Financial Impact and Opportunity of Silex Laser Enrichment and Terrestrial Energy’s Integral Molten Salt Reactor

Levis Kochin writes at SeekingAlpha. Levis is an investor in Silex and Terrestrial Energy. Nextbigfuture has covered the Silex process for laser uranium enrichment and Terrestrial Energy’s Integral Molten Salt Reactor.

Some of the Nextbigfuture coverage of Silex and Terrestrial Energy

Costs and economics of Terrestrial Energy’s Integral Molten Salt Reactor [nextbigfuture]

Terrestrial Energy Video update [nextbigfuture]

Terrestrial Energy successfully closed its final seed round of financing [nextbigfuture]

Laser Uranium Enrichment has completed first test loop [nextbigfuture]

GE SILEX laser uranium enrichment [nextbigfuture]

The Financial Impact Analysis of Levis Kochin

Levis Kochin is an associate Professor of Economics at the University of Washington, Seattle Campus. He earned my Ph.D. in economics from the University of Chicago in 1975. Lester Telser and Milton Friedman were his advisors. He have taught at the University of Washington since 1973. He has also worked for the Federal Reserve Bank of New York, the Federal Reserve Bank of St. Louis, the Bank of Israel, and the Hoover Institution of Stanford University.

* Silex will cut the cost of nuclear fuel, a minor cost of nuclear power. Terrestrial Energy will cut the capital cost of nuclear plants- the major cost of nuclear power.

* Eighty percent of the cost of nuclear power is the capital cost of the power plant. The fuel is less than ten percent.

* Integral Molten Salt Reactor powered electricity give promise of being cheaper and safer cheaper than coal or conventional nuclear powered electricity.

Silex – a public company – is an attractive investment opportunity. Its technology for laser enrichment of uranium is markedly lower cost than the centrifuge enrichment technology of its competitors. Its licensee Global Laser Enrichment will over time take over the Uranium enrichment market and Silex is likely to receive royalties which are a multiple of the cap value of Silex. But the disruptive effect of laser enrichment is narrow. The prospects of nuclear power are only marginally affected because uranium enrichment is a small portion of nuclear power costs. Terrestrial Energy is attacking the main costs of nuclear power- capital costs, safety and waste disposal. If Terrestrial Energy succeeds, a substantial number of important public companies in nuclear reactor construction and coal will lose much of their capital value. The value of companies exploiting the oil sands will, on the other hand, be substantially enhanced.

Enrichment represents about 30% of the cost of nuclear fuel. But nuclear fuel represents only 10% of the total cost of nuclear power. The total value of nuclear electricity in the world at wholesale is about $200 Billion per year. The total value of nuclear fuel is about $20 Billion per year. (All valuations in this article are stated in U.S. dollars.)The world enrichment market is worth about $7 billion per year. Two manufacturers of centrifuges, one Russian (Rosatom) and one West European (Enrichment Technology Company) both manufacturing centrifuges designed by Gernot Zippe while a prisoner in the Soviet Union, have over 90% of the uranium enrichment centrifuge market.

Global Laser Enrichment (GLE, has Silex license) obtained U.S. Government permission to build a six million SWU per year plant. GLE is building the first cascade of enrichment devices. If that works as projected, the plant will be completed and supply 10% of the world enrichment market. At current forward prices of about $120 per SWU, Silex’s royalty will be between 5% and 12% depending on the cost of enrichment at the plant. At current forward prices for enrichment, Silex would collect about $75 million per year at a 10% royalty rate when the plant is completed (projected for 2020). Since GLE’s costs per SWU will be about $60, GLE could (and probably would) obtain additional revenues by “underfeeding” their enrichment contracts, that is by using more SWU and less uranium to make the low-enriched uranium they deliver to their utility customers.

GLE is in exclusive talks with the U.S. Energy Department to build an enrichment plant in Kentucky to “mine” 50 million pounds of uranium by re-enriching the 110,000 tons of tails which accumulated in 60 years of operation of the obsolete and recently closed Paducah Kentucky enrichment plant. The 50 million pounds of natural uranium equivalent in the form of uranium hexafluoride that Silex would produce over the life of the enrichment plant are worth $3 Billion at current uranium forward prices. This would over time yield additional royalties of $300 million to Silex.

GLE would have to cut the contract price from the current $120 per SWU to the operating costs of centrifuge enrichment which are almost certainly less than $30 per SWU in order to force the closure of existing centrifuge plants. What GLE is more likely to do is to set a SWU price enough lower than existing prices to make it uneconomic for Urenco to construct new centrifuge enrichment capacity. Nuclear power generation is expected to rise about 30% over the next decade as new plants under construction and planned in China, India, Russia, South Korea, France, Finland and the UAR have a larger generating capacity than the plants likely to close in the US, Japan and Germany so the additional demand for laser enrichment over the next decade is not insignificant.

In 2020 and after, Silex would receive $100 million in annual royalties or about $75 million after tax. The present value of $75 million a year would be $1 Billion in 2020 at a 7.5 % discount rate and $647 million now which exceeds the $270 million enterprise value of Silex. On the upside, Silex has hopes for follow up plants which would yield additional royalties.

Terrestrial Energy

Existing reactors have not been able to penetrate the industrial heat market because they are too large and operate at too low a temperature to supply most industrial demand. Heat cannot be transported more than a few miles and no industrial heat application has a demand for anything near the 3000 thermal megawatts (1000 electrical megawatts) of most reactors within a one mile radius. Other firms are designing small nuclear reactors but their projected capital costs per kilowatt are multiples of those of Terrestrial Energy’s reactor design at small sizes.

Terrestrial Energy is designing three version of its IMSR. Its prototype and initial commercial reactor is sized (80 megawatts thermal, 29 megawatts electrical) to produce electricity and heat for isolated communities on islands or in the Arctic. It could provide heat and cogenerated power to large industrial plants where natural gas is not available at North American prices. The middle sized reactor is sized (300 Megawatts thermal, 121 Megawatts electrical) for use in the oil sands or other extremely large users of heat. This size of reactor would be ideally suited to provide base power, for example, on New Providence Island in The Bahamas which has an average power demand of about 200 megawatts and a base load of about 150 megawatts . Economies of scale (as compared to the 80 MW thermal design) enable this (300 MW thermal) reactor to be a somewhat cheaper source of heat in the oil sands than natural gas. The largest reactor design (600 megawatts thermal, 288 megawatts electrical ) is for use on large grids and is projected to be a cheaper source of heat and electricity than coal. Even the largest IMSR reactor would provide about one fifth the power at one half the cost per KWH (Kilo Watt Hour) as the EPR reactors Areva is now constructing in Finland and France (4500 MW Thermal and 1650 MW Electrical). Fleets of 288 MW IMSR would be added over time to electrical grids without any individual reactor being a bet the company decision.

The Alberta oil sands are the largest market for industrial heat on the planet.

The total value of the natural gas at current forward prices which could be displaced by Terrestrial Power’s nuclear plants would be $920 Billion-assuming that only 10% of the heavy oil is extracted from the oil sands.

At existing forward natural gas prices and projected costs of the heat generated by the Terrestrial Energy 300 Megawatt IMSR reactor, the reactor would be somewhat but not much cheaper than burning natural gas is the oil sands. But there are other advantages both to Terrestrial Energy and to the oil sands industry in installing some of the first commercial Terrestrial Energy reactors in the oil sands.

The Alberta tax on carbon dioxide emissions in large scale industry is $15 per ton of carbon dioxide emitted over and above 88% of carbon dioxide emissions on a business as usual basis. The tax had as of early last year yielded $181 million which was used to fund projects to cut emissions of CO2 in Alberta by seven million tons over the next decade. The Government of Alberta proposed last year to raise this tax to $40 per ton and to increase the base to 60% of business as usual emissions of carbon dioxide. Such a tax is estimated to amount to $1.50 per barrel of oil sands oil or a total of $1 Billion per year. The revenue from such a tax could easily fund the design and operation of a molten salt reactor optimally sized for the oil sands industry. This investment would if successful greatly reduce the pressure from activists on the oil sands industry.

One target market for Terrestrial Energy is the industrial heat and electrical power market in the UK. The UK has a nuclear friendly government and will soon have 160 tons of reactor grade plutonium in storage. Each ton of plutonium used in a Terrestrial Energy reactor (together with five tons of thorium costing $300,000) could produce as much electricity as 600 tons of natural uranium (in the form of enriched UF6) costing over $100 million.

If Terrestrial Energy can build a reactor producing heat at a cost lower than burning natural gas in Alberta where natural gas is cheap, Terrestrial Energy will have built a reactor capable of producing electricity at a cost lower than the full private cost of coal fired power.

A zero CO2 emissions nuclear power plant cheaper than coal fired power will lower worldwide CO2 emissions in the same way that the increased natural gas production in the US (the shale gale) has enabled the US to reduce the emission of CO2 without ratifying the Kyoto Protocol.

A MSR is inherently stable and responds passively to equipment or power failures. This leads to a key commercial implication: the MSR can deliver superior safety at a materially lower cost. The safety-cost relationship is entirely different for a MSR for it is an entirely different reactor.

Terrestrial Energy reactors could reduce their use of uranium per kilo watt hour to 1/6th the level in conventional reactors. Terrestrial Energy’s reactors would be capable of generating all the world’s power with the current level of production of uranium with the addition of two million pounds of thorium costing less than $100 million per year to mine or to separate from the waste piles of existing rare earth refineries.

Terrestrial Energy’s reactors are a threat to all existing nuclear reactor manufacturers.

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