cleanup plans. The cleanup process typically involves a combination of physical removal of contaminated soil and waste, as well as treatment and stabilization of contaminated materials. The process also includes the reclamation and restoration of the affected land and water resources to their pre-mining condition, to the extent possible.

Evidence (losers have been notified) strongly suggests that PESI has been awarded the project and will be made officially public in the near term. This deal is worth an estimated at $85M over 3 years. FYI, cleanup services deliver incremental EBITDA margins (a proxy for incremental operating profits) of around 50% (which means that 50% of any NEW revenue essentially drops straight to PESI’s pre-tax income line), most of which becomes net income… and therefore EPS.

If those figures prove accurate, this one deal equates to $28M of revenue per year and $14M of EBITDA. With 13.3M shares outstanding, that’s nearly $1 per share of EBITDA. FYI, PESI has approximately $19,920,000 and $72,767,000 in net operating loss carryforwards for federal and state income tax purposes, so they won’t have to pay taxes on profits until they cumulatively exceed those amounts.

It’s important to note that PESI currently generates about $1M in quarterly operating losses, so $14M of incremental annual profits will “only” get them to $10M in annual pre-tax profits. That being said, $10M of operating profits likely equate to about $8M of net income, which is about 60-cents of EPS.

The stock is currently trading in the $7 range.

2. THE HANFORD SITE

This is an opportunity to be the vendor of choice to clean up “The Hanford Site”. This could prove larger than PESI’s total existing business. The Hanford Site is a decommissioned nuclear production complex operated by the United States federal government on the Columbia River in Benton County in the U.S. state of Washington. It has also been known as Site W and the Hanford Nuclear Reservation. Established in 1943 as part of the Manhattan Project, the site was home to the Hanford Engineer Works and B Reactor, the first full-scale plutonium production reactor in the world. Plutonium manufactured at the site was used in the first atomic bomb, which was tested in the Trinity nuclear test, and in the Fat Man bomb used in the bombing of Nagasaki. It is considered to be the biggest nuclear waste site in the western hemisphere. It is estimated that it will take well over 100 years to clean.

Within this opportunity, there exists:

a) The typical waste water cleanup, for which PESI has been named in public hearings and the DOE’s final documentation. PESI subsequently provided comments on being named the provider. Based on our research, the deal is expected to bring in at least $40 million and more likely something closer to $80 million annually for the next 10+ years (1-2 million gallons per year at $40/gallon).

Assuming the aforementioned EPA proceeds smoothly, this deal would be incremental to PESI’s positive EPS to the tune of $1.00 (and possibly a multiple of that), assuming 50% incremental EBITDA margins.

b) The Hanford “Test Bed Initiative”, which could multiply PESI’s opportunity at Hanford. The Test Bed Initiative at Hanford is a program that was established to accelerate the cleanup of the Hanford Site, a former nuclear weapons production facility in Washington State. The initiative involves using innovative technologies and approaches to address some of the most challenging environmental remediation issues at the site. PESI possesses capabilities that may be exactly what the project needs. It’s a collaborative effort between the Department of Energy (DOE), the Environmental Protection Agency (EPA), and other stakeholders, including contractors, tribal nations, and local communities. The initiative provides a platform for testing and evaluating new technologies and approaches for cleaning up the contaminated soil, groundwater, and waste at the site.

The program is focused on identifying and testing promising new technologies that have the potential to improve the efficiency and effectiveness of the cleanup efforts at the Hanford Site. By accelerating the deployment of these technologies, the initiative aims to reduce the overall cost and duration of the cleanup while ensuring the safety of workers and protecting the environment.

Overall, the Test Bed Initiative is an important part of the broader effort to clean up the Hanford Site and is helping to pave the way for more efficient and effective environmental remediation efforts at other contaminated sites around the world. PESI’s proprietary method results in a solid (vs. liquid) and could result in an additional $70 million in annual high-margin revenue (1 million gallons per year at around $70/gallon).

The winner(s) of the above opportunities are expected to be announced within the next couple of months, if not weeks. The first appears to be a layup for PESI, due to the company’s expertise, proximity to the site and company-owned rail system at Hanford to transport the waste.

c) Service Contract. This is a deal to oversee the entire process of the Hanford cleanup. PESI is part of a consortium (one of two) bidding to win this business. It is unclear how much PESI would gain from this, but the total deal is expected to be worth $45 BILLION over the next 10+ years.

Delays in the awarding of these projects have stemmed from the Department of Energy (DOE). It’s notable that the DOE has now published final documents signaling that things are now moving forward. Included among these documents is a 760 page monster which repeatedly mentions Perma-Fix as their vendor of choice for much of the work required at Hanford.

3. WARSHIPS

The decommissioning of nuclear U.S. aircraft carriers and submarines is a complex process that involves a series of steps to ensure the safe and secure removal of nuclear reactors and other sensitive equipment from these vessels.

Aircraft carriers and submarines are designed to last for several decades, but eventually, they become too expensive or outdated to maintain and must be decommissioned. For nuclear-powered ships, the decommissioning process is even more complicated due to the presence of nuclear reactors and other highly sensitive equipment on board.

The decommissioning process for a nuclear-powered aircraft carrier or submarine typically involves the following steps:

a) Defueling: Before the decommissioning process can begin, the ship’s nuclear reactor must be defueled. This involves removing all nuclear fuel from the reactor and transporting it to a secure storage facility.

b) Decontamination: The ship must then be decontaminated to remove any radioactive material or other hazardous substances that may have accumulated during its service life.

c) Disassembly: The ship is then dismantled, and its various components are removed for disposal or recycling. This process can take several years to complete, depending on the size of the vessel.

d) Final Disposal: Any radioactive waste or other hazardous materials generated during the decommissioning process are carefully packaged and transported to a secure disposal facility.

The decommissioning process for a nuclear-powered aircraft carrier or submarine is highly regulated and closely monitored by various government agencies, including the U.S. Navy, the Nuclear Regulatory Commission (NRC), and the Environmental Protection Agency (EPA).

Many American nuclear warships are expected to be decommissioned in the coming years as they reach the end of their service lives or become too expensive to maintain. The U.S. Navy currently operates a fleet of nuclear-powered warships, including aircraft carriers, submarines, and guided-missile cruisers. These ships are designed to last for several decades, but eventually, they must be decommissioned due to age, wear and tear, or obsolescence.

The Navy has announced plans to decommission several nuclear-powered warships in the coming years, including the USS Harry S. Truman aircraft carrier, which is set to be decommissioned in 2024, and the USS Olympia submarine, which was decommissioned in 2019. Other ships that may be decommissioned in the future include the USS Nimitz aircraft carrier, which was decommissioned in 2022, and the USS George Washington submarine, which is set to be decommissioned in 2026.

Each of these ships could represent approximately 10 year / $100 million ($10 million per year in revenue) projects for PESI. That being said, the next project coming up appears to be the U.S.S. Enterprise (not a joke) which was officially decommissioned on February 3, 2017, after over 55 years of service. This is a monstrous craft, which will require an estimated one BILLION dollars over ten years ($100 million per year).

4. INTERNATIONAL

There is growing demand for nuclear cleanup in Europe, as many countries in the region are dealing with the legacy of nuclear energy and weapons production, as well as accidents such as the Chernobyl disaster in Ukraine in 1986 and the Fukushima disaster in Japan in 2011. These events have left behind significant environmental contamination and radioactive waste that needs to be managed and cleaned up.

The European Union (EU) has been working to address nuclear cleanup and decommissioning through its Euratom Treaty, which aims to ensure the safe and peaceful use of nuclear energy in Europe. The EU has established several programs and funding mechanisms to support nuclear cleanup and decommissioning efforts in member states, including the Instrument for Nuclear Safety Cooperation and the European Decommissioning Academy.

In addition to government-led efforts, there is also growing demand for nuclear cleanup services from private companies that specialize in environmental remediation and waste management. These companies provide a range of services, including soil and water remediation, waste transportation and disposal, and decontamination of buildings and equipment.

Overall, the demand for nuclear cleanup services in Europe is likely to continue to grow in the coming years, as countries work to address the environmental and health risks associated with past and present nuclear activities.

With respect to this, in 2022, PESI formed a partnership with Westinghouse in Europe.

MORE: For more information on PESI and its opportunities, I recommend checking out this Breakout Investors podcast.

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