A few weeks ago, I wrote about the overall investment environment of uranium. I concluded from a top-level perspective, that due to a stressed supply-demand situation, higher prices likely are more a question of “when”, not “if”. After publication, one of my readers and Premium Members wrote to me about a certain company that could benefit from the plan to not only build more, but also smaller, next generation nuclear reactors. I have put this idea under the microscope.

Summary and key takeaways from today’s Weekly
– Discussions and also concrete steps towards an implementation of small modular reactors (SMRs) are undertaken. The main advantages are found in cost and time savings.
– A promising company and pure play in this space is NuScale Energy Corporation. It is worth to be watched down the road.
– However, it is not an interesting investment at the moment. The timeline for its projects is too long and there are simply too many uncertainties.

This is my first Weekly that has emerged from the direct involvement of a reader.

After I published my article “Uranium: Explosive investment opportunity or meltdown ahead?” (see here) about a month ago, an interested Premium Member wrote to me with reference to a particular company from this space.

And rightly so, because it is an intriguing topic!

Those readers of my blog that were subscribed to at least my free newsletter up until the publication of my first uranium-article, received a free research report from me, as a big thank you and pre-mature Christmas present for their loyalty and support.

My report presented a rather defensive investment idea in uranium. The company leaves out the many risks that uranium miners are facing, but that are not often being discussed. When there are only blue sky scenarios, I am getting skeptical.

I explain this and more in my report that is now exclusive to Premium Members.

But there is one more potential option to gain exposure to the likely higher and rising demand for nuclear energy outside the resources sector.

My reader asked me specifically about NuScale Power Corporation (ISIN: US67079K1007, WKN: SMR). The ticker “SMR” already tells you what it was about – small modular (nuclear) reactors.

Thanks for this hint!

After having spent some time analyzing this company, I decided to share my results in today’s Weekly with all my readers.

The company is no immediate investment candidate due to too many uncertainties. But it is worth to put it on the watchlist. Maybe we’ll pick up this idea again, sometime in the future, when there is more clarity about the points I am going to show you.

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Small Modular Reactors on the rise

For sources and more information, see here, here, here and here.

If you remember from my first article, most of today’s active 438 nuclear reactors (as of Januar 2023) are so-called second generation nuclear reactors.

There is also a third generation which started operations in the 1990s, but they haven’t replaced its predecessors. They were only comparatively “small upgrades” and add-ons, mainly in design standardization, an enhanced security system as well as efficiency, and thus not a big revolutionary step forward.

Both, second and third gen, have in common that they are huge reactors like they are commonly known. They are very expensive to build (even crossing the double-digit billions in USD) and it takes about a decade until operations start.

Cost- and time-overruns are rather a norm than an accident.

The problem is that the majority of these still active plants has operating histories of several decades. Not only that, many are even more than 40 to even 60 years active since their construction and start of operation.

Several countries even extend the permits to keep the old reactors operating. In 2022, Japan was thinking about prolonging operations of one of its 60 year old plants that was ready for eternal retirement.

Otherwise the lights could go out.

The also called “next generation nuclear plants” or “small modular reactors” (SMRs) are finally a bigger step forward. Such advanced nuclear reactors must satisfy several requirements like producing less waste, being highly economical and increase their safety profile even more.

Likewise, as the name already suggests, they are smaller. And this is the main advantage. So small (capacities of only 20% or even less compared to the “big ones”), that small to medium reactors even could be factory fabricated centrally, then loaded on a truck to be finished and connected onsite.

Smaller reactors means more reactors for the same energy needs.

This allows for a more decentralized construction that in return would allow for taking pressure off of big, central grid systems. Call it independence or also diversification.

Likewise, due to the modular architecture, capacities could be bundled or added to existing sites by building a few more reactors. This approach also has the big advantage that in the case of a shutdown or maintenance, the operator could switch off one reactor while the others could keep on producing energy.

This isn’t possible with large single plants.

As nuclear power became mainstream in the 1950s, with time the power plants became bigger. This was mainly to achieve economics of scale in the operating phase.

The plan with SMRs is to reduce building time and costs dramatically, which both have only increased in the last years and decades, now using serial production instead of individual constructions.

There are also recurring discussions and proposals to repurpose old and supposedly dying coal-fired power plants and to use the already working infrastructure for small modular reactors. I am not a nuclear physicist to be able to confirm that this is doable with some simple exchanges of parts.

However, I also read that nuclear reactors have different steam pressures than coal-fired plants and thus the turbines could possibly not be compatible.

What is sure, however, is that there will be several issues to solve down the road. But at least, something is happening in the background.

But that’s not today’s main question to answer.

What’s the matter with the next generation – the small modular reactors?

According to the World Nuclear Association:

SMR development is proceeding in Western countries with a lot of private investment, including small companies. The involvement of these new investors indicates a profound shift taking place from government-led and -funded nuclear R&D to that led by the private sector and people with strong entrepreneurial goals, often linked to a social purpose.

World Nuclear Association on Small Modular Reactors (see here)

Note: You will also find that some sources use the abbreviation “SMR” for small and medium reactors. But the World Nuclear Association writes that the more common meaning is small modular reactors, due to the standardized serial construction capabilities.

But what is holding the technology back is design licensing and permission.

The World Nuclear Association continues:

Licensing is potentially a challenge for SMRs, as design certification, construction and operation licence costs are not necessarily less than for large reactors. Several developers have engaged with the Canadian Nuclear Safety Commission’s (CNSC’s) pre-licensing vendor design review process, which identifies fundamental barriers to licensing a new design in Canada and assures that a resolution path exists. The pre-licensing review is essentially a technical discussion, phase 1 of which involves about 5000 hours of staff time, considering the conceptual design and charged to the developer. Phase 2 is twice that, addressing system-level design.

World Nuclear Association on Small Modular Reactors (see here)

To put it into context, 15,000 hours for one staff member are 625 full 24-hour days or 1,875 full 8-hour working days. Even if ten people work full time on it, they would need more than half a year together – under optimal conditions, that are unlikely – to go through these two licensing processes.

You can assume nearly for sure that there are requests or additional demands for more input or documents that only prolong this procedure.

There are still processes, collaborations and committees in the background that try to figure out which designs to give permissions and licenses to. It is by no means just a quick “go through the documents and attach a hook on it”.

And don’t forget about testing.

China, India, Pakistan and Russia already have some sort of smaller nuclear reactors in operations. But the issue in the West is that the technical formalities are not decided upon.

Some of the new proposed designs would require very highly enriched uranium in the ballpark of 20%. In the US, however, it is only possible to enrich uranium up until 5%. This means, there would be a growing dependence on foreign countries to be able to operate such plants. It is not only about pure design, but also about national security.

The next-generation reactors were intended to go into operation sometime in the second quarter of the century, i.e. past 2025. But still more investments and “evaluation” are needed for final approval.

Thus, commercial use isn’t realistic before 2030 or even 2035.

You can also be sure that every participating company would like to have their design approved. This will involve also heavy lobbying convincing, testing and finally approval.

But there is a company from the private sector that seems to be ahead of the competition – NuScale Power Corporation!

NuScale Power Corporation – a smart pick?

NuScale’s investor relations page: see here

the latest investor presentation: see here

latest Q3 10Q report: see here

NuScale Power Corporation does not come randomly into this latest Weekly.

It is a US company that came public via a SPAC transaction last year in Mai. Its business model is to commercialize a modular and scalable so-called “light water reactor”. The design was obtained from Oregon State University. To be more precise, NuScale is a spin-off of the university that with funding money was separated to develop the technology privately.

NuScale Power is currently 60% majority-owned by the energy engineering firm Fluor (ISIN: US3434121022, Ticker. FLR). Fluor is also executing engineering services for NuScale. NuScale also has other strategic investors like Samsung.

The small modular reactors of NuScale are designed to be pre-build in factories and then finally assembled on-site, i.e. where the final plant will stand. As a major differentiation from competitors, the company claims that it focusses on a better passive cooling mechanism. Instead of using complex active cooling systems, NuScale uses a more natural convection for cooling.

Reactors from NuScale are intended to operate for 60 years.

Also, a group of reactors on-site will be controllable in a way that single reactors can be switched on or off. This is not only important for maintenance reasons, but also thought further, for example in interaction together with wind or solar power as a source for base-load energy.

As a further plus, its modular architecture will allow to add single reactors later to an existing site, if demand for energy requires to.

In a few words: NuScale’s goal is to build smaller, simplified, cheaper and more flexible to use nuclear reactors.

Already in 2020, NuScale received a design and safety approval in a major step towards commercialization. But this cannot be accomplished over night or even in a matter of a few weeks.

With all the above, it seems to be far and beyond its competitors.

The latest plans and also official news from NuScale itself, are to build first SMR reactors in the USA, Poland and Romania. They shall be ready for operations by the end of this decade.

In their investor presentation, they show even more “potential” customers.

What is important at this stage: These are just intentions or discussions, not bankable jobs!

The company has several hundreds patents, nationally as well as internationally.

But that’s not all! Due to its leading position, covered by patents, NuScale also wants to act as a licensor to other construction companies which will build SMRs themselves. This is a huge advantage, as this part would allow to operate a more asset-light business model with better predictable cash flows, higher margins, and basically no inventories from this part in the future.

As good as the story reads, so do the financials leave much to be desired at this stage.

Revenues currently are quasi non-existent in relation to the huge envisioned potential. Self-explanatory, the company is losing money and burning cash.

This means that an investment in SMR is an unsecure bet on the future rather than hopping on a smooth ride.

The financial picture is described on the next chart:

The good thing is that the company has no debt and plenty of cash in the books.

The 300 mn. USD in cash and short-term investments as of 30 September 2022 could last for more than two years, if the current burn rate doesn’t increase.

However, I cannot say with confidence whether this will be enough to endure until the first bigger revenue streams come in.

The second to last point I want to discuss is potential shareholder dilution. This can come either through an equity raise, should the current cash position not be enough. This could happen faster than expected if costs rose too much or if unexpected time delays occurred – being it from the regulatory side or from politics.

Also, there are currently many potential rewards in form of options and warrants outstanding. These, if exercised, will likewise dilute current shareholders. If all were exercised, the dilution would be a not to be underestimated nearly 15%:

The final and last point: valuation.

NuScale has an enterprise value of around 2 bn. USD. This is rather ambitious for a company not generating meaningful revenues. Or in other words: to a certain degree, a successful outcome is already priced into the stock!

I miss the margin of safety. Should something go wrong, this stock is due for a sharp price correction.

With that all said, I am putting this company on my watchlist. I await the next financial results and the annual report for more information.

Conclusion

Discussions and also concrete steps towards an implementation of small modular reactors (SMRs) are undertaken. The main advantages in comparison to big single nuclear plants are found in cost and time savings, which more and more plagued big projects in the past.

A promising company and pure play in this space is NuScale Energy Corporation. It is worth to be watched down the road.

However, it is not an interesting investment at the moment. The timeline for its projects is too long and there are simply too many uncertainties, like ongoing discussion instead of safe projects.

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