Light At The End Of The Tunnel For Lightbridge

Summary

• EPA's Clean Power Plan sets standards for low-carbon electric grid and opens door of opportunity for energy industry players.
• Nuclear fuel developer Lightbridge could be a beneficiary of new emphasis on low-carbon fuel sources.
• Lightbridge's all-metal nuclear fuel rod offers greater efficiency, better safety to nuclear power plant operators.

The U.S. Environmental Protection Agency is preparing to execute on the Clean Power Plan aimed at reducing carbon emissions from U.S. power generation facilities. Each state has to meet a set of standards set by the EPA based that state's particular circumstances in electrical generation. The carbon pollution limits begin in 2022 and ramp to full effect by 2030.

In the meantime, the power generation industry must begin preparation in order to be ready for the initial standards. The lower-carbon emitting power sources will clearly be in favor as a consequence of the new standards. That could mean a new lease on life for the nuclear industry, which has been out of favor due to safety concerns. Most investors might first think of the uranium mining industry as a beneficiary of a nuclear renaissance. However, there is another contestant in the game that could be a big winner in the drive to clean up the electrical grid.

Lightbridge Corporation (NASDAQ:LTBR) is a developer of nuclear fuel technologies. The company has long been known for its efforts to perfect thorium-based fuels as an alternative to uranium. However, it is an all-metal fuel that could be the light at the end of the tunnel for Lightbridge as it navigates the evolving nuclear power industry. The company has developed and patented a novel design that replaces conventional tubes filled with ceramic uranium pellets now used by pressurized water reactors. Lightbridge's fuel rods are also produced differently. A co-extrusion technology is used to shape a single piece of solid fuel rod from a metallic matrix composed of a uranium and zirconium alloy.

The Lightbridge fuel rod affords a number of advantages. Most important for nuclear power plant operators is the potential for a 10% to 17% increase in power generating capacity from existing reactors. For new reactors the "power uprate" as Lightbridge calls it, could be as high as 30%. The Lightbridge all-metal fuel rods could also extend the operating cycle length from 18 months to 24 months. These benefits mean a dramatic change for the better in the economics of nuclear power plants, making both existing and new plants more attractive alternatives to fossil fuel plants that spew out offending carbon pollution.

Increased efficiency and improved economics are only part of the story. Lightbridge's metal-alloy fuel rods also improve reactor safety. For example, nuclear power plant operators are always concerned about a large loss-of-coolant that could lead to rising fuel rod temperatures, explosions or nuclear fuel leakage. Indeed, at temperatures above 850 to 900 degrees steam generated in a loss-of-coolant accident could begin to interact with the zirconium in Lightbridge's metal-alloy, resulting in hydrogen gas that could explode. However, computer simulations of Lightbridge's uniquely-designed fuel rods show that they remain 200 degrees Celsius below that critical level. Lightbridge engineers believe their all-metal fuel could provide increased time to restore coolant and recover from an accident situation before fuel failure compared to conventional nuclear fuels.

Some reactor system adjustments would be required to use Lightbridge's all-metal fuel rods. That hurdle does not seem to have intimidated four of the leading power generation companies in the U.S. In April 2015, Duke Energy (DUK), Southern Company (SO), Dominion Generation (D) and Exelon Generation (EXC) notified the Nuclear Regulatory Commission (NRC) of their interest in Lightbridge's novel fuel design. The notification indicated the group of four would be submitting an application sometime in 2017 to use the Lightbridge fuel beginning in 2020.

Of course, the power generators will not be Lightbridge's direct customers. The company will license its technologies to nuclear fuel suppliers such as Westinghouse or Areva. The licensing strategy could lead to an attractive, high-margin business model. Until license fees from its fuel rod technology hit the top-line, management has been providing consulting services to the nuclear power industry. Revenue from these services in the twelve months ending June 2015, were $1.1 million. While the company still reported a net loss of $4.3 million in that twelve-month period, its operations only used $3.5 million in cash. The company has $2.4 million in cash on its balance sheet, suggesting a runway of about nine months before the bank account is overdrawn.

The company recently announced a new financing facility through which management can 'put' shares of common stock at their own election for up to $10 million in value over the next two years. The equity financing facility provides some assurance that the company can move forward with the next phase of tests required to get approval by the NRC.

Lightbridge shares trade near $1.00 per share, well below where investors might expect valuation for a company that is on the cusp of a major product introduction. The depressed stock price might arise from the company's long association with thorium fuel development, which seemed to languish as the years went by.

Lightbridge has also been heavily dependent upon relationships in Russia to test and prove the all-metal fuel design. With the imposition of sanctions against Russia related to incidents in the Ukraine, Lightbridge has had to find alternative laboratory relationships. Management is still focused on demonstrating the all-metal fuel's performance in anticipated operational situations. Two new laboratory deals have been set up, but the significance of those new relationships does not seem to have filtered into investor sentiment toward LTBR.

Likewise investors do not seem to have been impressed by the group of four power generators who have gone on record at the NRC with their interest in Lightbridge's all-metal fuel rod. Perhaps the breakthrough of a fuel supplier license would get investor attention. After all, this is the step that would pave the way for licenses fees.

In my view, LTBR is a stock well worth putting on a watch list even if the stock appears to present more risk that it's worth today. For those who have a long-term time horizon, the stock price can be considered an option on the last laboratory tests and the application to the NRC in 2017. Granted neither lab tests nor applications is on par with a license agreement with a fuel supplier. Yet both hurdles must be cleared before fuel suppliers could find it worthwhile to give Lightbridge a call.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.