Thursday, July 17, 2014

Lightbridge (Nasdaq - LTBR ) -- Powers Up

Lightbridge (LTBR - $2.80) is the leading provider of next generation fuel systems for the nuclear power industry.  The company also provides a wide range of consulting services.  Traditional reactors employ uranium fuel rods.  That approach has kept plant operators under pressure for decades due to safety, proliferation, and disposal concerns.  In recent years competition from natural gas has further impacted profitability.  Lightbridge has developed, tested, and patented an alternative fuel rod technology ("metal") that improves electricity output by 10%-17% in existing facilities.  New reactors that are fine tuned for the technology could see a 30% improvement.  The rods also run cooler than today's uranium systems -- 360 degrees Centigrade compared to 1,250.  That reduces the meltdown threat.  The new fuel also is more difficult to convert into nuclear bombs.  The U.S. utility industry has expressed growing interest in the technology as a way to improve the economics of its installed base.  Those upgrades alone could yield substantial royalty income and recurring service revenue.  New construction also has the potential to surge.  The nuclear industry was beginning to enjoy a renaissance prior to the Fukushima disaster in 2011.  Most analysts have concluded that was an isolated event caused by a non-standard design.  Construction activity has resumed around the world.  That trend could accelerate if efforts to contain global warming expand.  Lightbridge's new technology is poised to ride that wave due to its superior performance and economics.

Lightbridge is pursuing a technology license agreement with Babcock & Wilcox.  Negotiations currently are underway.  B&W is a leading provider of nuclear fuel systems for the U.S. military.  That market has slowed in recent years.  B&W hopes to leverage Lightbridge's superior technology to penetrate the revitalized commercial sector.  There are four principal suppliers of commercial fuel at the moment -- GE-Hitachi, Westinghouse-Toshiba, Areva (France), and the Russian government.  Lightbridge has worked with the Russians previously but that relationship currently is on hold as new contract language is developed.  B&W and Lightbridge could sign a formal deal by the end of 2014.  That's likely to be a non-exclusive arrangement.

The U.S. nuclear utility industry is participating in the technology's development.  All of the major operators are involved, several to a significant degree.  An independent analysis that was performed last year by Siemens reinforced that interest.  The study confirmed that Lightbridge's metal fuel likely would yield a 40% internal rate of return on investment spanning 20 years.  Nuclear utilities have suffered earnings declines with the advent of low cost natural gas facilities.  Operating costs remain lower than for natural gas (and coal).  But the capital investment required by safety regulations drives up depreciation charges.  Lightbridge's technology delivers more output from the same plant.  It also requires less downtime.  Fuel rods are replaced every 24 months compared to 18 months under existing uranium systems.

The rising interest among utilities is prompting the major fuel suppliers to examine Lightbridge.  Conventional uranium systems are likely to retain a large share of the market over the intermediate term.  But the new technology could become a bigger factor as the scale up to commercialization in 2019 continues.  More active negotiations with those groups have started.  Lightbridge may enter non-exclusive deals initially.  If the technology becomes viewed as a genuine game changer, though, a dynamic bidding war could develop.

Lightbridge plans to collect royalties if it stays independent.  The amount may vary among the fuel fabricators.  In general, the company hopes to earn 10% of the expected $60 million economic benefit each reactor is expected to enjoy -- per year.  Even at half that rate income could accumulate to spectacular levels.  There presently are 435 nuclear plants in the world, with 71 more under construction.  One hundred are in the United States.  Growth is accelerating in Central Europe, the Middle East, India, and China.  Economics likely will drive demand in North America.  The new fuel promises to restore profitability by reducing costs below natural gas and coal.  Environmental regulations may create additional impetus.  Coal already is being phased out, albeit gradually, due to high levels of greenhouse gas emissions.  Natural gas only generates half as much.  So it's a good stop-gap measure.  But two gas plants emit the same amount as one coal fired unit.  If global warming becomes a serious issue the switch to clean low cost nuclear could intensify.

Near term revenue likely will depend on consulting activities.  Those nose-dived following the Japanese debacle.  They now are regaining speed.  Technology access fees from the fuel fabricators could provide additional money, most likely from Babcock & Wilcox to begin with.  Assuming a partnership is formed pilot plant testing will begin next year.  Testing of full length rods will follow in 2016.  NRC approval could be received in 2018.  Delivery to commercial reactors is contemplated for 2019.

Lightbridge might be acquired before the full payoff is realized.  If the company remains independent, though, earnings could attain $2.45 a share or more by the early 2020s.  Applying a discount rate of 15% suggests a 2015 value of $1.05 a share.  Assuming a P/E multiple of 20x suggests a target price of $21 a share, potential appreciation of 650% from the current quote.

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