Updated: Jul 11, 2022
Fundamental events in the economic and/or political realm which have (or will have) massive world-wide ramifications usually provide the basis for our top down investment approach. Of late, much of our investment framework has revolved around fundamental worldwide shifts with regards to onshoring, supply chain availability, energy independence, ESG initiatives and minimizing our dependency on fossil fuels. Our convictions on those trends have only been further solidified following Russia’s unprovoked invasion of Ukraine. One of our investment pillars has been that of exposure to the nuclear cycle, a trend we have exposure to via the uranium miners (CCJ, URG, DML, EU, NXE) and some of the utilities (most notably CEG). Our bullishness on the nuclear renaissance has also been supported by recent commercialization developments in a new category of reactor, namely the Small Modular Reactor (SMR). We consider the SMR as a gamechanger in the industry given its smaller size (usually starting at 300MWe+ but very scalable higher or lower) and with it, much lower capital intensity, permitting timeframe and construction timeframe (not to mention operational and safety improvements as well). After extensive research we managed to identify the best possible exposure to the upcoming SMR revolution, that being NuScale Power (SMR).
NuScale Power was founded in the early 2000s based on research funded by the U.S. Department of Energy. After funding was cut, scientists within the program obtained the patents in 2007 and started NuScale in order to commercialize the technology. The fruits of all of this R&D can be seen in the company’s flagship product, the VOYGR SMR. This scalable power plant design can accommodate up to 12 NuScale power modules, with each module having a generating capacity 77Mwe. Configurations can vary but most range from 4 modules (308Mwe), 6 modules (462Mwe) or 12 modules (924Mwe). Each module can be easily transported by road, rail or barge and has dimensions of 15ft x 76ft. Each module consists of a reactor core, steam generators and a pressurizer, all contained in a single vessel. Unlike large-scale 1.0GW+ nuclear reactors from GE or Westinghouse, note that each NuScale module can be built at a plant and then easily transported to site. The point here being that the modules can be placed right next to the end user and assembled on site in the field. Moreover, unlike the traditional nuclear reactors, the NuScale SMR’s don’t necessarily need to be connected to the grad. They can instead power operations to create ammonia or hydrogen for example. Additionally, the nuances of small reactors include 60% fewer components when compared to the largescale conventional reactors. The beauty of the modules are that all is self contained, water is continuously recycled and re-used (the modules are self cooling), no AC/DC backup systems are needed and neither are any A/C units or cooling fans. In terms of manpower, a 12 module system (generating 934MWe) would only ever require 3 operators, a concept unheard of with the conventional nuclear power plants. All of these concepts were strenuously tested on the road to achieving NRC certification in 2020.
Each NuScale module uses light water technology and is cooled by natural water circulation without the need for complicated systems involving coolant pumps, vales, pipes and the associated power. All is self contained, the water cools after passing over the steam generator coils, then falls back to the bottom of the reactor, and then the heating/steam/cooling cycle repeats again, in perpetuity. According to NuScale, the company anticipate generating costs to be between $41-$64/MWh which puts them on competitive footing with photovoltaics or wind. Keep in mind that with the renewables mentioned (solar and wind), generating intensity is intermittent, so it isn’t baseload capacity power. This isn’t an issue with nuclear power, as the power generated from a nuclear reactor is always at the constant, uninterrupted intensity needed for baseload capacity.
What we specifically like the fact that at this point, in terms of competition, no other SMR manufacturer has thus far received U.S. Nuclear Regulatory Commission approval. Receiving this approval (currently for a 50MW design) took over 3 years and cost well over $600M. The approval by the NRC goes a long way towards signing contracts not just domestically, but throughout the world as well. This gives NuScale a massive first mover advantage. In the quarters ahead we expect the 77MW module and other configurations to eventually also receive NRC approval.
Pathway to commercialization and revenues: NuScale has thus far signed 18 MOU agreements in a total of 10 different countries (some MOUs signed with Polish mining giant KGHM, Romania’s Nuclearelectrica SA, Korea’s Doosan Enerbility and the U.S.’s Dairyland Power Cooperative). The company even already has one firm customer commitment, from the Utah Associated Municipal Power Systems (UAMPS). Delivery is expected for 2029 though NuScale expects to be able to deliver its first modules in 2027. Additionally, partnerships have been signed with Nucor Steel (NUE) and Japan Bank of International Cooperation (among others).
Note that NuScale’s revenue streams will include 1) the actual delivery of modules, 2) licensing fees and 3) services (this includes testing, training, fuel support and other management). The company will begin recognizing revenue once a contract is signed and construction of a module begins (this typically requires 5 years for completion). The services fees will encompass the entire 40+ year lifespan of the SMR. In short, revenue per module begins many years before (T-8 years) actual module commercial operation date, COD.
Though the power plants can be customized based on energy needs, NuScale will be offering three plant configurations, each with either 4,6 or 12 modules. The company has indicated that over the life of the power plant (40+ years) the average plant should generate $2.8B of revenue at approximately 25% gross margins. The company expects to be cash flow positive by 2024, given one other contract win.
In the previous 12 months, MOUs have been signed in countries such as Romania, Poland, Bulgaria and Kazakhstan, along with the U.S. In light of Europe’s largest energy crisis in over 50 years (with natural gas prices increasing by +700% y/y), we can only expect that Europe will be a leading force behind future MOUs and contract wins given the region’s resolve to wean off of Russian energy. Recall that just last month, the European Commission voted to classify nuclear energy as “sustainable”, a move in taxonomy which would aid in financing and permitting new nuclear projects.
Over the slightly longer term: as NuScale continues to ramp up on MOUs and firm contracts, we can even envision a scenario in which a large global infrastructure company would make a bid for NuScale, if entry into the nuclear space would be desired. Top on our list would potentially be SNC Lavalin (SNC) which already has numerous capabilities in the nuclear space. SNC’s commitment to ESG and zero carbon initiatives is well placed given that its capabilities in the nuclear space which revolve around their capabilities in all things related to the CANDU nuclear reactor (ranging from construction, maintenance and decommissioning services). SNC’s CANDU reactors are a heavy water conventional design which is fully licensed and has a 60+ year track record of reliable power generation ranging from units of 500MW-1.0Gw+. We can only assume that if the NuScale SMR’s prove popular, SNC would be more than willing to have an SMR offering in the light water reactor design as well. Moreover, knowing SNC’s long established global nuclear customer base, expanding its reactor offering to encompass the much sought after (and licensed) light water SMR could prove to be a winner, specifically once twinned with SNC’s ancillary services with heavy water reactors and general know-how over the full reactor lifecycle. Note that early investor Fluor (FLR) currently owns a 57% ownership stake but has indicated a preference to monetize their stake (over time) and become a minority shareholder in the range of 20%. Over the longer term, despite a fantastic product offering, we think it may be difficult for NuScale Power to continue as an independent, going head to head against the likes of nuclear heavyweights such as GE Hitachi or Westinghouse. NuScale Power is currently debt free with approximately $400M in treasury.