Small Nuclear Reactors Could Generate Large Returns With NuScale Power

• Since their reintroduction of sorts, new listings forged through reverse mergers with shell companies have enticed, then disappointed investors.
• Given the awful performances of such business combinations, investors may be leery of opportunities in this realm, yet NuScale Power could possibly buck the trend.
• Although it’s a highly speculative opportunity, investors may want to put NuScale on their radar due to the urgency of energy independence.

As soaring demand for retro video game platforms have demonstrated, nostalgia can sometimes generate tremendously positive sentiment. However, the same might not be said about the special purpose acquisition company (SPAC). Created during the 1990s, SPACs provide an alternative mechanism to entering the public capital market. However, their post-merger performances have been disappointing, leaving many participants with a bad taste in their mouths.

To put everyone on the same page, SPACs feature no underlying operations; thus, analysts often refer to them as shell companies or blank-check firms. Their main goal is to first launch an initial public offering (IPO), then seek out potentially viable private companies for a merger deal. If successful, the core relationship is based on reciprocity. The merger target provides the business while the SPAC offers access to the equities market.

In theory, retail investors benefit from SPACs since they have access to opportunities that would ordinarily be denied them due to the onerous vetting process of a traditional IPO. While this framework certainly commands merit, Harvard Law School warned that SPACs can be dilutive due to the issuance of warrants. So far, several high-profile post-business combinations have resulted in crimson-laden portfolios, understandably putting off the investment community.

Still, not every SPAC deal is likely to end in disaster. And one in particular, Spring Valley Acquisition Corp (SV), may be able to buck the trend.

Nuclear Energy in the Picture Again

On Dec. 14, 2021, NuScale Power, billed as an industry leading provider of transformational small modular nuclear reactor (SMR) technology, announced that it entered a business combination agreement with Spring Valley Acquisition, a SPAC which is listed on the Nasdaq.

Per NuScale’s press release, the combined entity will feature an estimated pro-forma enterprise value of approximately $1.9 billion. The transaction includes a $181 million oversubscribed, fully committed common stock private investment in public equity (PIPE) from major financial and strategic investors. NuScale shares will trade under the ticker symbol SMR, expected to list under this new label on May 3.

Ordinarily, investors might immediately shy away from SMR stock for two key reasons: first, it’s a SPAC-based IPO and second, nuclear power is controversial. Amid high-profile nuclear accidents like Chernobyl and Fukushima, the political narrative has largely pivoted toward clean renewable energy sources like wind and solar.

However, Russia’s unsettling attack on Ukraine has completely shattered the modern global paradigm. Suddenly, world leaders (especially in the west) recognized that energy supply chain flows are vulnerable to unpredictable behaviors. But the understandable acceleration of renewable energy initiatives may soon hit a scientific snag.

According to the Nuclear Energy Institute, one uranium fuel pellet creates as much energy as one ton of coal, 149 gallons of oil or 17,000 cubic feet of natural gas. Renewable energy sources don’t come anywhere close to this magnitude of energy density. Therefore, nuclear power cannot be ignored when it comes to the broader energy independence argument.

The NuScale Advantage

Nevertheless, both the public and policymakers have reasonable concerns about nuclear energy infrastructures. While they may produce massive power volumes consistently and reliably, if circumstances go awry, the consequences can be catastrophic. But this is where NuScale and the underlying SMR technology is compelling.

Unlike traditional nuclear power facilities, SMRs impose smaller space requirements. According to the Office of Nuclear Energy, SMRs offer multiple advantages, including “relatively small physical footprints, reduced capital investment, ability to be sited in locations not possible for larger nuclear plants, and provisions for incremental power additions. SMRs also offer distinct safeguards, security and nonproliferation advantages.”

Further, the federal agency “has long recognized the transformational value that advanced SMRs can provide to the nation’s economic, energy security, and environmental outlook.” As part of its broader initiatives, SMRs are likely to be deployed in the late 2020s to early 2030s.

Interestingly, NuScale’s press release states that its “SMR technology is safe, reliable and scalable and the first and only to receive Standard Design Approval from the U.S. Nuclear Regulatory Commission.”

If deployment of SMRs becomes successful, NuScale may enjoy first-to-market advantage. Over time, it may be possible for the company to be a trusted leader in the global expansion of these potentially game-changing nuclear power technologies.

Don’t Throw Caution to the Wind

When it comes to the volatility of SPAC-based IPOs, retail investors don’t need advanced analytics to recognize the bare truth. Anyone with basic internet access can see the carnage for themselves. Just based on that factor alone, SMR stock will be risky.

Further, political realities make wagering on nuclear-related investments complicated. While nuclear facilities command the highest level of power flow reliability metrics, they are anathema to the overriding narrative of clean, renewable and safe alternatives. In other words, NuScale has a product education gap that it must address.

Still, the other side of the equation is that the free market may be realizing that nuclear will not (and perhaps cannot) go away. For instance, uranium producer Cameco Corp (CCJ) is up nearly 14% year-to-date through the end of the April 29 session, a far cry from the almost 14% loss of the S&P 500 index during the same period.

As with any investment, NuScale will require tremendous due diligence before participation. However, it’s a surprisingly relevant (albeit speculative) idea given the new world circumstances.