Doomberg, which is increasingly impressive, on small scale nuclear reactors.
A pithy and well thought out investment analysis of a company that could be a game changer. But only if our politicos, regulators, left wing enviro nutcases, etc. keep an open mind instead of reflexively dismissing nuclear power.
I'm tempted to buy some shares, then lock them up for future generations.
doomberg.substack.com
“If you cannot do great things, do small things in a great way.” – Napoleon Hill
The 1945 Battle of Okinawa was the last major combat operation between the US and Japan in the Pacific Theater of World War II. Code-named Operation Iceberg, the invasion involved a symphony of naval logistics on the US side, countless waves of kamikaze suicide bombers launched from the Japanese home islands, and brutally bloody fighting on the ground that lasted several months. While many statistics about the battle are staggering, here is one that stands out: in summoning an impressive armada of fleet oilers, repair ships, floating dry docks, hospital ships, salvage vessels, and munition suppliers, the US Fast Carrier Task Force was able to remain at sea, in combat mode, for an incredible 92 consecutive days.
War is nothing more than the concentrated conveyance of destructive energy, and the history of war can best be understood through the lens of primary energy development, its efficient conversion into weapons, and its resulting targeted delivery against the enemy. The carbon footprint of Operation Iceberg was massive and that energy had to come from somewhere. Blessed with an abundance of oil and the technologies to extract and refine it, the US enjoyed an insurmountable energy advantage over Japan, one it was ultimately able to press for total victory.
Armed with a solid knowledge of physics, US military leaders understood the vast potential of nuclear energy – the ultimate high-density energy source – and by the time the Battle of Okinawa was over, the development of the first generation of nuclear weapons was largely complete. Faced with the prospect of massive US casualties should a full invasion of Japan be undertaken, and simultaneously hoping to send a powerful message to Soviet leader Joseph Stalin, President Truman authorized the use of these novel superweapons to accelerate the end of the conflict.
After the war, the US military continued to develop alternative applications for their newly harnessed nuclear technology. In the hands of brilliant engineers, the massive advantages of high energy density are handily exploited. By September 1954, the first nuclear-powered submarine was commissioned. The USS Nautilus revolutionized naval warfare and set records for speed, dive time, and mission longevity. Small nuclear reactors like the one that powered the Nautilus could go decades between refueling. Today, nuclear reactors are deployed in hundreds of US submarines, cruisers, destroyers, and aircraft carriers, and the military claims a perfect safety record with the technology.
USS Nautilus | Getty
The history of propulsion technology at sea is marked by a completely sensible journey up the energy density ladder. Wind-powered sailing vessels were made obsolete by ships that burned coal, which were displaced by those that burned diesel, which ultimately gave way to those that leveraged nuclear technology. There is no room for platitudes in the great geopolitical chess match – you either wield real power or become ruled by others willing to do so – and energy density is a decisive metric.
That our civilian leaders seem to have forgotten this, choosing instead to sway in their politically expedient hammocks of denial, is one of the great mysteries of our time. By shunning nuclear power in favor of low-density and intermittent renewable energy like wind and solar, much of the Western world has trapped itself in a rolling series of energy crises. Despite the incredible safety record of the existing nuclear fleet, the ongoing improvements in the latest proposed reactor designs across all critical parameters, and the obvious need for a nuclear renaissance if we have any hope of meeting aggressive climate goals, getting new projects built has proved stubbornly challenging. This is especially true in the US, where a labyrinth of unnecessary regulations seems specifically designed to satisfy the Malthusian impulses of the radical environmental movement.
There are encouraging signs that the tide is finally turning. Support for the nuclear industry was substantial in the recently passed Inflation Reduction Act, an accomplishment that would have been unthinkable just a few short years ago. Democratic leaders in California are signaling their support to keep the Diablo Canyon Power Plant open beyond 2025, offering the last remaining nuclear facility in their state a much-needed reprieve. Perhaps most notably, the Nuclear Regulatory Commission (NRC) recently signed off on a new small modular reactor (SMR) design, the cumulation of a multi-year application process by NuScale Power. Here’s how POWER Magazine described it (emphasis added throughout):
“The Nuclear Regulatory Commission (NRC) has indicated it will certify NuScale’s 50-MWe (160 MWth) small modular reactor (SMR) design, marking another definitive milestone for the reactor vendor and its technology prospects.
The NRC on July 29 said it directed staff to issue a final rule that certifies the standard SMR design, for which NuScale submitted an application in December 2016. The certification, which means the design meets the agency’s applicable safety requirements, will be effective 30 days after the NRC publishes that rule in the Federal Register. When published, NuScale’s SMR will become only the seventh reactor design certification that the regulatory body has issued for use in the U.S.”
Just how important is this approval by the NRC and will it pave the way for a future with hundreds of small nuclear reactors spread across the country? Is it truly a regulatory turning point or will environmental extremists continue their desperate fight against a nuclear resurgence? NuScale recently became a publicly traded company. What are its long-term prospects? Let’s dig in.
We begin with the fact that the design recently approved by the NRC is, unfortunately, not the one NuScale intends to market. Their latest generation module – the VOYGR-6 – is a larger 77 MWe embodiment of the company’s technology, and significant paperwork remains to be filed before this bigger reactor is fully approved for operation in a new power plant. The company plans to build a 462 MWe facility in Idaho using six VOYGR-6 modules, a project it expects to complete by 2029. Before doing so, it needs to gain approval from the NRC for its power uprate as part of the Standard Plant Design application. On the bright side, the company expects this to be a rapid process. By rapid, they mean roughly 30 months from submission, a triggering event expected before year-end. Such is the current timeline for complex new project builds in the US.
The anticipated performance characteristics and safety standards of the VOYGR-6 are indeed impressive. Management claims unlimited coping time for its reactors with no operator actions or external support, making its design “inherently safe.” It also claims an Emergency Planning Zone (EPZ) of only 40 acres, compared to 10 miles for traditional nuclear power plants. Using the cumulative knowledge gained over decades, practically any modern nuclear design would be superior to the aging fleet currently in operation and vastly better than all other alternative sources of energy. NuScale’s design attests to both.
Slide from recent NuScale management presentation
As part of our research for this piece, we consulted with an expert in nuclear technology that we trust who wished to remain anonymous. In their view, NuScale’s technology – while almost certainly workable and clearly fit for purpose – does have drawbacks compared to competing SMR offerings, although its clear lead in regulatory progress and sharp marketing skills are both badly needed in the nuclear sector. Here is a quote from one of our exchanges:
“The problem is that America doesn't know how to build nuclear yet. If America can commit to learning to build nuclear, NuScale will probably work just fine. In an America that can't, NuScale scarcely helps.”
The simultaneous recognition that NuScale isn’t perfect but that perfection need not be the enemy of the more-than-good-enough is the type of pragmatic response one would expect from industry veterans who have long-suffered like beaten puppies at the hands of anti-scientific decision-makers. The benefits of the underlying technology of uranium fission are so overwhelmingly positive for humanity that getting any new design over the line is a victory worth savoring.
Of course, the one thing radical environmentalists can’t stand for is the development of technologies that allow humans to flourish while minimizing our impact on the planet. They are in the suffering business, after all, and business is booming. Many professors at elite universities long ago debased their institution’s reputation for scientific rigor in the name of political self-enrichment, and a recent “study” attacking SMR technology – one which rolled out the same old and tired attack on the nuclear waste issue – is another in a long line of political gibberish masquerading as research:
“Mini nuclear reactors that are supposed to usher in an era of cheaper and safer nuclear power may generate up to 35 times more waste to produce the same amount of power as a regular plant, according to a study.
A team of researchers at Stanford University and the University of British Columbia came to this conclusion after studying a design from each of three small modular reactor (SMR) manufacturers: NuScale Power, Toshiba, and Terrestrial Energy.”
This is the type of headline that announces a report which can – and should – be immediately dismissed as captured propaganda. If you are prone to believe that the best the nuclear industry can offer after eight decades of development is a design exacerbating nuclear waste by a factor of 35, then, as the saying goes, we have a bridge to sell you. The entire purpose of reports like this is to force nuclear supporters onto their back foot, defending false attacks on the technology instead of marketing its many advantages. We won’t indulge the authors of that garbage paper here. The same nuclear expert we referenced above characterized the study as “utter horseshit.”
A spokesperson from NuScale was forced to give a more polite response:
“Diane Hughes, VP of marketing and communication at NuScale, disagreed with the paper's conclusions. She described NuScale's SMRs as producing waste consistent with well-established storage guidelines the US has been using for more than 60 years.
‘The study uses outdated design information for the energy capacity of the NuScale fuel design, wrong assumptions for the material used in the reactor reflector, and incorrect assumptions on burn-up of the fuel. With the correct inputs, NuScale's design compares favorably with current large PWRs on spent fuel waste created per unit energy,’ Hughes said.”
We close with an acknowledgment that NuScale is a publicly traded company and many of our readers are investment professionals. While nothing we write should be considered investment advice, no member of the Doomberg team has any position in the name, and we have no plans to initiate one in the coming weeks, NuScale makes for an interesting analysis as both bullish and bearish cases can be supported.
The bullish case is straightforward enough. The company represents a rare pure play on an obvious solution to the challenge of decarbonization, claims to have sufficient funding on hand to achieve the self-sustaining milestone of cash-flow breakeven by 2024, has excellent relationships with and understanding of the US regulatory agencies, and has the perfect stock symbol for its mission (it trades under the ticker “SMR”). Lest you consider the last advantage to be a minor one, we can assure you that Cheniere Energy is thrilled to trade under the ticker “LNG” amidst the current global natural gas crisis. If SMR technology comes to dominate the future of our electricity production, that listing will be a valuable asset. Further, if nuclear becomes “acceptably green” for ESG-oriented passive investment vehicles, NuScale’s stock could benefit substantially.
In our view, the bear case has three components: the manner in which NuScale became publicly traded, its current valuation, and the substantial execution risk embedded in its business plan. NuScale went public through a reverse merger with a Special Purpose Acquisition Company (SPAC), a deal that closed in early May. As part of the deal, the company raised $235 million from a private investment in public equity (PIPE) transaction that funded at close. When the PIPE shares become registered and the investors holding them are free to trade, that $235 million slug of stock will be hard for the market to absorb. For context, the stock currently trades only about $10 million worth of notional value each day.
As a result of the SPAC transaction, the company has a large number of in-the-money warrants outstanding as well as other classes of stockholders, making the calculation of its effective market cap somewhat challenging. To clear up these issues, the company’s Chief Financial Officer indicated on its most recent earnings call that the fully diluted share count stands at 257.2 million. Given where NuScale trades today, that puts its market cap at over $3 billion, a frothy number for what amounts to a pre-revenue technology play.
Chart from NuScale’s recent earnings call
Finally, the execution risk seems high to us. The recently approved design took six years to get through the NRC, and it isn’t even the one the company intends to market. In the presentation deck shown to investors when the SPAC transaction was announced, management projected that its GAAP revenue would grow from $16 million in 2022 to over $5 billion by 2030. On a “cash revenue” basis – a non-GAAP metric the company uses to account for the unique accrual accounting applied to its sales – management promised $13 billion in 2030. Given the glacial nature of the nuclear power industry, achieving that growth will be a substantial challenge.
Count us among those who hope to be proven wrong. |
